TruBridge, Inc. (TBRG) Earnings Call Transcript & Summary

Greetings and welcome to today's event, CPSI Announces the Acquisition of Healthcare Resource Group, Inc. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Dru Anderson. Thank you. Please go ahead.

Good morning, and welcome to the CPSI conference call to discuss the company's acquisition of Healthcare Resource Group, Inc. During this conference call, we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information and are not guarantees of future results or performance. Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown risks, uncertainties and other factors, including those described in our public releases and reports filed with the Securities and Exchange Commission, including, but not limited to, our most recent annual report on Form 10-K. We also caution investors that the forward-looking information provided in this call represents our outlook only as of this date, and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call. At this time, I will turn the call over to Mr. Christopher Fowler, Chief Operating Officer. Please go ahead, sir.

Thanks, Dru, and good morning, everyone. We appreciate you joining us today. Joining me on the call this morning are Matt Chambless, our Chief Financial Officer; and David Dye, our Chief Growth Officer. Boyd Douglas, CEO, is unavailable due to travel. I'm going to provide an overview of yesterday's announcement regarding the acquisition of HRG, and after my comments, I'll hand the call over to Matt to speak a little bit about the transaction details. Yesterday afternoon, we announced our acquisition of HRG, which is a leading provider of customized RCM solutions and consulting services that enable hospitals and clinics to improve efficiency, profitability and patient satisfaction. HRG was founded in 1994 and is headquartered in Spokane, Washington, with a distributed workforce of over 400 employees. This strategic acquisition provides real value to CPSI on two fronts: scale; and talent. The addition of 77 customers to the core services TruBridge provides such as end-to-end revenue cycle management, medical coding and early-out services, cements TruBridge as the growth engine for CPSI. These customers span across 25 states with a high concentration in the Pacific Northwest, which is a region in which TruBridge has historically not had a large presence. Their customer base includes acute care organizations ranging from critical access facilities to large academic centers, travel health systems and physician practices. We're also thrilled to add an employee base that is committed to quality service and delivering real value for their customers. While we continue to leverage technology to gain efficiencies, we will always need talented people to deliver our services, and HRG has no shortage, including their service staff, management and sales executives. Based on our shared cultures and like services, we are confident that our integration efforts will go smoothly over the coming months. We expect additional value to be realized through the cross-sell opportunity into the HRG client base of our TruBridge RCM product suite as well as our medical encoder solution that came with our previous acquisition of TruCode last May and our patient engagement and digital front door solutions from Get Real Health. As healthcare providers continue to adapt and rebound from COVID-19, there is a great opportunity to help address the pain felt by hospitals due to the staffing challenges that they are facing. Healthcare organizations are looking for ways to gain efficiencies and collect revenues. With our joint RCM solutions that are both peer-reviewed by HFMA, there are significant opportunities to leverage our combined scale and extend our market reach. This acquisition of HRG is well aligned with our opportunistic capital allocation strategy, and the connection with TruBridge represents another positive step toward executing our long-term growth strategy. With that, I'll turn the call over to Matt for a deeper dive into the financials of this acquisition.

Thanks, Chris. I'm going to briefly walk through the revenue and EBITDA profiles of HRG, followed by some brief commentary on the deal structure and concluding with what this means for our near-term guidance. With the acquisition of HRG, TruBridge further cements its position as a leader in the outsourced hospital revenue cycle arena, with a strategic rationale for the deal leaning heavily on the benefits of consolidation within this vital component of the domestic healthcare landscape. HRG brings with its expanded scale, particularly in geographic markets where TruBridge's bona fides were less prudent, with a loyal client base generating annual revenues that are more than 90% recurring and an impressive 94% client retention rate. While the expanded scale is attractive in its own right, we're excited about adding HRG's talented sales and operations teams to drive even greater future revenue growth for the combined company with a sharp focus on operational efficiency and margin optimization. Sales effectiveness at HRG has driven a 5-year revenue CAGR of 5.63%, representing responsible growth that is culminated in HRG becoming one of the most respected names in the hospital RCM services market. On the bottom line, HRG's 2021 EBITDA margin of nearly 11% is a testament to its operational excellence, while not being optimally scaled on its own to allow for margin expansion through operating leverage. Unlike TruBridge, HRG's margins haven't benefited from higher-margin revenue lines, such as our TruBridge RCM solution, the TruCode encoder or our remote hosting solutions. Cross-selling these solutions into the HRG customer base provides opportunities to deepen client relationships while raising the overall margin profile of HRG's client base. In the near term, we also see the opportunity for $2.6 million of synergies between our two companies with the potential to drive 700 to 800 basis points of margin expansion for HRG as we exit 2022. Moving to the transaction itself. The purchase price paid was $44 million in cash at closing, with no earnout, funded by a combination of cash on hand and borrowings under our existing revolving credit facility. The initial purchase price of $44 million versus 2021's total EBITDA for HRG of $3.6 million works out to an initial valuation pre-synergies of 12.1x EBITDA, with the forward multiple implied at around 8.5x. Pro forma for annualized synergies, the EBITDA multiples are around 7.1x on an LTM basis and 5.7x on a forward basis. To close out our prepared remarks, will turn to guidance. Two weeks ago, we issued 2022 guidance of $288 million to $298 million for total revenues, and expectations for adjusted EBITDA margins to land between 18.25% and 19.25%. Adjusted to include the 10-month partial year impact of HRG on our totals, we now expect revenues between $320 million to $330 million. Inclusive of synergies that we expect to capture in our 2022 actuals, we still expect 2022 adjusted EBITDA margins of 18.25% to 19.25%. Lower-margin HRG revenues will soften our consolidated overall margins for a few months before execution on synergy opportunities elevates total margins to be in line with our initial guidance range as we exit 2022. Our long-term target for organic recurring revenue growth of 5% to 8% remains unchanged. And with that, Donna, we'd like to open the line up for questions.

[Operator Instructions] Our first question today is coming from George Hill of Deutsche Bank.

I have a couple of questions, if you'll give me the time here, Chris and Matt, and I appreciate the color that you guys provided on the acquisition price and the valuation. My first question is HRG appears to operate in the mid- to large hospital space. And I guess, my first question is, does this represent a strategic pivot for CPSI to move into the larger hospital market or is this more about bringing new improved functionality to CPSI's current customers?

Yes, George, great question. Yes. So of the 77 customers, approximately 20 are in the critical access base of sort of the vast majority are into that mid and upper side. Obviously, that's been an area that we've focused on, and our traction has not been what we hoped over the last several years. So obviously, this gives us an opportunity to expand and accelerate that. So while we'll continue to serve from an RCM standpoint into the CPSI EHR base, we feel like this is a nice accelerant to see us move upmarket from a TruBridge perspective. .

Sorry, George, I'll add to that. I think it's worth pointing out, too, that the TruBridge RCM product, formerly, [indiscernible] has had a great deal of success in larger hospitals in the enterprise space over the last couple of years just within TruBridge. So bringing RCM -- I mean, excuse me, HRG now under our umbrella is going to get the opportunity to cross-sell that, which is successfully running a lot of large enterprise.

Okay. That's helpful. I guess, second, and David, I kind of love your macro thoughts on this space. It's just you've seen there's one big public player in the RCM space, which continues to have good success and sees good traction in growth. There is another company that probably -- there's a second player that probably is close to wanting to go that route. You just saw tenants say that it was going to hold on to conifer as opposed to spin that business out given the growth profile that they see for the business. I guess, given the acquisition and where you guys operate, would just kind of love an update around how you guys are seeing the competitive environment and the macro growth opportunity into hospital health system in RCM. Is it -- and it seems like you're seeing people want to hold on to these assets or recognize value for these assets as opposed to part with them, and the space seems to be getting at the margin increasingly competitive. So we just kind of love from a macro perspective, what you see.

Yes. No, I think we've said this on here before, George, but it's kind of like the EHR space before meaningful use, right? It feels that way, very much so. And frankly, competition is slowly increasing, but our primary competitor is still the hospital or health system, deciding whether or not to continue to just do it themselves or to look to someone like a TruBridge to provide them those services. And it's generally a very pace taking decision for the facilities now what's going on from a job market standpoint now. And I know you've certainly heard this from the public players seems to be accelerating the demand and we feel like that's likely to continue. Of the companies that I believe you're referring to, we don't see a whole lot of them even down into the 400 bed and under hospital space, which is where sort of we live in. TruBridge, obviously, with the EHR space, we -- our bread and butter is the 100 bed really for TruBridge, it's in that 400 be under space. So we're not seeing a whole lot of them yet. I mean certainly, potentially, they might decide that they want to be more aggressive in that market. We're not seeing it at this point in time.

Yes. And George, I'll add, too. One of the things that I think differentiates us from the other players that you referenced is the fact that we do have a customer base related to the EHR, and we still have a ton of runway to grow TruBridge services. So we're obviously excited about our ability to now accelerate the outside of that installed market and we have the ability to really focus on both of those fronts.

Okay. And then, I guess, my obvious follow-up here, David and Matt, is can you guys kind of remind us kind of what is your TruBridge penetration into the EMR footprint? And what percent of your clients have outsourced versus continued interest?

Yes. So I'll take that first one. When we look at the total business office outsourcing solution for TruBridge, we're penetrated somewhere between that 15% to 20% within the hospital EHR customer base.

Okay. and you guys are being very polite in dealing with me. The last one I'll ask is, you guys -- sorry, I'm looking at my models here. I thought you guys had just shy of $12 million cash at the end of the quarter. You talked about the cost to finance this transaction. Maybe cash balance now, like how little cash do you guys feel like you need to run the business?

Yes. So we're managing the cash balances, the two things we want to keep an eye on are obviously the balance sheet cash we have on hand and then also what's available under the revolver. And so we obviously feel comfortable with the size of this transaction, and this still leaves us with the cash balances on the balance sheet that are pretty much in line with where we were at the end of the year.

Okay. You guys have heard me enough. Congrats on the deal.

Thanks, George.

Our next question coming from Jeff Garro of Piper Sandler.

You guys gave some helpful comments on your ability to expand within HRG clients and you referenced some specific products, I really appreciate that. But -- and maybe to help quantify it a little bit more, if you could describe HRG's penetration in terms of partially outsourced versus fully outsourced RCM. And then just from a high level, looking at HRG revenue per customer versus TruBridge revenue per customer.

Jeff, I'll take the first one, and I may tag out to Matt on the second half. I would say that the heavy lane in their business is obviously on the fully outsourced model, and they have done a very good job over the last several years where they do that partial outsourced and then upsell to the full. So the vast majority of those 77 customers are in the fully outsourced model. And then as it relates to their average revenue compared to the TruBridge, Matt?

Yes. So there are -- let's just ballpark and say it's 100 hospital customers on the full business office outsourcing generating somewhere around, what is it, $40 million, $45 million a year in revenue. So that works out to some fairly easy math there.

And could you help us compare that to TruBridge?

Those were the TruBridge numbers that I was providing.

Those are the HRG or TruBridge in the 77?

That's right. Yes, the 77 is at the base of it.

Got it. And another one for me is the least mentioned HRG's stable client base. Maybe kind of a few on this front. Could you tell us more about their historical customer retention? Is there any notable customer concentration? And then what's the typical contract like then? And just generally, how should we think about where they are in their renewal cycle?

Yes. I'll start. Their average retention is right around 94%. Other than geographic, I would say, which we referenced in the call, a high concentration in the Pacific Northwest, there's no real other concentration I would speak to. It very much looks like the TruBridge landscape as far as a good bit of hospitals and also physicians also just kind of scattered across. What was the second part of your question, Jeff?

The second part was what's the typical contract length? And how should we think about the renewal cycle?

Yes. So the typical contract length there is going to be pretty similar to what we see on the TruBridge side. So initial terms, they're generally somewhere around that 3-year timeframe with annual renewals after that. So with HRG being founded in 1994, you can see that they've got a significant amount of history behind them and launch of renewals to support that 95% retention rate. So the revenue is -- it's over 90% recurring and very sticky.

Great. And then last one for me before I jump back in the queue. Is the revenue model based on percentage of collections or subscription-like pricing or consumption of resources based?

It's a percentage of collections. I mean, the way to think about it, Jeff, is it's very, very service-oriented. It's not a -- there's not a tech aspect to this, so to speak, so not a TruBridge RCM offering. It's solely services. So it's almost 100% percentage of collections. The medical coding aspects is similar to ours where it's more of a standard fee. But otherwise, it is based on the percentage of collections.

The next question is coming from Joy Zhang of SVB Leerink.

Congrats on the latest acquisition. My first question is, wondering if you can give us a sense of what the level of automation that HRG has now, just given that you guys have made great progress on the automation front. And does the $2.6 million cost synergies embed any sort of automations in addition to sort of scaling and cross-sale synergies or is that upside to that number?

Yes. I would say -- Joy, thanks for the nice comments. I would say, they've developed a homegrown workflow engine that they've used to really optimize the way that they do work. That's something that we'll be evaluating how we layer that into the workflows that we have right now. But I think from an automation standpoint, the work that we've done over the last 12 months obviously, something that we're excited about being able to layer-in to what they're doing as well. So there's a pad built into the model for 2022, but we really see that upside probably coming out of that year and more into 2023.

Yes. So Joy, from a substandard standpoint, there's really not much in the way of automation savings within the $2.6 million that we announced.

Okay. That's super helpful. I guess, as a follow-up, you mentioned that this -- the rationale for this acquisition is more on the consolidation front, which is a departure from your past two acquisition for more test tuck-ins. Can we sort of draw a pattern going from here that you're going more towards the consolidation direction on the M&A strategy, or is it a little too early to say?

Joy, I would say, it's probably too early to say. I think the one that I would use, as we're thinking about M&A and we've said this over and over is that we're opportunistic. Obviously, we've got -- it's the balance between where there are gaps that we can go and fill from a cross-sell standpoint like a TruCode or is there an opportunity where something becomes available that is more of a consolidation. Obviously, the economics of the deal play a big part of that. But we want to make sure that we're not getting kind of tunnel vision on one aspect of making sure that we're evaluating opportunities that could serve the betterment of CPSI going forward.

Perfect. And then one last question for me. Just given sort of how tough the labor market is currently, what measures are you using to ensure that the employee -- their employees' retention as the HRG hands it's teams over to TruBridge? And maybe on the integration side, can you give us a sense of how long it takes to get the new employees fully ramped up on TruBridge's processes?

Yes. So from a labor standpoint and again, even though we're looking at this from a consolidation standpoint, there is a big people aspect of how the services that we provide are delivered. And so with that, a lot of the organizational structure that they've got from a team level and how they're delivering the service to their customers today will remain intact. And that's why, one, we think, from a labor standpoint and just the security of these employees with now part -- being part of CPSI, should go over very well because their day-to-day world should remain fairly well intact. I also think that feeds into the integration being something that we should be able to manage pretty nicely over the coming months. We are going to have a period where we want to make sure that there is a stability creator as we plan through the rest of the integration. But we don't think that there'll be a long tail beyond that as far as seeing the true integration of two organizations.

Our next question is coming from [indiscernible] of Pine Creek Capital.

Could you please define adjusted EBITDA for us? Specifically, how much incremental CapEx and share-based comp is below the adjusted EBITDA line for HRG?

Yes. [indiscernible]. So I'll take that one. When it comes to, say, working capitalization of product development capitalization, we think is the genesis of this question, there essentially is none at HRG. And as a private company, I mean, you can imagine the stock-based comp is minimal or nil, so there's no stock-based cost component either.

Okay. That's really helpful. And then, Matt, you referenced changes to the outlook still targeting adjusted EBITDA margins of 18.25% to 19.25% for 2022. You also mentioned it softening margins in the first few months. So I just wanted to clarify, is the adjusted EBITDA margin now a year-end exit target or is it still your full year target, including the 10-month impact of HRG?

That's a good question. And to clarify that, that is still the full year adjusted EBITDA margin target for CPSI consolidated as a whole.

Okay. So that implies then potentially, given the lower profile duo coming of HRG that there are, I guess, potentially incremental cost reduction measures you're putting in place that were not previously being taken into account? Am I reading that -- am I reading into that correctly?

Yes. So what you're -- what we're essentially inferring is that we are going to be executing against this $2.6 million of synergy opportunities throughout the year, and we should be able to capture -- most of this should be captured at least in run rate by the end of this year. And so based off of the plan that we have before us on executing against those opportunities, we feel comfortable that adjusted EBITDA margins will still land within that range.

Okay. And could you help us understand how much CapEx, including capitalized R&D and share-based comp, we should think is reasonable for CPSI for the full year so we can get down to a metric that's more tangible for shareholders?

Yes. So those aren't specific measures that we guide on, and we don't intend to get down to that level of detail. We feel pretty comfortable with the top level -- the top line guidance that we've given on the top line revenues, and then on the bottom line when it comes to the adjusted EBITDA margin. So we'll sit still on that.

Okay. And I noticed, HRG, I think, is looking for very high growth in 2022. $33.8 million in '21 and the expected revenues of $40 million in '22. That's quite a bit higher than your 5-year revenue CAGR that you quoted earlier of 5%. Could you help us understand what's driving the high growth into 2022?

Yes. [indiscernible], this is David. It was the last 6 months of bookings in 2021 for HRG is what's driving that growth that had substantial bookings in the last year.

At this time, I'd like to turn the floor back over to Mr. Fowler for closing comments.

Thanks, Donna, and thank you, everyone, for joining us on such short notice. And also thanks for your continued interest in CPSI. Everybody, have a wonderful day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and walk off the webcast at this time, and enjoy the rest of your day.