TruCode LLC (TBRG) Earnings Call Transcript & Summary

Greetings, and welcome to the CPSI conference call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference call over to your host, Ms. Dru Anderson. Thank you. You may begin.

Thank you. Good morning, and welcome to the CPSI conference call to discuss the company's acquisition of TruCode. 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 now turn the call over to Mr. Boyd Douglas, President and Chief Executive Officer of CPSI. Please go ahead, sir.

Thank you, Dru. Good morning, everyone, and thank you for joining us today. After my comments, I will hand the call over to Matt Chambless, our Chief Financial Officer, to speak briefly about the transaction details. Afterwards, the 2 of us, along with David Dye, our Chief Growth Officer; and Chris Fowler, our Chief Operating Officer, will be available to take your questions. Yesterday afternoon, we announced our acquisition of TruCode, a medical coding solutions provider that helps hospitals of all sizes and post-acute organizations more accurately and efficiently conduct medical coding. TruCode is headquartered in Alpharetta, Georgia, with a remote workforce even pre-COVID-19 and has been a valuable strategic partner for CPSI for more than 5 years. Matt will provide more detail regarding the financials of this transaction and the impact that we expect it to have on our bottom line. However, I think it's important to note that TruCode is financially sound with 2020 revenues of $12.5 million and an adjusted EBITDA of $5.9 million. Also impressive is the fact that 99% of TruCode revenue is recurring in nature, driven by nearly 400 customers and a greater than 96% 3-year average customer retention rate. This acquisition is perfectly aligned with our opportunistic capital allocation strategy that we have discussed over the last year. The combination of TruCode's complementary encoder solutions with our TruBridge RCM services represents another positive step toward executing on our long-term growth initiatives given our strong balance sheet and healthy cash flow. Since 2005, the TruCode encoder technology leverages coders' knowledge, preferences and experience to ensure accurate code assignment. This knowledge-based coding methodology versus a logic-based methodology is a valuable competitive advantage for TruCode and has delivered impressive and tangible productivity and clinical documentation results to hundreds of health care organizations. We are excited to welcome Mike Mulligan and Tom Golden, the founding partners of TruCode to CPSI. While plans are underway to integrate the TruCode team and resources with our company, Mike and Tom will continue to run the medical encoder business unit under the TruCode brand, reporting to Chris Fowler, President and CEO of TruBridge. At the same time, we are quickly beginning the planning and executing of our joint go-to-market plans that target incremental market opportunity for cross-sales into our acute and post-acute EHR base, our TruBridge client base and net new sales. With the switch to ICD-10 codes and the increased need for technology to help less experienced coders, there are favorable industry tailwinds helping to create a total addressable market for encoder solutions of more than $1 billion. With that backdrop in mind, we have real confidence in the long-term growth potential of TruCode, which includes greater than $15 million in cross-sales opportunities into our EHR client base and another estimated $5 million to $7 million in cross-sales opportunity into our TruBridge client base. In addition to these cross-sales, we see exciting growth opportunity within the TruCode client base, not only within the community hospital segment, but specifically upmarket. A successful channel partner program, combined with their proven encoder technology that increases medical coder productivity, TruCode has grown its percentage of revenue driven by larger hospitals and health systems to nearly 35%. With this stated ability to scale and in combination with TruBridge complementary RCM services, we jointly target the TruCode client base that do not currently have TruBridge RCM solutions and services as well as health systems and net new hospitals of all sizes. With a solid list of client references across each market segment highlighting tangible outcomes specific to increased revenue and coder productivity, we have great confidence in the likelihood of the contribution TruCode will have to our continued growth. With that, I will turn the call over to Matt for a deeper dive into the financials of this acquisition.

Thanks, Boyd. I'm going to briefly walk through the revenue and EBITDA profiles of TruCode, followed by some brief commentary on the deal structure and concluding with what this means for our near-term guidance. In looking at the numbers, TruCode checks all the boxes on our ideal M&A target profile. The company has an impressive history of responsible growth with a 5-year revenue CAGR of 8%. Nearly all of the revenues are recurring, which pairs nicely with our renewed emphasis over the past few years of driving recurring revenue growth, reaping the benefits of enhanced visibility and predictability. TruCode's historical customer retention rates are in excess of 95%, so the revenue is both recurring and sticky. At around 45%, the EBITDA margins are robust. 2020 pro forma for the combined company, which showed TruCode making up less than 5% of total revenues or roughly 12% of total EBITDA, lifting overall pro forma EBITDA margins by 130 basis points. On top of these impressive EBITDA margins is incremental upside to the tune of $1 million as TruCode, having been a small privately held company, hasn't historically applied the GAAP requirements behind capitalizing software development costs. Lastly, although we're certain some level of synergistic efficiencies may be gained, this acquisition is not a synergy play, so we'd expect any efficiencies to be immaterial. Moving to the transaction itself. The purchase price paid was $61 million in cash at closing, plus an earn-out of up to $15 million tied to pro forma EBITDA during the 12 months following closing. The initial cash at closing was funded by a combination of cash on hand and borrowings under our existing revolving credit facility. The earn-out is included as Appendix B to the purchase agreement that was filed as an exhibit to the transaction's 8-K filed yesterday. It's a pretty simple earn-out structure with anything below $6.1 million of pro forma EBITDA resulting in no earn-out and a maximum earn-out of $15 million if EBITDA comes in at $9 million or more. The initial purchase price of $61 million versus 2020's total EBITDA of $5.9 million works out to an initial valuation of 10.3x EBITDA, with the forward multiple implied at around 9.7x. We've structured the earn-out in such a way that the multiple goes down as the earn-out increases with a 5x multiple on the incremental EBITDA necessary to achieve the earn-out levels. All told, the EBITDA multiple decreases to 8.4x if we reach the full earn-out of $15 million. Finally, an acquisition of this scale makes it necessary for CPSI to revise the guidance we stated back in February. At that time, we stated an expected 2021 revenue range of $270 million to $280 million and an expected adjusted EBITDA margin between 16.5% and 17.5%. Adjusted to include the 7.5-month partial year impact of TruCode on our totals, we now expect revenues between $275 million and $285 million and adjusted EBITDA margins between 17% and 18%. Our long-term target for organic recurring revenue growth of 5% to 8% remains unchanged. And with that, we'd like to open the line up for questions.

[Operator Instructions] Our first question comes from the line of Jeff Garro with Piper Sandler.

Yes. Congrats on the transaction. I want to ask more about the cross-sell opportunity. So could you just set the baseline with how much of TruCode's revenue today comes from CPSI customers and what that represents in terms of penetration of the CPSI client footprint?

Jeff, so the cross-sell revenue today, so TruCode's revenue coming from CPSI customers, is somewhere around $0.5 million a year.

Yes. And in terms of -- go ahead, Jeff, sorry.

It's safe to say that that's pretty small in terms of penetration of the footprint.

Yes. Yes, sorry, Jeff, in terms of penetration, there's approximately 80 of our acute care EHR clients that have TruCode installed as their encoder.

Excellent. So maybe follow-up a little bit on the go-to-market strategy with the cross-sell opportunity. Just curious on any more color on what the bundle with other TruBridge services might look like? And what the ROI case is for these clients, in addition to the strong retention and customer satisfaction metrics that you mentioned for TruCode?

Jeff, it's Chris. So from a go-to-market standpoint, especially in the cross-sell opportunity, notwithstanding a bundle, but just looking at it by itself, obviously, the tighter integration we can provide with TruCode and the EHR, we think, would differentiate between whatever existing solution our customers are using. We've seen some modest success as the partnership has evolved over the last several years, but we think we can accelerate that with having an asset that we own. From a coupling with another service, obviously, it would make tons of sense that it would help us accelerate the coding service that we provide. So we would -- we currently use TruCode, let's say, in about half of the -- in the coding customers that we have right now. And so we can continue -- with this being our asset, we can continue to drive efficiency and automation by owning this and how we can deliver the coding service itself. The last thing I would add with that, as we push everything towards the full offering of either the accounts receivable management service or even larger than that [ in trust ], this would be one more differentiator for us to be able to help drive the cost down for the customer, for us to make that a more viable solution for them going forward.

Our next question comes from the line of Donald Hooker with KeyBanc Capital Markets.

So just wanted to follow up on that question. I think you -- I heard you say TruCode generates only about $1.5 million of revenue from CPSI customers currently. Does it work? Does it have any other sort of EHR vendor relationships or revenue cycle vendor relationships with other companies in particular?

Yes. The one most notably to that, Donald, would be Dolbey. And where that's particularly intriguing to us as it relates to our ability, again, to be more efficient in how we're delivering the technology and the service, specifically with computer-assisted coding. And so TruCode has had a very strong relationship with Dolbey up to this point, and we're excited about how we can further that going forward. The other one to call out would be ChartWise, which we also have a partnership with as well. And that's focused specifically on clinical documentation improvement. And what that really gets to, to put that in layman's speak, is just making sure that the hospitals are getting reimbursed for the services that they're actually providing.

And just one point of -- one point of correction. The -- I think you may have misheard the revenue contribution from CPSI clients to TruCode. That number is $0.5 million, so not $1.5 million. I think that's what you called out.

Okay. Super. Taking notes rapidly here. And then I guess the adjusted EBITDA margin looks extremely high. And it sounds like that's going to be sustainable going forward. What is -- is there anything to think about in terms of sort of capital spending or depreciation or amortization or anything sort of help us bridge that to an EPS and a free cash flow number, if you would?

Yes. So as a stand-alone company, TruCode is -- has previously been a privately held LLC with very little CapEx as what you would expect from a SaaS solution provider. So all that to say, historically, EBITDA has effectively equaled net income, which has equaled free cash flow in this case. As far as other things in terms of depreciation and amortization, we really don't expect to load up much in terms of CapEx on this deal. And we obviously haven't gone through the full exercise of determining the allocation of that purchase price that we paid to all of the intangibles to figure out what the amortization expense would be. But taking a wild guess, just looking at our historical deals in the past, we think that roughly 60% of the purchase price may end up going towards intangibles, which would result in incrementally about $4.5 million of amortization expense from a GAAP perspective going forward.

Our next question comes from the line of Steve Halper with Cantor Fitzgerald.

Two housekeeping questions. Is there any deferred revenue implications to consider?

Yes, Steve. So there are some deferred revenue implications here. As a SaaS provider with, in some cases, annual billings, there will be some deferred revenue captured in the opening balance sheet. I believe the number is somewhere between -- generally somewhere between $4 million and $5 million is, I believe, where it sits right now. So there will be a slight deferred revenue adjustment that we see come through on the GAAP financials after the fact.

Right. So the guidance raise on the top line, does that contemplate the deferred revenue adjustment?

No, it does not, which we wouldn't expect that adjustment to be material in any case.

Then how do you reconcile that with the $4 million to $5 million?

The $4 million to $5 million is total deferred revenue sitting in the balance sheet today. So that's not the anticipated adjustment. That's the total deferred revenue balance that's out there.

Our next question comes from the line of Joy Zhang with SVB Leerink.

Congratulations on the nice transaction.

Thanks, Joy.

Can you talk to how we should think of the market expansion opportunity as you position TruBridge for larger hospitals and health systems? And would an upmarket strategy be concentrated primarily on the RCM software side given the scalability? Or would there be that headcount-based outsourcing component as well?

I think it just fits nicely into the net new market altogether. Obviously, as we're going into those larger opportunities, it's a consultative process trying to find what those -- where those pain points are. Obviously, coding is just another one of those areas. So whether it's a technology play with just the straight TruCode, coupled with TruBridge RCM or whether it's a services play as well, we think that TruCode delivers nicely on both of those 2 opportunities.

And Joy, I think it's worth calling out, too. I believe we mentioned that a little more than 30% of their revenue was in the larger hospital and health system space. And the majority of that is new to them. So that's a growing area for them is the upmarket. And obviously, with our focus there, we look forward to expanding our relationships with their customers in that arena.

That's super helpful. And as a follow-up, I think you touched on this a bit before, but can you walk us through your sort of cost and benefit considerations behind the decision to acquire TruCode rather than staying in the partnership?

I think the easy answer to that question is it fit with our strategy that we laid out -- we laid out last quarter publicly, but obviously, we've been working on it for quite some time, and that's to increase recurring revenue, really focus on TruBridge and TruBridge growth, become a more efficient company and improve EBITDA margins, and it fits all those bills. And it's also going to help us -- as we mentioned, it's going to help us go upmarket.

And it's also in line with what we said about the value of our customer base, and we can grow TruCode, obviously, and reap the benefits of that within our own customer base, which is something that we look forward in these acquisitions as well.

Yes. And then lastly, just to pile on from a capital allocation standpoint, it hit all the markers there as well. So from a deal component standpoint, looking at the partnership being successful and then just the mechanics of the deal made tons of sense.

[Operator Instructions] Our next question comes from the line of Gene Mannheimer with Collier Securities.

Congrats on the transaction. Looks like a good one. Your 5-year revenue CAGR of 8%, I'm just curious to know, has that growth tapered off the last couple of years? What's kind of the more recent growth rate that TruCode has experienced?

Yes. So Gene, this is Matt. Historically, over the past 5 years, it's been relatively kind of pro rata over that term. So the growth hasn't necessarily been front-loaded into the front end of those 5 years or backloaded into the back 5.

Okay. Okay. Good to hear. And the competition here for TruCode, is it, I mean, Nuance, 3M? Is that who sort of plays in this coding realm?

Yes. That's it. And I would say, obviously, 3M is the big horse in the market.

Okay. Okay. And last thing, I do note that it appears they have or had a relationship with one of your competitors, Prognosys. And I'm just wondering how this transaction would change those dynamics, if any? Or if you see that as an opportunity?

I would say that it's insignificant. And given the customer base of Prognosys, it's not something that's significant or material.

Our next question comes from the line of Steve Halper with Cantor Fitzgerald.

Just 2 more follow-ups. Does the revenue contribution, is that going to go into the TruBridge line initially?

That's right, Steve.

Okay. And then what's the current rate that you're going to be paying on the credit facility?

So with -- so pro forma -- so subsequent to the $61 million revolver draw, this is going to put our leverage ratio at above 2.5x, which is going to mean that our incremental borrowing rate will be our LIBOR floor of 50 basis points plus a 250 basis point margin. So all in, it's going to be incrementally 3%.

Our next question is a follow-up from the line of Jeff Garro with Piper Sandler.

One more big picture question for me. You guys have previously highlighted the opportunity to automate more of the revenue cycle, which, of course, can improve TruBridge margins and help you win more business. And TruCode's productivity sort of appear aligned with that opportunity. But wanted to ask specifically how TruCode will accelerate TruBridge's product development in that area?

Yes. So good question, Jeff. This is Chris. Again, going back to one of their strategic partnerships, specifically calling out Dolbey and specifically their ability to deliver on computer-assisted coding, we think that's the near-term opportunity for that scalability and efficiency creation in the -- one, the coding service that we deliver and also another differentiator as replacing the competition within the current base.

And just help me understand that a little bit more. Does that mean that you'll work as a partner with Dolbey and TruCode now owning it to get that, call it, combined offering to more of your TruBridge or CPSI customers?

Yes, absolutely. It's twofold. So it's not just to the customers that would be using TruCode, but it's also the customers that we're doing the coding for. So as we're leveraging that technology of TruCode right now, that we'll be able to appreciate more of the partnership with Dolbey with the staff that we have, the 100-plus coders that we have on staff that are using TruCode right now, that we can augment some of the work they're doing with the computer-assisted coding solution.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Douglas for any final comments.

Great. Thank you, and thanks, everyone, for joining us this morning. I hope that you were able to sense the level of energy and excitement we have around the addition of TruCode to the CPSI family and the value that we believe this will deliver to our current and future customer base. The strategic fit with our growth plan is undeniable, and we are confident that this will have a positive impact on our objective to increase shareholder returns over the next 3 years. Thanks, everyone, and have a great weekend.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.