Earnings Call Transcript - TBRG Q3 2025

Operator, Operator

Greetings and welcome to the TruBridge Third Quarter 2025 Earnings Conference Call. This conference is being recorded. It is now my pleasure to introduce your host, Dru Anderson. Thank you. You may begin.

Dru Anderson, Host

Thank you. Good morning, and welcome to the TruBridge Third Quarter 2025 Earnings Conference Call. Leading today's call are Chris Fowler, President and Chief Executive Officer; and Vinay Bassi, Chief Financial Officer. This call may include 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. The company cautions 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 public releases and reports filed with the Securities and Exchange Commission, including, but not limited to, the most recent annual report on Form 10-K. The company also cautions investors that the forward-looking information provided in this call represents their outlook only as of this date, and they 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. Chris Fowler, President and Chief Executive Officer. Please go ahead, sir.

Christopher Fowler, CEO

Thank you, Dru, and thanks to everyone for joining us today to discuss our Q3 results. I want to start by reflecting on the significant progress we've made in enhancing the quality of our earnings and financial performance over the past seven quarters through our ongoing efforts to streamline and improve our operations. We've seen expanded margins, accelerated free cash flow generation, and reduced our debt load, all while providing mission-critical solutions that enhance financial and operational performance in rural and community hospitals. Vinay will delve deeper into the success of these initiatives, but I'm proud of our accomplishments and believe we can replicate this success in other business areas. In terms of specific results for the quarter, our bookings amounted to $15.5 million on a TCV basis, down from $25.6 million sequentially and $21 million year-over-year. While this is lower in absolute terms, we are focusing on improving the quality of our bookings, which is more evident when considering the year-to-date figures. Our investments in enhancing our products, particularly in the Encoder business, have enabled us to secure higher-margin deals. Additionally, we've observed an increase in our financial health bookings in the 100- to 400-bed category, from less than 20% in 2024 to over 30% in 2025. As we achieve success in RCM tech for this segment, we create more opportunities for improved booking performance. Although Q3 bookings were disappointing, our sales efforts for Q4 have started strong. Historically, bookings tend to be skewed toward the end of the quarter, but October has significantly exceeded our usual expectations for the first month. Overall, our bookings remain variable, so we are cautious about claiming victory at this stage. However, we are encouraged by indications that previous barriers to pipeline conversion in Q3 appear to be easing. Given the current operating environment, not all factors are within our control, so we continue to focus on addressing challenges we can manage, such as ensuring we have top-quality talent. In early October, we welcomed Mike Daughton as our Chief Business Officer. He will lead our sales, marketing, and client success teams, focusing on building high-performing teams, holding team members accountable for exceptional client management, and delivering measurable value. We expect Mike to elevate our sales efforts in terms of efficiency and tracking, and to focus on high-quality opportunities. Additionally, I'm happy to report that our offshore transition is advancing as we implement our strategic plan. We’re also completing our leadership team, including appointing a Head of India, to ensure we have strong leadership for executing the plan. The foundational improvements necessary for success are in place, along with a metrics-driven approach that is crucial for restarting our transition processes. As of October 1, we've begun this process cautiously, with two transitions underway and more expected in Q4. We are collaborating closely with each customer to clarify expectations throughout this process and have established structural support to ensure a smooth handoff from our domestic workforce. Looking ahead to 2026, we plan to gradually accelerate transitions, but only when we are confident it will not disrupt our operations. We will closely track performance metrics with a focus on stability, communication, and customer comfort. We’ve made it clear that this transition process is crucial for continued margin expansion beyond 2026, but we will not compromise service quality. While the number of client losses rose slightly in Q3, our net revenue retention for our core CBO business has improved over the first half of the year. Renewals were stronger in Q3 than in Q2, and this positive trend has continued into October. Earlier this year, we began a multi-quarter initiative to enhance client success and operational efficiency, aiming to strengthen our capabilities. I believe that this, combined with our careful approach to restarting transitions, will help us improve long-term client retention. As we look towards the end of 2025 and into 2026, we have a clear strategy for sustainable performance at TruBridge: first, implement successful practices across more business areas; second, deliver higher-quality bookings; and third, execute our strategic transition process thoughtfully, improving customer satisfaction and retention. During Q3, we made effective strategic changes to foster long-term success, and we are confident that we have the right foundation to progress in these initiatives. We look forward to updating you in the coming quarters. With that, I'll turn the call over to Vinay to discuss the financials.

Vinay Bassi, CFO

Thanks, Chris, and good morning, everyone. Let me take a few minutes to highlight some of our financial achievements over the past two years, review our third quarter results, and then provide additional color on our outlook for the remainder of the year. We have come a long way since I joined in January 2024 with significant improvement in adjusted EBITDA margins, free cash flow, and leverage. Specifically, adjusted EBITDA margins are expected to expand approximately 600 basis points from 2023 to year-end. Year-to-date, free cash flow has improved dramatically by $20 million, and we have paid down debt by approximately $35 million, reducing our net leverage position by more than two turns, all amidst a complex operational backdrop. As Chris mentioned, since the end of 2023, we have meaningfully improved the quality of our earnings, and we believe we are in significantly better position today than just two years ago. One of our top priorities was to drive efficiency and cost optimization across the organization. We put in place many process improvements, including an ROI-driven assessment of our spend, clear accountability to the business units, and monthly forecast reviews of the business. Throughout 2024, we implemented cost optimization decisions along with the change in mindset throughout the organization, resulting in an adjusted EBITDA margin of 16.5% for the year, a 340 basis point improvement compared to 13.1% in 2023. In 2025, based on the midpoint of our guidance, we are on track to reach a 19% margin for the full year, yielding another 260 basis points increase. Continuing with the same mindset, we have identified and are in the process of actioning additional cost optimization opportunities in combination with incremental net savings expected from the global workforce transition. I'm confident that as these actions compound, we will be able to deliver continued improvement in our margin profile in 2026 and beyond. Further, disciplined ROI-driven cost management and investment decisions have significantly optimized our product development spend. As a result, capitalized software spend has decreased by 30% from approximately $18 million in the first three quarters of 2023 to approximately $12.5 million in the first three quarters of this year. Additionally, year-to-date capitalized software spending as a percent of revenue has come down to 4.8% from 7.2% in the corresponding period. These efforts, along with the working capital improvement, have resulted in growth in our cash balance from $3.8 million at the end of 2023 to approximately $20 million today. In addition, free cash flow, which we define as operating cash flow minus CapEx, was $15 million year-to-date in 2025 compared to a cash outflow of $5 million in the corresponding period in 2023. Further, we have also continued to strengthen our balance sheet through disciplined debt reduction, paying down debt by approximately $35 million since January 2024 and improving our net leverage ratio from 4.4x in Q4 2023 to approximately 2.2x by Q3 2025. This also marks the third consecutive quarter with net leverage below 2.5x, highlighting our consistent focus on balance sheet improvement and capital efficiency. As cash generation continues to accelerate, we are well positioned to conclude the year with a meaningfully stronger financial foundation. Turning now to our Q3 2025 financial performance. Total revenue for the third quarter was $86.1 million, an increase of approximately 2% compared to a year ago. However, I'd like to point out the year-over-year growth included approximately $1 million impact from the sunset of our Centriq product in the Patient Care unit. Normalizing for this, revenue would have been up 2.8% versus the prior year. Further, recurring revenue continued to be high around 94% of our total revenue. Financial Health revenue of $54.5 million in the quarter represented approximately 63% of the total company revenue and was essentially flat year-over-year. Mid-single-digit growth in our CBO business and strong growth in Encoder revenue were offset by slower performance in other products. Financial Health gross margin of 46.2% was almost flat compared to the prior year as labor efficiencies were offset by incremental investments in the stabilization of the CBO business. Patient Care revenue was $31.6 million, reflecting 5.3% year-over-year growth, primarily driven by growth in SaaS and some nonrecurring revenues offset by the sunsetting of Centriq. Excluding Centriq, growth in Patient Care revenue would have been 8.9% in the third quarter. Patient Care gross margin expanded meaningfully to approximately 60%, an increase of nearly 370 basis points versus last year, driven by continued operational efficiencies in vendor spend and labor costs. Operating expenses of $40 million represented 46% of revenue and were roughly flat to the prior year as a slight increase in investments in product development for Encoder and Financial Health and in support functions were offset by lower nonrecurring costs. All of this resulted in third quarter adjusted EBITDA of $16.3 million with an 18.9% margin, representing a 155 basis point improvement compared to 17.3% in the third quarter of 2024. This margin expansion is primarily driven by gross profit improvement and our disciplined approach to cost management. We ended the quarter with $19.9 million in cash, an increase of $11.3 million, 132% year-over-year, and an increase of $7.6 million sequentially, primarily driven by improved profitability, lower interest expense, and disciplined working capital management. Net debt was approximately $144 million, and our net leverage ratio improved to 2.2x, marking our strongest leverage position in several years. In Q3, we repaid approximately $2 million on our debt, including normal amortization payments, bringing our total payments to approximately $35 million since January 2024. Finally, turning to guidance for the fourth quarter and the rest of the year. For the fourth quarter of 2025, we expect revenue of $86 million to $89 million and adjusted EBITDA of $16.5 million to $19.5 million. And for the full year 2025, we expect revenue of $345 million to $348 million and adjusted EBITDA of $65 million to $68 million. Once again, we will be increasing the adjusted EBITDA guidance for the full year despite lowering the midpoint of revenue. At the revised midpoint, margins expand approximately 260 basis points compared to the prior year, driven by a continued focus on prudent cost management and ROI-driven cost rationalization. As communicated in the past quarters, we expect the adjusted EBITDA margin in Q4 2025 to be around 20% at the guidance midpoint. While we will not provide formal 2026 guidance until early next year as usual, we do want to take this opportunity to share that we believe we will deliver further adjusted EBITDA margin expansion of around 200 basis points from the midpoint of our full-year 2025 guidance. This is primarily driven by the next level of cost optimization actions we have identified and are in the process of realizing along with the net savings from the next phase of global offshore transitions. Through the first three quarters of the year, I'm pleased with the meaningful progress in improving the quality of our earnings and am looking forward to ending the year on a strong financial footing. There is still more work to be done and we will continue to be laser focused on continuous improvement. Thank you. And I will now turn the call over to Christine for questions.

Operator, Operator

Thank you. Our first question comes from Sarah James with Cantor Fitzgerald.

Gabrielle Ingoglia, Analyst

This is Gabie on for Sarah. I had a quick question about bookings coming in at $15.5 million, and I appreciate the fact that they're higher quality bookings. But can you talk about where this landed in terms of your internal initial expectations for bookings in the quarter? And if we should expect the cadence of bookings to be with higher EBITDA margin from here?

Christopher Fowler, CEO

Yes. So first of all, Gabie, and please share our congratulations to Sarah as well. Obviously, not the number that we were looking for. I would say we're probably 20% off the number of what we were expecting for the quarter. And again, it wasn't like we saw a negative decision influence on this. It was more of a delayed decision. And I think that, that's showing through in the early success of Q4 and what we're seeing in October. I will say we are being very intentional on the bookings that we're going after on the Patient Care side focused on our conversion to the SaaS model, which is a larger overall booking and does have some more complexity. So it has expanded the buying decision at the customer level. On the Financial Health side, we continue to be optimistic about the opportunity that's out there. We've just got to continue to get these hospitals to see the value and the need for the additional services to come in. As the regulatory landscape settles down a little bit, I do think that the focus on improvement for the RCM side of the house for the hospitals will continue to be a priority and will lead to increased bookings efforts going forward.

Vinay Bassi, CFO

Regarding the margin question you raised about bookings, Gabie, we are observing an enhancement in quality from a margin perspective as well. For instance, our Encoder business is achieving margins of 70% to 80%. Year-to-date in 2025, bookings for Encoder have nearly doubled compared to last year. The more bookings we secure, the better our margins. However, the mix of bookings does play a role in this, but overall, we've noticed a positive trend.

Gabrielle Ingoglia, Analyst

Okay. Great. And then just one more follow-up on that, if I could. In the conversations where the hospitals are choosing to delay implementation, are you seeing that commonality and if it's referenced to Medicaid funding cuts coming through One Big Beautiful Bill? Or is the $50 billion rural hospital fund and net benefit coming up at all in your conversations? And could that be a tailwind in '26?

Christopher Fowler, CEO

Yes. I think it will be a tailwind. Again, I think the uncertainty is, again, not changing people's decision. It's just delaying them for just a beat. We are seeing that pickup. I think there's also the impact of the vast majority of our hospitals are on a calendar year budget cycle. So you take the impact of the budget process and what they're doing or what they're trying to figure out relative to what the OBBB may have an impact on their next year is creating some delay. But again, as they're shoring up what their spending needs are for '26, we're starting to see those decisions accelerate.

Operator, Operator

Our next question comes from Jeff Garro with Stephens.

Jeffrey Garro, Analyst

Maybe we'll follow up a little bit on the bookings front and great to hear the mention of October bookings success. It sounds like that kind of reflects timing, maybe some decisions pushing out of Q3. So with that, I was hoping you could discuss kind of the broader pipeline, the state of the pipeline. And then kind of help us level set bookings growth expectations for the year. Just more specifically, if some decisions pushed out from Q3 into Q4, is there enough in the pipeline that kind of pro forma back half of the year could deliver in line with maybe what you were intending or could compare to last year as well if there should be an expectation for overall growth or not?

Christopher Fowler, CEO

Yes. First of all, Jeff, thanks for being on the call. Yes. The short answer is I would say, I wouldn't draw a straight line to the second half of the year based on the early success of October kind of covering up the shortfall in Q3 at the very top of it. With that being said, obviously, we are focused on driving as much performance from a bookings perspective into this year as we can. Obviously, Mike has stepped in with guns blazing at the first of October. And while a leadership change can also lead to a little bit of disruption, we're pleased with the continuity and the smooth transition that we've seen from Dawn to Mike and how the team has rallied behind him. So with that said, we're off to a good start. We've got the bookings. We've got the pipeline coverage to cover what we expect for Q4. However, what we could see is a very similar outcome to Q3, which is those bookings continue or those pipeline decisions continue to delay. We try to balance the optimism that we're seeing with making sure that we're setting the right expectations, obviously. So with that said, we're very focused on making sure that we convert on those opportunities to close this year. I think the balance of the rest of this year will also set up how we're looking into going into next year. What is positive as we see the pipeline build is that there is coverage on a lot of fronts. You heard Vinay talk about the Encoder and the success we're seeing there. We're seeing that same optimism build on the Patient Care side with the SaaS bundled opportunities and again, in the Financial Health, both from a cross-sell standpoint and into that net new space. So now it's just a matter of seeing that pipeline convert to those bookings opportunities.

Jeffrey Garro, Analyst

I appreciate that. I want to follow up on something regarding the new sales leadership. I'm looking for more details on what's required moving forward. What is the process for improvement? I recognize that there have been efforts over the past few years to enhance the quality and consistency of bookings, and for the most part, those efforts have yielded positive results. I'm curious to know whether new leadership will need to introduce new personnel and start from scratch, or if there's a possibility that Mike can make an immediate impact as you work on converting more of that pipeline into closed bookings.

Christopher Fowler, CEO

Yes. That's a very fair question. I would say it's probably a mix of both, right? I mean if you look at how we've gone through the other areas where we brought new leadership, I think we want to make sure that we're taking advantage of the talent and the continuity that we have, but also make sure that we're finding the resources and the talent that have been down the road that we're trying to go down. I think the Financial Health organization is a great example of that, where we brought in additional talent and leadership under Merideth that have been a part of a transition to India or operating a successful global environment. So I think that Mike will do the same thing. I think that we're going to make sure that we have the right infrastructure in place for him. I'm excited about also tying together the sales, marketing and the client success function together under him so that we do have that holistic view of a customer, both in the pipeline and all the way through as we onboard them and that we've got single ownership there and accountability to deliver on the fronts that are most important to us, which is the retention and the growth. So a long-winded way of saying, I think that we're going to give Mike the latitude to bring in the team and support him to make sure that we're able to achieve the bookings goals that we've got set for ourselves over the coming years.

Jeffrey Garro, Analyst

Excellent. That helps. One more for me. I want to make sure to hit the retention front. And I'll ask it in part as a housekeeping question, whether you have the recurring backlog number that usually shows up in the 10-Q on hand. And then from a fundamental perspective, I wanted to recognize that that's a bit of a legacy metric, but given the focus on renewals and retention and recurring revenue, I think there's a case to be made that it's as important as ever. So I would appreciate any color on whether you guys are managing to that backlog, I guess, most specifically the recurring backlog metric internally.

Vinay Bassi, CFO

Yes. So we do look at the backlog because we run it this way. And that number, obviously, will be in the 10-Q coming up in the next few hours. So on how we do it, just to give you a little color more is on backlog for that number is contracted and noncontracted. Contracted revenue is at a client level, monitored with ins and outs to it. And like we said, in like in Financial Health, it's like 95%, 96% is generally how we start the year. Like if you look at our recurring numbers that I see right now, it's 94%, Financial Health is like 95%, 96%. So we have a huge contracted revenue there. But obviously, the ins and outs of that is attrition that happens and how the bookings fill in, that gives the impact on the growth rate. But I think the backlog number should be coming out in the 10-Q in the next few hours.

Operator, Operator

Our next question comes from the line of Gene Mannheimer with Freedom Capital.

Eugene Mannheimer, Analyst

Let's see. I just had two quick ones. The Patient Care revenue was the best growth we've seen in some time. You called out a combination of SaaS build and nonrecurring. I mean, since that SaaS build is pretty gradual, I'm thinking you recognize some good nonrecurring business in the quarter. Can you tell us what specifically customers are buying in those cases?

Vinay Bassi, CFO

Yes, you're correct. There are two parts to this. SaaS has shown double-digit growth based on a few recent successes. The nonrecurring segment includes the timing of when implementation revenues are recognized, which can vary. Additionally, there are other nonrecurring revenues related to regulatory consulting work. We did see an increase in these areas compared to last year, with a slight uptick this quarter. However, we expect to see even higher numbers by Q4 of '24 due to these fluctuations. Aside from SaaS, we are continuing to strengthen our partner ecosystem with products like Multiview and all implementation services. Occasionally, we also receive requests for hardware sales and ancillary products from customers.

Eugene Mannheimer, Analyst

Okay. Great. That's helpful, Vinay. And my follow-up would be, your comment earlier was encouraging to hear, if I heard it right, 200 bps of EBITDA margin expansion expected next year. I'm thinking that, that's going to be due primarily to continued cost efficiencies? Or should we infer that there could be an acceleration of revenue growth next year?

Vinay Bassi, CFO

That's a great question, and I appreciate your understanding of my perspective. The 200 basis points of EBITDA margin expansion primarily comes from our cost optimization efforts. This isn't just a hopeful projection; as you saw last year, this has been an ongoing initiative that we will continue to pursue. Last year, we reached our lowest cost level, which was what Chris, the leadership team, and I could achieve at that time. Over the years, we've worked on enhancing our optimization strategies, aided by our internal teams and external advisers. The momentum we've gained, particularly in the second half of this year, is focused on more complex solutions, such as Patient Care support, tech support, cloud operations, and return on investment-driven initiatives for other products. I'm optimistic about our progress and the potential we have for next year, ensuring that these enhancements will positively impact our bottom line. This is one of the key factors driving our projected numbers, in addition to the advantages we expect from our global workforce optimization. While we've considered some revenue growth scenarios, as Chris mentioned, it's still early for us to provide precise guidance. However, through various analyses, we believe it is quite attainable to achieve that 200 basis points based on the midpoint of our guidance. We shared our goal of reaching 20% in Q4 '25, which has kept us focused. Thus, we see multiple paths to achieving the additional 200 basis points.

Christopher Fowler, CEO

Yes. And I think, Gene, I think there's also a trend that we're trying to create here. So if you go back two years ago, as Vinay came in, and you're seeing the stability and the financial improvement in the company, that's the first layer of the cake. The second layer is Merideth and her team coming in and stabilizing the Financial Health business and accelerating and delivering on that opportunity for the global transitions, which is going to be the big driver in margin expansion next year. And then now we brought in Mike to really kind of focus on that upsized opportunity from a sales growth and quality of bookings going forward. So it's the three layers of the cake that we've built. We've shown that we can bring that right talent and deliver on the financial excellence. We're delivering on the performance from the financial health and the stabilization of that business. And now we look forward to success on the sales front going forward. So just continuing to replicate a model that seems to work in each of the areas to put it all together to extract the value we think is still ready to unlock in the organization.

Operator, Operator

Mr. Fowler, we have no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Christopher Fowler, CEO

Thank you, and thank you to all for your continued interest in TruBridge, and thanks to all of our team members for their continued efforts at the company and all that they do. And lastly, a very early Happy Veterans Day. We express our gratitude to all those that have served our great country, and hope everyone has a wonderful weekend, and thanks again. Goodbye.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.