Earnings Call Transcript - TBRG Q2 2025

Operator, Operator

Greetings, and welcome to the TruBridge Q2 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Dru Anderson. Please go ahead.

Dru L. Anderson, Host

Thank you. Good morning, and welcome to the TruBridge Second Quarter 2025 Earnings Conference Call. Leading today's call are Chris Fowler, President and Chief Executive Officer; 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 now turn the call over to Mr. Chris Fowler, President and Chief Executive Officer. Please go ahead, sir.

Christopher L. Fowler, CEO

Thank you, Dru, and thank you, everyone, for joining us this morning to discuss our Q2 results. We made steady progress towards our long-term goals with bookings, profitability and cash flow standing out as bright spots in the quarter. Before I dive into the results, I'm excited to share that last week, I had the honor of representing TruBridge at the White House for the CMS HealthTech ecosystem event, where we officially signed the CMS interoperability framework pledge. This is an important milestone for us, and it really speaks to our ongoing commitment to empowering rural and community health care providers to keep care local. For over 45 years, TruBridge has delivered solutions designed to help providers remain independent and focus on what matters most to their patients. By reinforcing our focus on interoperability and modern data infrastructure, we're working to make real-time secure patient data accessible anytime and anywhere it's needed. This not only protects patient privacy, but it also gives patients and providers the tools they need to improve outcomes and enhance the health care experience. I'm proud of the impact our work is having in the communities we serve, and I'm encouraged about what we can achieve together as we work to move health care technology innovation forward. As we continue to advance through our transformation, progress isn't always a straight line and can sometimes involve delays, but we remain confident in achieving our long-term objectives. A key factor contributing to our confidence is our work with a third-party consultant building upon our existing efforts to enhance three main areas across the enterprise: one, improvement of operations; two, driving efficiencies; and three, unlocking the value of our existing customer base. We will elaborate a bit on these initiatives today and keep you updated on our progress going forward. With that, let's move on to our review of the quarter and outlook for the remainder of the year. Bookings came in at $25.6 million on a TCV basis compared to $22 million sequentially and $23 million year-over-year. Revenue of $85.7 million came in towards the lower end of expectations, while adjusted EBITDA of $13.7 million came in slightly ahead of the midpoint. Now that we are halfway through the year and with more visibility into the second half, we are taking a refreshed look at our guidance. We're lowering the top end of our revenue range and adjusting our adjusted EBITDA range as well. On the revenue side, there are two key factors driving our adjustment to guidance: CBO client retention and delayed revenue recognition from bookings. First, client retention in the CBO side of our financial health business was slightly lower than we had originally forecasted at the start of the year. Our North Star remains client delight, and we continue to take steps to improve client satisfaction back to our historical levels and beyond. At the beginning of the year, we identified 60 of our CBO clients up for renewal to use as a proxy for these efforts. In the quarter, we signed 12 of 15, bringing our year-to-date total to 21 of 26. With respect to this group of clients, we expect renewals to remain in this range in the back half of 2025 but with significant improvement in 2026 based on our performance. The first half of this year has been used to build a thorough and strategic plan. And now, in the second half of the year, we will turn our attention to operationalizing this plan, fully recognizing that this is going to be a multi-quarter journey. To that end, I'd like to walk you through some of the steps. First, we have significantly enhanced our resource management efforts for CBO primarily by aligning people and work through a refined resource model that corrects misalignments, ensures the right resources are in the right place, and allows us to prioritize client work more efficiently. As a result, we instituted a temporary pause in Q2 in our global hiring efforts to rightsize staffing needs while continuing to invest in our people through training programs that enhance our acute RCM talent. We were able to offset the savings impact of this decision with savings from other efficiencies in the Financial Health business unit associated with resource management and productivity. Second, to supplement our remote workforce strategy, we are moving forward with establishing a physical presence in India to standardize our workflow, align with industry best practices, and ensure capacity to ramp at our desired pace. We are in the final stages of planning and are targeting an opening in 2026. Once operational, enhanced training and greater accountability through in-office presence will drive continued improvements in productivity, quality, client satisfaction and retention. Our plans include increasing the global workforce for this office with the initial focus on the CBO and EBO businesses. This is another testament to our commitment to streamlining operations and strengthening our team dynamics, both of which we believe will benefit meaningfully from a physical location in India. And third, we completed several leadership hires focused on offshore service levels. First, our new Head of Services for Financial Health brings 15 years of experience in the health care outsourcing services in the RCM industry. This new role will ensure our services successfully support our clients' financial health through the delivery of consistent revenue cycle operations. We also brought on a new Head of India who joins us with more than 25 years of leadership experience in the U.S. health care sector specializing in RCM operations, data analytics, and business transformation. With our new leaders on board, we have lifted the temporary pause. They will focus on enhancing client service quality, driving operational efficiency, and establishing strong in-office capabilities to support long-term client retention. Now that we have identified client retention as our area of opportunity and laid out a tangible plan to tackle this head on, I feel confident that we will begin to make headway on improving this metric. The second factor affecting our revenue outlook is our success in bookings and more sizable deals. We've mentioned in the past that as we move upstream into larger hospitals and as we sell more of our integrated interest solution, these larger-sized deals take much longer to implement than what we have seen historically with smaller hospitals. While this sort of positive improvement is encouraging, it doesn't come without growing pains. In our experience, deals that were over $1 million in recurring revenue took approximately six months to go live compared to deals under that $1 million mark, which went live in between one and two months. Said succinctly, some of the meaningful deals we've signed in Q1 and Q2 won't start contributing revenue until 2026. For example, we're incredibly pleased to share that we signed a large deal this quarter, which expanded an existing partnership through the addition of three nTrust agreements. Implementation is not scheduled to go live until next year, but their decision to add three hospitals following a competitive process was based on the positive experience they've had with us to date as well as the risk-sharing model of our nTrust package. Turning now to our profitability expectations for the year. Our revised EBITDA outlook now reflects an EBITDA margin of 18.5% at the midpoint of the range, up from 17% in our previous guidance. This is driven by factors in both Financial Health and Patient Care. First, in Financial Health, we see further efficiencies in our global offshoring initiative. Since Merideth has come on board, she has taken a metrics-driven approach and implemented productivity enhancements and performance-based incentives, which we expect will yield incremental savings in the second half. Second, we have taken steps to improve our resource management process. Specifically, we have implemented a more robust model for tracking supply versus demand of resources by functional area, and as I mentioned above, have adjusted our hiring approach and incentive programs. Not only does this make us more efficient, it provides an opportunity for cost savings, but it also helps ensure we have the right levels of staffing to best serve our customers. Lastly, we are seeing a favorable revenue mix with our encoder solution over-performing and delivering higher gross margins. Finally, in patient care, we are working to enhance and streamline our operations, particularly in client support. As a result, we expect some savings beginning in the fourth quarter. I want to close my comments today with some of the ways we're innovating, specifically leveraging AI, both internally to drive efficiency and externally to enhance the client experience we're able to deliver. Internally, we recently released an AI solution for our patient care client support team. We believe that it will help our patient care support team respond in a timelier manner and, more importantly, with a standardized approach, ensuring that all our clients receive the same high-quality experience. Externally, as we announced in May at our National Client Conference, we are collaborating with Microsoft to integrate Microsoft Dragon Copilot into our EHR solution. Providers that use TruBridge will be empowered by advanced secure speech recognition and AI capabilities designed to support the unique needs of our rural and community health care clients. Our goal with this collaboration between our two technologies is to enhance care delivery, financial stability, and operational efficiency for thousands of hospitals and health care systems across the country. I believe this collaboration will be welcomed by our clients when the integrated solution becomes available later this fall, and I'm thrilled for TruBridge to be partnering with Microsoft to bring cutting-edge solutions to our clients. As I hand the call over today, I'd like to reiterate that I am pleased with the progress we continue to make across the company. We feel that our bookings growth validates the value we offer clients, and our improving margin profile is a sign that we are on the right track. We will always continue to refine and optimize our approach, but I firmly believe that the actions we are taking today are the best way to set us up to deliver sustainable and durable growth down the road. Now with that, I'll turn the call over to Vinay for a deeper dive into the financials.

Vinay Bassi, CFO

Thank you, Chris, and good morning, everyone. Let me take a few minutes to walk through our second quarter financial results, share the progress we are making on key financial initiatives and provide additional color to Chris's update on our outlook for the remainder of the year. We have made notable progress in working capital improvement and on increasing free cash flow conversion. For the first half of 2025, we generated $14.5 million in cash flow from operations, an increase of $2.8 million compared to the first six months of the prior year. Year-to-date, free cash flow, which we define as cash flow from operations less CapEx, was $5.5 million, up $3.4 million compared to the first six months of 2024. Accounts receivable in the second quarter improved 5% and DSO improved by four days compared to the prior year. We expect to continue to improve in this area. But this year, anecdotally, we are still seeing our clients holding cash, given the ongoing external policy uncertainty. From a leverage standpoint, we ended the quarter at 2.4x, an improvement from 3.9x a year ago and marking the second consecutive quarter net leverage has been below 2.5x. During the quarter, we paid down $1 million in incremental principal, bringing the total debt payments to $32.5 million since January 2024, including $5 million in normal amortization payments. Our profitability profile continues to improve as we realize the efficiencies and leverage that are inherent in our business. In Q2, we delivered an adjusted EBITDA margin of 16% compared to 15.7% last year. This Q2 also carried expenses related to our annual user conference and the sales kickoff meeting that was rescheduled from Q1. We continue to work on identifying additional areas of cost efficiency in client support and vendor relationships, as well as optimizing our global offshore initiatives. The midpoint of our revised guidance reflects an adjusted EBITDA margin of approximately 18.5%, which is up 200 basis points compared to the previous year, and we remain confident that we can end the year around 20%. Finally, we are making continuous progress on our financial stability, accounting processes, and forecasting accuracy. We are actively working on remediation and strengthening of our accounting processes and internal controls. We are also excited about the selection of KPMG as TruBridge's new independent registered public accountant and look forward to their partnership as we work to remediate and strengthen our key controls. Now turning to our second quarter results. Starting with bookings. As Chris mentioned, we reported $25.6 million on a TCV basis, an increase of 10% year-over-year. On an annual contract value, or ACV basis, which we provide in our press release and 10-Q filing for better comparability and improved clarity on revenue potential, bookings were $19.6 million in Q2, up 13% sequentially. Revenue in the quarter of $85.7 million was roughly flat to the prior year. However, I'd like to point out approximately $1 million of the year-over-year variance is primarily due to the sunsetting of the Centriq product last year. Normalizing for this revenue would have been up 1% versus the prior year. Financial Health revenue of $54.3 million was relatively flat and represented 63% of the total revenue. This is largely due to slightly elevated levels of customer attrition as well as the impact of timing of some revenue in Q1, as mentioned in last quarter's update. On a year-to-date basis, Financial Health revenue grew 2.3%. Patient Care revenue of $31.4 million increased approximately 1.1%; excluding Centriq's contribution from last year's Q2, patient care would have grown almost 4%. Gross margins in the quarter of 52% increased 250 basis points over last year. Financial Health gross margins of 46% in Q2 increased 150 basis points compared to a year ago and benefited from our offshoring initiative as well as run rate savings from the 2024 cost optimization actions. Patient Care gross margins reached a recent high of 62% in Q2, increasing 400 basis points year-over-year, driven primarily by cost optimization actions from '24 and '25. Moving down the P&L, total operating expenses of $40.8 million primarily represented 48% of total revenue and compared favorably to Q2 of last year at 52% of total revenue due to cost optimization effort of the previous year. All of this resulted in Q2 adjusted EBITDA of $13.7 million with a 16% margin compared to $13.4 million at a 15.7% margin in Q2 of 2024. From a cash and cash equivalent standpoint, we ended Q2 with $12.3 million, up $2.2 million sequentially and $4.6 million year-over-year. Turning to guidance for the third quarter, we expect revenue to be in the range of $85 million to $87 million and adjusted EBITDA to be in the range of $14 million to $16 million. For the full year, we are lowering the top end of our revenue range and raising our adjusted EBITDA range as follows: revenue will be between $345 million and $350 million, at the lower end of our previous range of $345 million to $360 million, and adjusted EBITDA will be between $62 million and $67 million, up from a previous range of $60 million to $66 million. Despite the revision in full year revenue guidance, as Chris discussed, we have increased adjusted EBITDA guidance through prudent expense management, labor cost optimization, and resource management. We have made meaningful improvements in several areas during the first half; I believe we are well positioned in the multi-billion dollar market we are in with plenty of room to run. With that, operator, let's open the call to questions.

Operator, Operator

And our first question comes from Sarah James from Cantor Fitzgerald.

Sarah Elizabeth James, Analyst

You mentioned a number of savings and efficiency initiatives. Is there any additional color you can help us with scaling that or pacing of how that may come on board?

Vinay Bassi, CFO

Yes. That's a great question, Sarah. So how I would say, I'll just take one step back to explain that. Last year, we did cost efficiencies. I would characterize that as the low-hanging fruit. That if you remember, were $8 million, $9 million on a run rate basis, some $4 million, $5 million came in, in '24. With the team settling in and getting now the benefit of our third-party consultant, we are now cracking a little more complex part of the puzzles. And like, for example, one of the areas I mentioned was in client support. We are trying to modernize our client support organization. So that is one of the areas where we were working in the first half on the planning part of it. And in the second half, most likely from the fourth quarter onwards, we will start realizing some savings. So that is one example of there. So I would say, to give you a sizing of it right now, from a run rate basis, I see a run rate basis, meaning it would be seen in the low single-digit millions. But our goal is to find areas which are tougher but help us get on a solid footing to our overarching goal or objective that we set to be in the mid-20s EBITDA margin in the couple of years. So as I had mentioned, some of these are now complex, which will help us, but with that goal. And the other part of these are, I would say, vendor optimization, which is, I would say, run of the mill every day, every week. But then the third part is the resource management initiatives, productivity initiatives that will help us, but I would characterize the first target like the client support is one of the few that we are trying to tackle, and hopefully add more in our journey to get to the mid-20s EBITDA margin.

Sarah Elizabeth James, Analyst

That's very helpful. And one more, now that OB3 or One Big Beautiful bills passed. Have you had a chance to check in with your client base and see how they're thinking about budgeting and if it has any impact on the pace of signing contracts or expanding contracts?

Christopher L. Fowler, CEO

Thank you for your question, Sarah. Since January, we've been in touch with our clients regarding the uncertainty surrounding the legislation. I would say the first half of the year was characterized by some hesitation as we awaited the final outcome. However, now that the bill has been passed into law, there is a sense of certainty that is prompting our hospitals to begin their planning processes. We are collaborating with them and providing resources to evaluate the potential effects, particularly concerning Medicaid eligibility and its implications. We are also considering ways to partner with state agencies to contribute to the $50 billion rural health care fund included in the legislation. While it's still early in the process, we are fully engaged both internally and with our customers to assess the possible impacts. Regarding your question about sales impact, I anticipate there could be some challenges in the second half of the year. We haven't observed any effects yet, but it's hard to predict with certainty how things will unfold. As our clients start their planning for 2026, this will definitely influence their strategies. In the long run, we see this as an opportunity to play a significant role in guiding our customers through the new landscape, ensuring they operate efficiently and provide the best services to their patients.

Operator, Operator

Our next question comes from Jeff Garro with Stephens.

Jeffrey Robert Garro, Analyst

Yes. Maybe we'll follow up on the demand front and specifically about bookings and overall, last couple of years, an effort to deliver more consistent bookings and you guys have come through on that. And for the most part, maybe one quarter a year with bookings slipping below $20 million. But what are the leading indicators and the macro environment telling you right now about your ability to deliver that kind of consistent above $20 million bookings level for the rest of the year?

Christopher L. Fowler, CEO

Yes, that's a great question. We remain confident in our bookings performance. It's a good balance between patient care and financial health. In terms of financial health, there's a favorable balance between our customer base and the net new market. We are noticing positive trends across all areas. However, the unpredictable aspect for us is how the patient care net new market will evolve. We achieved a good win this quarter, raising our numbers to a strong position. Unfortunately, opportunities in that space aren't as plentiful as they used to be. We're winning when we can, but the broader economic environment shows that hospitals are still committed to their current electronic health records. We are enthusiastic about our capacity to deliver innovation in that area, along with RCM services, to provide a unique solution for our market segment. The trends in financial health remain stable, with ongoing demand to reinforce the performance of RCM and our customer base. This quarter also saw some substantial expansion deals on the net new side, which aligns with our strategy of starting small, establishing our presence, completing a deal effectively, and then further developing the relationship. While we cannot predict the future, we feel optimistic about our ability to maintain consistent performance.

Jeffrey Robert Garro, Analyst

Excellent. I appreciate all that detail. And of course, another part of the growth story is retention. We'd welcome any additional comments there on performance by segment. And I really appreciate the transparency on financial health renewals. But of course, overall retention is likely much better than what we get, if we do the math on those renewal conversions as not all of the book is up for renewal each quarter. So a little more color there on how we should think about retention trends for the overall book of business by segment would be helpful.

Christopher L. Fowler, CEO

Yes, absolutely. Vinay and I may share insights on this topic. I'll begin by discussing the Patient Care side. We're seeing strong retention numbers and renewal rates, and I'm pleased with how the team has performed over the past few years. You might recall we brought in a new general manager at the end of 2023, and we are now witnessing that transformation take effect, evident in our customer interactions. For Financial Health, our focus is on ensuring that our offshore and global operations are well-managed so that we continue delivering to our customers as consistently as before. When we examine the performance metrics, we see a month-over-month improvement for our customers, leading to greater satisfaction and, subsequently, better retention. While we experienced some challenges during last year's conversion, we've re-evaluated and adjusted our approach, giving us confidence in our ability to stabilize and eventually enhance retention on the financial health side. It's crucial to highlight that in our Revenue Cycle Management business, the primary focus has been on the Customer Business Operations, which has transitioned offshore and constitutes about half of our financial health revenue. The rest of our business remains steady and continues to improve. There are positive developments worth noting, particularly in the Encoder business formerly known as TruCode. Our investments in this product are yielding results, and we are observing strong momentum in bookings, implementations, and revenue. Overall, as I mentioned at the start, we anticipated that the journey wouldn't be entirely smooth, and we've encountered some challenges. However, we have a solid plan in place to address these issues and anticipate improvements as we approach 2026. Would you like to add anything?

Vinay Bassi, CFO

Yes, I can provide some additional details. Regarding patient care, our retention rates are very high, as reflected in our 10-Qs being released today. This is not only due to the points Chris mentioned but also because we are developing operational and financial discipline, including pricing and cost of living adjustments. Our retention rates are in the high 90s. On the financial health aspect, the increase in bookings, particularly with the Encoder, aligns with the investments we approved last year based on an ROI metric, and that is proving effective. While growth may not be steady each quarter, we believe that with Merideth joining us and her tech expertise, along with our focus on financial discipline, we can ensure that all investments are driven by ROI objectives. We anticipate continued growth in the technology sector. On the CBO side, we now have resource management tools to improve our operations. However, net revenue retention is currently in the low 90s, which is a slight decline compared to our expectations. Nevertheless, we project that by '26, as things stabilize, we should regain momentum and improve this metric.

Jeffrey Robert Garro, Analyst

Excellent. Appreciate all that detail. Well, maybe one final follow-up on the financial health side of things. Just kind of trying to take a little bit of a step back and assess the Viewgol acquisition. My overall impression is that you're probably happy having the captive effort versus working with a third-party vendor, but maybe a few more issues to handle and tackle and remediate than you initially expected. But would love to kind of get your assessment on how that overall has performed relative to expectations? And maybe an assessment of kind of where you are in the duration of the journey to I know there's never going to be a perfect endpoint, but get to a place where you feel comfortable accelerating your clientele moving to the offshore model.

Christopher L. Fowler, CEO

Yes. Again, another good talking point for us. Yes, I would say, overall, still very pleased with that acquisition. To your point, we knew that we would need a captive effort, and we still believe that this was a good solution for that. I will say, and obviously said this in the prepared remarks, I think the learning for us over the last 1.5 years is based on the pace that we want to go with our size of our installed customer base and the need to bring on new resources at a speed; there definitely was a gap in the fact that the remote workforce just doesn't necessarily lead to that in a perfect solution. It doesn't mean that it's a bad part of the business. It just means it needs to have a complement to it, which is the academy that we're in the process of standing up. The other nuance in that as well is the difference between the ambulatory and the acute billing, while I'll say, and I've argued this point internally with our team, the level of acuity of our hospitals is probably closer to an ambulatory setting than it is to some of the larger facilities. However, it is still different. And that's something that we've got to make sure that our team in India is set up for success, understanding the nuance and the procedures associated with that. The last part I would say, is as we think about looking backwards to go forward, before we move to India, we had a very bespoke service and we were client-centered on the work which meant that we had 100 different processes for each client. As we look to the new global model, we realize that standardization is the path to scale and the path to what I think is ultimately higher performance and delivery for the customers. That has been part of the machine that's being built right now, is making sure that we have that standardization, that we've gone back through and that we've thoughtfully got all of our customers lined up right in the new workflows so that we're making sure that the delivery is there. The connection being to the old model was that we also have a staff that we've built up that does represent client success that is very focused on the impact and the relationship with the customer, married back to the performance that we're delivering with our global team. So you look at all that, you look at the new leadership team that we brought in kind of in all facets through this, both on the global side and here domestically revisited the plan with them with our outside help as well, and feel very confident that as we finish this year and we're seeing that momentum continue that will hit next year running and see that conversion turn back on at full speed in '26.

Operator, Operator

And our next question comes from Gene Mannheimer with Freedom Capital Markets.

Eugene Mark Mannheimer, Analyst

So two things for me. One would be, will you disclose the name of that third-party consultant you mentioned in your prepared remarks? And secondly, regarding client attrition, where are these clients going? Are they opting for alternative solutions or bringing these capabilities in-house? A bit more context on that would be helpful.

Christopher L. Fowler, CEO

Yes, I appreciate you joining us early on the West Coast. The short answer to your first question is no, we will not disclose the name of the third-party consultant. Regarding client attrition, it's a mixed situation, but most clients are transitioning back in-house. To be fair, this can sometimes be influenced by new leadership at certain facilities that prefers to bring services in-house. There is still a bit of hesitation in our market towards the offshore model, which is why we have been intentional about maintaining strong relationships with our customers in the U.S. and ensuring a contingent of our workforce is also U.S.-based to help bridge that gap. Most clients have returned to the hospital, which keeps the possibility open for us to re-engage these customers in the future. Go ahead.

Vinay Bassi, CFO

Just on your first one, obviously, we cannot give the name, but let me tell you, Gene, it's not one person army. It's a top-notch consultants with the expertise of helping us in the core pieces. So obviously, as you appreciate, naming this stuff, but these are the best of the best that we could get that help.

Operator, Operator

This now concludes our question-and-answer session. I would like to turn the floor back over to Chris Fowler for closing comments.

Christopher L. Fowler, CEO

Thank you, Carry. As always, thank you for everyone in their continued interest in TruBridge and a special thank you to all of our TruBridge teammates. Without them, this journey would not be possible. So thanks to everyone, and have a great weekend.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.