CPSI 2017 Annual Report

45 TruBridge revenues increased 27.9%, or $17.8 million, primarily due to $13.4 million of revenues attributable to the HHI acquisition, mostly generated through the Rycan RCM solution ($8.0 million) and hosting services ($4.2 million). TruBridge- legacy increased 6.9%, or $4.4 million. Our hospital clients operate in an environment typified by rising costs and increased complexity and are increasingly seeking to alleviate themselves of the ever increasing administrative burden of operating their own business office functions, resulting in an expanded customer base for our private pay services (increasing 5.9%, or $0.8 million) and accounts receivable management services (increasing 11.9%, or $2.5 million). Additionally, the added complexity of the medical coding environment facing healthcare providers since ICD-10 became effective on October 1, 2015 has resulted in a substantial increase in demand for our medical coding services, resulting in an increase in these revenues of 79.4%, or $1.7 million. These increases were partially offset by a decrease of 59.0%, or $0.5 million, in health management consulting reflecting the 2015 ICD-10 compliance deadline. Costs of Sales . Total costs of sales increased by 48.2%, or $42.3 million. The increase was mostly attributable to $42.4 million of cost of sales contributions from the acquisition of HHI. As a percentage of total revenues, costs of sales increased from 48.1% to 48.6%. Costs of Acute Care EHR system sales and support increased by 42.4%, or $22.2 million due mostly to $26.3 million of costs of sales contributions from Healthland, partially offset by a 7.6%, or $4.0 million, decrease in costs related to Evident operations, mostly the result of decreased payroll and related costs due to managed attrition in the trailing twelve months and decreased travel costs associated with the aforementioned decrease in add-on sales for Evident. The gross margin for Acute Care EHR system sales and support decreased to 53.0% from 55.7%, primarily due to the margin profile associated with the Healthland system sales and support revenues. The gross margin on system sales and support generated by Healthland operations was 43.7% in 2016. Comparably, the gross margin on system sales and support generated by Evident operations was 56.9% during 2016, increasing slightly from 55.7% in 2015. The difference between the system sales and support gross margins of Healthland operations and Evident operations is the byproduct of a decreased support customer base for Healthland compared to Evident, resulting in a sales mix for Healthland that is more heavily weighted towards the more cost-intensive system sales revenues. Costs of Post-acute Care EHR system sales and support were $9.6 million in 2016, all attributable to the HHI acquisition. Gross margin on Post-acute Care EHR systems sales and support was 63.8% in 2016. Our costs associated with TruBridge increased 29.6%, or $10.4 million, with the acquisition of HHI contributing $7.1 million in 2016. The largest contributing factor for the increase in cost of sales to TruBridge-legacy was an increase in payroll and related costs of 23.6%, or $4.9 million, as a result of adding more employees during the trailing twelve months in order to support and develop our growing customer base and increase capacity in advance of anticipated future increases in demand. The increase in payroll costs was partially offset by a decrease of 61.5%, or $1.7 million, in temporary labor costs during 2016 due to intentional efforts to fulfill our incremental labor needs through direct hiring as opposed to contract or temporary labor. The gross margin on these services decreased to 44.1% in 2016, from 44.8% in 2015. This margin compression is primarily due to headcount growth related to our accounts receivable management services outpacing the related revenue growth, as recent bookings had not fully converted into revenues as of December 31, 2016, but nevertheless required immediate investment in capacity. Product Development Costs. Product development costs consist primarily of compensation and other employee-related costs (including stock-based compensation) and infrastructure costs incurred, but not capitalized, for new product development and product enhancements. Product development costs increased 129.3%, or $18.4 million, with nearly all of this increase related to contributions from the acquisition of HHI. Sales and Marketing Expenses. Sales and marketing expense increased 48.3%, or $8.9 million, with the largest contributing factor being $7.1 million of contributions from the acquisition of HHI. Additionally, payroll and related costs and travel costs associated with our CPSI-legacy operations increased a combined $1.8 million due to the expansion of our sales force. General and Administrative Expenses. General and administrative expenses increased 43.7%, or $16.1 million, with the largest contributing factor being $8.2 million of transaction costs in 2016 associated with our acquisition of HHI compared to $3.0 million in 2015. Other contributing factors were $1.8 million increase in payroll expenses, a $3.5 million increase in employee health expenses, a $0.8 million increase in legal and accounting expenses, a $0.7 million increase in retirement plan benefits, a $1.7 million increase in rent expenses, a $1.2 million increase in utilities, and a $0.5 million increase due to an added user group conference, all related to the HHI acquisition. In addition, despite $1.9 million in bad debt recoveries related to HHI pre-acquisition receivables, bad debt increased $1.3 million in 2016 primarily due to increased accounts receivable from the inclusion of HHI and severe collectability determinations related to two customers filing bankruptcy.