Thoughts on CPSI 3Q15 Results

Steven A. Rubis [email protected] (214) 706-9451

Stifel Equity Trading Desk (800) 424-8870

Analysis of Sales/Earnings

CPSI: 3Q15 Results - Illustrates Our Reimbursement Reform Concerns Facing HCIT; Hold

Thoughts. CPSI continues to face financial pressure stemming from weak hospital

spending trends in the community and rural hospital market. Management believes

poor performance can be attributed to the 365-day attestation period for MU2 in

2015, as the shorter 90-day period did not materialize until October. At the same

time, management spent ample time discussing IT adoption and installation fatigue

at these hospitals. Furthermore, the community and rural hospital EHR market is

completely penetrated. Management expects to see a 200 to 300 hospital

replacement opportunity in the coming years. CPSI’s revenue seems to be

evolving from perpetual license to subscription (we believe management uses the

term SaaS to describe subscription). While management sees opportunities for a

turnaround (roughly $100 million associated with MU3, and $33 million around

analytics), we are skeptical the company can put humpty dumpty back together

again. Our below consensus estimates illustrate our belief that negative trends are

larger than the Meaningful Use program and will likely continue into FY16,

especially should MU3 be delayed a year. Additionally, CPSI was affected by client

bankruptcies in 3Q15, which we believe could become a more significant issue as

healthcare moves to outcomes-based reimbursement.

Derivative Implications. Like Imprivata, CPSI’s poor financial performance seems

to illustrate a pause in small and rural hospital spending. Furthermore, we believe

CPSI’s results illustrate our concerns that HCIT faces a deflationary spending

environment heading into FY16. We believe management’s discussion also

suggests the reimbursement reform environment is leading hospitals to make

performance driven technology decisions rather than adoption driven decisions. In

our view, the negative backdrop affecting CPSI likely benefits ATHN ($151.74,

Buy) as its efforts aimed at the sub-50 bed hospital market continue to evolve.

Ultimately, we think the small, community, and rural replacement market will be

quite competitive; we think the market will favor innovative, cloud-based solutions.

Making a Distinction Around Outsourcing in HCIT. Management highlighted the

trend in community hospitals to outsource the majority of work that is not directly

related to patient care. We believe hospitals should outsource non-care work in

order to focus on improving outcomes. At the same time, we believe investors

should differentiate between HCIT-as-a-Consulting Service e.g., Trubridge, Cerner

ITWorks, Cerner RevWorks, et al., and software enabled services, which are

platforms extending capabilities via a third party ecosystem e.g., Allscripts and

CareSync and athenahealth’s More Disruption Please program. We believe the

long-term competitive advantage lies in providing technological solutions rather

than consulting or people solutions. Continued on page two.

Changes Previous Current

Rating — Hold

Target Price — NA

FY15E EPS (Cash) $2.49 $2.12

FY16E EPS (Cash) $2.61 $2.33

FY15E Revenue $189.9 $184.1

FY16E Revenue $195.8 $190.2

Price (10/29/15): $44.61

52-Week Range: $65 – $41

Market Cap.(mm): 493.0

Shr.O/S-Diluted (mm): 11.1

Enterprise Val. (mm): $453.4

Avg Daily Vol (3 Mo): 110,265

LT Debt/Total Cap.: 0.0%

Net Cash/Share: $3.53

Book Value/Share: 7.26

Dividend($ / %) $2.56 / 5.7%

S&P Index 2,089.41

EPS (Cash) 2014A 2015E 2016E

Q1 $0.73 $0.58A $NE

Q2 0.87 0.60A NE

Q3 0.91 0.40A NE

Q4 0.62 0.54 NE

FY Dec $3.13A $2.12 $2.33

P/E 14.3x 21.0x 19.1x

Revenue 2014A 2015E 2016E

FY Dec $204.7A $184.1 $190.2

EV/Rev 2.2x 2.5x 2.4x

EBITDA 2014A 2015E 2016E

FY Dec $55.4A $34.5 $38.1

EV/EBITDA 8.2x 13.2x 11.9x

One Year Price Chart October 30, 2015

Computer Programs and Systems, Inc.

CPSI – NASDAQ

HoldDigital Healthcare

Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors shouldconsider this report as only a single factor in making their investment decision.

All relevant disclosures and certifications appear on pages 5 - 6 of this report.

FY15 Guidance Reduction. For the third consecutive quarter, CPSI issued a downward revision to its full yearfinancial guidance. Management attributes the poor performance to a 365-day attestation period for MU Stage 2 in2015, as CMS did not allow for a 90-day attestation period until October. Management expects FY15 revenuesbetween $184 million and $186 million (previously $188 million to $192 million) and EPS of $1.77 to $1.81 (previously$2.05 to $2.17).

3Q15 Financial Results. Results were uninspiring, led by a 16.3% y/y decline in revenues. The company missed Stifeland FactSet consensus expectations across revenues (misses between 7% and 8%), adjusted EBITDA and cash EPS(misses between 30% and 40%). We provide a recap of CPSI’s 3Q15 results in Exhibit 1. We continue to believeCPSI faces structural issues beyond weak spending trends stemming from Meaningful Use attestation periods.

Exhibit 1: CPSI 3Q15 Financial Results Recap

Computer Programs and Systems, Inc. (CPSI)3Q15 Results

Total Diluted Adjusted

($ in mils, ex EPS) Revenues Non GAAP-EPS EBITDA

3Q15 Results $44,617.0 $0.40 $5,967.3y/y growth (%), Actual -16.3% -56.2% -62.4%

Stifel Estimate $48,561.8 $0.64 $10,581.2

y/y growth (%) -8.9% -29.7% -33.3%

Actual, % beat (miss) v. SN estimate -8.1% -37.7% -43.6%

First Call Consensus Estimate $47,700.0 $0.60 $10,000.0

y/y growth (%) -10.6% -34.0% -36.9%

Actual, % beat (miss) v. consensus -6.5% -33.6% -40.3%

Source: Company documents, FactSet, and Stifel estimates

Valuation. We maintain our Hold rating.

Post-Script:

We think Glenn Frey’s song Smugglers Blues may help tell our story best:

The Legacy EHR Blues – set to Glenn Frey’s Smugglers Blues

There's trouble in the hospital tonightIts my client server EHR, I had a premonitionwe should’ve gone cloud

I knew the chart was loadedBut I didn't think the order’d be killedOrders never closed, and the schedule went unfilled

So baby, here's your implementationPut the blueprint in your hand, here's a little customization nowDo it just the way you plannedYou hire my consultants, and I'll give you a twenty year contract

I'm sorry the EHR went downAnd someone had to lose, it's the nature of the businessIt's the legacy EHR blues, legacy EHR blues

The CMOs and CIOs, the providers and the chartThe installation and the maintenance and the things nobody sawNo matter if it's EDIS, point of care, or PASYou've got to call yourself SaaS, 'cause investors love recurring cash

There’s lots of SaaS-pirational companies, lots of EHR vendorsEvery patient’s an alias, since its all multi-instanceThe lure of a large installed base, it’s got a very strong appeal

Page 2

Computer Programs and Systems, Inc. (CPSI) October 30, 2015

Perhaps you’d like client server betterStandin’ in an EHR vendor’s shoes, Keep investors happyIt’s the legacy EHR blues, legacy EHR blues

Company Description

Computer Programs and Systems, Inc. (CPSI) provides healthcare information technology solutions predominantly forthe rural and community hospital space, including critical access hospitals. The company provides enterprise-widesoftware and hardware systems, which automate the clinical and financial management functions within a hospital.Additionally, CPSI provides business management, consulting, and managed IT services through its subsidiaryTruBridge, LLC. CPSI has over 650 clients across 46 states and Washington, DC, with the company’s target marketconsisting of rural and community hospitals with less than 300 beds. Management’s primary focus revolves aroundrural and community hospitals with less than 100 beds, which represents 94% of the company’s client base. Thetraditional hospital decision cycle associated with adopting CPSI typically takes nine months to 12 months. The typicaltime from contract signing to actual implementation is between 90 days and 150 days, with 120 days being theaverage.

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Computer Programs and Systems, Inc. (CPSI)Statement of Income

FY FYE FYE 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 EFY Ends Dec 2014 2015 2016 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

System Sales 75,098,728 43,844,448 35,952,447 20,453,427 20,663,393 20,755,908 13,226,000 12,584,948 12,268,000 9,072,000 9,919,500 Support and Maintenance 73,552,885 75,450,112 78,468,116 18,245,121 18,454,030 18,243,734 18,610,000 18,531,712 18,542,000 19,022,000 19,354,400 Business Management, Consulting, and Managed IT Services 56,090,205 64,805,953 75,822,965 13,395,830 13,935,853 14,327,522 14,431,000 15,122,683 16,276,000 16,523,000 16,884,270 TOTAL REVENUE 204,741,818 184,100,513 190,243,529 52,094,378 53,053,276 53,327,164 46,267,000 46,239,343 47,086,000 44,617,000 46,158,170

System Sales 44,620,259 39,104,233 30,919,105 11,193,416 11,292,643 11,087,200 11,047,000 9,809,683 10,641,000 9,726,000 8,927,550Support and Maintenance 29,080,279 28,010,383 29,817,884 7,373,953 7,127,197 7,454,129 7,125,000 7,159,711 6,842,000 6,654,000 7,354,672Business Management, Consulting, and Managed IT Services 37,065,438 41,491,754 47,768,468 9,091,710 9,454,761 9,525,967 8,993,000 9,963,978 9,927,000 10,626,000 10,974,776Cost of Revenues 110,765,976 108,606,370 108,505,457 27,659,079 27,874,601 28,067,296 27,165,000 26,933,372 27,410,000 27,006,000 27,256,998

Gross Profit 93,975,842 75,494,144 81,738,072 24,435,299 25,178,675 25,259,868 19,102,000 19,305,971 19,676,000 17,611,000 18,901,173

Sales and Marketing 14,370,242 12,398,955 14,746,621 3,964,167 3,633,891 3,561,184 3,211,000 3,033,358 3,271,000 3,002,000 3,092,597 General and Administrative 30,032,125 35,576,036 34,665,399 8,484,121 7,475,529 7,523,475 6,549,000 8,438,984 8,019,000 10,348,000 8,770,052

Operating Income 49,573,475 27,519,152 32,326,052 11,987,011 14,069,255 14,175,209 9,342,000 7,833,629 8,386,000 4,261,000 7,038,523

Other Income, Net 165,690 423,838 299,845 (40,910) 66,630 68,970 71,000 83,366 115,000 137,000 88,472

Pretax income 49,739,165 27,942,990 32,625,897 11,946,101 14,135,885 14,244,179 9,413,000 7,916,995 8,501,000 4,398,000 7,126,995

Income Taxes 16,818,973 7,789,376 9,135,251 4,231,043 5,029,498 4,889,432 2,669,000 2,409,087 2,597,000 859,000 1,924,289Tax Rate 33.8% 28% 28.0% 35.4% 35.6% 34.3% 28.4% 30.4% 30.5% 19.5% 27.0%

Net Income, pro forma, cont ops 32,528,192 20,033,614 23,490,645 7,715,058 8,962,387 9,202,747 6,648,000 5,507,908 5,784,000 3,539,000 5,202,706

Basic EPS, pro forma, cont ops 2.94$ 1.81$ 2.12$ 0.69$ 0.81$ 0.83$ 0.60$ 0.50$ 0.52$ 0.32$ 0.47$ Diluted EPS, pro forma, cont ops 2.94$ 1.81$ 2.12$ 0.69$ 0.81$ 0.83$ 0.60$ 0.50$ 0.52$ 0.32$ 0.47$ Dividends declared per share 2.28$ 2.55$ 2.55$ 0.57$ 0.57$ 0.57$ 0.57$ 0.64$ 0.64$ 0.64$ 0.64$ Shares outstandingBasic 11,065,081 11,078,289 11,091,385 11,162,523 11,022,076 11,027,723 11,048,000 11,052,044 11,079,000 11,091,000 11,091,110Diluted 11,065,581 11,078,289 11,091,385 11,162,523 11,022,076 11,027,723 11,050,000 11,052,044 11,079,000 11,091,000 11,091,110

Cash EPS (before stock comp) 3.13$ 2.12$ 2.33$ 0.73$ 0.87$ 0.91$ 0.62$ 0.58$ 0.60$ 0.40$ 0.54$ Adjusted EBITDA 55,353,368 34,472,768 38,113,072 13,347,739 15,644,479 15,852,460 10,508,690 9,621,292 10,177,599 5,967,329 8,706,548 Percentage of RevenuesGross profit, pro forma 45.9% 41.0% 43.0% 46.9% 47.5% 47.4% 41.3% 41.8% 41.8% 39.5% 40.9%Sales and Marketing 7.0% 6.7% 7.8% 7.6% 6.8% 6.7% 6.9% 6.6% 6.9% 6.7% 6.7%General and Administrative 14.7% 19.3% 18.2% 16.3% 14.1% 14.1% 14.2% 18.3% 17.0% 23.2% 19.0%Operating Income 24.2% 14.9% 17.0% 23.0% 26.5% 26.6% 20.2% 16.9% 17.8% 9.6% 15.2%Adjusted EBITDA 27.0% 18.7% 20.0% 25.6% 29.5% 29.7% 22.7% 20.8% 21.6% 13.4% 18.9%Year / Year Growth RateNet Sales 1.9% -10.1% 3.3% 5.1% -0.4% 14.0% -9.8% -11.2% -11.2% -16.3% -0.2%System Sales -5.9% -41.6% -18.0% -1.3% -7.7% 28.2% -35.5% -38.5% -40.6% -56.3% -25.0%Support and Maintenance 2.9% 2.6% 4.0% 3.2% 4.0% 1.4% 2.9% 1.6% 0.5% 4.3% 4.0%Business Management, Consulting, and Managed IT Services 13.2% 15.5% 17.0% 20.1% 6.0% 13.7% 13.9% 12.9% 16.8% 15.3% 17.0%Adjusted EBITDA 1.2% -37.7% 10.6% 19.5% 9.9% 31.2% -39.0% -27.9% -34.9% -62.4% -17.1%Operating Income -1.3% -44.5% 17.5% 18.6% 7.0% 28.6% -41.5% -34.6% -40.4% -69.9% -24.7%Dividend 11.8% 12.0% 0.0%Guidance from CompanyTotal Revenues $196M to $206MTotal Revenues (Revised 2Q15) $188M to $192MTotal Revenues (Revised 3Q15) $184M to $186M $46.1M to $48.1MNet Income $29M to $31MNet Income (Revised 2Q15) $23.2M to $24.5MNet Income (Revised 3Q15) $20.0M to $20.4M $5.2M to $5.6MDiluted EPS $2.62 to $2.77Diluted EPS (Revised 2Q15) $2.05 to $2.17Diluted EPS (Revised 3Q15) $1.77 to $1.81 $0.43 to $0.47

Steve Rubis: (214) 706 - 9451

Published: October 30, 2015

Source: Company reports and Stifel estimates

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Important Disclosures and Certifications

I, Steven A. Rubis, certify that the views expressed in this research report accurately reflect my personal viewsabout the subject securities or issuers; and I, Steven A. Rubis, certify that no part of my compensation was, is,or will be directly or indirectly related to the specific recommendations or views contained in this researchreport. Our European Policy for Managing Research Conflicts of Interest is available at www.stifel.com.

Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q332

40

48

56

64

72

2013 2014 2015 2016

04/06/15I:H:NA

Rating and Price Target History for: Computer Programs and Systems, Inc. (CPSI) as of 10-29-2015

Created by BlueMatrix

Rating Key

B - Buy UR - Under Review

H - Hold NR - No Rating

S - Sell NA - Not Applicable

I - Initiation SU - Rating Suspended

D - Discontinued

For a price chart with our ratings and any applicable target price changes for CPSI go tohttp://sf.bluematrix.com/bluematrix/Disclosure?ticker=CPSI

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Our investment rating system is three tiered, defined as follows:

BUY -We expect a total return of greater than 10% over the next 12 months with total return equal to the percentageprice change plus dividend yield.

HOLD -We expect a total return between -5% and 10% over the next 12 months with total return equal to thepercentage price change plus dividend yield.

SELL -We expect a total return below -5% over the next 12 months with total return equal to the percentage pricechange plus dividend yield.

Occasionally, we use the ancillary rating of SUSPENDED (SU) to indicate a long-term suspension in rating and/ortarget price, and/or coverage due to applicable regulations or Stifel policies. SUSPENDED indicates the analyst isunable to determine a “reasonable basis” for rating/target price or estimates due to lack of publicly available informationor the inability to quantify the publicly available information provided by the company and it is unknown when theoutlook will be clarified. SUSPENDED may also be used when an analyst has left the firm.

Of the securities we rate, 54% are rated Buy, 40% are rated Hold, 1% are rated Sell and 5% are rated Suspended.

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Please visit the Research Page at www.stifel.com for the current research disclosures and respective target pricemethodology applicable to the companies mentioned in this publication that are within Stifel's coverage universe. For a

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