HealthStream Inc (HSTM) 2003 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the HealthStream First Quarter 2003 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are on a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I will now turn the conference over to Robert Frist, CEO of HealthStream. Please go ahead, Sir.

Robert A. Frist, Jr.: Thank you. Good morning and welcome to our first quarter earnings conference call. Also in the room with me are Art Newman, SVP and CFO, and Susan Brownie, VP of Finance and Corporate Controller. Art, would you read the forward-looking statement please?

This conference call will contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC including Forms 10K and 10Q. A replay of this conference call may be accessed online by going to www.healthstreams.com/investor. Bobby?

Robert A. Frist, Jr.: Thank you, Art. Our primary goal at HealthStream continues to be to improve the quality of healthcare by improving the quality of healthcare education. Already, at the end of this quarter, with a hospital customer base of approximately 650,000 fully implemented subscribers, HealthStream is about the future of healthcare education and training. In the quarter we made meaningful progress in network growth, operations and finance. We believe that our growing network of hospital based students is having a tangible impact on the practice of healthcare. For example, some metrics around the growth of the network. We added 70,000 fully implemented subscribers bringing the total to 650,000, 70,0000 over the prior quarter. We surpassed in the quarter the 4th million course completion certificate delivery and just shortly after the quarter, on April 1st, we passed the deliver of the 5th million course completion certificate. Finally, utilization of the system in the quarter surged 50% over the prior quarter. We delivered over a record 800,000 certificates of completion in the fourth quarter and 1.2 million in the first quarter of '03.

Another significant event was the AORN Congress held in Chicago where 37,700 activity registrations occurred by the nations' OR nurses attending the Congress. 43 pharma and med device companies sponsored 65 continuing education programs. We also made significant operational improvements that were implemented in the first quarter. With the number of healthcare professionals logging onto our platform at an unusually high rate, we experienced a surge in utilization of our system that at times resulted in delays for our users. In response, our schedule of planned system enhancements and upgrades was accelerated which enabled us to effectively accommodate the increased activity. As a result, we believe that the company's system capacity is now significantly expanded to meet future courseware demands from our customers for the foreseeable future.

While our pipeline of new products remains strong, we made the decision to delay the launch of HospitalDirect until mid-year instead of the first quarter as previously announced. This decision allowed us to accelerate our schedule of system enhancements first enabling greater long-term service to our customers. We made financial progress during the first quarter as well. Top line revenues of $4.4 million were 25% over the same quarter last year and 9% over the prior quarter. Return revenues are now 55% of our total revenues, up from 39% in the same quarter last year and up 52% from the last quarter. Finally, net loss improved 60% to a loss of $1.4 million over the same quarter in 2002. With those highlights in mind, I'd like to turn it over to Susan Brownie for a recap of the first quarter results.

Thanks, Bobby. Revenues for the first quarter of 2003 increased by 25% to approximately $4 million from $3.5 million for the first quarter of 2002. The revenue increase over 2002 was attributable to both the hospital based business and pharmaceutical medical device business. Improvements included $700,000 of growth related to our Internet-based Healthcare Learning Center products, $300,000 of increases from add-on courseware revenues, principally HIPAA contracts, and $100,000 related to live event activities. These increases were partially offset by $100,000 of decreases of maintenance fees associated with our installed Learning Management product and $100,000 of decreases in content development services.

The 9% increase over the fourth quarter of 2002 also included growth of our Internet-based Healthcare Learning Center products of $210,000 as well increases in add-on courseware, again primarily HIPAA, of $200,000, as well as moderate increases in live event revenues. Consistent with the trend that I noted in the comparisons of the first quarter of 2002, content development services were down by $140,000. The portion of revenues associated with our Internet-based subscription products also increased to 55% for the first quarter of 2003 from 39% for the first quarter of 2002 and 52% for the fourth quarter of 2002. The changes of revenue mix that I've mentioned are consistent with our continued focus in reaching new customers and transitioning existing accounts.

Revenues in the current quarter and prior quarter were split approximately 65% for the hospital based business and 35% for the pharmaceutical and medical device based business. While the hospital based business is growing at a faster pace, both the hospital base and pharmaceutical and medical device businesses are growing in absolute terms as well. During the first quarter of 2002, our split was approximately 60% / 40% between the hospital based business and the pharmaceutical and medical device based business.

Moving down to the P&L, gross margins improved from approximately 48% from the first quarter of 2002 to 66% for the first quarter of 2003 due to favorable margins associated with the shift in the revenue mix to revenues associated with our Healthcare Learning Center as well as a reduction in personnel expenses, principally associated with the consolidation of customer service operations that occurred during the first quarter of 2002.

Gross margins declined, as we expected, from 70% for the fourth quarter of 2002 to 66% for the first quarter of 2003 as a result of higher royalty expenses associated with add-on courseware such as HIPAA and higher costs associated with live events including the AORN Congress that Bobby mentioned. Product development expenses during the first quarter of 2003 declined slightly from levels experienced during the same quarter for 2002 and more significantly from the fourth quarter of 2002, primarily due to reductions in personnel.

Our current development spending is focused primarily on maintenance and performance enhancements associated with the Healthcare Learning Center products as well as specific new development products, namely HospitalDirect. Sales and marketing expenses for the first quarter of 2003 declined from both the same quarter in 2002 and the fourth quarter of 2002 as a result of changes in the commission structure for 2003 as well as reductions in marketing spending. Also, when comparing the fourth quarter of 2002 with the first quarter of 2003, we have an expected seasonal reduction in contract value that we experienced during the first quarter. We have experienced reductions in other general and administrative expenses as a result of consolidation of corporate and administrative functions both since the first quarter of 2002 and the fourth quarter of 2002.

Depreciation and amortization declined as well during the first quarter of 2003 when compared to the prior year as the result of certain intangible assets that are associated with prior acquisitions reaching the end of the estimated useful lives and thus completing the related amortization expenses. Other income declined due to lower investment balances and, to a lesser degree, declined in yield rates during 2002. As we've communicated historically, we adopted a new accounting standard effective January 1, 2002. As a result of this new standard, we no longer recognize amortization related to intangible assets with indefinite lives such as goodwill. For comparative purposes, we've provided the measures, both GAAP and non-GAAP, exclusive of the impact of this accounting change.

Moving to net loss, we improved our net loss to a loss of $1.4 million or 7 cents a share for the first quarter of 2003. This is comparable to a loss of $3.4 million, excluding the effects of the accounting change, or 17 cents a share for the first quarter of 2002 and a loss of $2.6 million or 13 cents a share for the fourth quarter of 2002. We improved EBITDA, or earnings before interest, taxes, depreciation and amortization, again exclusive of the accounting change, from $2.5 million for the first quarter of 2002 to a loss of $1.7 million for the fourth quarter of 2002 to a loss of $560,000 for the first quarter of 2003 as a result of the reasons I've discussed above earlier.

Please refer to our earnings release for a reconciliation of net loss to EBITDA. Moving on to the balance sheet, we ended the first quarter of 2003 with cash and investments of $18.8 million. The decrease in cash and investments for the first quarter of 2003 was $1.8 million compared to a decrease of $2.6 million for the same period in 2002. This improvement resulted from the factors that I have discussed. The rate of consumption did increase from the fourth quarter 2002 as we expected as a result of payments during the first quarter of 2003 of December, 2002 commissions as well as incentive compensation related to 2002. The other balance sheet change that I should highlight is further improvement in our DSO or days sales outstanding. We improved from approximately 76 days for the fourth quarter of 2002 to 74 days for the first quarter of 2003. This also compares favorable to DSO of 99 days for the first quarter of 2002. Art will now discuss our expectations for the second quarter and the remainder of 2003.

Thanks, Susan. We expect the second quarter revenues to approximate $4.7 million. Revenue improvement over the first quarter will come from continued increases in subscription revenues, including both our Internet-based Healthcare Learning Center and add-on courseware. The largest product line growth is expected to come from the content development services within the pharma and med device customer channel where several new projects have been received and initiated. We expected the revenue to be split approximately 60% in hospital based and 40% pharma and med based in the second quarter as compared to the 65/35 split we experienced in the first quarter. This shift is primarily due to the content development increases I mentioned a moment ago. Gross margins for the second quarter are expected to be comparable to the first quarter results which, as Susan mentioned, came in at 66%. This comparability is expected as a result of anticipated changes in the revenue mix. Product development and other G&A expenses are projected to be comparable with the expense incurred in the first quarter while sales and marketing expenses will increase as a result of higher marketing spending, primarily associated with out e-learning summit that concluded this past week and increases in selling expense primarily due to sales commissions. Based on these revenue and sales projections, our second quarter net loss and EBITDA will be comparable to the results we reported in the first quarter of 2003. Finally, as noted in our earnings release, we continue to expect to reach cash flow positive results as measured by EBITDA this coming September. I'll turn it back to Bobby for some closing comments.

Robert A. Frist, Jr.: Thank you, Art. In closing, I'd like to share with you that last week we held our third annual E-Learning Summit where over 260 healthcare professionals representing 110 healthcare organizations participated here in Nashville and interacted with HealthStream's staff. The summit brings us an opportunity to interact face to face with our customers to learn more about their training needs and collaborate to help us improve our service and product lines to them. We were also able to demonstrate new products in the pipeline like HospitalDirect which is coming out of beta, and introduce new vendors with whom we are partnering to offer additional course content like Pierson Prentiss Hall and Delmar Learning, a Thompson Company. It's an exciting time for all, renewing our enthusiasm for the important mission we are undertaking at HealthStream and giving us that face to face contact with our customers. I'm proud of the accomplishments at the summit and the interactions that the HealthStream employees were able to have with our customer base which again renewed our enthusiasm for the coming years and the next quarter in which we expect record revenues. I'll now turn it over for questions as we look to you for your questions. Thanks.

Thank you, Sir. The Today's question and answer session will begin at this time. conducted electronically. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have would like to ask a a question, please signal by pressing the star key followed by the digit one on your pushbutton telephonetouchtone telephone. If you are using a speakerphone, please make sure that your mute function is turned off to insure that your signal reaches our equipmentIf you wish to withdraw your question, please press star two. Your questions will be taken in the order that they are received. Please stand by for your first question. Our first question comes from . We will come to you in the order that you signal and we'll take as many questions as time permits. David Francis with Jeffries. Please state your question.

Good morning. Congratulations on a solid quarter, guys. I have a question as it relates to sustainability of the sequential growth that we saw this quarter. Bobby, you mentioned that you saw a large uptake in utilization as a result of the HIPAA deadlines coming in April. Was the new business there signed on a one time basis or was that subscription based revenue? And if so, what do you think the renewal rates are likely to be on that giving you visibility going forward?

Again, that is star one to signal for a question. We'll pause for just a moment to assemble our roster.

David, this is Art. Let me see if I can answer that for you. The HIPAA courseware we added pretty heavily in the last quarter, in the fourth quarter, and continued in the first quarter of '03, is all subscription based business. The average life on that is about 2 and a half years which is not too far off what our contract life is on our HLT system. So while there hasn't been kind of a mandate that says that this material needs to be taken every year, I think the intent of our customers is that it will be an annual review process, not only for those people that are in the hospital from the prior year, but any new employees that join the hospital during the year So we see this as a continuing revenue stream and there are other aspects of HIPAA that will continue on in terms of compliance later this year and through '05.

Okay. You also mentioned that you have some service slowdown, some service issues as the result of the increase in utilization in the quarter. Are you, I guess (A), are you comfortable that the capacity issues have been taken care of and (B), are there any potential lingering customer issues that might negatively impact re-upping on contracts and whatnot going forward?

Robert A. Frist, Jr.: Well, David, this is Bobby, and we did experience some slowdowns towards the end of the first quarter, particularly preceding the April deadline for HIPAA. As we discussed, that 50% surge in utilization caught our system and caught us a little bit off guard. But as a result, we took our planned enhancement pipeline which is constantly scheduled and reviewed, and planned out for the next year. And we accelerated several of those technological advancements into the quarter. The result of that was obviously that some new product development was swapped with enhancement, performance enhancements, like HospitalDirect, which we just said would be delayed for another two or so months. But the result of that is a stable system that is operating well and handling the capacity today and a system which we feel will handle us out in the foreseeable future. Again, we were forced to accelerate certain enhancements and we can report safely today that we feel we are though that.

As far as lingering customer issues, that is a little harder to see. We feel that we have addressed them aggressively through strong account management and customer service. We feel we maintained constant contact with all of our customers in sending them a letter every week informing them of our progress on the enhancement to the system and keeping them constantly informed of our situation. We feel that the delays were something that we area able to work through and that our customer relations, in fact, may come out stronger and better because of the situation that we went through together given the strength of our customer service and the strength of our partner relations group and our account management group and the responsiveness of our systems group in quickly deploying enhancements. So it is a little hard to see into the future, but at this point, we do not see any material risks and, in fact, we see that our relationships, as I discussed at summit, were strengthened where we had a great opportunity kind of post the delays to talk face to face with several of our key customers, most of them in fact, and feel that they have a renewed commitment to the company as we do to them. So I felt that we handled the situation very well.

Great. One last question. On HospitalDirect, I guess (A), can you give us your level of comfort in being able to roll that service capability out by the end of June? And second, any presale activities that you have to give a little visibility on for second half contribution for that? Thanks.

Robert A. Frist, Jr.: Yes, David, thanks. Well, we are very confident that we will roll this product out before the end of Q2 and the enhancements to the system, we've been through many of them and those are - - we have a few more in front of us, but the big one, one of the big ones, is behind us. So we'll shift our attention to HospitalDirect immediately after another deploy that's coming up in two weeks for more enhancements to the system. So I'm very confident that the pipeline will get back on and we'll have a few months delay, but that we'll get that product out to market. In fact, we did quite a good amount of pre-marketing at the summit to our hospital customers who received it with great enthusiasm, the potential for this product. Then on the presale, I would say that our sales force of the pharma medical device side is, of course, disappointed that we have not been able to launch this product exactly to schedule. But they continue to promote the product, describe its potential benefits to the pharma med device customers of HealthStream and while there are no current closings of contracts, we feel we have a good pipeline and solid relationships with all the top medical device companies to build on as soon as the product is launched.

Great. Congratulations.

Robert A. Frist, Jr.: Thank you.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one at this time. Thank you. Our next question comes from Brian Horey with Equity Growth Management. Please state your question.

Thank you. Can you just refresh me on the percentage of hospital versus pharma for Q1 and Q2? The percent of revenue?

The breakout was 65% hospital based, 35% pharmaceutical and medical device based in Q1, 2003.

And Q2 would be closer to 60% hospital and 40% Pharma medical device.

Okay. And I think you said that in Q1, 55% of your revenue was Internet-based recurring revenue, is that right?

Correct.

Okay, and is there a sense as to where that will come out in Q2?

We have not put that number out, but if you look at the revenue growth between Q4 where we were at 52% at $4.1 million to $4.4 million being 55%, I would expect that as our base grows, that growth rate is going to slow down slightly but I would expect that we would still be in the mid 50s for the second quarter of 2003.

And, Brian, I'd add to that, on an absolute basis, it will increase from quarter to quarter.

Robert A. Frist, Jr.: We've seen growth in that Internet-based platform really every quarter for the last, what, year and a half or two years? So we expect that component to continue to grow at a steady pace.

Okay, has there been any pronounced seasonal pattern to that revenue stream in terms of where it tends to pick up?

Well, if you go back to where the orders come, there's - - typically year end is a pretty heavy order value period where hospitals commit to these types of contracts and so you delay that somewhere between 50 and 90 days depending upon the implementation cycle. So that's usually the highest peak in terms of activity. The second highest peak is in the fiscal year end in September. Second quarter and third quarter tend to be a little soft.

In terms of orders?

Yes. And then, therefore, implementation.

Okay, and can you tell me what your cap ex was in the quarter?

Yes, it was $300,000 and that will be in the 10Q.

Okay, and what do you think it will be for the year as a whole?

Just below a million dollars is what we've put out as our expectation for the full year.

Okay. And lastly, have you given kind of a cash forecast for end of the year or somewhere out in the future?

Yes, in our last conference call when Art discussed our expectations for reaching cash flow positive in December and then maintaining cash flow positive in the fourth quarter, in September, excuse me, and then maintaining cash flow positive for the fourth quarter, we said that we anticipate that we will, when we take cash flow positive, we'll be at approximately $16 million in cash and then we'll maintain that and then begin to increase as we move into 2004, 2005.

And so is it reasonable to think that might be a little higher given that you've pulled it in by a quarter?

Actually, our expectations for the first quarter were slightly - - we did a little bit better than what we anticipated for the first quarter, but we did anticipate about a $1.6 million decline in cash and investments where our actual decline was about $1.5 million.

All right, thank you.

Robert A. Frist, Jr.: Thanks, Brian.

Thank you. Ladies and gentlemen, as a final reminder, should you have a question, please press star one at this time. If there are no further questions, I will turn the conference back to Mr. Frist to conclude.

Robert A. Frist, Jr.: Thank you. I appreciate everyone's participation this morning and look forward to reporting the second quarter and we'll sign off until Q2. Thank you much.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 288738. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.