HealthStream Inc (HSTM) 2003 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen to the HealthStream second quarter 2003 earnings conference call. At this time, I would like to inform you that this conference is being recorded and all participants are in a listen-only mode. We will open the call up for questions and answers after the presentation. I will now turn the conference over to Robert Frist. Please go ahead, sir.

Thank you. Good morning and welcome to our second quarter earnings conference call. Also in the room with me are Art Newman, Senior Vice President and Chief Financial Officer, Susan Browning, Vice President of Finance and Corporate Controller, and Mollie Condra, Director of Investor Relations. Art, would you read the forward-looking statement, please?

This conference call will contain forward-looking statements regarding future events and 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 the forward-looking statements are contained in the company's filings with the SEC, including form 10-K and 10-Q.

Thank you, Art. Our primary goal at HealthStream continues to be to improve the quality of health care by improving the quality of health care education. Already with the customer base of approximately 700,000 fully implemented subscribers, HealthStream is about the future of health care educational training. In this quarter, we made meaningful progress in network growth, operations improvements and financial metrics. We believe our growing network of hospital-based students is having a tangible impact on the practice of health care. In the quarter we've added 50,000 fully implemented subscribers bringing our total subscriber base to 700,000 health care professionals. Also in the quarter, utilization of our system increased over the prior quarter. We recorded 1.2 million course completions for the first quarter, a record. The April 14 [HIPA] training deadline overlapped by 2 weeks into the second quarter, the surge in utilization continued. Even after the expected drop-off in [HIPA] course completions in mid-April, the remaining 10 weeks of the second quarter were strong as customers continued to assign additional courses and as our number of new subscribers grew. This resulted in the second quarter total of 1.23 million course completions surpassing the fist quarter record. Also in the quarter we hosted our third annual e-learning summit, here in Nashville. It was attended by 250 health care professionals, which was a record. Representing over 110 health care organizations. We're excited to introduce two new innovative products both were announced at the summit, both launched during the second quarter.

The first was the Health care offering center, integrated suite of offering solution services that's available exclusively through HealthStream's Internet-based learning platform. Through the end of the second quarter, a mere 70 days after a launch in announcement, we have 70 contracts in hand. 25 are upgrades to our prior authoring tools and 45 are new contracts for the authoring services. The 45 contracts for new services will result in additional $72,000 of revenue during their terms. The remaining 25 will be generating revenues when their services are renewed. Also announced during the summit was HospitalDirect, a new software application for training hospital-based healthcare professionals about medical device and pharmaceuticals. It was launched on an introductory basis to HealthStream's learning network recently. As part of our product introduction, and launching hospital direct, we formed team hospital direct, an advisory group of 165 health care professionals selectively representing 130 hospitals. These individuals have volunteered to provide the company with suggestions for the type of training they'd like to receive through hospital direct. In the few weeks since its launch, we do not yet have any medical device customers or hospital direct product but we remain optimistic in this early stage of launch for the potential of this product as we continue to educate the market about this innovative, educational channel.

We also made financial progress during the second quarter. Revenues were a record $4.7 million, up 13% of the same quarter last year and 6% over the prior quarter. Net loss was 1 million, a 69% improvement or 2.2 million on same quarter of 2002, while EBITDA which we define as loss excluding cumulative effect of change in accounting principle and before interest taxes, depreciation and amortization, improved by $2 million or 87% to a loss of $259,000 which compares to the loss of $2.3 million in the second quarter of 2002. Our improvement in EBITDA has resulted in cash and invested balance remaining at $17.5 million. I'd like to turn it over to Susan Browning for more detail look in our financial performance during second quarter. Susan?

Thanks, Bobby. Revenue in the first quarter of 2003 increased as Bobby mentioned by 13% to $4.7 million from $4.1 million for the second quarter of 2002. To explain the detail, the revenue increase over the same quarter 2002 came from the hospital-based business where the pharmaceutical medical device business showed moderate decline. Improvement included $610,000 growth related to the Internet-based health care learning center products. Approximately $350,000 of increased from add-on course for revenues principally with the contract. These increases were offset by $280,000 anticipated decrease in license and maintenance fees associated with our installed learning management products as well as $80,000 decrease of the content development services and $60,000 worth of declines in live event activity. The 6% revenue increase over the first quarter of 2003 also included growth of our Internet-based health care learning center product of approximately $100,000. As we discussed during the first quarter call, the surge in utilization resulted in moderate customer disruption which led to the provision of credits to customers, which are treated as a reduction of our revenues over the remaining contract term. We expect the quarterly impact to approximate just over $30,000 for each quarter during the remainder of 2003. We also experienced increases in add-on course ware again principally related to [Inaudible] of $120,000 as well as $150,000 worth of increases and content development services.

We also experienced moderate increases in our live events business which will partially offset again an anticipated decline in licensing and maintenances fees associated with our adult learning management products, that approximated $100,000. Portion of revenue that are associated with our Internet-based subscription products continue to grow from 40% to the second quarter of 2002 to 55% for the first quarter of 2003 and 56% for the second quarter of 2003. Changes in revenue mix that I've mentioned are consistent with our continuing focus on reaching new customers and transitioning existing accounts. Revenues in the current quarter were split approximately 65% from hospital-based revenue and 35% for the pharmaceutical and medical devices business which is comparable to the first quarter of 2003. Looking at the same period in prior year 2002, our split was approximately 60% hospital-based business and 40% pharmaceutical and medical devices business. Turning our attention to gross margins, we see the gross margins improve from approximately 62% from the first quarter of 2002 to 56% for the second quarter of 2003 due to favorable margins associated with the shift and changes in revenue mix. As well as reductions in personnel expenses, principally associated with the consolidation of customer service operations that occurred in 2002. Gross margins were comparable with the 66% experienced for the first quarter of 2003 as well. Despite the favorable impact of subscription revenue growth, we have higher revenues [Inaudible] with constant development that also resulted in higher direct expenses and had a slightly negative impact on our expected gross margins of the second quarter of 2003. Product development expenses during the second quarter of 2003 declined by $400,000 from the levels during the same quarter of 2002 and declined by $150,000 in the first quarter of 2003. Principally due to reductions in personnel. In addition to reductions in personnel year-over-year, we also reduced spending for contract labor personnel. Our current development spending is focused primarily on maintenance and performance associated with our health care learning center products as well as specific new development products, namely hospital direct. Decline in product development expenses reflects our focus on fewer products and efficiencies gained in consolidation of product development efforts overall.

Turning to sales and marketing expenses for the second quarter, we declined sales and marketing expenses by $420,000 compared to the same quarter of 2002 but increased those expenses over the experience for the first quarter of 2003. The reduction over the same quarter in the prior year resulted from changes in the commission structure as well as reductions in marketing spending. So compared to the first quarter of 2003, we actually experienced a minor increase as a result of the e-learning summit that we conducted in April of 2003. We've experienced reductions in other general administrative expenses as a result of consolidating the corporate and administrative functions, as well as office consolidation when comparing the second quarter 2002 to the same quarter 2003. These resulted in savings of approximately $700,000. When comparing other general administrative expenses to the first quarter, the expense reductions mentioned resulted in a savings of just over $100,000.

Moving to non-cash expenses including depreciation and amortization, this declined as well from the second quarter 2002 to the second quarter 2003 by a quarter million dollar as a result of certain intangible assets as associated with acquisition of prior year was reaching the end of the estimated youthful lives. The experience during the second quarter 2003 was comparable with our experience during the first quarter of 2003. Other income declined to a lower investment balances and to a lesser degree declines in yield rates during 2003. As we [Inaudible] communicated, we adopted a new accounting standard which is effective January 1st, 2002. As a result of this new standard, we no longer recognize amortization related to intangible assets with indefinite lines such as good will. For comparison purposes, we've provided the measures both GAAP and non-GAAP and I'm referring to net loss and EBITDA exclusive of the impact of this accounting change. We improved our net loss to a loss of $1 million or 5 cents a share for the second quarter of 2003. This compares favorable to a loss of $3.2 million which again excludes the impact of the accounting change or 16 cents a share for the second quarter of 2002 and a loss of $1.4 million or 7 cents a share for the first quarter of 2003. We improved EBITDA or as Bobby explained earnings before interest taxes, depreciation and amortization. Again, exclusive of this accounting change from a loss of $2.6 million for the second quarter of 2002 to the loss of $558,000 for the first quarter of 2003 down to a loss of $259,000 for the second quarter of 2003. As a result of this, reasons I've already explained. Please refer to our earnings release for reconciliation from the GAAP measure of net loss to a non-GAAP measure of EBITDA.

Moving onto the balance sheet we ended the second quarter of 2003 with cash and investment balances of $17.5 million. The decrease for the first quarter of 2003 was $1.3 million compared to a decrease of $2.1 million for the same period of 2002. This also improved over the prior quarter decrease of $1.6. So to recap there, in the current quarter, we used cash and investments of $1.6 million compared to $1.3 million for the first quarter and $2.1 million for the same period in 2002. The other balance sheet change that I should highlight is further improvement in our DSO or days sales outstanding. This measure improved from approximately 74 days at the end of the first quarter of 2003 to 61 days at the end of the second quarter of 2003 and compares favorably to the DSO at the end of the second quarter of 2002 which is approximately 97 days.

Recently, we've been asked about our renewal rate. But while, the bulk of our renewal activity doesn't really come until 2004, we will begin disclosing measures of our renewal rate. During 2003, we have a small number of health care learning center customer contracts that come up for renewal and in 2004, this will increase. Which we've begun measuring renewal rate in two ways. First by the number of customer contracts that are renewed and second by the annual contract value renewed. In each case we determined the number or value up for renewal during the measurement period and compare it to the actual number of customers or annual contract value that renewed. The percentage renewed is calculated for each quarter and cumulatively during the year. For the quarter ended June 30, 2003, the account renewal rate was 79% and the annual contract value renewal rate was 96%. Cumulatively for the year-to-date period, 2003, the account renewal rate was 87% and the annual contract value renewal rate was 73%. As of June 30th, we had four customers with contracts that came up for renewal that had not renewed representing a contract value of approximately $107,000. Our full year order value target renewal rate approximates 90%. I should mention while we had four customers that did not renew, we did have 27 accounts to renew that represents approximately $300,000 of renewal order value. Art will now discuss our expectations for the third quarter and remainder of 2003.

Thanks, Susan. With respect to the third quarter revenues approximate $4.5 million which represents 3% decline compared to the second quarter. This decline is associated with seasonal factors in the pharmaceutical medical device system, primarily live events and clinical education, which are not fully offset by continued decreases in subscription revenue including both our internet based health care learning center and from content development services where several new projects have been received and initiated. We expect the revenue split to be approximately 68% hospital based and 32% Pharma and med based in the third quarter as compared to a 65/35 split we experienced in the second quarter. The shift is due to the continued growth in subscription based products and the seasonal factor in the Pharma med device product lines I mentioned a moment ago. Gross margins for the third quarter are expected to be comparable to what we experience during the first half of 2003, which as Susan mentioned came in at 66%. This comparability is expected as a result of anticipated changes in the revenue mix.

Product development expenses are expected to increase as we maintain and developed additional features for our health care learning product. We expect other SG&A expenses will be comparable to the expense incur in the second quarter while combined sales and marketing expenses will decrease as a result of the second quarter peak in marketing expense primarily associated with the e-learning summit, which took place during April. Some expenses are expected to increase over the previous quarter due to the addition of two sales representatives that were hired this past June. Based on these revenue and expense projections, we expect that our third quarter net loss of EBITDA will improve moderately from the results reported in the second quarter of 2003 and will result in achieving cash flow positive results in September. For the full year, we expect to show revenue growth of between 16-18% over 2002 results. We believe our continued focus on expense control and the expected revenue growth will enable us to achieve cash flow positive results again as measured by EBITDA for the fourth quarter. Finally, we estimate our cash and investment balance at year end will approximate $16.5 million, which is inclusive of $500,000 of capital expenditures that we expect to incur in the second half of this year. I'll turn it back to Bobby for some closing comments.

Thank you, Art, Susan and Mollie. I'll summarize with a few closing comments. Another indication of our growing momentum is the caliber our leadership to continue to attract the board of directors. In that light, Mr. Ron Hinds former Executive Vice=President and Chief Financial Officer for Renal Care Group was elected to our Board of Directors and will serve on our audit company. Mr. Hinds' extensive leadership and depth of knowledge in the health care industry will be valued as he joins the board in overseeing strategic and corporate initiatives. Our second quarter results include record quarterly revenues $4.7 million at 87% improvement in EBITDA and a customer base of approximately 700,000 fully implemented subscribers. We also launched two innovative products during our customer summit that we believe meet the long-term need of our customers and further support our market leadership. With this matrix in hand I'd like to reinforce that a long standing goal of turning cash flow positive is within 60 days' reach for our company and employees. And we're very excited to report that we are attracting that objective and feel confident that we will turn EBITDA positive within the next 60 days. We think that all of these things together position us well for growth in the coming months and years and that we're excited for our employees, we're excited for the management team, our board of directors that have carried us through all of these years of hard work and we look forward to celebrating the moment we return to cash positive. Then turning our attention to how to accelerate growth beyond the forecast of 16-18% per [inaudible] that we are seeing, turning that positive cash flow back into investments that will grow our company even faster. I appreciate your time this morning. I'd like to turn it over to the operator for questions.

Thank you. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the hand set before press anything numbers. Should you have a question, press star one on your push button telephone. If you wish to withdraw your questions, press star two. Your questions will be taken in the order they are received. Please stand by for the first question. Our first question comes from David Francis (ph) from Jeffries and Company. Please state your question.

Good morning, guys. Congratulations on another quarter of solid results. I wanted to focus despite the good results on a couple of issues. One is the trimmed outlook for the balance of the year, and I guess in conjunction with that, the expectation of a slightly down revenue quarter sequentially here. Can you talk to us about the dynamics in each part of the business a little bit more and give us some color as to why the acceleration where you've seen in the first half is not necessarily carrying through as strongly in the second?

Sure, David. I'll be glad to start addressing that by saying that clearly there are two types of products inside our company, there are the recurring revenue subscription products, mainly the health care learning center that we sell to hospitals, and then there are service-oriented products that have a shorter sales cycle but harder visibility into the sales pipeline and also once you earn the revenue in the quarter, then you go back out and earn the next sale. The pharmaceutical medical device business is constituted mostly of the nonrecurring non-subscription-based products. As such, we see some seasonality trends that favor the second quarter and fourth quarter being stronger quarters in the first and third being weaker quarters in those product lines. And so typically coming into the third quarter, we see the non-subscription base nonrecurring revenue product lines in the pharmaceutical medical device side of our business show some growth but declines in the prior quarter, the second quarter. So in general, what we see is constant growth on a subscription product, although, sometimes they grow a little faster rate like in the fourth quarter when there are more closings for the health care learning center. The subscription products see a little more closings that occur in the fourth quarter. The subscription products grow in a regular kind of more steady pace and the nonrecurring revenue products have a real strength in the second quarter where we complete things like our Congress for A.R.A.N. which has high revenue impact in the second quarter. It's only once a year event. So again, I think it's balancing some of the seasonality of the nonrecurring medical products against the consistency of the subscription products. One other bit of news that we hope will even this out in the future is that although it's premature to say that HospitalDirect will be a success, I'm encouraged by the hospital, the demand side of the equation of hospitals that want to see the service deployed. As I mentioned, we haven't seen any subscriptions to that product. But the interesting part is that it will provide a subscription-based business that relates to all of the nonrecurring revenue businesses on the pharmaceutical medical device side of our company. And we're hopeful that as HospitalDirect takes hold in the coming months and years that the subscription for that product will start to smooth out the seasonality of these nonrecurring revenue product lines, which again, are showing growth year to year and I believe quarter to quarter but we do see a seasonal dip in Q3.

That's a good seg way into the second part of my question. With hospital direct and obviously a lot of resources of the company being dedicated to successfully launching the service, can you give us a little bit more color as to how that product and service is being both priced and marketed right now and when we should expect to start see some customers subscribe to the service, and I'll tend end it there, thanks.

Thanks, David. Hospital Direct has been under development for a year and a half now. And the way we're going to start this product is kind of at a product that has a chicken and the egg effect. It's got to have demand on the hospital side and we have to sell the value proposition to the pharmaceutical medical device companies. I would just say we're very early to figuring out that value proposition. That said, we feel that the product itself will have tremendous value in helping with sales force effectiveness, market education, helping these device companies reach over 700,000 employees for product launch. So we're optimistic of that as a position in the market of a rather unique product that rides on the backbone of the health care learning network. We expect in the next quarter or so to be offering up more pilots and seed programs that are experimental for the device companies to see and prove we can deliver traction. I would say very low revenue dollar contracts and it's below $10,000 range, we would expect to see a couple of those lands in the next month or so. And then over time as we proved the value proposition, we'd like to see the subscription value go up, assuming we can deliver the value and the audience we think that we can to these device companies and pharmaceutical companies, we'd like to see the values go up in time. I guess I have great hopes for this product. It's still very early. We under a pilot. We have two proposals that are out for contracts that are below the $10,000 range and a pipeline of other small proposals that are in the developmental stage that range from $5,000-100,000. And so it is a subscription product. It's early to tell where that subscription price will settle in, and I believe that by the end of the year, we'll have several contracts in hand and we'll get more of a sense of the price value proposition that we're offering to these device companies. Sorry to be so vague on that, but it's just a new product and we think it holds a lot of promise but it has not materialized at this point.

Thank you. Our next question comes from Jim Stone (ph) from Alexander Capital. Please state your question.

Good morning, gentlemen. Thank you for a nice quarter there.

Thank you, Jim.

I wonder if you can give us a little flavor for the folks who said they did not renew. Obviously they are both small but can you give us a flavor of why they did not renew?

Sure, Jim. We can address some of them then, I'll turn it over to Art Newman to take a few of those. You are right to observe that three of them were very, very small. One as small as 50 employees. But one of them was a medium sized account for us. I'll turn it over to Art Newman to talk about the renewals.

Jim, as Bobby said, three were nominal size. One was a modest sized hospital. There are two thing in subscription business. One is in the first time -- by the way, all of these people were renew customers to it. They were not transition customers. And one hospital, the medium sized hospital, it ended up being an ineffective implementation on their part of the system. That is to say they license the system but really never got full utilization of the system and what we've learned from that is that it's more important for us to become proactive in working with our clients, not just to load the products but also to help them through the implementation and rollout in their facility. Now, we had done that exquisitely with HDA. As you know they had 180 facilities. They needed a dedicated account manager which we've had for the last two years. We've now implemented a plan and we've had several people who help customers not only load their data but also help them figure out how to implement the services in their organization. So in the case of the one that didn't renew, the medium sized one that didn't renew, they didn't have a good implementation. And that's really the long and short of it.

Well, we learned quite a bit from it then?

Yes. I would say, Jim, I want to reemphasize what Art said. Beginning in January and a little bit of December, we expanded what we call our account management model from having two full-time employees dedicated on one large account and now we have five and some other people that also serve in that role maybe take the palette up to seven employees that seven in the account management role. These are non-sales people that focus on measuring the utilization of our accounts and they are in constant communication with their account base. And all of our 700 web-based customers now have an account manager assigned to them in addition to their ability to call into the customer call center, which is always available during business hours in the day and their salesperson in their territory that they've been familiar with for a long time since the closing of the contract. So one of the things we've done in preparation for the upcoming renewal patterns that we're seeing and we hope to see improvements over the numbers we just gave you was that we instituted an account management model early in the year. Actually, I attribute the account management model and personnel in that being an important factor in the early late first quarter, early second quarter when we had some struggles with our platform. I think the relationships being built by the account managers help to see us through that period and see our customers through the difficulties that we had during that period. And in fact, I think those accounts ended up having a stronger relationship with our company and our account managers and with our customer care people and their sales people in that region. We all banded together to develop those accounts further. My hope for account management is that they can not only renew the accounts but get involved in showing them the other products inside the company and then handing them back to the sales people and customers show an interest in other companies. So we see that they can be an important relationship to introducing new products of HealthStream to the same customers. So I think we did learn a lot and we have reacted. And I think we'll start sowing seeing the been fits of that as we move into more renewals in the second half of the year and early next year.

Did you mention during the call or could you show us the number of new hospitals that you have now or I should say buying points?

Jim, the way we have about two quarters ago shifted to reporting that is based on the number of subscribers instead of the number of buildings. We found the number of buildings started to become a little less meaningful because some buildings have 20 employees and some have 8,000. So we shifted from reporting the number of hospitals or facilities, which if you include Dallas's centers, surgery centers and hospitals it's well over 1,000 now but we're shifting to FTE's, which are the employees that are paid by the institution, paid as subscribers. You'll see that the net increase during the quarter was 50,000 employees and that's net of any non-renewals. So we added about 80,000 in the first quarter and we activated them and began billing and we added about 50,000 in the second quarter. It's my hope that we will renew between 40-80,000 every quarter. The difference typically being whether we land the large account during the quarter or a couple of large accounts during the quarter or not. We have a steady stream of small account and medium account acquisitions. When we win a national account that has 10, 20 or 30,000 employees in the quarter, it puts that number up. So I'd like so see that range between 40 and 80,000 every quarter and the difference being when we land the large accounts.

Could you share with us what you are seeing in the competitive situations? Or competitive marketplace?

Sure, Jim. What we are seeing is there are a couple of nimble small competitors that are working and dong good jobs competing with us primarily we believe competing on price. And we as of yet haven't really played or had an offering in the pricing point and pricing levels where they are offering, but I will tell that you we are working diligently and expect to announce product offerings that compete head to head on pricing that are more introductory level reserving our higher margin, higher prices for our new products, especially as they come on board like Hospital Direct and Authoring Center which is a new incremental revenue generator for us. So we are seeing a price sensitive market and we are seeing very small competitors that are doing a good job fighting those accounts that are most price sensitive and winning those accounts. We still think the win rate is very strong on a relative basis and we think as we introduce these entry level products that where we pull some capabilities out of our flagship products and sell a lower price point will help us win even the smaller account. So we're working on that strategy and hopefully within a quarter or so we'll announce it and hit the market really hard and win all accounts that come on the plate.

Great. Thanks very much.

Thank you, Jim.

Thank you. Just a reminder, ladies and gentlemen, if you do have a question, please press star one on your push button telephones at this time. If there are no further questions, I will turn the conference back to management to conclude.

I want to thank everyone for listening in on our conference call and I want to thank Mollie Condra for her diligence in helping us prepare quarter to quarter year after year for these meetings and had done fantastic job of that. She is available to all of you investors to get more information about the company through I.R. at HealthStream.com. We look forward to reporting the third quarter and look forward to maintaining and achieving our EBITDA goals as outlined earlier. Thank you much.

Ladies and gentlemen, if you wish to access the replay for this call, dial 1-800-428-6051 or 973-709-2089 with id number of 301423. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.