HealthStream Inc (HSTM) 2003 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the HealthStream fourth-quarter and full-year 2003 earnings conference call. (OPERATOR INSTRUCTIONS). I will now turn the conference over to Mr. Robert Frist, Chairman and CEO. Please go ahead, sir.

Thank you. Good morning and welcome to our fourth-quarter and full-year 2003 earnings conference call. Also, in the room with me are Art Newman, Senior Vice President and CFO, and Susan Brownie, Vice President 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 10-K and 10-Q. Bobby?

The primary goal of HealthStream continues to be to improve the quality of healthcare by improving the quality and accessibility of healthcare education. There are five metrics I would like to share with you that summarize our progress throughout this year -- this last year.

Number one, we wrapped up the year with topline growth hitting a number of 18.2 million, which is a 15 percent topline growth. Number two, our net loss improved 71 percent to 3.4 million, which was a reduction of 8.2 million over the prior year. We ended the year with two consecutive quarters of positive cash flow as measured by EBITDA. Number four, we now have 839,000 contracted subscribers to our Healthcare Learning Center product. Number five, we passed the 9 millionth course completion in the middle of January, so we are seeing continued high utilization of our core products and services.

I think those five metrics summarize up well how how we feel about our progress this year. We are proud of the progress we have made on our basic platforms and products, and we are looking forward to addressing the growth challenge we face coming up in front of us.

So now onto the challenge. Our challenge this year is to build on the success of the products that we have recently launched and increase the adoption and penetration of those products. Many of these products have associated premium value and increase the value per subscriber on our network, and the more penetration we get of those the more we can scale our financial progress.

Operationally, there are four metrics I would like to share with you. This year we implemented 190,000 healthcare professionals over the course of 2003, which brings the total of fully implemented healthcare professionals to 770,000. That is up from 580,000 the year prior, a 33 percent increase in base number of healthcare professionals that are fully implemented. The course of fully implemented subscribers, one for which we are billing, because fully implemented is the time at which billing and revenue recognition begins for HealthStream.

Number two, over the course of 2003, we improved the responsiveness of our customer call center. We are hearing regularly from customers about these improvements. Our improvement now at our call center is an average wait time of 8 to 11 seconds, which is four times faster than the national average for a call center. Our customers have appreciated these operational improvements, and I am proud of the team that delivered those improvements, and we hope to keep up that responsiveness to our customers throughout the year.

Number three, operationally we have added five sales representatives recently -- two in the fourth quarter and three during the January/February period -- bringing our total up to 25 quota carrying salespeople, supported by five full-time people in account management who have additional responsibility for account renewal, and six program managers, also a revenue generating and account relationship management people. So if you look at it in total, about 31 people are involved in account management, account revenue growth and account revenue generation.

And finally, our operational metric that I am also proud of is our DSO. We continue to improve our DSO, our revenue collection process. We are now down to 48 days during the fourth quarter from approximately 76 days at the end of the fourth quarter in the prior year. This represents a significant improvement, and again, I am proud of our finance and accounting teams for delivering such strong operational improvements. I think also this is indicative of improving relationships with our customers that we are able to get payments faster from them.

In addition to operational improvements, I want to talk about our development pipeline of new products. Over 2003, we launched a series of new products which are we are beginning to see initial traction with this year. First is the HealthStream Authoring Center, which has been contracted by approximately 200 healthcare organizations, which allows hospitals to self-publish and self-author courseware content and even share it between and among other healthcare organizations. We think the Authoring Center is what used to be known as a sticky application, one that gives customers a good reason to stay with the HealthStream solution, and we are pleased with the progress of the HealthStream Authoring Center.

Second is Hospital Direct. It is our new application that allows medical device and pharmaceutical companies to deliver educational programs into the hospitals. We are seeing initial success in terms of piloting. A lot of -- we now have I believe eight contracts in total for Hospital Direct. These contracts are pilot contracts. They are not significant revenue generators. I believe we reported 63,000 revenue from them, but they all we think represent great potential for the product as that product catches on. So we still say that Hospital Direct has promise, but currently it is in a piloting phase with our customers.

Finally, Competency Compass, which helps shore up the workforce development initiatives that we want to help our hospitals develop their employee base, and Competency Compass is a new software product that allows the hospital to assess the strengths and weaknesses of their workforce and identify educational and remediation educational opportunities for that workforce, and that product is gaining good traction as noted. We have now 10 contracts for that since its launch, and the value per person is higher than any of our base products, so we are excited about that.

Finally, our pipeline and tending -- we expect to announce the launch of our Pearson Prentice Hall content library that has been in development for over year with Pearson. We think this library is -- again, it is a five-year exclusive library or exclusive distribution right over 220 nurse skills. We think that this is going to give us a huge competitive advantage in the market and allow us to further our initiative to help hospitals develop their workforce. 220 skills library or 220 nurse education skills that we have been working on for over a year should launch in the next six to eight weeks.

And finally, in January also to further our market share and penetration to the growth, we launched HealthStream Express, which is our entry-level product. It allows smaller hospitals or hospitals that are purely driven by economics a way to begin utilizing our Learning system, get on our network and become part of it, and then give us the opportunity to upgrade them with a full suite of products.

We are excited about this one because we even presold it before it launched, did our first contract before we even launched it. Since the January 9th launch, we signed five more contracts. Again, smallish contracts, but it allows us to penetrate the 2500 hospitals that comprise the small hospital population representing about 600,000 FTEs as a target for this product.

I would like to turn it over to Susan Brownie to take a more detailed look at the financial progress, and then Art to look into the future a little bit for us, and then finally I will come back with some concluding thoughts. Susan?

Thanks, Bobby. Revenues for 2003 grew 15 percent from 15.8 million in 2002 to 18.2 million, a change of 2.4 million. The significant (technical difficulty)-- in revenue include an increase of 2.2 million associated with our ASP-based HealthStream Learning Center product; 1.2 million of increased (inaudible) in additional courseware subscriptions, which are partially offset by 830,000 declines in revenues associated with our installed Learning Management product, and 170,000 of declines in our live event business.

Consistent with the subscription methodology of recognizing revenue, approximately 80 percent of the growth in our HealthStream Learning Center product revenues resulted from the runout contracts in existence at the beginning of the year.

Looking at the allocation of revenues between the hospital-based and pharmaceutical, medical, device-based business, approximately 65 percent of the revenues were attributable to the hospital-based business and 35 percent to the medical device business in 2003, which corresponds to a 62 percent/38 percent split in 2002. Comparing the segment components, the hospital-based business represented 12 million of revenues in 2003 compared to 9.8 million of revenues in 2002. The hospital-based growth includes the HealthStream Learning Center and courseware increases I just mentioned, which were offset by the installed Learning Management Center product decline. These increases are consistent with the growth of our network of subscribers and the continued transitioning of installed Learning Management product customers to our ASP-based products.

The pharmaceutical and medical device businesses increased from approximately 6 million of revenues in 2002, 6.2 million of revenues in 2003. This change reflected growth in content development services within the pharmaceutical medical device customer base, which has been partially offset by the decline in the live event business previously mentioned. The declines in the pharmaceutical medical device business are attributable to softness, which we believe to be a reaction to the LIG guideline which were issued in April of 2003.

In addition, we had a temporary dip in our salesforce that was addressing this segment of the business during the middle of the year. By the end of the year, our salesforce is back to full strength for the pharmaceutical and medical device business. The significant changes in the remainder of the business which supported our 7.2 million of improvement in earnings before interest, taxes, depreciation and amortization, include a $2.1 million improvement associated with the previously discussed revenue changes net of the change in cost of goods; 1.4 million of improvement in product development efforts, principally associated with in-house and third-party personnel; 1.5 million savings with respect to commissions and sales personnel; 500,000 principally related to reduced marketing spending, and 1.7 million of improvements associated with backoffice operations and facilities.

In addition to these financial results that I have highlighted, we have historically provided two other metrics, which we believe are important to understanding our business or financial position. The first metric is our renewal rate. As we announced in the earnings release, our fourth-quarter renewal rate was 86 percent based on the number of accounts and 14 percent based on the annual value associated with the contract. The fourth quarter rate was adversely impacted by the nonrenewal of a regional health system, the rate structure to training function and elected to implement an in-house solution to meet their compliance needs.

For the full year, our account renewal rate was 90 percent, resulting from 45 out of 50 accounts renewing. The full-year renewal rate, based on the annual value of renewed contracts, was 61 percent. We have a team in place that works to assess customs utilization and satisfaction with our products and solutions. Early in 2003, we expanded this team to increase the customer basing activities and content. We continue to work to refine our knowledge of customers and actively manage those relationships.

The second metric I referred to is Day Sales Outstanding or DSO. The details in our press release, DSO improved approximately 48 days for the fourth quarter of 2003 from approximately 76 days in 2002. This improvement resulted from a combination of factors both prospective and historic, plus more HealthStream personnel across multiple disciplines in relationship management and collection.

Art will now discuss our expectations for 2004.

Thanks, Susan, and good morning. Revenues for the first quarter of 2004 is expected to approximate $4.6 million. This represents an increase of approximately 200,000 over the same quarter prior year or 4 percent growth and a decline of $200,000 from the prior quarter or a 4 percent decline.

Growth versus the same quarter prior year is expected to come from our HealthStream Learning Center and content development services. Declines will come from maintenance revenue from our installed Learning Management products and courseware subscription. Versus the previous quarter -- that is the fourth quarter of '03 -- live event activity revenues are expected to increase due in part to the annual AORN congress, while development services and courseware subscriptions are expected to decline modestly.

In the first quarter, we anticipate modest improvements in gross margin compared to the prior quarter due to the lower content development revenues which have a lower gross margin. For the full-year, revenues are expected to grow between 8 and 12 percent over 2003, with each quarter showing improvement over the prior quarter -- same quarter prior year. Approximately 90 percent of the growth is expected from existing products. All products (inaudible) existing products except maintenance revenue from installed Learning Management products are expected to experience increased revenues year-over-year. New products are expected to account for approximately 10 percent of the growth for the full year, which much of it weighted in the second half of 2004.

New products include Hospital Direct, Competency Compass and several new courseware subscription offers, including AACN, which is the American Association for Critical Care Nurses; (inaudible) nursing skills, which Bobby mentioned, and internally developed courseware for patient safety. The 8 to 12 percent range from the full year reflects our visibility at this time related to some of the new product offerings in terms of our customer's adoption rate and timing. As Bobby mentioned, Hospital Direct is currently being piloted by a number of medical device firms, while Competency Compass is being implemented in several of the sales facilities that were the first to contract for this product this past year. The AACN courseware has experienced good traction thus far this year, and the 200 plus (inaudible) nursing online skills programs are expected to publish in the next six weeks. (inaudible) have been received --sent out to our customers, and we have gotten good feedback so far on those particular courses.

All of these products are subscription-based, and they promise to show good promise for this coming year. In addition, after two plus years of organic growth, we are beginning to explore opportunities to extend and/or expand our product offering. To the extent we consummate any such opportunities during the current year, they would be additive to the above revenue guidance.

From a business mix perspective, we expect our hospital-based business to account for approximately two-thirds of our full-year revenues in 2004, and the pharma and medical device based business to account for one-third. This is comparable to the 2003 ratio that Susan mentioned a moment ago.

To reiterate, our gross margins are expected to be slightly lower than in 2003. As we ramp up for both the Competency Compass and the Hospital Direct products this year, we expect that our product development expenses will be comparable. With our experience in 2003, we expect that our sales expenses will increase due to both the sales personnel and the related commission expense. And finally, we anticipate general and administrative expenses to decline versus 2003 due to reductions in depreciation and amortization of intangibles. We expect to continue to achieve cash flow positive results as measured by EBITDA for each quarter and accordingly for the full year. Finally, cash is expected to be in the range of $16 to $17 million at the end of 2004, and this includes capital expenditures of approximately $2 million.

We are looking forward to 2004, and I will now turn it over to Bobby for some closing remarks.

Thank you, Art. I want to close with a few upcoming events. Our fourth annual e-learning summit will be held in March, end of March and early April. April 2nd is the end date. We expect to have record attendance this year. We currently have over 240 registered attendants with a month to go. We were hoping for a record attendance of about 300 professional educators. This is the largest conference of professional hospital-based educators in the country, and it has grow each year for us very successfully. This is the time to showcase new products and generate excitement leading into the year, and all of our teams are gearing up for this major event which we do once a year. It is supported by our ongoing customer groups that meet out in the field. We have I think as many as eight of these groups that meet on a regular basis, these user groups out in the field.

I would also like to mention that our board recently appropriated $1 million investment to create a second datacenter and hosting facility. That facility will be here in Nashville, and with the company Inflow (ph) after careful due diligence, we selected Inflow as our hosting partner. We are excited about our progress in that. We expect this facility to be up at the end of the first quarter. We are excited about the added capacity and extended capability this new facility will bring us, providing us greater protection, greater speed and all the things associated with a second and separate city geographically diversified operations as far as serving our customers through our Internet service.

As we move into 2004, we are excited about what we have seen with our new products. Although most of the results are preliminary, we have successful implementations of Competency Compass, and we have growing pilot interest in our Hospital Direct program. We have presales on our new Express platform, and we're seeing initial traction on that. So we feel good as we come into 2004.

Our current visibility of 8 to 12 percent is the best we can see based on where we are today, and we will do everything we can with our new products to work to beat that range. But our current guidance of 8 to 12 percent topline growth and cash flow positive in four quarters is where we are going to leave it today.

I think we are now prepared to turn it over to questions after I congratulate our employees on their progress all of last year and the excitement with which we are entering into 2004. Thank you and I will now turn it over for questions.

(OPERATOR INSTRUCTIONS). David Francis, Jefferies & Co.

Good morning. Two questions, Bobby. First, as it relates to Hospital Direct, it was good to see the signing of original contracts there. The dollar value that you published as well leads me believe that those are pilot contracts. I guess a) is that the case, and b) can you remind us what the business model for that business looks like as you start to ramp it up and what that means from a revenue and P&L perspective?

Yes, David. I can comment on that. Of course, it is a new product, and so we are experimenting with the pricing models. But to get down to the basic economics that we're planning for the product is that you are right to acknowledge these are all pilot programs. Where we hope that this product will go in terms of pricing and scalability is that there will be an initial implementation fee on a per device basis between $8,000 and $12,000 and then a distribution fee out to our network where we have over 700 hospitals to distribute to currently of about $500 per hospital per year.

Currently in the pilot programs, we are having people sample, and they are paying the fee to get the set up on their product, and we have offered six months of free distribution on several products to see how well the uptake is on the courses. We would expect that within these pilots to be an inflection point of decision as to whether they will begin to pay the distribution fees, which is, again, where all the margin and scale comes in this product.

Obviously the potential is for these to be big commitments for these organizations. They have multiple products given the size of our network, and we think that they are treading carefully in their decision as this could scale quickly if it catches on.

Now that said, it is an experimental model and so is the pricing, and we are working to prove the value of distribution, and we are working to prove that it can save them effort for their salesforce, save them time in the sales and retraining process in the hospitals, and that they can get uptake of their training materials through our network, which we have seen by the way.

One of our device manufacturers has already come back and contracted for a second pilot on a second product. After over an eight-week period, we had 300 course completions on one of their medical devices. So we are excited about the uptake. You are right to acknowledge that the current revenue generation is very low. We still think this product has good promise as a scalable product with eventually high gross margins, but until it becomes a competitive necessity and is viewed as a salesforce effectiveness tool, we won't know how to forecast this product, and we will just keep you posted on our progress with the pilots.

That is helpful. One follow-up question. Renewal rates for the quarter on the traditional subscription business, it looks like you lost one very large customer. I guess, again, a) is that right, and b) are there any other significant renewals that you anticipate may be at risk as we look out over the next year? Thanks.

We did lose a regional provider, which was a medium to larger customer for us. Certainly not our largest by any means, but a medium to large customer. We think the reasons we lost them are very explainable and that we hope not to see repeats like that.

So first off, our renewal rate based on the number of accounts for all of 2003 was 90 percent. We renewed 45 of 50 customers throughout all of 2003. In the fourth quarter, however, seven accounts came up for renewal. We renewed six of them. The one that did not renew was obviously larger in contract value than the other six combined -- somewhat of an anomaly in the way that that happened -- so our renewal rate on a number of accounts basis was 86 percent, and on a contract value, it was an unfortunate 14 percent. However, we think that looking forward into the next year that the contract renewal rate and the contract value rate should equalize over the whole body of our accounts, and we are currently looking at an 85 percent expectation on a number of accounts to renew and the value of contract renewals. for '04.

So we think there is somewhat of a bit of a timing anomaly. Occasionally we will lose an account, and we will also win accounts. You can also see from our topline growth and the number of subscribers that even with that loss, we grew to 839,000 contracted subscribers from roughly 770,000. So net of losses, we still added -- now we are up to 839,000 subscribers, which I am very proud of.

So I guess the follow-up is, can you describe what kind of account management process is in place at the company to be sure that at least your larger accounts are relatively close to the family rather than positioned to be leaving?

Yes, I can. We have really strengthened that process over the last year and tied a lot of our services together into one big operations group that we think really does a much better job of staying in touch with the customer. First, it begins at the Customer Service department, which I reported earlier has really improved performance and beats the national average in terms of responsiveness. Responding to questions is an important part of customer service, and customers that call-in and we resolve their problems give us a good sense for it.

Second, we have strong implementation teams that are also now linked together and we have a software system to track all of our customer relationships and know when they call-in, know how their implementations are going.

Third, we have invested in and developed over the last year a strong account management team. The account management team has varying focuses, and one is own account relationships. When the relationships are healthy, the account managers are working to introduce new products and show more services from HealthStream. When the account is under any kind of stress, the account manager is working to build the relationship and work through any issues they may have. This account management team is independent of the salesforce, dedicated to account relationships and also keeps their finger on the pulse of these major accounts.

And then finally, the sales team, which is also involved in account relationships and have a long-standing sales relationships with these accounts, is staying in close touch with the content. So between our customer service, account management, salesforce, we have trained them, and they have built strong relationships with these accounts, and we feel they have a better finger on the pulse of renewals, which gives us our confidence in our 85 percent renewal rate that we are forecasting for all of next year.

Let me turn it back over for questions.

(OPERATOR INSTRUCTIONS). I am showing no further questions in queue.

Well, we want to thank everybody for their participation in the conference call, and we want to thank our employees for their hard work during 2003 and a strong start into 2004 with our new product introductions. We look forward to reporting Q1 as that unfolds. Thank you very much.

Thank you, 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 a passcode ID number of 337940.

This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.