HealthStream Inc (HSTM) 2004 Q1 法說會逐字稿

Good morning and welcome ladies and gentleman to HealthStream's first quarter 2004 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. I will now turn the conference over to Mr. Robert Frist. Please go ahead, sir.

Thank you. Good morning and welcome to our first quarter 2004 earnings conference call. Also in the room with me are Arthur Newman, Senior Vice President and CFO, Susan Brownie, Vice President of Finance and Corporate Controller, and Mollie Condra, Director of Investor Relations. Arth, would you read the forward-looking statements, 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 Form 10-K and 10-Q. Robert?

Thank you, Arth. Our primary goal at HealthStream continues to be to improve the quality of healthcare by improving the quality and acceptability of healthcare education. And in the first quarter of 2004, we believe, we made significant progress towards achieving that goal. We wrapped up the quarter with record topline revenues of $4.9m, which was up 11% of the first quarter of 2003. Our net loss improved 69% to a loss of $400,000 from $1.3m loss a year ago, a reduction of $900,000. We just reported our third consecutive quarter of positive cash flow as measured by EBITDA. We also had near record implementations in the quarter, and her team of implementation specialists activated 61,000 healthcare professionals in the first quarter. We now have a total of 875,000 individuals, healthcare professionals under contract of which, 831,000 are fully implemented subscribers, which means we are billing for those 831,000 subscribers. Also, in the quarter, we passed a $10m completion mark for course completions on our learning network and as of April 26, we did $10.8m. So we are seeing continued acceleration in the use of our products and services online as measured by course completions.

I am also pleased to tell you that during the quarter, we made progress with the adoption rates of our new products. HealthStream Express which was launched on early January in the quarter, was adopted by 14 small hospitals representing 3350 healthcare professionals. It is also important to note that this product that targets more hospitals has a rapid implementation cycle, currently averages two days from contract signing to building an implementation, which I'm very pleased with that turnaround cycle on a new HealthStream Express platform. Also in the quarter, two medical device companies representing eight medical devices contracted for distributions through HospitalDirect, nearly doubling the number of devices under contract for this new product HospitalDirect. We're very excited about that and the number of subscribers to Competency Compass, another new product launched in the middle of last year, grew 74% to 8250 subscribers from 4750 subscribers last quarter. So, we are very excited about the progress of Competency Compass and look forward to continued momentum in that product. Also, 32 facilities contracted to receive the AACM courseware, which we announced recently and 68% of those 32 facilities were in the first quarter.

One of our content sales reps Debbie set a new record breaking the core million mark in content sales order drive during the first quarter and we hope to see that continued across all of our content sales reps that are beginning to sell content into the channel of 831,000 activated users. We continue to develop new products that respond to the needs of our hospital customers, and in April, we previewed our Easy Scan this week , which is a new set of software that allows for automatic importation of records through barcodes and scanners, and even the scan device for automatic test paper-based test. So, we'll be rolling that product out during this quarter, the second quarter, we are very excited about the new Easy Scan suite as an addition and extension of the Healthcare Learning Center. With those thoughts, now I'd like to turn it over to Susan Brownie to review the financial performance for the first quarter.

Thanks Roby. Revenues for the quarter grew 11% from $4.4m during the first quarter of 2003 to $4.9m for the first quarter of 2004 an increase of $0.5m. The significant changes in revenue include $420,000 associated with our AST HealthStream Learning Center product, $350,000 in growth and development of our online content. These increases were offset by a 140,000 declines in revenues associated with our installed learning management products and declines in our live event business. Revenues during the quarter were split approximately 65%, 35% between the hospital and the pharmaceutical medical device businesses during the first quarter of 2004 and 2003. The significant changes in the remainder of the business, which supported our 940,000 improvement in net loss, include approximately of a 100,000 associated with the previously discussed revenue improvement. Net as a change in cost of goods associated with additional personnel from our new Competency Compass and hospital direct products. In addition approximately 300,000 improvement in product development effort is associated with both in-house and third party personnel. This savings is also in that with the reclassification of personnel associated with new confidency covenants in hospital direct products, which were moved up to cost of goods during the quarter. We also experienced approximately 200,000 of improvement in general and administrative expenses associated with reductions and personnel responsible for administrative function.

And finally we have approximately 400,000 of improvements associated with reduced depreciation and amortization expenses. In addition to the financial results that are highlighted, two other metrics are important to understanding our business and financial position. The first metric is our renewal rate. As we announced in the earnings release, our first quarter renewal rate was 80% based on the number of accounts and 78% based on the annual value associated with renewed contracts. The second metric is days sales outstanding or DSO. As detailed in our press release, DSO increased to approximately 55 days for the first quarter of 2004 from approximately 48 days for the fourth quarter of 2003 and 74 days from the first quarter of 2003. This change resulted from increased tax through expenses associated with the changes and OIG regulations in related added net guidance that we discussed in the release. We are working to reflect a larger portion of such expenses upfront. We split the calculation on a comparable basis exclusive of pass throughs. Field sale improved to 45 days for the first quarter of 2004 compared to 48 days for the fourth quarter of 2003. In addition, the percentage of our accounts receivables that are more than 90 days old improved by 6% from the end of the year. Art will now discuss our expectations for the second quarter and the remainder of 2004.

Thanks Susan. Revenues for the second quarter of 2004 are expected to approximate $4.4m to $4.5m. This represents a decrease of between $2 and $300,000 over the same quarter of prior year. As we discussed in our earnings release, the OIG and AdvaMeds guidelines were expected to result in lower sales activity in our pharmaceutical and medical device business. Compared to the same quarter prior year we expect to grow our HealthStream Learning Center and content development services. However, these will be more than offset by reductions in live event services and revenues associated with our installed learning management products. We are maintaining our guidance that revenue growth will approximate 8% to 12% for the full year 2004. Despite the anticipated shortfalls with respect to the live events business, we anticipate growth in our reoccurring HealthStream Learnings Center revenues to grow as favorable for renewal experience in our installed learning management products. We expect gross margins to improve for the remainder of the year due to the changes mentioned above in our revenue mix. Our product development expenses are expected to growth slightly primarily for the share with internal and third party personnel expense. We expect that both sales and marketing and general administrative expenses will remain a level comparable for the first quarter of 2004. Collectively, these anticipated expenses will enable us to maintain our guidance to achieve cash flow breakeven as measured by EBITDA for the second quarter and for the remainder of 2004. I'll turn it back to Boby for some closing comments. Thank you Arthur, Susan and Mollie for helping prepare for this summarization here. There, I'd like to close with a few comments about our Probosa learning platform, during the quarter we hit two milestones, I think are important -- both indicate that we are developing, delivering a best of class learning system to our market.

Healthcare Learning Center was awarded score on 1.2 certification from the Advanced Distribution in Learning initiatives (ADL) lab. The highest attainable level of conformance was the Shareable Content Object Reference Model or SCORM. We're very excited about out progressed move toward this industry standard and the attainment of SCORM 1.2 certification places our learning system in a best of class category in elite 24 inter-project class learning systems are in this category out of over a 140. They're considered enterprise class learning systems, so top 20% of learning systems; we're excited about that. Moreover our system maintains a 99.97% uptime rate, which I think is very important in the healthcare industry to maintain a near perfect uptime rate, as those environments are 24/7 settings, the clinical settings in hospitals require this kind of reliability and 99.97% place us in the highest category among internet based providers of internet based ASP services. Also like to mention a few other achievements during the quarter, we have attained the re-accreditations through the ACCME, which is the Accreditation Council for Continuing Medical Education. We re-attained a four year status accreditation with them in -- during the quarter which is an exciting and very involved process that a team of HealthStreamers led us through in the quarter, and again that certification is another testament to our, the excellence of our operations in that area.

In closing there are two major events that occur really at the end of the first quarter beginning of the second quarter, each year at this time. Both are very exciting, both are very successful. The first if our E-learning summit held in Nashville, a few weeks ago, we had a record 392 participants that came from 42 states and they brought with them their insights into the learning needs of the acute care industry. That attendance by the way was up over 100 to 115 more than the prior year. So, we're excited about what we think that indicates about the interest level in both our company and our parts and services. We held over 52 educational sessions over a three day period where really everyone from HealthStream had the opportunity to interact with our customer base, and is a very exciting time for every one at HealthStream. In addition in San Diego, HealthStream executed one of its highest activity level congresses. At that congress this year the AORN congress we delivered an incredible level of educational event activities, up from the prior year, during this week long process of delivering educational activities on the floor, the exhibit floor at the congress in San Diego for AORN, and also in the quarter we renewed with AORN a three-year agreement to continue those services for them at their annual congress event and we're very excited about the success of that event and the teams that pulled them off, just a fantastic two or three week period with both of those major events occurring for our company. Like to take a moment out and turn it over for question if we have any, we'll stay around for a few minutes and take the questions about the first quarter performance. Thank you.

Thank you, the question and answer session will begin at this time. If you're using a speaker phone please pick up the handset before pressing any number. Should you have a question please press star one on your push button telephone. If you wish to withdraw your question please press star two. Your question will be taken in the order as received. Please stand by for your first question. Our first question comes from David Francis with Jefferies & Company, please state your question.

Good morning, three questions guys. First as it relates to renewal rates, the company had a large customer at the end of the fourth quarter, that decided not to renew and while you had 80% renewals in the first quarter, that means a fifth of the customer base decided not to renew, given the other strong metrics that you're seeing in the business, I was wondering what you could tell us about your target is for renewal rates going foreword and what reasons there might be for fairly significant portion of the customer base deciding not to renew?

Sure, David, I -- we'll take a crack at that. The first thing you have to remember about renewal rates is that the first renewal cycle that someone goes through is typically, you achieve a lower level than you'd expect in the long-run of any kind of subscription business. For instance once an individual subscribes to a magazine, they make their decision about that magazine on the first renewal extension. And once they've made that decision the likelihood of renewal increases over time fund, so we're going to this first round and so we would the average to be slightly lower than you would in a long, long-term cycle once they come up for second, third renewals. So 80% - - our target is 85% and one of the things we did see occur in this quarter was that the account renewal basis leveled out with the dollar-value renewal basis which was a positive sign for us, they both are approximately 80% and we thought that was a positive sign. We would expect those -- the 80% that did renew in the second renewal cycle that their renewal rates would jump up into the 90% range. So our target for the year is 85%. We see that - - we believe that we have visibility to attain the target for the year and again we want get through this first renewal cycle, so that we can get into the second renewal cycle, where I think, once people made a commitment and decision to do education and training in this way and that through that first cycle we expect the rates to increase.

And normally the renewals are for one-year period, three-year periods?

They vary David. Depending on the hospital some are permitted to only renew for a one-year period. But we have probably on average about two and half year lifecycle of renewals, that means it is a mixture of a lot of three's and some one's.

Okay. Second question, the cut back in expectations relative to live event revenues in the near term, is a little disconcerting to my mind given some of the activity that we're seeing among pharmaceutical companies in particular and their efforts to move to alternative channels for marketing their products and services and other activities that the companies are offering similar services, I was wondering how you may characterize the activity in the entire PMD division and what if anything can be done to accelerate the revenue contribution there?

Sure David. First of all, we have seen kind of what we call as cautious response to these new AdvaMed and OIG sponsors. New regulations have been placed on the method and modality of sponsoring these live educational events, the ones that we manage for instance in on this resort type educational activity. So, we're definitely seeing a decline or at least a hesitancy right now into the next three quarters in the use of that kind of event. That said and if you are right on to say that, obviously industry has to do their educational activities and has to build relationships with the industry, how they need to sponsor events and then use, and we firmly believe that Hospital Direct is well positioned to take advantage of these kind of alternative spending dollars. So we've been working for, as you know, for over two years to develop and launch Hospital Direct and we think that a) It is a unique product, does not exist anywhere in the market, b) It provides a unique channel for building relationships and launching educational activates into the clinical settings in hospitals. So what our expectations is our hope and our goal, is to see a shift of those dollars over time. We hope that it will recover at least from the baseline forecast we have now of $2m, but that said, we are also counting on the shift overtime this year towards spending in areas like Hospital Direct which is a more subscription-based, recurrent-based model that is also the unique competitive advantage of our company. So this is a morphing period for lot of the PMD lines and I think that I - we're confident we are seeing the right trends in both obviously with Hospital Direct growing faster, but we do see a catching on and we think it's going to be a strong offset to these declines.

Can you remind us what kind of resources you have dedicated to the sales and marketing for Hospital Direct and other PMD product lines?

Yes we have about five full-time dedicated reps to the PMD sales and marketing side, and what we have began to see now is the cross colonization between the hospital side, in other words, Hospital Direct is directly linked into the hospitals and the sales reps on both sides of our sales force are increasing awareness of that product, both in the hospitals to create demand for the product and then the five direct-sales reps in the PMD that are beginning to showcase it to the pharmaceutical, medical device companies.

Okay. Last question, I'll turn it over, relative to the financials it's good to see the company at positive EBITDA again. Can you give us an estimate of the timeframe that you expect the company to be a net cash producer rather than consumer?

David, we have not put that number out there, we'll take your request into consideration and see when we can provide that guidance. We did focus on EBITDA. Last year, we're trying to structure our internal budget and goals to get a good firm date on net income positive goal for the company and as soon as we feel very, very confident of the attainment of that goal, we will put that guidance out for you and we'll try to do that sooner than later.

Thank you.

Thank you. Our next question comes from Peter Waltman with Associates. Please state your question.

Yes, thanks. You mentioned you had 392 participants in the e-learning summit and I'm just curious how many of those represent existing customers and how many potential new ones?

That's a great question. I think the rough number is about I'd say about 10% were -- just under 10% were brand new customers, potential customers, that is a big uptick. The prior year was basically a 100% existing customers, looking at new products and this year we actually did make a point to try to bring in about 30 or so customers to come in and look at our company and it was very exciting for them to mix with existing customers and see the excitement around the company and it's products. We need to do even more next year, we realized that, that was such a big success, its well positioned us. Actually three, what I would consider enterprise level of clients spent three days in Nashville that are all potential clients for us and we think that the summit goes a long way to help winning their business.

So out of those ten here, three of them many convert the customers, is that --?

No, actually I'll tell you that 30 or so attended that were potential customers and three of those 30 were enterprise level larger clients who spent several days with us and so we are helping to try to win all those three but of course we'll get more visibility in that as we move into the second quarter.

Right, you also mentioned that you had five marketing people in the live event field, is that correct?

Well, five in the whole pharmaceutical, medical device side of the business.

I was curious in total what your headcount in marketing and sales is versus what it's been?

Well, it's up a little bit. It's up about three or four representatives --.

About how many?

We have 25 full time quota carrying sales representatives. We have about four in our marketing group that does lead generation and off shore we have an account management team that works on renewals, so some of the functions are broken out through sale people who are really just focused on new business acquisition.

And you're comfortable long-term keeping that whole function in-house rather than looking at networks of sales people of some sort?

Yes, but we would like to grow the sales force as we can add to it intelligently. For instance we have these new products Competency Compass and in the last quarter we added two sales reps to that product line. I think that product line could support even more sales reps and we want to -- as we get traction in the new products Hospital Direct, Competency Compass, HealthStream Express, we are looking to add sales people or staff as it makes sense. We expect to add hopefully a couple of more sales people during this quarter -- the second quarter.

Just two more questions if you don't mind. The first one is -- is there any direct competition in your mind?

Well there are for specific product lines. What we're beginning to see is strength in the uniqueness of the completeness that's the combination of our products and in fact another trend that we're seeing is that the -- our larger target accounts are beginning to go through a little bit more of a drawn out or a key process, but we think that favors us because we think our track record is real strong winning enterprise accounts and in fact several of our competitors accounts where they have penetration into those accounts have come up for bid and we're in the process now and we think we got a really get short at it. So, I would say that we see favorable trends towards the move towards these enterprise accounts realizing HealthStream has a complete suite of products. We definitely have individual competitors from a Prime Media to a Net Learning to an MC Strategies that sell subsets of the complete suite that we sell and again what we are seeing now is that we are doing a much better job positioning the completeness of our package content, Hospital Direct, Competency Compass, Learning Center and the completeness of our support of the educational list is that an acute care facility is helping us in our positioning in the market and we're really just now optimizing that position.

Okay and then the last question, just if you could look forward. Jim, what element of your product mix can you point to or what event something to spot you towards more rapid revenue growth, is there anything that you see really kick starting the effort to move up above 10% revenue growth to 20% or even higher?

Well, yes Peter we have a whole group now of new products and if you look at our historical product, the --HealthStream's Learning Center. Really last year was a year of launching new products

from about June till January, there was four new product launches and I would say our company is in the early stages of figuring out how to scale our sales and marketing efforts intelligently to ramp those other products. I think that each of those other products, or each of the three core products we launched have the potential to be $10m plus products for us in a reasonable window of time. So, what we got to do is figure out how to intelligently scale our sales and marketing operations to get growth in new products and it is our hope and expectation that we can figure ways to ramp those products. Of course I have to say that they are new products and early reception is good, but we don't know exactly the uptake rate and what will be in those products.

Going well, keep up your hard work. We appreciate it.

Thank you Peter.

Thank you. Once again ladies and gentlemen, if you do have a question, please press star one on your pushbutton telephone at this time. At this time I am showing no further question.

I would like to thank everyone for attending and listening into our earnings conference call and thank you to the team for working hard to prepare this. Thank you to our HealthStream's for supporting the efforts of this quarter, it was a really solid operating quarter, with good topline results and we look forward to reporting the second quarter to you in the near future. 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 an ID number of 353-299. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.