HealthStream Inc (HSTM) 2004 Q2 法說會逐字稿

Good day everyone, thanks very much for holding and welcome to the HealthStream's second quarter earnings conference call.

[OPERATOR INSTRUCTIONS].

At this time I would like to turn the conference over to HealthStream's Chief Executive Officer Robert A. Frist Jr. Mr. Frist please go ahead.

Thank you. Good morning and welcome to our second quarter 2004 earnings conference call. Also in the room with me are Art Newman, Senior Vice President and CFO, Susan Brownie, Vice President of Finance and Human Resources, and Mollie Condra, Director of Investor Relations.

After Art reads the forward-looking statement, I am going to ask Mollie Condra to have some opening remarks on our product lines and services. 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 Form 10-Q and 10-K. Mollie?

Thank you Art. Our primary goal at HealthStream continues to be to improve the quality of healthcare by improving the quality and acceptability of healthcare education. I would like to start this morning by giving you a few updates on our products. HealthStream Express, a streamlined economy scaled version of our platform has been adopted now by 31 hospitals during the first half of the year representing about 9,300 healthcare professionals.

With an average two-day implementation cycle, HealthStream Express is gaining momentum along our smaller rural hospitals. Two medical device companies contracted for HospitalDirect in the second quarter that together represent training for six medical devices. To date, we now have 11 companies that have collectively contracted to train hospital based healthcare professionals on 18 medical devices.

And the number of subscribers for our competency compass grew in the second quarter to more than 10,000. This is up from 8,250 of last quarter. Facilities continue to enroll in this powerful tool to accept and track competencies in the clinical environment.

And to date 45 facilities have contracted to receive the AACN course curriculum. This is with over 1,800 subscribers with the contract value now of approximately $370,000. We continue to develop products that respond to the needs of our hospital customers. Just in April this year, we previewed our new Easy Scan Suite. This is an application for easily recording classroom attendance with a bar code and a scanner, and also for easily grading exams with a scantron device. So in all, we look forward to building off of this momentum in the next quarter. At this time I will now turn it over to Susan Brownie.

Thanks Mollie. Revenues were comparable between 2003 and 2004 reaching approximately $4.7 million, while net losses improved 48% to $500,000 from a net loss of $1 million a year ago, which represents approximately $500,000 of production in our net loss. The significant changes over the prior period from a revenue perspective include $450,000 associated with our ASP based HeathStream Learning center product, which represents a 24% increase over the same quarter in 2003. In addition, $200,000 decline in live event revenues and a $150,000 decline in revenues associated with our own self-earning product rounded out the changes from our revenue standpoint. Revenues were split approximately 70%/30% between the hospital and pharmaceutical medical device business during the second quarter of 2004, while the split for the same quarter of 2003 was approximately 65%/35%.

This change relates primarily to the growth in HLC but is offset slightly by the decline in live event revenues. The significant changes in the remainder of the business, which supported our half a million improvement in net loss include approximately $300,000 associated with reduced amortization, which is attributable to the expiration of estimated useful life for intangible assets associated with acquisitions completed during 2000 and approximately $100,000 have improvement in general and administrative expenses principally associated with fewer administrative personnel.

In addition to the financial results I have highlighted, there are two other metrics that are important to understand our business and our financial position. The first metric is our renewal rate. As we have discussed in our earnings release, our second quarter renewal rate was 65% based on the number of accounts and 88% based on the annual value associated with renewed contracts. Year-to-date results reflect a renewal rate of 73% for the account renewal and 82% based on the annual value of renewed contracts. This compares to the 2003 rates of 87% for account renewal rate and 73% for the annual contract value of renewals during the first half of 2003.

The second metric that I mentioned is day sales outstanding or DSO. As we detailed in our press release, DSO decreased to approximately 49 days for the second quarter of 2004 from approximately 55 days for the first quarter of 2004 and is comparable with the rate experienced during the second quarter of 2003 at 48 days. The improvement over the first quarter resulted from decreased receivables associated with pass through expenses as we discussed last quarter. Art will now provide our expectations for the third quarter and remainder of 2004.

Thanks Susan. Revenues for the third quarter of 2004 are expected to approximate between $5-and-$5.2 million. This represents an increase of 15% to 20% over the same quarter prior year and an increase of 6-10% over the second quarter. The increase over the prior year third quarter is expected to come from both business units, while the increase over the second quarter of '04 is expected to come largely from continued growth in the hospital-based business, primarily due to the implementation of the tenant agreement, while we expect that the pharmaceutical and medical device business will remain comparable with the second quarter. As we discussed in last quarter's earning call, guidelines that were issued late in 2003 by the Office of Inspector General in AvaMed have resulted in lower sales activity from our pharmaceutical and medical device customers in both the first and second quarters.

We expect that to continue during the remainder of the 2004. Growth from our HealthStream Learning Centers expected to more than offset reductions in revenues associated from the installed learning management products. We are revising our guidance to reflect expected full year 2004 revenue growth to approximate between 10% and 13% up from 8% to 12% we had previously communicated.

We now expect growth from reoccurring HealthStream Learning Center revenues as well as increased sales of our new courseware offerings during the remainder of the year to more than offset the anticipated shortfall with respect to the live event business. We expect gross margins to improve over the remaining part of the year while product development and sales expenses are expected to grow moderately, primarily associated with additional personnel.

We expect that marketing expense will remain at levels comparable to the second quarter of 2004. General and administrative expenses are expected to decrease slightly due to the continued operational and personnel efficiency. Collectively, we expect that the revenue growth and the expense levels will support improvement in our net loss and EBIDTA for the third quarter and remainder of 2004. I'll turn it back to Bob for some closing remarks.

Thank you Art, Susan and Mollie. I would like to close with covering just five basic points that I want to go through. The first is that during the second quarter each year, we complete and deliver our services to the AORN congress, this year held in San Diego.

The event itself was another great success for HealthStream and well-executed over 76 continuing education programs were delivered on the exhibit floor at this congress, this gathering of nurses in San Diego. Since the start of 2002, approximately 300,000 nursing contact hours have been awarded from HealthStream, and in the second quarter of this year 49,320 nursing continuing education contact hours were awarded and that number is primarily the result each quarter-in the second quarter of the AORN congress.

So, congratulations to our team for yet another successful execution of this major event for HealthStream that occurs every year in the second quarter.

The next topic I would like to cover is the implementation and activation of the tenant healthcare account. Acquired early in the second quarter through a contract that was announced separately over nine weeks of diligent work by teams from both tenant and HealthStream rep resulted in the successful activation of the tenant account early in the third quarter or earlier this month.

We are very excited about that activation. It represents implementing over 80,000 employees turned active from tenant including three years of historical data that was imported from the Legacy System at tenant.

So, our teams there have done an excellent job and we have complimented in the midst of that process last quarter report, but once again, I want to compliment everyone for the excellent execution of the tenant contract and most importantly, financially for our financial institutional investors, we began revenue recognition on that account here in the third quarter, so we are excited about that.

The third point I want to cover is the importance of customer care at our organization. We have made great strides in last 12 months improving our customer care services. In fact, earlier this year, we implemented a system that allows customers to provide direct feedback by way of a survey delivered after each customer service interaction.

I want to report on the scores; how we are doing on that. A rater and 12 responses have been sent in as a follow-up for the customer care call. With an average score of 4.2 out of 5, we believe that this is a solid rating remembering that all of those inbound calls are troubled customers or customers that want assistance in correcting a password or learning how to use the application. So, we are very excited that our team led by Michael May has been exemplary in demonstrating superior customer service recognized by our customers, again, with this excellent average score of a 4.2 out of 5 across 812 responses, direct surveys from customers after their resolution of their issue.

The fourth point I want to cover is the increasing optimism both within HealthStream and that we want to share with our shareholders for the second half of the year. The first half was characterized by a decline in one our expected businesses, the live event business and posed some challenges for our teams to overcome. I feel like we have already quickly responded to those challenges and begun to see a path through new product development and product growth to have an optimistic and forward looking 15-20% growth for the third quarter, which will spread our growth between the 10-13% for the year, so the increasing optimism I want to share with you is for the second half of this year, share with our employees, so that we can gear up for what looks to be more growth ahead.

And finally, I would like to share my enthusiasm for another milestone, the company expects to crossover the next 60 days and that is the one millionth subscriber to our learning platform. We are very excited to have achieved this in really four short years since our initial public offering, which was about coincided with the launch of our Internet based learning platform and we expect some time in the next 60 days to crossover this important milestone of having one million paid and our contracted subscribers on our platform and we look forward to sharing that both publicly and with our employees and we plan to make a big deal of it, here at HealthStream, we hope our investors see it as an important milestone in our history. At this time, I would like to conclude the comments from management and turn it over for questions.

Thanks very much.

[OPERATOR INSTRUCTIONS]

We will go first to Peter Waltman, at Deerfield Associates.

Hi, Bob, it is Peter Waltman.

Hello Peter.

It sounds like you are making progress. Can you, I guess it would be relevant for '05, but when can we expect significant or solid earnings per share rather than just cash flow or-EBIDTA?

Right, Peter that is a very fair question. What we plan to do on that is we will provide a concrete date for that at the end of next quarter. We think that it is sooner than later, but we are going to wait and make sure our third quarter delivers as expected the 5-5.2, which we do expect, which is a 15-20% growth and at that time, we will feel much more confident in the trajectory of the crossover to net income and I would say, just as a general guidance, we are looking at some time in the next two quarters after that but we will firm that up, whether it is going to be the fourth quarter or the first quarter of next year, but we have it narrowed down to one of those two, whether we turn that income positive and we will update everyone at the end of the third quarter and give a more concrete deadline for crossing over as we did with EBIDTA.

Thank you, can I ask the second question. Tenant healthcare was terrific, has it led to any other large contracts or interests from some of their competitors and colleagues.

That is a great question Peter we believe the tenant contract was a great validator of our company for two main reasons. One, the bidding was very, very competitive and many, many both large and small companies as many as 18 competed for that business and HealthStream emerged as the victor, it was a quite a validator of our business. Secondly, we think that it was quite a confidence builder for other enterprise level systems to look at HealthStream and see that, not only, number one HCA and the number two for-profit chains had turned to us for the solution set.

We think that it helps clarify that our position in the market is that anyone should be comfortable working with HealthStream regardless of where they are or their, the geographic location of the nature of their hospital for-profit or not-for-profit. So, we are excited about the messages sent and we have seen some follow on, and kind of a accelerated interest from the enterprise class accounts that now see us as a very much more of a validated business for them.

OK, thank you.

Next up, we have a question from David Francis, Jefferies & Company.

Hi Bobby, congratulations again on the progress as well. One quick question is it relates to renewal rates and this has been an issue in the last of couple of quarters, but it appears as though the company is still below what I guess, I would have expected relative to previous contract customers re-update (ph) , and I was wondering if you could give us a little bit more color on what the company is doing from an internal sales perspective to try and lock down renewal customers who I would imagine would be higher margin as well, and what can be done to increase those rates? Thanks.

Thanks David. The first what we are doing a lot on that. Our account management teams have been really good at getting way out in front of this renewal issue, and they focused on the largest account, so in this particular quarter the initial number looks a little lower in the number of accounts, but if you look at the value of accounts and the number of FTEs (ph), the numbers are actually much more favorable and we think that the value of the account, the dollar value is important as are the FTEs, which is probably a really good indicator of the retention among the larger accounts.

So, I will turn it over to Susan Brownie to address the value of the account of the number of FTEs which measures up nicely against the number of accounts renewed, which this quarter we did loose some very small accounts, but you will see financially they were really relatively immaterial, and so Susan can you bring up some of those numbers please.

Yes. Dave in the year-to-date period, out of 37 accounts that have come up for renewal, the 73% rate gets us to about 27 accounts renewing, but if you look at the number of FTEs included with those accounts, they are basically 35,000 FTEs up for renewal. We renewed approximately 31,000 of those FTEs. So, we are at about 88% on the FTE renewal rate, and then tracking to the annual contract value, it is giving about 450,000 of annual contract value up for renewal. We are at roughly 82% there , which translates to about under 370,000 of annual contract values that did actually renew during the period.

So Dave if you look at the 88% and 82% they track we did lose again a few very small accounts from an FTE finance perspective and we are working on that, but to answer your question we feel that financially the impact on target with 82%-88% numbers that we just quoted from Susan. Secondarily, the account management team is getting further and further ahead meaning they are calling people now as much as nine months in advance of renewal beginning to work those relationships. So we are getting further ahead of the curve on working a healthy relationship and insuring renewal. So it is a little hard to see in the numbers, I guess that we put out, but I am feeling still confident that we can achieve our objectives on the renewals.

And let me follow-up if again, it is called a blended 85% hit rate does that mean that the 15% you are losing that as you at growing the top line here that, when you are growing revenues year-over-year that you have got to replace that 15% as well as add to it to keep the growth rate up?

David, that is Art, that is a valid assumption or assessments, I mean that's how we build our budget to assume that there is going to be some non-renewal of business. I would add to what Bobby and Susan said, the more of the products the courseware that we are releasing, launching to customers. We see that not only as a way to get the (inaudible) amount for those customers remaining, but as well the sticky type of capability to keep customers with us.

So for example there might have been have a customer who said look, I can probably do the OSHA regulatory training without HealthStream. But when we start providing the AACN courseware the recently released nursing skills courseware, some new programs that we have coming out later this year, they will increasingly be another delivery for that content and we believe we will increase our retention rate on those customers up for renewal.

David aside from retention also now the big part of our internal focus we have done a couple of things on the sales side. We have hired a director of Tele Sales Management, who is going to increase the value per existing account, and we currently have three Tele Sales people under the Tele Sales Manager. We plan to grow the number of people who are good in selling into the existing accounts. So we are going to expect to see some growth in the value of the individual accounts that do remain with HealthStream.

In addition, we have posted or are in the process of selecting a VP of National account development, and we have several high quality candidates for that, and the idea between this new officer position in the company is going to be to develop our 10 key accounts, and get them to grow-these are the top 10 really revenue generators for HealthStream-to get in there with initial focus on tenant and HCA and grow the value of those larger accounts that again retention of those kind of the 80-20 rule here. The retention of those top 10 accounts are critical as in long-term HealthStream. So we are taking some action in the sales force side with a new VP position, the new Manager of Tele Sales, and to increase the same-store-sales essentially.

Thank you.

Thank you.

And just a quick reminder before we move to our next question.

[OPERATOR INSTRUCTIONS]

We will move on to Anthony Marcase (ph) at Monarch Capital.

Hi good morning. Given the increasing optimism that you have, is there any potential to use some of the cash to buy stock back.

Anthony, we have talked about that from time-to-time, but we still believe that the use of the cash should go more directly to growth and that will ultimately grow more shareholder value. So we have talked about that, but it is not.

We'd rather preserve the cash, because as we have mentioned in our prior calls are beginning to look at small what I would call tuck in acquisitions that fit our model. They can help us grow in that way. And we'd rather the cash to invest a new product development. We are a company that invests in technology for growth.

So our current plans are not to just stock buy back instead to invest in new products, and in the sales force and in the other tools for growth.

All right. Thank you.

[OPERATOR INSTRUCTIONS].

If there are no further questions, I want to thank everyone for their participation this morning and congratulate the employees on the delivery in the first half, the stabilization, and look forward to the second half with increasing optimism for both shareholders and employees of HealthStream.

Thanks, again, for participating, we look forward to reporting our revenue growth and success of Q 3 sometime 90 days from now. Thank you much, goodbye.