HealthStream Inc (HSTM) 2004 Q4 法說會逐字稿

Good day. Thank you for standing by and welcome to the HealthStream fourth quarter and year-end 2004 earnings release conference call. Just a reminder, today's call is being recorded. At this time I would like to turn the conference over to HealthStream's Chief Executive Officer, Mr. Robert A. Frist, Jr. Mr. Frist, please go ahead.

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

Art, would you read the forward-looking statement please?

This conference call will contain forward-looking statements regarding the 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.

Thank you, Art. As we remain focused on our vision of improving the quality of health care by improving the quality and accessibility of health care education, we are pleased to report our first quarter of profitability in the history of the Company since becoming public.

We wrapped up the year with topline revenue growth of 10 percent over 2003, hitting 20.1 million and I am most excited here in a few minutes to turn the conference over to Susan Brownie who will cover many financial metrics that show the improving health of the Company.

Before I do that though, I would like to hit some of the other milestones that we hit during the fourth quarter and throughout the year. First in October of 2004, we crossed over the 1 million mark of fully implemented subscribers or learners on our system. We now have 1,040,000 fully implemented subscribers, which is a 35 percent increase over the year-end number 2003.

Cumulatively we have completed over 16 million course completions since the inception of our platform with over 2 million completed in the last quarter alone. The number of course completions just passed over 17 million already in the first quarter of 2005. We're now averaging over 30,000 course completions per weekday on the HealthStream Learning Center.

For 2004, we introduced several new partners and products and I'd like to mention a few of them. A very successful content initiative for us is our partnership with the Association of Clinical Care Nursing where we launched the essentials of critical care orientation, a curriculum, an on-line curriculum that we have launched to many of our key customers. We also signed up with Ann Hendrich in the Hendrich Falls program. It's a falls risk management program to reduce falls in hospitals and we are looking forward to the success of that program in '05.

Early in '04, we introduced HealthStream Express, a streamlined economy scale version of our platform and during the year we signed up over 147 health care organizations to the Express platform. The key to the Express platform is rapid implementation and a feature set that is very appropriate and perfectly suited to the smaller health care facilities that are such a large part of the available market. Over 26,000 contracted subscribers were added through the additions of 147 accounts on the HealthStream Express platform. With this rapid two day implementation cycle, we look forward to reporting continued success of this extension of our core platform.

Throughout the year we experienced reasonable growth or moderate growth on some existing products that were introduced late in 2003. Competency Compass for instance we tripled our subscriber base from 5000 to 17,000 FTEs covered on that platform representing an order value of about 1.1 million cumulatively on this relatively new product. And on HospitalDirect we continued to add courseware and both in and out of network hospitals for this platform that allows medical device and pharmaceutical companies to deliver training and education partners directly to the end-users in our one million and growing network.

I'd like to turn it over to Susan Brownie because I think the numbers will speak for themselves and I hope you'll all celebrate with us as we acknowledge our first profitable quarter since becoming a Public Company. Thank you, and Susan.

Thank you, Bobby. In addition to the excitement related to the achievement of net income for the fourth quarter, full-year results also reflect good news with respect to sustained growth in our predictable recurring revenues. While revenues for 2004 grew just over 10 percent from 18.2 million in 2003 to 20.1 million, which represents an increase of 1.1 million, it is important to understand the components of the change. The significant revenue changes compared to 2003 include the 2.1 million increase associated with our AFP HealthStream Learning Center product, approximately 340,000 of the increases associated with content maintenance services, 150,000 of Competency Compass revenues, and 130,000 of on-line development revenues.

These improvements were partially offset by lower revenues for two product groups, approximately 550,000 of lower revenues associated with our installed learning management products and approximately 290,000 of revenue declines associated with our live event revenues as we've discussed in previous quarters.

We also experienced a modest decline in content subscription revenues. The allocation of revenues between the hospital base and pharmaceutical and medical device business was approximately 70 percent/30 percent during 2004 and approximately 65 percent/35 percent during 2003. As mentioned above, the change in this dispersion relates primarily to the growth in our recurring HealthStream Learning Center revenues.

The significant changes in the remainder of the business which supported our improvement from an EBITDA loss of 755,000 in 2003 to 818,000 of earnings before interest, taxes, depreciation, amortization in 2004 include approximately 850,000 of improvement related to the previously discussed revenue changes net of the impact of cost of goods; approximately 716,000 of improvement associated with product development efforts; approximately 360,000 of savings with respect to general and administrative personnel, which were offset by approximately 400,000 of increased spending associated with sales and account management personnel.

Our renewal rate, which were reported as a significant operating metric as well, also improved over 2003, resulting in an 81 percent renewal rate based on the number of accounts and an 85 percent renewal rate based on the annual value associated with contracts.

Finally, our results with respect to Days Sales Outstanding or DSO did not reflect improvement. As we detailed in our press release, DSO increased by approximately 19 days for the fourth quarter of 2004 from approximately 48 days for the same period in 2003. This decline is associated with the timing of billings for content subscriptions that are not reflected in the revenue base used to calculate DSO; a deterioration of certain individual or pharmaceutical and medical device accounts; and to a lesser degree, extension of payment terms.

Payments during January and February have improved our aging with respect to our pharmaceutical and medical device business, so we anticipate improvement in DSO from the fourth quarter levels.

Art will now discuss our expectations for 2005.

Thanks, Susan. Revenues for the first quarter of 2005 are expected to increase modestly over the previous quarter and increase between 5 and 700,000 or 10 to 14 percent over the first quarter of 2004. Growth for the first quarter as compared to the previous quarter is anticipated to result from content development services and the association business. These increases will be partially offset by lower content maintenance revenues.

Growth compared to the same quarter prior year is expected to come from our HealthStream Learning Center and content maintenance services. This growth will be partially offset by lower maintenance revenue from our installed learning management projects.

For the first quarter we anticipate a modest decline in gross margins compared to the prior quarter due to the growth in content development and association businesses which have lower gross margins.

For the year revenues are expected to grow between 15 and 20 percent over 2004, with each quarter showing improvement over the prior quarter and the same quarter prior year. Revenue growth is anticipated to come from our HealthStream Learning Center, content subscriptions, and Competency Compass products as well as live events, on-line development and HospitalDirect products. We continue to expect that revenues associated with our installed learning management products will decline year-over-year.

From a business mix perspective, we expect that our hospital-based business will account for approximately 70 percent of our full year revenues in 2005 while pharma and med device businesses will account for approximately 30 percent. This is comparable to the 2004 ratio that its Susan mentioned a moment ago.

Gross margins are expected to improve modestly throughout 2005 as we continue to grow our Internet based subscription products. We expect that our product developments, account management, and marketing expenses will increase during 2005 as we add personnel to accommodate our anticipated growth. We expect that our sales expenses will increase due to both additional sales personnel and the related commission expense.

Finally we anticipate general and administrative expenses will increase first in 2004 due in large part to compliance with Sarbanes-Oxley regulations.

On the earnings front we expect the first quarter results to approximate net income breakeven while the second quarter will experience a net loss due to our annual e-Learning Summit. We continue to evaluate the impact of new accounting rules related fair value expensing of stock options. Excluding the impact of this charge, which will take effect in our third quarter, we expect to achieve net income for the second half of 2005.

Finally cash is expected to be in the range of 15.5 to 16.5 million at the end of 2005 and this includes content and capital expenditures of approximately $3 million. We are looking forward to 2005 and now I will turn it over to Bobby for some closing remarks.

Thank you, Art, Susan, and Mollie for helping prepare the presentation this morning. I would like to wrap up with a few other notable events during the year. During the year we strengthened our operations significantly along the lines of reliability by investing in creation of a second data center and hosting facility for our primary applications. Along with that throughout the year we strengthened our management team. We have added, we've promoted internally Susan Brownie as a recent promotion from Vice President to Senior Vice President and Kevin O'Hara recently promoted to Vice President to oversee our pharmaceutical and medical device product lines.

Additionally we brought in some outside talent and Michael Sousa (ph) joins us from IBM where he will assist with enterprise level training objectives to provide hands-on consulting to our key accounts, our key national accounts.

In a couple of months we will hold our fifth annual e-Learning Summit. In each of the four prior years we have set new attendance records. This year should be no exception. We're anticipating over 20 vendor partners to participate in the exhibit hall, which should draw the interest of all of our customer base. We are also reaching out more to our installed customer base to work to convert them over to our Internet based learning platform and hope to see some participation from them in the Summit.

And finally at the Summit we expect to introduce some new products and we look forward to announcing those products during Summit and shortly thereafter. These products will extend the capabilities of our platform and allow new users that have not had previous access to our platform to access components of the platform.

So we look forward to reporting on our new momentum as we report you our first quarter earnings in the next couple months. I will now turn it over for questions. Thank you, operator.

(OPERATOR INSTRUCTIONS) Steven Hart (ph), Sire Capital (ph).

Hi Bobby and team. How are you doing? Congrats on the continued progress here. Things are looking good. Can you tell me the difference between subscribers, which I guess is 1,040,000, and the contracted, which is 128,000 more to that? What has been the timing of that incremental difference in this case, 128,000 of them coming on board and becoming paying subscribers?

Sure, Steve. The difference is of course that the contracted subscribers are those that have been signed and are under contract but have not yet been trained and activated. Upon activation and training, that is when billing begins, so in a sense it's a little bit of a look into the backlog of signed contracts that are not yet implemented. A historical down between contract signing and implementation has ranged between 45 and 90 days depending on the size of the account and the complexity of the deployment. But most recently in the last year it has been in the 30 to 45 day range from contract signing to implementation.

Okay great. And also in the second quarter the e-Learning Summit, what is the approximate one-time cost of putting on an event like that?

Well, the investment in that event I'm going to say is approximately $250,000 and we sponsor a lot of activities for our users. It is a four-day event but we also get a lot of work done during that period. All of our account managers schedule full workdays meeting with their customers and our customers of course pay their way to get to Nashville and pay for their accommodations. We pay for special events to keep them energized and we pay to bring in prominent speakers in the industry. We also facilitate some of our vendor partners to participate in the event.

So the total investment is between 250 and $300,000 for that one-time one-week event each year.

One of the reasons why we called it out specifically in the second quarter of this year is because as it happened last year, it split between almost evenly between the first quarter and the second quarter because of the dates of the actual conference. This year it is entirely in the second quarter.

Right. Okay, so for year-over-year comparisons, it's going to be slightly different?

Yes.

All right, thanks.

Peter Waltham (ph) with Fairfield Associates (ph).

Could you talk a little bit about where we stand with competition, how you are facing up? What you're facing, how you are proceeding, etc?

Certainly. I think that 2004 represented a really strong year for us against our competition. In fact several key account wins during the year were migratory accounts that we won away from competition along with several brand-new accounts where we were head-to-head competition. So if you look at some of the key account wins, Henry Ford and Bond Secure (ph) were transitions from what I would consider our historical number one competitor, Thompson Net Learning. As was Tenet Healthcare was another transition from a separate internal house solution that was built on another vendor's platform.

So those three accounts represent kind of our momentum at winning what I will call enterprise level accounts. Towards the end of the year we also landed a couple of other fresh new accounts that were head-to-head competitions like Ohio Health where we added over 20,000 FTEs in that way. I think what is happening is that the completeness of our vision and solution meaning the Competency Compass, the HospitalDirect, the authoring capabilities we deliver and the content offerings, the mix of content partners and offerings that we have is -- all of our research and development was coming to fruition early in 2004 and resulting in a better positioning against the competitors.

Looking forward we expect more and more fierce competition of some of the baseline products like our OSHA regulatory products that are becoming more broadly distributed. So we plan to address that with several new introductions in the next two or three quarters that make our system even more powerful.

For instance this year is a huge year of focus on what we will call business analytics. We plan to open up our databases and create new products from our databases, new dashboards, new information products for our customers that are derived directly out of the strength of our leadership position in the market. So we have begun investment with both inside and outside resources, Hitachi Consulting, to build a data warehouse and we're looking forward to introducing those new products in Q1, Q2, and Q3.

How about on the bigger picture, the acceptance of the e-Learning in general? Are you seeing a major change in that?

I think in general a lot of the hurdles from two and three years ago have been overcome. There is a general acceptance that e-Learning is an efficient way to do certain training. The challenge is to get more and more of the training budget shifted to e-Learning, which I think is a natural outcome over the next several years.

Just yesterday, the Wall Street Journal had an article on the use of training for various compliance topics and talked about the strengthening adoption of technology for a documentation and helping abate risk and generally I think when it hits the general media like that, it's generally becoming a more accepted modality for training. So we think the future is bright for e-Learning currently.

Thank you.

There are no further questions at this time. I'll turn things back over to Mr. Frist for any additional or closing comments.

Thank you very much to our employees who have stood by and helped grow the Company. It was a challenging yet rewarding year as we moved into profitability together. Thank you to our shareholders. As we've seen the returns increased to them as the Company becomes more stable and we all want to celebrate briefly together as we look forward to this year our accomplishments of turning right on through to the net income positive in the fourth quarter. Thank you. We look forward to reporting our first-quarter earnings here in the next couple of months.

That does conclude today's conference call. We thank you for your participation. You may now disconnect at this time.