HealthStream Inc (HSTM) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the HealthStream First Quarter 2005 Earnings Release Conference Call. This conference is being recorded. At this time, I would like to turn the call over to HealthStream’s CEO, Mr. Robert A. Frist, Jr. Mr. Frist, please go ahead, sir.

Robert A. Frist, Jr.: Good morning and thank you. Welcome to our First Quarter 2005 Earnings Conference Call. Also in the room with me are Art Newman, SVP and CFO; Susan Brownie, SVP of Finance and Human Resources; and Mollie Condra, Director of Communications and IR.

Art, would you read the forward-looking statements, 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. Bobby?

Robert A. Frist, Jr.: Thank you, Art.

Well, welcome to our first quarter call. We’ve got a lot of good things to report in the next several minutes here. I’ll open up with a quick look at the numbers. We feel really strong about this quarter. It’s our best performance in our history as a public company.

We had $5.7 million in top-line revenue, which is about 16% of the prior year same quarter. Net income of $144,000, as compared to a $419,000 loss in the prior year same quarter. Our EBITDA improved to about $700,000, approximately $700,000 -- $676,000 -- which is an improvement over the $17,000 EBITDA we delivered prior year.

A few other dimensions we look at. In our fully implemented subscribers, which are the ones that are billable, increased by 44,000 in Q1, which brings our fully implemented number to approximately 1,084,000. So, we’re excited to be solidly over the million mark. And also, we’re consistent with our goal of adding the 30 to 50 to 60,000 fully implemented subscribers per quarter that we set out for ourselves.

Another metric we look at is just the rate of utilization of our system. And throughout the quarter, we saw steady increases in utilization, and increased our average course completion rate per day to about 40,000, which is a relatively significant change for us as we see continued uptick in the consumption rate of our online products and services.

In fact, on March 31st, we set a new record of 51,000 course completions in a day. Again, we think this would be the solid metric to show increasing adoption of our online solutions.

Also, at the very end of the quarter, we announced the acquisition of Data Management & Research, which is a national area company that provides measures of patient, physician and employee satisfaction to acute care hospitals. We’re glad to have the DMR employees now a part of the HealthStream family. And we believe firmly that this acquisition adds to our selection of products and services that we deliver to acute care hospitals nationwide. And in fact, we see already some good opportunities for cross-selling between our customer bases.

I’d like to turn it over to Susan Brownie to take a more detailed look at the numbers and comment on a few other metrics. And then, we’ll go to Art Newman and look at the forward-looking projections, and then we’ll bring it back for a brief close. Susan?

Thank you, Bobby.

Our revenues for the first quarter grew by 16%, or almost $800,000 compared to the first quarter of 2004, to reach $5.7 million. The significant changes in revenue include 650,000 associated with continued growth in our ASP-based HealthStream Learning Center products, like Bobby mentioned, which is an increase of 29% over the same quarter during 2004. We also experience 160,000 of an increase associated with content subscriptions. We experienced 180,000 of declines in revenues associated with our installed Learning Center -- or installed Learning Management products. And approximately 100,000 decline in our live event revenues.

As Bobby mentioned, we completed the acquisition of Data Management & Research on March 28th. However, the impact for the three days that DMR was included in our results was not significant for the first quarter.

Total revenues were split approximately 70%/30% between the Hospital and Pharmaceutical business during the first quarter of 2005, and approximately 65%/35% during the first quarter of 2004, as well as during the second quarter of 2004. This change in revenue mix is primarily associated with the continued growth in our AFC HealthStream Learning Center revenues.

The significant changes in the remainder of the business which supported improvement is net income of $144,000 for the first quarter of 2005, from a net loss of 419,000 during the first quarter of 2004, included approximately 630,000 related to the impact of revenue expenses, net of cost of revenues; approximately 130,000 associated with depreciation of new equipment; and, to a lesser extent, increased amortization associated with our acquisition of DMR, and an increase of approximately 100,000 in sales expenses, which were primarily associated with increased personnel.

In addition to the financial results that I’ve highlighted, we’ve historically provided two other operating metrics that are important to understanding our business and financial position.

First, as we discussed in our February 23rd call, the volume of business subject to renewal has grown this year. As we announced in the earnings release, our first quarter renewal rate was 80% based on the number of accounts, and 77% based on the annual value associated with winning these contracts. These rates are somewhat below our target and we are taking steps for improvement going forward.

These levels also reflect rates that are virtually comparable with our 2004 first quarter experience. However, the number of contracts increased by 3.25% -- or 3.25 times, and the annual contract value increased by over 4.5 times.

The second metric that we refer to is called Days Sales Outstanding, or DSO. As we detailed in our press release, DSO increased to approximately 66 days for the first quarter of 2005 from approximately 65 days for the first quarter of 2004, and is down slightly from the 67 day mark at the end of the fourth quarter of 2004. The increase from the comparable quarter in the prior year resulted from the acquisition of Data Management & Research at quarter end, as well as slower pharmaceutical and medical device collections.

We continued to experience improvement during the first four months of 2005, and expect continued improvement as billings for products sold begin to be reflected in our revenue base.

Art will now discuss our expectations for the second quarter and remainder of 2005.

Thanks, Susan, and good morning.

Revenues for the second quarter of 2005 are expected to approximate $6.8 to $7 million. This represents an increase of between $2 and $2.3 million, or 45% to 50% over the same quarter of the prior year. This increase is expected to be split almost evenly between organic growth from both the hospital-based and the pharmaceutical/medical device businesses, and the full quarter incremental impact of the DMR acquisition. The increase over the prior quarter is expected to be between $1.1 and $1.3 million, or 20% to 25%, primarily related to the DMR acquisition.

Gross margins are anticipated to decline during the second quarter of 2005, principally due to the higher cost of goods related to DMR revenues. We expect that product development, sales and G&A expenses to grow moderately, primarily due to the DMR acquisition, but decline as a percentage of revenue. Marketing expenses are expected to increase due to our annual eLearning Summit, which Bobby mentioned in his earlier remarks. And as we discussed in our February 23rd earnings call, this expense is expected to result in a net loss during the second quarter.

We expect full-year revenue growth of approximately 35% to 40%, which results in approximately $27 to $28 million for top-line revenue. In addition to the impact of DMR, we expect the continued growth of our HealthStream Learning Center products, as well as continued growth of our Content product. Our Pharmaceutical and Medical Device business is also expected to grow modestly.

We expect gross margins to be down from the 2004 levels due to the inclusion of the DMR costs of revenues. We expect the product development and sales and marketing expenses will increase moderately, primarily associated with additional personnel, including those added in conjunction with the DMR acquisitions. We also anticipate increase in G&A expenses, but expect all these expenses -- all these expense categories will decline as a percentage of revenue. We continue to expect profitability for the full quarter.

And lastly, as a result of the deferral of the Fair Value Stock Option Accounting until 2006, we do not expect to reflect any expense associated with the stock compensation until that time.

I’ll turn it back to Bobby for some closing comments.

Robert A. Frist, Jr.: Thank you, Art.

I just wanted to note one thing I noted. When Art said -- I think that you meant to say we continue to expect profitability for the full year. Is that correct?

That’s correct.

Robert A. Frist, Jr.: Thank you, Art.

I’d like to close with some comments about some of the things that are going on. April’s one of the busiest times of our year. In fact, during the month of April, we completed the AORN Congress, which was held in New Orleans. And it’s an exciting time for those in our live events and education business, targeted the Pharmaceutical/Medical Device companies. We introduced some new products and capabilities there where we began to track the educational completions online at this AORN Congress. So, we had some great innovations occurring on that side of our business in the quarter here in the first month of the second quarter.

Also going on right now is we see over 550 attendees from all across the country are gathered here in Nashville. In fact, in a few minutes, we’re going to step out and go back over to that event, where we’re going to be giving a State of the Union address to our 550 customers that have traveled from all over the country.

Over 20 partners are distributing their capabilities and products to those customers. Those are partners of HealthStream. And we’re introducing new products at Summit. So, one exciting new product is a partnership with Adam. Adam out of Atlanta. And we’re enhancing some of our core products, like our [Authoring] Center, with the Adam Image Library and Adam Assets. We think that our customer base will be very receptive and excited about these new products, as we are.

We’ve also introduced a new product just recently called Connect. Connect, we think, will help us increase the market opportunity for specific content libraries that HealthStream offers. Connect allows organizations that are on other platforms, competitive platforms, to have access to specific content offerings that HealthStream makes available through HealthStream Connect, which will increase the market opportunity for those content libraries.

So, we’re excited about that extension to our platform. We’re excited about our new partnership with Adam. We’re excited about our acquisition of DMR. We welcome the DMR employees to HealthStream. And we’re also looking forward to wrapping up this conference call, getting your questions, and then getting back to our customers, which have all gathered here in Nashville.

I’d like to turn it over to questions for a few moments. And thank you for participation in this conference call. Thank you.

(OPERATOR INSTRUCTIONS.) [Patrick Rau], Sterling Capital.

Nice quarter. Can you talk a little bit more about the renewal rate and what specifically you’re going to do to try and get that back up? And secondly, a little bit about the DMR acquisition. Why the business was for sale, one, and also the impact on your SG&A going forward from that acquisition.

Robert A. Frist, Jr.: Okay. Great, Patrick. First is the renewal rate. We had a little bit of known renewal issues in the first quarter that we were anticipating for a little while. For example, about two years ago, we had penetrated an account with -- and got landed -- a couple of the hospitals of a large system account. But two years ago, that account selected another learning system, Corporate Live. It was done before we were able to compete on it. And so, we knew that eventually all of the hospitals in that system would convert to the Corporate system that had been selected. That occurred in this first quarter, and somewhat was a known event and was preconditioned on things that occurred as much as two years ago.

So, we hope that, with that known event, that we won’t have that kind of thing in the next quarter or two. And it made that first quarter a little bit of an anomaly.

Our targets for renewal rates. Our minimum acceptable rate for the management team here is 80%. Our target is 85% on the measures we gave. And what are we doing to improve it? Well, we continue to add to our customer care sets, we continue to focus on relationship management. This Summit is a big opportunity for us to touch and meet with and work with all of our customers in a face-to-face basis, which we think always helps the relationship and, therefore, the renewal.

And of course, platform enhancements are also key to maintaining our position in the market. So, many of the new innovations we’re introducing, we think increase the reasons for people to renew with us. It’s always good to have new product available when renewal decisions are being made. And at Summit, we’re introducing three or four new products, and we’ve mentioned two of them already.

The second question you asked was about DMR. DMR was a nice, somewhat quiet local company here in Nashville that had done a good job over a 10-year period of building strong relationships, what we consider enterprise accounts. And relationships with the executive suite at those hospital system. And they were about 28 or 29 healthcare systems as customers. And they’ve done a good job building that business

I think that in their 10 years of bushiness, they had developed great relationships and had taken the business to where they wanted to go. I think the owner of the business viewed joining up with HealthStream as a way to grow the business more rapidly, take advantage of our broader customer base, and it creates more opportunity for the lines and businesses that that team had built.

So, we think it’s a very good acquisitions for the company and we’re pleased with our purchase price. And I’ll tell you, about four weeks into it, we’re very satisfied with the trajectories, the relationships, and some of the cross-selling that we’re already working on in some key accounts where we’re competitive, either for their products or our products. And together, we think we increase our chances of winning those accounts. So, overall, we’re very encouraged by the DMR acquisition.

And Mr. Rau, did you have any further questions, sir?

Just one follow-up question, Bobby. What will be the impact on your SG&A from the DMR acquisition this year?

The impact on G&A is approximately 10%. And the impact for sales and marketing expense will be slightly north of 10% of revenues.

(OPERATOR INSTRUCTIONS.) Brad Evans, Heartland.

I was just curious. I just noticed that the contract subscribers was relatively flat from the fourth quarter. I was curious as to whether there was a target that you had for contracted subscribers as you look toward the end of the fiscal year?

There is. We’re like to see that number grow at the same rate as our implemented subscribers. So, the good news is we have a nice backlog for a quarter or two of implementations that protects our total at rate. And remembering that it’s the implemented subscribers that count as far as billing.

Of course, the contracted subscribers is a little bit more of leading indicator. We’d like to see that number grow at a similar rate, obviously. And so this quarter was somewhat disappointing in that regard. However, in the quarter, the ins and outs of how this first quarter worked we hope would be somewhat of an anomaly. There were no singular major account wins of what we call enterprise accounts in the quarter. And we have several that we believe maybe just are delayed closing and we’re looking forward to closing some of those in the next quarter or two. So, we’d hope to see that number move again.

So again, the target would be to have it grow at the same rate, the 30 to 50,000 that’s targeted to add to the implemented subscribers. And I guess we’ve got a quarter or two here to get that number moving again.

Brad, this is Art. I just wanted to add to what Bobby said. Year-end is usually one where we have a lot of activity. So, in December we had a number of contract close. And the pipeline goes a little dry, a lot of incentives for the salespeople. But, as Bobby also indicated, we have a pretty good pipeline coming in the second quarter. So, we feel pretty good about it.

Could you just refresh my memory as to whether, with respect to GPO contracts. Are you guys on the hunting list for the Premiers and Novations of the world?

Robert A. Frist, Jr.: We’re on some of them. We tend to focus on the smaller regional players that we think actually really pay attention to the HealthStream product line and help us market them. So, Iroquois Health is a good example of a GPO partner that helps deliver real sales and marketing results.

Historically, we have been on the GPOs of Premier and VHA. And we weren’t satisfied with the results. We thought we did as well or better with our stand-alone sales force than through the GPO. So -- in fact, in many cases, we elected to not participate in those networks. We evaluate those one at a time as opportunities arise and make decisions on whether we think those are good investments in sales and marketing, or whether in those regions of the country we can sell direct and on our own more efficiently.

And can you just talk about the price environment in general?

Robert A. Frist, Jr.: The pricing environment in some of our products is somewhat pressured. On the base learning system product, we see some pressure. A little bit of pressure. I’d say it’s stabilizing somewhat from the last quarter. And maybe even a slight uptick in the next quarter or two as people make decisions about the types of vendors they want. And we’re positioning ourselves as more of an enterprise level, higher value proposition company. And so, we’re hoping to see a slight uptick in the next quarter or so.

We have other products that are premium products and exclusive products, where we’re able to increase the margins. We’re optimistic through this Adam’s software release that we’re having in partnership with Adam will be a high value proposition product that will have really good pricing power in that area.

So, on the mix, I think I see an overall slightly improving environment. We’ve also be able to sell some components of our system, stand alone, at premium pricing. So, we think that is also a good dimension as well.

And just lastly -- I got on the call late, so if this was addressed I apologize. But, can you just review the competitive landscape? And I know there’s one large competitor you historically face. What do you see in terms of competitive win rates when you knock heads with that large competitor?

Robert A. Frist, Jr.: The second largest competitor in terms of market share is Thomson Delmar, which owns a product line and service line called Net Learning. Historically, in the last -- all of last year, we did very well in a head-to-head basis. In the first quarter, we’ve seen a little bit of a resurgence from them as they’ve done a little better repositioning through their transitional period where they were acquired. So, they’ve done a little better.

Overall, though, I’m feeling very confident in our head-to-head competitions against that competitor. In fact, I’m seeing a newer trend where an organization called GeoLearning and Pathlore, which were two -- what I call relatively quiet competitors in the last couple years -- have really done a good job repositioning and working to reposition as an enterprise level supplier to the mid-size and enterprise accounts in our market. So, we’ve seen a couple of new competitors emerge in the last two quarters that I think are more effective.

That said, their market share is much, much lower. It’s a 5th or 6th position in the market. And again, we feel that the suite of our products and our singular focus on acute care hospitals pays dividends and helps us with our win rates.

And again, sorry for the redundancy if this does overlap prior comments, but the issue with respect to the lower retention rate on a dollar basis, was that -- what was the explanation for that?

Robert A. Frist, Jr.: That is a little bit of the pricing pressure we mentioned. Art, would you add any more color to that?

I’d say that some of the arrangements that came up renewals this first time were at a time three years ago when the prices were high. And so, they’re renewing at a lower rate.

Now, somewhat offsetting that is that we have some customers -- and as Susan had mentioned, our installed base of customers, which were of a one-time license for a kind of a maintenance sale. And when we converted them over, we offer them an incentive to kind of to dilute or offset their initial licensing. And as they came up for renewal, those prices are going up. So, it’s a confluence of some of the premiums three years ago coming down and the transition in pricing, which was modest, coming up a little bit.

(OPERATOR INSTRUCTIONS.) And at this time, we’re standing by with no further questions. Mr. Frist, I’ll turn the conference back over to you, sir, for any additional or closing comments.

Robert A. Frist, Jr.: Thank you very much. We look forward to reporting the second quarter. It’ll be the first full quarter with the financial results of our acquisition integrated, so we’re cautiously optimistic about the impacts of the acquisition. We are now going to wrap up the conference and head back over to meet with our customers who have gathered here in Nashville. We thank you for your participation and look forward to the next quarter.

Thank you. And this does conclude today’s HealthStream conference call. A replay of today’s call will be available beginning today, April 27th, at 11:00 Central Time and run through midnight, May 26th. You may access the replay by dialing 1-888-203-1112, or dialing internationally 1-719-457-0820 to listen to this replay. Thank you again for your participation in today’s conference. You may now disconnect.