HealthStream Inc (HSTM) 2005 Q2 法說會逐字稿

Good day everyone and welcome to the HealthStream Second Quarter 2005 Earnings Release Conference Call. As a reminder, this conference is been 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.

Good morning and thank you. Welcome to our second quarter 2005 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 Research and Investor Relations. Art, would you read the forward-looking statement please.

This conference call will contain forward-looking statements regarding future events and future performance at 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?

Thank you Art. Good morning to everyone. The second quarter is always a quarter of accomplishments for HealthStream, and this morning I'm going to touch on some of the highlights and accomplishments. Our hospital customer base is now over 1.2 million contracted subscribers, and we think that is a new milestone for our Company and we all celebrate that milestone together. That has resulted in very strong activated subscriber base and therefore our quarterly revenues of 6.8 million, which was roughly split 60% growth from our acquisition and 40% growth from organic product growth. We are pulling a 29,000 net new subscribers in the second quarter bringing our implemented number of subscribers to 1.113 million and a backlog of 109,000 to be implemented. So, very excited about those metrics as well.

One of the most significant metrics for the second quarter that was outstanding by our goals and measures is our renewal rate. Our targeted renewal rate ranges between 80% and 90% across all measures with kind of a focus target of 85%. This quarter on many of our measures of renewal, one in particular and most important are the way we measure the number of subscribers, the FTEs, Full Time Equivalent, that had a 99% renewal rate in the second quarter. Over a 107,000 individuals were up for renewal through their institutional contracts, and a 107,000, roughly a 107,000 were renewed, actually just a few hundred did not renew. We were very excited about that renewal rate, we are not sure we can maintain that rate, but nonetheless it was an exceptional number for us and a testament to the quality of our services we believe in the following 6 month period.

Some interesting statistics on our Hospital Direct as well, one of our products of the future. It continues to build our network in indirect ways. This quarter alone over 1400 hospital based healthcare professionals registered into our platform from over 340 different healthcare organizations. So, these are outside of our traditional network of hospitals and so we continue to gain new subscribers to the Hospital Direct platform that are out of what we call out of network. So, we are very excited about how Hospital Direct continues to help us to build our overall network with healthcare professionals.

In the first quarter, at the end of the first quarter we completed the acquisition of DMR and DMR performed well as expected during the second quarter contributing 1.2 million of our 6.8 million in second quarter revenues. So, we are excited about DMR's performance, first full quarter performance under HealthStream and we continue to look forward to their contributions as we move forward in the year. We have already begun the process of organizing task forces, looking at new products that can be created between the capability sets of DMR and Health Stream, and we look forward to introducing those new products throughout the next 12 months as the task forces reach their decisions and move forward in the development of new products. Also we continue an active program of looking for and identifying acquisitions to date, we completed one acquisition in the first quarter, will continue looking and working actively with our Investment Banking Partners to identify more opportunities. The program is active, that's opposed to a program two years ago, we really weren't looking for acquisitions. But today, we continued to look for acquisitions.

I'm now going to turn it over to Art, or Susan Brownie to give the numbers for the quarter and many milestones to talk about there as well.

Thank you, Bobby and good morning. As Bobby mentioned our revenues for the first quarter grew by 45% or $2.1 million compared to the same quarter in 2004, to reach topline revenues of $6.8 million. The significant changes in revenue include approximately $1.2 million of growth associated with the Data Management & Research acquisition. $590,000 associated with continued growth in our ASP based HealthStream Learning Center product, and as Bobby mentioned that represents 25% increase over the same quarter in 2004. We also experienced in increase of $270,000 associated with constant subscriptions, while we did have a modest decline of approximately $100,000 in revenues associated with our installed learning management products. The pharmaceutical medical device business revenue component did increase modestly but the components of revenues change as we addressed in our press release.

We completed the acquisition and Data Management & Research on March 28, 2005, which resulted in $1.2 million of additional revenues compared to the same quarter in the prior year. While the HLC growth and content growth that I mentioned rounded out the majority of the increase. If you exclude the impact of the acquisition revenues were up 19% over the same quarter in 2004. This split of revenues are approximately 78% hospital based and 22% pharmaceutical medical device business during the second quarter of 2005, compared to a 70:30 split during same quarter of 2004. As we noted in the release, we experienced an increase in the dollar amount as Internet-based subscription product during the first quarter returned in the second quarter. However, given the impact of the DMR acquisition, the percentage of total revenues associated with these products declined from 65% during the second quarter of 2004 to 59% during the second quarter of 2005. We should note that we view these Internet-based and other revenues to have recurring characteristics. When we compare it, the percentage of revenues with recurring characteristics the portion increased from 71% during the second quarter of 2004 to 81% to the second quarter of 2005.

In addition to the Internet-based subscription revenues we also believed that our installed product maintenance revenues, our content maintenance revenues and revenues associated with DMR have recurring characteristics. If you exclude the impact of DMR this recurring percentage of revenue increased from 71% during second quarter of 2004 to 76% for the second quarter of 2005. Moving to the significant changes in the remainder in the business, which supported improvement in earnings again achieving net income of $23,000 during the second quarter from a net loss of $529,000 during the second quarter 2004. We experienced $1.4 million related to increases in revenue net of hospital revenue. And in addition while product development, sale, depreciation and other general administrative expenses all increased in dollars, each category declined as a percentage of revenue.

Marketing and amortization expenses did increase in both total and as a percentage of revenue. The marketing expense increase, which related to our annual eLearning Summit as we've highlighted in our release, well the amortization increases are consistent with our preliminary allocation purchase price associated with the DMR acquisition. For P&L purposes we should note that during 2004 the annual eLearning Summit timing was spread over the first and second quarters while in 2005 the event was in entirely held during the second quarter. In addition to the financial result 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 2004 in our first quarter call the volume of business subject to renewal has run out here because of the increase in activity level we transitioned our renewal rates of subscription to reflect renewed FTEs and annual order value.

Our renewal rates and the number of account continued to be strong, greater than 95%, while the number of STE's renewing exceeded 99% as Bobby mentioned, and our annual contracts value renewal rate approximated 105%. These favorable results indicate our ability to grow the size of our account and also obtain price increases with our new customers. On a cumulative basis year-to-date renewal rates approximate 87% per account, 91% for full time equipment with an 89% per annual contract value. The second metric that we historically refer to is day sales outstandings or DSO. As we detailed in our press release, DSO decreased to approximately 54 days for the second quarter of 2005, from approximately 66 days for the first quarter of 2005. Or if you exclude the impact of DMR, which impacted the first quarter of 2005, the comparable for the first quarter will be 61 days. Our first quarter mark at 54 days, was up modestly from the 49-day mark at the end of the second quarter for 2004. The improvement from the prior quarter resulted from strong collections as well as the full quarter revenue impact associated with the DMR acquisition. Art will now give us a view to the third quarter and the remainder of 2005.

Thanks Susan, good morning, revenues for the third quarter of 2005 are expected to approximate 7.1 to 7.3 million, representing an increase of between 2.1 and 2.3 million, or 40 to 45% growth over the same quarter in the prior year. This increase is expected to be split between the impact of the DMR acquisition, and growth in our historical business, both from the hospital base and the pharmaceutical and medical device businesses. The increase over the prior quarter is expected to be between 300,000 and $500,000, or 4 to 7%, with growth split between DMR and historical businesses. We expect growth in the historical business to come from our Internet-based platform and content subscriptions, as well from live events. Gross margins are anticipated to decline slightly during the third quarter of 2005, principally due to the higher cost of goods related to DMR and live event revenues. We expect the product development sales and general administrative expenses will grow modestly, but decline as a percentage of revenue. Marketing expense for this quarter is expected to decrease compared to the prior quarter, where we incurred the cost related to our annual eLearning Summit, which Susan mentioned in her earlier remarks. We expect these changes to result in a modest increase in net income during the third quarter. We continue to expect full-year revenue growth of approximately 35 to 40%, over the prior year, which will result in approximately 27 to $28 million of topline revenue.

In addition to the impact of DMR, we expect a continued growth from our HealthStream Learning Center products, as well as continued growth from our Content subscriptions. Our Pharmaceutical and Medical Device businesses are also expected to grow moderately. We expect gross margin to be down slightly for the remainder of the year, due to the changes in revenue mix previously mentioned. We expect the product development and sales expenses will increase moderately, primarily associated with additional personal, including those added in conjunction with the DMR acquisition. We expect marketing expenses to return to levels comparable with or slightly higher than the first quarter run rate. We also anticipate modest increases in G&A expense, but expect all these expenses categories to decline as a percentage of revenues. We continue to expect profitability for the full in the range of between 400 and $600,000. I will turn it back to Bobby for some closing comments.

Thanks Art and Susan. The second quarter is a busy quarter full of activities and I'm going to tell you about just two or three of them. The eLearning Summit that we held in Nashville during the month of April, the early weeks in April, we spent three to four days with over 500 individuals from hundreds of our institutional customers. This is the time for our account managers to meet face to face with their customers, and for us to talk about the direction of our product and pipeline, to all of -- many of our key accounts and all of the customers, who have taken their time to travel to Nashville and learn about those new and exciting products that HealthStream is working on. This year, over 540 participants from 42 different states attended our summit, and notched up over a 100 attendees from the prior year, and the prior year to that, we were up over a 100 as well, so that event continues to grow for us also during that quarter, the second quarter we always deliver the Association of periOperative Nurses, we go to their congress where we manage all the educational activities on the event (indiscernible). And once again, this was a very successful congress for us. I believe over 69 continuing education programs delivered during that event.

Importantly, this year was the first year that an online component was introduced to congress and about a third of the educational programs that were completed were tracked through our online system. So, excited to see the involvement of the congress in some of our online activities.

Also during the quarter, we attended another conference as marketing on hardwares. And the National Nursing Staff Development Organization was attended by many HealthStream customers. For example, Kimberly Hall from Carilion Healthcare spoke of HealthStream platform as where a hospital should start and grow at the learning program. We are existed to see our customers attending other leading conferences and speaking of our products as an anchor part of their program of growing eLearning in their facilities.

As we move into the second half and look forward, we are very excited about our financial forecast. We are looking at a 35 to 40% topline revenue growth and net income of approximately 400,000 to 600,000. So, we entered the second half of the year very excited about where we wrapped up at the mid point and we are very much looking forward to the third and fourth quarters where we project a net income and continued growth.

I'll now turn it over for questions, thank you.

[OPERATOR INSTRUCTIONS]. David Dempsey, Avondale Partners.

Question for you on the fully implemented subscriber growth for the first half of the year. It is pretty close to 30%, 29-30%, is that a reasonable expectation for the rest of the year?

Well, David that number can swing each quarter between -- typically we target between 30,000 and 80,000 FTE's through our contracted number and our subscriber number by filling the backlog. So, it has a broad range because it's highly dependent on when what we call mid range accounts are landed, and as always, several of those in the pipeline, you are never quite sure which quarter they are going to close. So, for instance in the next several quarters we have five or six accounts we are working that all have in excess of 10,000 subscribers. And we don't know if they are going to land in the third or fourth quarter, but we are pretty confident several of them by year end. So, it's hard to say exactly how it plays out quarter-to-quarter. Our historical rate on an annual basis has been to add between 200,000 and 250,000 net new subscribers, and we would like to see that rate continue to the next couple of years.

I would also add that to the extent we can maintain renewal rates that we were (indiscernible)enough to have in the second quarter that helped that number because if you get 99% of renewing that means you have to acquire (ph) net new ones to come on board.

Moving on to DMR. I think I remember reading in the press release the DMR revenue was up $300,000 over the prior year. Is there any fall out that you are seeing from contracts going away, I mean that sounds like that business has continued to grow nicely. How are the prospects for renewing the existing business and increasing that business line?

David, I will take that one. It's Susan. We have seen good growth during the quarter both in -- we have referenced this in the press release that we did grow new accounts and we also had one significant renewal. Do anticipate that over the next couple of quarters we will begin tracking renewal rates and reporting on that for DMR. Also maintain good visibility for the remainder of the year from a pipeline standpoint both in growth of existing account, primarily it resulted in acquisitions that have occurred within the existing account base, as well as acquisition of new accounts.

And then last thing. I know the HCA contract is coming up, any probability assessments in terms of renewal, I know that's pretty significant and then I guess there are other large contracts that we need to be thinking about as we go through the rest of the year that are going to be coming up for renewal.

David, this is Bobby. We do not comment on contract that are under -- in process, except to note when they are up and that they are under the process. So, the significant ones of course are HCA at the end of the third quarter -- end of September, and Tenet as well comes up at year end and that contract has some provisions that give us some confidence but we really don't comment, it has a rolling provision in it. So, we -- some of the processes here are different for each account and each account goes through its own processes and we respect those processes. They evaluate the market and services we provide. We don't know if there is any indicator but the second quarter renewal rates give us some confidence that the customers like what we are doing, particularly recently and it's always good to go into big renewals when you have such a high renewal rate with all the other customers.

Sure, thanks a lot. Nice quarter.

[OPERATOR INSTRUCTIONS]. Steven Hart, IR Capital (ph)

First of all, just wanted clarity on when you referred to increasing and decreasing different revenue or gross margin, are you talking about this from Q2 to Q3, are you talking about from a year-ago period?

I would characterize, Steven, that revenues increased both from Q1 to Q2 and increased also from Q2 2004 to Q2 2005.

Susan, I'm talking more about like your expectations when you say like marketing expenses are expected to be fine.

Okay. Generally, those are all provided in sequence to the prior quarter, so we are giving markers off of separate quarter actuals.

Okay.

So, for example on the -- when we talk about the second quarter marketing expense compared to the third quarter, the decline was vis-a-vis second quarter, Steven.

And on the HCA contract, when that's up for renewal, are you -- is this open for renewal to outside competition or do you actually have a kind of your own negotiation going on to possibly extend it before that would happen?

Steve, we are not going to comment on HCA's renewal processes, but do note that we are in discussions with them actively about renewal and again each account goes through its own processes, some put things out to bid, others look to market indicators for value, given and provided, and we don't comment on our customers' individual processes. We'd like them comment on their own contract renewal processes. We are participating obviously in all of them. So, sorry, we can't provide any more color in there. That is a little bit with regard to protection of their processes.

On the DMR business, is there any seasonality in their business?

We did talk in the release a bit about the revenue spread between the businesses, and as you know that there it is weighted towards the fourth quarter. I think if you look historically, you will see that the second quarter is a bit of a down quarter and that will also be reflected in the pro forma numbers that are presented within the 10-Q disclosures.

Okay. And lastly, I think what is really impressive obviously what you've stated here is the annual contract renewal raising a 105% of the price. Can you talk a little bit Bobby about how you are able to do that, I mean you are adding, is there additional functionality, additional product being added in there?

Well, there are a couple of trends going on there. There are several historical accounts that transition from other platforms where we are able to move the average price per FDE up because we are coming off of older software and coming on the newer software, That's somewhat counterbalanced by in the base platform some pricing pressures. So, some existing contracts there on the web-based platform that are up for renewal, those prices come down a little bit. It just happened that in this quarter the net effect of all of that was an increase. Of course, we also have add-on products that are not included in that number that can further increase the value for account, like our authoring profile. So, I'm pretty confident that's not included. So, if an account renews on a same -- on a comparative basis and then they add offering that would further increase that 105% up higher, which in fact does happen, we don't report that. So, if they add on products, that's not part of the comparison, it's the same product from year-to-year and (indiscernible) of some coming off old software and the new software going up and some coming up for renewal on the current software coming down and there is a net effect of that.

David Dempsey, Avondale Partners

As you look into the acquisitions and new products, generally speaking I guess, what kinds of things are you looking for? You've got some of these, as I call them have to's, with the OSHA and JCAHO. What are the kinds of things that you are looking at that would have value that you deliver into the customers and obviously move that revenue per customer up?

Well, David there are lots of things we are looking at as we look forward to how we add it to our model. If you think about how DMR adds to our model; we have a lot to, of course prove with that but we believe that we have added a whole measurement dimensions to our model. So that today DMR measures various types of satisfactions and in the following years we hoped that DMR would measure great types of other outcomes as well. So, DMR added a dimension of measurement to our model. We might look to add other things that help, for instance identify problems where training and education can be part of the solution. So probably you got to get in and do root cause analysis on problems might be another category of that we might look for. In addition we always will be looking for technology that adds capabilities. So anything that touches what I call the human capital development arena where software can be used by our customers to attract, deliver, and develop their employees; I'd say we are always on the look for innovative software that leverages our 1.2 million contracted subscribers and provides our 1100 institutional customers with new software tools to develop their human capital. And finally, occasionally we want to make a small content foray where we would like to own a small piece of highly valuable content property, although that's not number one on the list obviously its number three. So you will see different things that we are looking for; ways to add to the model, ways to put more software through the distribution channels and finally potentially some content if its in a really hot area we would like to have higher gross margins in the sales of that content.

[OPERATOR INSTRUCTIONS]. It appears we have no further questions at this time.

I would like to thank everybody for attending this morning. And as I said, the Company comes fully energized for the second half of the year which is forecasted to be stronger than the first half and we look forward to reporting our results to you at the end of the third quarter. Thank you and Good-bye.

Thank you. Ladies and gentlemen, this conference will be available for replay after 11 AM Central time today through 11:59 PM Central time on 08/25/2005. You may access the replay at any time by dialing 888-203-1112 and entering the access code of 7403837. International participants may dial 719-457-0820. Those numbers again are 888-203-1112 and 719-457-0820, the access code once again is 7403837. That does conclude our conference for today. Thank you for joining us. And we wish you a great day.