HealthStream Inc (HSTM) 2005 Q3 法說會逐字稿

Thank you for standing by and welcome to the HealthStream Third Quarter 2005 Earnings Release Conference Call. This conference is being recorded. At this time, I would like to turn the conference over to HealthStream's Chief Executive Officer, Mr. Robert Frist. Mr. Frist?

Good morning and thank you. Welcome to our third 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 the future events and 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. The 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 everyone. We just completed our third quarter and excited to report on the results of our turning in our best financial results in our corporate history. The third quarter was a quarter definitely of just basic execution as we prepare our new product pipeline for next year and executing on the fundamentals of good expense control and solid revenue growth in some of our core products. The quarter closed out at 6.8 million in topline revenue and it was our fourth consecutive profitable quarter turning in a net income of $554,000 and that's up from a loss of $177,000 a year ago quarter. Also importantly, our cash flow, EBITDA was $1.2 million, resulting in also strong improvement in cash balances up to $9.9 million. In the quarter, we implemented 17,000 net new subscribers in the third quarter, which brings the total to 1.13 million fully implemented and a backlog of 99,000 to be implemented. Our renewal rate for the third quarter was slightly better than 90% and coming after impressive second quarter where we had a 99% renewal rate that came under renewals also an impressive, above average number and above our goals internally. So we are very pleased with our performance on the renewal and customer attention side of the equation.

Other products are showing some signs of growth. Importantly our HospitalDirect product continues to add devices and HospitalDirect is a recurring revenue subscription product that we are optimistic for as we pull into next year.

The fundamentals feel good right now on many dimensions. The utilization of the core product continues to grow; we have surpassed the 25 million course completion mark early in the quarter. And other measures of just kind of fundamental health to me, that I watch, our user groups, we now have 25 active user groups across the country and five new ones are being formed. And so those are strong indicators of a healthy base and one that is organized around our products.

Also, as we look forward, we have been quietly developing our new product pipeline; expect new product introductions in Q1 and Q2 of next year. I will just mention a few of those new products that we're looking forward to next year being revenue generators. Our Community Health Education Center, being built in partnership with one of our largest customers, we think, will provide a new service offering to all of our hospitals over time and we look forward to launching that at the end of Q1. In the content arena, we have been working for quite some time to launch our clinical content library, it is called the Digital Main Content Library, and the first courses of that library should be coming online and also in Q1. And next year as we look forward to that, (indiscernible) to see that a lot of what we will be working on throughout the remainder of this year is preparing the launch of our new benchmarking and analytics tool sets. So the product pipeline is robust, utilization is good; customers are organizing around our products. So we feel really good as we enter into the fourth quarter of this year. Let's take a more detailed look at the financials of the third quarter.

And I ask Susan to review that, and then we will turn it over to Art, to talk about our forecast into the fourth quarter and then some closing remarks. Go ahead, Susan.

Thank you Bobby and good morning. As Bobby mentioned, the revenues for the third quarter grew by 36%, or 1.8 million compared to the same quarter in 2004, to reach topline revenues of 6.8 million. The significant changes in revenue include approximately 1.3 million of growth associated with the Data Management and Research acquisition, 410,000 associated with continued growth in our ASP-based HealthStream Learning Center product, which represents a 15% increase over the same quarter in 2004 as well as an increase of 250,000 associated with content subscriptions, which represents a 42% increase over the prior year for our content offerings.

Our pharmaceutical and medical device base business experienced some modest decline of approximately 100,000 of revenues, which resulted from changes in product mix as we addressed in our press release. As we also noted in our release, one thing that we believe worthy of highlight relates to the transition from providing our clinical training packages through hardcopy materials to online delivery methodologies.

In the aggregate, our hospital base business grew approximately 52% compared to the same quarter in the prior-year, while the growth rate excluding the impact of the acquisition of DMR approximated 16%. Our revenue rates approximated 80% hospital base, and 20% pharmaceutical and medical device business during the third quarter of 2005, which compares to the 70-30 split during the same quarter in 2004. As we noted in the release, we continue to experience increases in the dollar amount of our Internet-based subscription products during the third quarter of 2005.

As a result of the DMR acquisition, the percentage of total revenues associated with these Internet based products declined from 68% during the third quarter of 2004 to just over 60% during the third quarter of 2005. In addition to these Internet based products, we view other revenues to have recurring characteristics as well. When we combine this percentage of revenues with the recurring characteristics, the percentage actually increased through 75% during the third quarter of 2004, to 84% during the third quarter of 2005. This presentation combines our Internet-based subscriptions with installed product maintenance revenues, content maintenance revenues, and the revenues associated with DMR survey and data analysis business.

Moving to the significant changes in the remainder of the business, which supported our improvement in earnings, that is achieving net income of 554,000 during the third quarter from a loss of 177,000 during the third quarter of 2004. Net impact of revenue growth, after cost of goods, resulted in 1.2 million of incremental gross margins. This increment reflects a slight improvement in our gross margin percentage. The third quarter is approximating 65% gross margin. In addition, while product development, sales and marketing, depreciation, and other general and administrative expenses, all increased in dollars, each category declined as a percentage of revenue. Amortization expenses did increase both in total and as a percentage of revenue. This increase is consistent with our allocation of purchase price associated with the Data Management and Research acquisition.

Moving to other operational metrics, the volume of business subject to renewal has continued to grow this year. Our renewal rate based on the number of subscribers, which we use, based on full-time equivalent or FTEs, approximated 90%. That represents the renewal of 46,000, out of 51,000 subscribers. And our annual contract value renewal rate approximated 88%, which reflects the renewal of $609,000 out of a possible $695,000 of annual contract value. These favorable results indicate our ability to grow these accounts.

On a cumulative basis, year-to-date renewal rates approximate 87% per account -- the number of accounts, 91% based on FTE or subscriber account, and 88% for annual contract value. The other metric that we have historically referred to is days sales outstanding or DSO. As we detailed in our press release, DSO approximated 51 days for the third quarter of 2005, from approximately 54 days for the second quarter of 2005, and approximately 55 days for the third quarter of 2004. The increases that we experienced relates to longer collection cycles for our pharmaceutical and medical devices, primarily live events. Finally, I'd highlight two other changes on the balance sheet that I think are worthy of mention. As Bobby highlighted, we ended the quarter with a healthy cash and investment balance of 9.9 million. I'd also highlight the changes that we made during the quarter with respect to the allocation of the purchase price at Data Management and Research. We allocated an additional $1 million of definite live intangible assets, primarily associated with the value of DMR's customer relationships. This approach incorporates our estimates with regards to renewals of the existing relationships in future periods, so we also like them to estimate the useful lives of the related to intangible assets.

Art will now address our full year and fourth quarter 2005 expectations.

Thanks Susan. Revenues for the fourth quarter of 2005 are expected to approximate $7.4 million to $7.7 million, representing an increase of between 2 and 2.3 million, or 37% to 42% growth over the same quarter of the prior year. This increase is expected to result from the inclusion of DMR and continued growth in our hospital-based business, primarily HealthStream Learning Center, and content sales. These increases will be partially offset by declines in our pharmaceutical and medical device business.

The revenue increased over the prior quarter is expected to be between 600,000 and $900,000, or 9% and 13%, primarily due to seasonal growth at DMR, and modest increases in the remainder of the hospital product line, and the pharmaceutical and medical device business.

Gross margins are anticipated to decline slightly during the fourth quarter of 2005, principally due to higher costs of goods related to DMR, and live event revenue. We expect that product development and sales expenses will grow modestly, an increase as a percent of revenue, primarily due to the addition of account management, product development, and sales personnel. These expenses and other changes will result in lower net income during the fourth quarter, compared to the prior quarter.

We expect the full-year revenue growth of between 33% to 35% over the prior year, which will result in approximately $26.7 million to $27 million of topline revenue. In addition to the impact of DMR, we expect continued growth from our HealthStream Learning Center products and from our content subscription. Our pharmaceutical and medical device business is expected to be comparable with 2004 levels. We expect gross margins from this year to improve modestly over 2004 results due to changes in revenue mix previously mentioned. We expect product development and sales expenses to increase moderately, primarily associated with the additional personnel including those added in conjunction with the DMR acquisition. We expect margin expense to be comparable with or slightly higher than 2004. We also anticipate modest increases in G&A expense, but expect all these expense categories to decline as a percent of revenue. We also expect profitability for the full-year to be in the range of 900,000 to 1.1 million. I'll turn it back to Bobby for some closing comments.

Thank you Art and Susan. I'd like to wrap up by discussing a few of the challenges of Q3. The first is in our implementation backlog; we had some -- one significant customer driven delay on implementation. That is with HealthShell (ph), which represents over 40,000 FTEs. And that account continues to be challenged in its implementation. We have a team on that, and we think again it's a customer driven delay, just timing and focus and attention as opposed to an execution of each one of our companies. So we look forward to moving that account forward into Q4, and moving it towards the implementation if not fully implemented by year-end.

Another challenge is the addition of new ad to the HLC customer base, while we feel the pipeline looks strong for Q4 with several, call it medium-sized enterprise accounts, the ads during the third quarter under the contract number were not as strong as we had hoped. We remain optimistic that we can reverse that trend in Q4 based on the pipeline again of several enterprise of medium-sized accounts that we are optimistic in closing. Third thing, I'll comment on -- we don't usually comment on stock price, but it seems somewhat related to the environment we are in, and avoid coming to stock price, talk about the environment.

The e-learning space that we were once considered part of continued its consolidation. And I think in some regards, we view ourselves as distinct from that space focusing on the human capital development needs of acute care hospitals, and the 5 million people who work in that space. But often, we get it closely associated with the pure e-learning software provider and we have seen some recent integrations, M&A activity, for instance the merger of Saber and Centra, and I've been asked to -- well, I will think about that. I'll just provide a brief comment on that. The software of both those companies is very strong, but HealthStream believes fundamentally that instead of acquiring technology like the Centra Technology, we would rather prospectively look at linking and hooking our technology to what we consider larger, more stable growing platforms.

For instance, Microsoft is releasing a fairly new product, Microsoft Life (ph) meaning which is a direct competitor of Centra, and its our objective to integrate and make sure our platforms connect to the Microsoft products as opposed to acquiring technology like Centra's technology. So, the environment is changing particularly in the e-learning space. We continue to focus our efforts on the human capital development needs and providing complete solution to those needs for the acute care hospital industry, but sometimes, you have (indiscernible) association, and we are doing our best to correct our positioning in the market. So, we are optimistic for the fourth quarter and particularly optimistic about our ability to continue to generate net income. We have revised our guidance upward by $500,000. We are working hard to achieve net income for the full-year between 900,000 and 1.1 million, which is again and upward revision from our previous guidance.

So, on the whole, the team is optimistic, we are addressing the challenges in front of us, and now I'd like to turn it over if anyone has any questions for the management team. Thank you. Operator?

[OPERATOR INSTRUCTIONS]. Sean Jackson, Avondale Partners

Can you go into more detail on the pharma and the medical device area, exactly what you're seeing, why the decline, you mentioned a little bit in the press release, but just want a little more commentary?

Sure, Sean. That product line has been on the whole, somewhat stable and flat for a little while. Optically that doesn't look good, and you know that. However, fundamentally, what is happening there is the sales force is beginning to ship it's efforts towards selling multi-year, multi-month contractor subscription base as opposed to selling what we call the one-off live events and clinical businesses, which produce strong income in the quarter which is solid, but not sustainable long-term income. There's also been somewhat of a shift in emphasis from selling what we typically have categorized as on-line development -- on-line development, is a descriptor for content development. Content development is a high service, intensive, low-margin business again related to our subscription base pharmaceutical products. Some of the subscription products that are growing include HospitalDirect, where we had several renewals in the quarter and new adds. And our set products, which is a sales force education tool set that is subscription based as well. So, we need to report on the growth rates of those products which we are excited about, which are offset by in-quarter declines, and content development or on-line development, and live events, which are again strong in quarter revenue recognition products, but not long-term sustainable. So, the net effect of those downward declines, and the upsellings and subscription products is a relatively flat-looking business unit, but I think the product mix is much healthier going forward.

Talk of that -- the content offering you mentioned, your strong year-over-year growth, I mean how significant is it, I mean can you quantify the size of it, and I assume that at some point, it's going to positively affect margins. Is that correct?

Well, Sean it's a little bit of a Catch-22 in a couple of ways. One, we're definitely seeing an up tick in the growth in subscription of the content, so we are becoming more effective at selling more content down the pipeline. Content though, comes with mixed contribution margins. For instance, some of our royalties that we pay to content providers are as high as 50%, while others are as low as 5 to 10%. So, depending on the sales mix of the content, it can either positively or negatively affect the overall gross margins of the Company. However, the nice thing about the content is allowing for mail cost to delivery, so, after paying the content royalties, there's a lot of contribution down at the bottom line. So, it continues to have a good net contribution.

And just briefly, can you talk about the new product launches a little bit more, you mentioned that especially the first half of '06, do you anticipate -- is one of the things you anticipate revenue right away a launch? Do you in other words get pilots undergoing right now, or, where is the visibility on revenue from these things?

Sure, Sean, a lot of the revenue we'll expect in the second half of next year with unveilings at our Summit, which is in April. And pre-piloting and launching the customers as early as January. So, the product categories that were looking at launching include our benchmarking and analytic services, which are probably more of a June, July revenue generator for us. And then, the content sales, however we planned a lot in January and expect to continue to see up ticks in the overall content selling. So, the digital made content library, this is a 400 contact hour course library, around nine or ten core (indiscernible). And we are gearing up to start selling that in January. So, we expect to see more immediate benefits from the launch of that content library, remembering of course, that these are all subscription products so, if you have a good order value in the quarter, they tend to spread over 12 to 36-month period. So, order value translates into long-term stability but necessarily up ticks in quarter.

[OPERATOR INSTRUCTIONS]. Doug Crawley, Arizona Wentcountri.

Good quarter. The question that I have has to do with the HCA contract. You start to get hit when you announced that that had been renewed for one year with a 45-day out, could you comment on that please, whether that is customary or kind of how you view that relationship?

Yes, sir. I can provide limited information about that. We have made a public statement about the status of that agreement recently and we reiterated mostly that in the press release, which is that, discussions are ongoing to renew a longer-term agreement. But until that the agreement is signed, announced, or we have otherwise have a filing on it, we really can't provide a lot of color to that. I would have hoped, that we would have renewed a little earlier, our longer-term agreements, so, we don't like to roll into the order renewal provisions of our contracts, but that is indeed the case here, and we continue to have the ongoing dialogs to improve that with a more stable longer-term agreement. Operationally, the products are in high utilization and the order renewal provisions provide an easy way for customers to take their time and their renewal processes. So, we are relatively comfortable with where we are, but we can't make any more comments until we have a definitive, hopefully, a new longer-term agreement. We did comment as well, that our Tenet account is up for renewal at year-end, it has similar renewal provisions, and again, we don't have any color on that, our business say, has those provisions in the agreement. And we will watch out that account and pull it throughout the year-end. On a more positive note, we did note that one of our very largest customer, I believe our third or fourth largest customer, provided an early renewal and a four-year term, which was Sutter Health, with 31,000 FTEs. So that is the situation we would like to find ourselves in more often than not. And so, sometimes you just, based on timing and interaction with the customers, you get different outcomes. So, naturally, all the color I provided on that, as you can see it, it's a mix of strong news and kind of wait-and-see how things unfold.

Is the utilization rate at Tenet comparably high to the HCA rate?

The utilization rates of those larger accounts all remain consistent and we are consistent and continue to be growing. In fact, we typically see and have seen quarter-over-quarter growth in our systems at both Tenet and HCA. So, the use of the systems remains strong even as recent as this quarter.

[OPERATOR INSTRUCTIONS]. Richard Geering from Longport Partners.

Thank you, but you just answered my question.

Thank you Richard.

At this time, that does conclude the question-and-answer session for today. I'd like to turn the conference back over to Mr. Frist, for any additional or closing remarks.

I want to thank everybody particularly our employees for delivering our strongest quarter in our corporate history. We are obviously excited about the net income performance and the improved guidance on the bottom-line performance. We look forward to improving our customer acquisition rate in the fourth quarter and reporting to you shortly on the outcome. Thank you for attending this morning and we look forward to reporting on our next quarter.

Thank you. That does conclude today's conference. Thank you for your participation.