HealthStream Inc (HSTM) 2005 Q4 法說會逐字稿

Thank you for standing by and welcome to HealthStream's fourth-quarter 2005 year-end conference call. As a reminder, today's conference 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, sir.

Thank you. Good morning and welcome to our fourth-quarter and year-end 2005 earnings conference call. Also in the room with me are Art Newman, Senior Vice President and CFO; and 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 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 in those forward-looking statements are contained in the Company's filings with the SEC, including Forms 10-K and 10-Q.

Thank you, Art. Our primary goal at HealthStream continues to be to improve the quality of healthcare by improving the quality and accessibility of healthcare education. Certainly, we wrapped up this year in an exciting way, and looking forward reporting to you in more detail (technical difficulty). For the first time in our history as a public company, we reported our first full year of profitability with net income of 1.9 million, and we wrapped up the year with topline revenue growth of 36% over 2004, hitting 27.4 million in revenue this year. Certainly, the numbers speak for themselves this year, and so I'm going to turn it right over to Susan Brownie and dive into the report on the numbers.

Thank you, Bobby. In addition to the excitement related to our strong net income for the fourth quarter, our full-year results reflect strong news as Bobby mentioned. We experienced the same growth in our organic business as well as growth that resulted from the data management and research acquisitions. Our revenues for 2005 were up approximately 36%, with the increase split approximately 60% from the acquisition of DMR and 40% as the result of organic growth. Our topline revenue improved, as Bobby mentioned, from 20.1 million in 2004 to 27.4 million in 2005, an increase in absolute dollars of $7.3 million.

The significant components of the change for the full year include an increase of 4.5 million associated with the acquisition of DMR, an increase of $2 million associated with growth in our ASP HealthStream Learning Center product, and an increase of approximately 900,000 associated with content subscription revenues. These improvements were partially offset by $368,000 of lower installed learning management product revenue. In addition, our pharmaceutical and medical device business improved modestly from a revenue standpoint, increasing approximately 2%. However, the mix of this portion of the business changed. Our online training service revenues that are associated with our RepDirect product increased by $391,000. In addition, our live event revenues increased $272,000, but these improvements were offset by declines in our project-based development services. These changes reflect the trend that we noted in our press release with respect to the transition of services from project-based revenues to Internet-based service revenues.

As we noted in the release, because DMR revenues are not Internet-based, the portion of our revenues attributable to Internet-based subscription products was slightly lower in 2005 than 2004, but we did increase the absolute dollars associated with such revenues. On a pro forma basis excluding the impact of DMR, our Internet-based subscription revenues for the full year increased from 65% in 2004 to approximately 72% in 2005. We think these trends are important to note. The significant changes in the remainder of the business, which supported an improvement from a net loss of $1 million in 2004 to net income of $1.9 million in 2005, were split approximately 55% associated with the organic business and 45% associated with the acquisition of the DMR survey business at the end of the first quarter of 2005.

With regard to the components of the change, on a full-year basis the revenue growth resulted in net margin impact of 4.8 million. In addition, we experienced increases in product development expenses of $400,000, sales and marketing increases of approximately $650,000, depreciation and amortization increases of approximately $570,000, and $350,000 of general and administrative expenses increases. All of these expense categories, while they increased in absolute dollars, declined as a percentage of revenue for 2005 compared to 2004.

Our renewal rate, which we reported as a significant operating metric, also improved over 2004. Our full year reflected a 92% renewal rate based on the subscribers or FTEs, while our renewal rate based on annual value associated with contracts renewed exceeded 89%.

Finally, with respect to our days sales outstanding or DSO, again we reflected improvement from 72 days for the full year of 2004 to 64 days for 2005. As we noted in our press release, DSO has decreased as a result of improvement in collections of our hospital-based revenues while the pharmaceutical and medical device-based industry has experienced longer collection cycles.

Art will now review our expectations for 2006.

Thanks, Susan, and good morning. Revenues for the first quarter of 2006 are expected to increase by 1.3 to $1.5 million over the same quarter in 2005. Growth for the first quarter compared to the same quarter in 2005 is attributable to the impact of the DMR acquisition, as well as growth in the HealthStream Learning Center and content subscription revenues. For the first quarter of 2006, we anticipate that gross margins will be comparable to the same quarter in the prior year, while net income is expected to improve modestly. We anticipate that the impact of revenue growth will be partially offset by increased spending in product development, as well as in the sales and account management area. Also, as we noted in our earnings release yesterday, depreciation and amortization expense is expected to increase due to the DMR acquisition.

Finally, all functional expense categories are expected to increase slightly as a result of the impact of share-based compensation related to the implementation of SFAS 123(R) effective January 1, 2006. For the full year 2006, revenues are expected to grow between 13 and 15% over 2005, with each quarter showing improvement over the prior-year quarter. Revenue growth is anticipated to come from our HealthStream Learning Center, content subscription, and DMR; in the case of DMR both from the first-quarter impact as well as anticipated growth during the remainder part of the year. We also expect growth in PhysicianDirect and HospitalDirect products.

From a business mix perspective, we expect our hospital-based business will account for approximately 80% of our full-year revenues in 2006, while pharma and med device business will account for the remaining 20%. Gross margins for the full year '06 are expected to be comparable to the full year '05. Expected growth of our Internet-based platform products, which enjoy higher gross margins, are expected to be offset by growth from our lower-margin content subscription product. We expect that in addition to increased expenses associated with share-based compensation, our product development, account management, sales and marketing expenses, and general and administrative expenses will increase versus 2005. The increase in G&A is due in large part to the compliance costs associated with Sarbanes-Oxley regulations.

Finally, cash is expected to be in the range of between 13.5 and $14 million at the end of 2006. This includes our content and feature enhancement costs, as well as capital expenditures, all of which are expected to approximate $3.5 million. We are looking forward to 2006, and now I am going to turn it over to Bobby for some final comments.

Thank you, Art and Susan. As we enter 2006 strong with strong numbers closing the quarter and the year, sometimes it is easy to forget that there are people behind the numbers. And certainly, the first half of '06 will be an important time of adjusting to absorb 36% growth and preparing new products for launch in the second half of the year. So the next time we speak to you, for instance, we will have new roles even across this team, with Art Newman being promoted to Executive Vice President of the Corporation, shifting his focus more over to the operations of the organization, again placing talent where it's needed to handle all the growth we're experiencing.

Meanwhile, Susan Brownie will be promoted next time we speak to you as our Chief Financial Officer, and certainly has run our accounting and finance and human resource operations with excellence. And the next time we speak to you, she will be speaking to you as our Chief Financial Officer. We're excited about both those promotions and feel that those changes will help prepare us for our growth in '06.

Also a change in our structure is that Fred Perner, our Senior Vice President overseeing sales and marketing, has announced that he has accepted another job with a global healthcare company, and the Company will have to now turn its attention to finding a Vice President of Sales to come in and help continue the growth record set down by Fred. We are greatly appreciative of his contributions in his six years plus of tenure with the Company, and also looking forward to great things from him in his new role where he is headed.

Behind that team, of course, there are many other activities going on inside the Company. We have the most exciting product development pipeline in our history, and looking forward to launching that at Summit in April, April 18th to the 21st. Tom Dugger, our Vice President of Systems, and Joe Christopher, our Senior Director of Development, are leading the charge in new product development. And we are looking forward to seeing the new architecture of our products that is more extensible and open, the new features and capabilities that we think will wow our customers, and a series of new products that we hope will generate revenue for us, incremental revenue in the second half of the year, and hopefully meaningful revenue streams in the following year.

So we are gearing up our company for Summit. We're absorbing change and growth, and we are preparing new products for launch in the first half of '06. Of course, all that isn't to say that growth didn't accelerate for us in November, December, January, and February. If you look at the numbers, we added about 133,000 subscribers implemented in the last calendar year, and already in the first six weeks of this year we have activated an additional 60,000 subscribers. So we provided an update in our release that now our numbers total active subscribers of 1.234 million and contracted subscribers of 1.309 million. So we are very excited to see the continuation of the acceleration on many of the metrics that represented our great financial results in the activation of new subscribers, particularly in December and January and the first half of February.

It does not stop there, of course. We are announcing now a couple of new account wins that were competitive in the marketplace. We are very excited about Texas Health Resources, a very strong and leading hospital chain in Texas, has signed on board with HealthStream in January, adding 16,000 FTEs to our network over the next several months as we implement them. So the momentum continues. We expect to see it continue into the next quarter or two. You have to remember the people behind the work, and certainly we're assembling and have a great team to lead us into 2006.

At this time, I would like to turn it over for questions after congratulating all HealthStreamers on their performance and their progress in 2005, and looking forward to 2006. I will now open it for questions. Thank you.

(OPERATOR INSTRUCTIONS) Avondale Partners, Sean Jackson.

A couple things, one on the ACA contract. Could you give us an update on the talks? Is it pretty much stagnant over the last couple of months, or is there any progress going on?

Sean, this is Bobby. The update we can provide is simply a reiteration that we are in active discussions about renewing a longer-term agreement. So the discussions have not stopped or, in my opinion, gone backwards, but of course we have not consummated anything. So really all we can do at this point is reaffirm that the parties are in direct discussions about a new longer-term agreement. Of course, the moment that the status changes on that negotiation and discussion, we will update everyone.

Thanks. Did you give the renewal rates for the fourth quarter? I heard the year number.

Sean, this is Susan. The renewal rate for the fourth quarter on an FTE basis was approximately 98%, and the annual contract value is approximately 97%. Then on a cumulative basis for the FTE count or the subscriber count, the renewal rate is 92%, and again for the full year 89.4% on the annual contract value.

Okay. Going forward in '06, when you gave your revenue guidance, can you break it out a little bit, at least in qualitative terms, on what is sort of organic growth versus the DMR growth?

We did talk more in general terms with regard to the expectations for 2006, and noted that we do expect growth associated with DMR basically to be split between the easier impact that is associated with the first quarter since we did acquire that at the end of the first quarter of 2005. The balance of that increase would come from growth in both new customers for DMR and existing customers that are already DMR customers.

Okay, and lastly in your '06 guidance, is there any revenue assumed for some of your newer solutions that you're expected to release at the end of '06?

Sean, there is a little bit of incremental revenue, but I would not call it significant. I would say that launches will take some time to get ahead of steam. We will introduce them at Summit. We hope to be taking our first orders soon thereafter, but these subscription-based products even if they have good momentum are typically amortized over one to three-year periods and spreads out in the end-year impact. So we have assumed minimal impact of what I would constitute as brand-new products, although we do, of course, have a pipeline of brand-new products. That is why I characterize it that they are more than likely to have more meaningful impacts later at the very end of the year or early the next year as the salesforce gets comfortable selling them and the contracts begin to come in.

Can you just talk about your content subscription revenue; what are you seeing there? Are you seeing any kind of acceleration into that? Just provide more insight into how that business is going.

Sure, Sean. That is probably one of the most exciting parts of the business right now. We had, I believe, a 33% growth year-over-year in content subscriptions, and there's some things driving that. The first is that the quality of the content gets better every year, and secondly, as we attract better partners, that brings other partners that are also stronger in general. So we believe we are beginning to prove that we are a great distribution outlet for strong branded content from the highest quality associations, and our pipeline for new content is very strong for this year, and we think very appropriate content.

For example, Advanced Practice Strategies out of Boston, we've struck a deal with them. They have a content series on advanced fetal monitoring that carries 64 cognates, which are credit hours from ACOG, and this content is so strong and so powerful that COPIC, the Denver Insurance Association, gives doctors an insurance premium reduction for participating in the program. So what you're seeing is that content tied to actual business or clinical type improvements is coming into the market. We think that kind of content is much easier to sell.

So yes, we saw 33% growth year-over-year. We are expecting that kind of growth to continue, and we have a pipeline of new partnerships. Some will be announced at Summit that we think are really right on target with the needs of the market. So I think we're getting better at matching demand and the quality of the content is better, and its business and clinical purposes are stronger.

Okay, thanks. Great quarter.

Kevin Liu, B. Riley & Co.

Just a couple quick questions. First on the CapEx side, it looks like you guys are planning on spending a little more. Could you go into a little more detail about what the CapEx is for and maybe why the timing -- why you're timing it for this year?

Kevin, this is Susan Brownie. I'll address that question. About two-thirds of the CapEx we anticipate will be focused on our hosting centers. We do have a primary hosting center and then a redundant hosting center as well. If you look at our primary hosting center, a lot of the servers that we have at that facility do require an update, and our cycle on that has been a two-and-a-half to three-year cycle for replacing and improving that equipment. So there is a pretty significant component with those hosting facilities in 2006.

Then the balance that we've talked about we view to be content and feature set enhancements that do relate to new product introductions that are anticipated during 2006.

Okay, thank you. That helps. In terms of the competitive landscape, I know a few of your competitors have consolidated. What is the outlook there? Are you seeing any pricing pressures? Are there any troubles getting wins?

Yes, this is Bobby. I think the competitive landscape, there's definitely some new entrants into the market. There's definitely some consolidation. So it is an ever-changing landscape. But generally as long as we keep our new product introductions, I think we're definitely in a strong leadership position and have the opportunity to bring both new products and new toolsets to our customer base. So I feel that we're gaining ground against the competition. In fact, there are several cases where through our new connect platform, our open extensible platform, customers that may have selected alternative platforms in the past are beginning to call us to connect to feature sets of our new open architecture platform and content offerings that we have. So we are actually seeing the penetration of our products into our competitors' base, as well as winning in the head-to-head competition.

So competition is always an issue. Probably on the base products, the base learning management system, you see the modest pricing pressure. But again, it is our position in the market that brings complete solutions that I feel strengthens our overall position against that. Wins like Texas Health Resources reinforce that we are a high-quality enterprise partner in developing the human capital of these hospitals. I think the way we put our solution together help us win those competitions.

All right. Just moving back to the contract talks, I just wanted to clarify, are these contracts -- at this point is it mostly over the details of the longer-term contract, or is there still any risk of losing the contracts?

I would have to say that all I can characterize is really what has been said, that we are in discussions and negotiations. So it would be fair to say that any time the negotiations and discussions could turn in any direction. So while we continue our negotiations and discussions, we really don't have any update other than to say we are in those discussions.

Finally, would you be able to quantify the number of subscribers under the Tenet and the HCA contract?

Yes, the HCA contract is approximately 190,000 FTEs, and the Tenet contract is approximately 70,000 FTEs.

Congratulations. Thanks a lot.

(OPERATOR INSTRUCTIONS) [Natahala] Partners, [Will Harkey].

Are pro forma product sales and marketing expenses expected to be up year-over-year? I think (indiscernible) said yes, but it was a little difficult to tell with all the amortization and stock. And if so, can you tell us a little bit more about how that would drive future cash flow and customer satisfaction?

Will, this is Susan Brownie on that question. With regard to product development expenses, we do anticipate increased expenses both in the CapEx area with respect to product development, as well as increased spending in personnel and incremental resources associated with product development. So from an investment standpoint in 2006, we anticipate incremental investment there that we expect will result in product introductions mid to latter part of 2006 really producing measurable revenues not until 2007 timeframe.

I would add to that, Will, that it is my personal belief that now is the time to continue to increase investment, and we always focus on profitability, but the strength of the way we are building this network and its uniqueness, having 1.3 million subscribers on a network, now is the time to continue investment in leveraging the network and the customer base we have with new features and capabilities that hook them into the network and give them lots of value, growing value from the network. So what we're building is communities around our products, not just products. We will see that focus and thread which builds a community that sticks with the Company.

So my theme and theory behind it is just because we started to generate some profits, now is not the time to sit back and try to generate a lot of cash flow. Now is the time to continue to increase investment in product development in what I will call the network, so that eventually we can achieve a stronger network effect of having 1.3 million subscribers using us for lots of different things.

Very good, I agree. My other question was, can you give us some evidence of the increasing importance of your products to your clients?

We can. I cited the one, certainly this new content partnership with APS, and there's several more to follow. What we think we're being able to achieve now is we have a newly formed team about nine months old that is our strategic accounts team, and I would say if you look back two to three years ago, we would sell a piece of software to a customer and we would watch them utilize it remotely because it's an ASP model. We would not know much about their growing and additional business needs. We would not understand very much about the problems that they were having where training and education could be a strategic part of the solution to that problem.

In our new strategic accounts team, which is relatively newly formed, we have five individuals that are establishing what we call strategic relationships, which typically means monthly meetings with senior management at our customer base. Out of those meetings come business and clinical challenges our customers face, which allow us to go back into the market and find solutions that help them solve their problems. So what I would say is that never before have I felt more close and intimate in understanding the challenges of our customers than in the last 12 months compared to two years ago when we just sold software and tools.

So overall, I would say that we are just much closer to their needs. We are introducing new products like this APS that comes directly from the defined needs and risks that they have. In that case, the highest risk insurance area is malpractice and OB, and we now have content solutions directly to help solve and address that problem. So our investment in strategic accounts is a serious investment of personnel, and it has resulted in a greater intimacy with the problems of our customers and that is leading to new product introductions. So it is a different type of relationship we enjoy now with our customers.

Do you have a sense that any of your competitors have that, or is this another competitive advantage?

At this time, our head-to-head competitors I think are more focused on what I call the older model of selling the software and some content. I am not sure exactly how they have invested in that, so I feel it is a unique advantage right now and one that is growing most importantly with our top 15 customers that deliver a significant portion of our revenue. So it is unique to those customers, and I think it is somewhat unique to our company at this point.

Okay, great. Thanks.

Harvey Patel, (indiscernible) LP.

Yes, gentlemen, earlier you referred to the competitive landscape. And can you give us some metrics that would enable us to understand the target market potential for subscribers to Internet learning; what the total potential is and how much of that potential is already committed to competitors?

Of course, there's several ways to slice the potential the way we think of it. In an aggregate, I would first characterize that there are about 5 million people that work in about 5000 U.S. hospitals, and we think that their training and education needs are really just beginning to be tapped. The core introduction of our regulatory training products is meeting a very small need at a very low price point, which helps them train everyone every year in the federal requirements of fire safety, back safety, bloodborne pathogens, needle handling. For that we get the $10 to $20 per subscriber per year. So one way to think about the market is what is the total training opportunity on a per-person basis? We've seen numbers from the American Society of Training and Development that peg that number north of $400 per person per year, times 5 million would be a $2 billion number.

So if a company were able to deliver all of the training to every person and all of their development needs for those people, obviously, we think the opportunity is really large. On the other end, though, you have to look at as they introduce each product, its market potential. So if you take a product like the APS product, that certainly is targeted to a subset of our 5 million. Approximately 2.3 million (technical difficulty) of those are nurses, which are the appropriate audience for the APS content.

So under this umbrella of this really large opportunity over time, there are specific and targeted opportunities for each piece of our solution; the regulatory being a $10 to $20 per person per year. Our APS content, although it targets a smaller audience, is roughly $200 per person per year. So you can see how the product mix will help move us over time towards the bigger numbers.

Of the 5 million, do you have any sense of what percent of that is already committed to other providers in the way of training?

Yes. By the way, with our new products, we don't see any problem penetrating those competitive accounts. But I will give you a quick estimate of the landscape. HealthStream has 1.3 million of them on its Web-based platform, roughly another 150,000 on our installed platform, which brings us to about 1.45 million that are HealthStream customers directly. Through our Connect platform, even institutions in our competitive platforms can now purchase buy-up services from HealthStream, which is a relatively new advancement. In fact, we now have over 50,000 subscribers through Connect, our new connection product that allows them to buy the things from us, which is also new and a newly reported number I just gave. So we are very excited about that.

My estimate is that approximately 45 to 50% of the market is untapped from a learning management systems estimate, which leaves -- if you take our 25% and you say 50% is untapped, that splits across the competitors another 25% of the market.

Great, thank you very much.

(OPERATOR INSTRUCTIONS) At this time, Mr. Frist, there appears to be no further questions in the queue. I would like to turn the conference back over to you for any closing remarks.

Thank you, everyone, for participating. Thank you to our employees for delivering such a phenomenal fourth-quarter and year-end wrap-up. And all of us here are gearing up for our Summit and our Congress programs, which are two huge events for the Company in early second quarter. We've got a pipeline of exciting new products that we hope to see introductions for at Summit, and again, thank you to everyone for participating. We look forward to reporting in our new roles at the next quarterly conference call. Thank you for your attendance.

That does conclude our teleconference for today. We would like to thank everyone for your participation, and have a wonderful day.