HealthStream Inc (HSTM) 2006 Q1 法說會逐字稿

Good evening ladies and gentlemen and thank you for holding. Welcome to the HealthStream Incorporated 1st Quarter 2006 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce your host, Mr. Robert Frist, CEO. Thank you, Mr. Frist. You may begin.

Good morning, thank you. Welcome to our 1st Quarter 2006 Earnings Conference Call. Also in the room with me are Art Newman, Executive Vice-President, Susan Brownie, Senior Vice-President and Chief Financial Officer. And Mollie Condra, Director of Research, Communication and Investor Relations.

Susan, would you read the forward looking statement please?

Certainly. This conference call would contain forward looking statements regarding future events and future performance of HealthStream that involve risks and uncertainties that could cause our 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 the forward looking statements are contained in the company's filings with the FCC including forms 10-K and 10-Q.

Bobby?

Thanks Susan. The first quarter is a busy time for HealthStream. And it doesn't drop off any as we move early into the second quarters as well. We wrapped up the first quarter with a lot of strong financial performance, particularly compared to prior same quarter with the top on at 7.5 million and net income of 658,000 and a good strong EBITDA of 1.3 million.

And we look a lot to performance measures we have in our release, a very detailed five page release. We talk about our renewal rates in excess of 93% on one measure and 100% on order value. And the number of subscribers that we implemented in the quarter, which was a very strong 85,000 activated subscribers.

So in most all the metrics, it's an exciting quarter for HealthStream and puts a good tone for the year. But the financial numbers are the underpinnings of our measure but our activity levels are very high as well. For instance, in Washington, DC we hold our Congress in partnership with AORN and the Congress we support the educational activities at this event. There were 67 educational activities that were managed by HealthStream employees and the event was very successful for us overall. [Steve Sorba] led the charge team of at least 15 HealthStreamers in Washington, DC managing this event AORN.

I think this is about the 15th year we've done that event and this marks one more successful year of high energy effort, 67 educational activities sponsored by 50 pharmaceutical medical device companies and great participation from an excess of 6,000 nurses that attended the AORN Congress in Washington, DC.

So if that's any indication of the activity levels, that continue on, it was just quite a busy, busy first quarter both from an activity level standpoint, a financial performance standpoint and as we'll hear in a minute, at the end I'm going to talk about how we kicked off our second quarter and the activity around our customer summit held in Nashville just last week.

But now I'll turn it over to Susan for a detailed look at the financials.

Thank you, Bobby. As Bobby mentioned our revenues for the first quarter grew by 1.8 million or 32% compared to the first quarter 2005 to reach 7.5 million.

March 28th marks the one year anniversary of our acquisition of DMR, which contributed 1.2 million of our revenue growth for the first quarter. The other significant change in revenue is associated with continued growth, in our AFP base, HealthStream Learning Center product, which grew by more than 400,000 or an increase of 15% over the same quarter during 2005.

We also experienced a modest increase associated with our pharmaceutical and medical device business. However, the components of that business changed. Our live events business increased, but that increase is partially offset by declines in project base development work.

Total revenues are split approximately 76%, 24%, between the hospital and pharmaceutical business during the first quarter of 2006. Compared to approximately 70%, 30% during the first quarter of 2005.

This change in revenue mix is primarily associated with the addition of the DMR survey business as well as continued growth in our ASP HealthStream Learning Center revenue.

The other changes in our business, which supported the changes in net income, from 658,000 during the first quarter of 2006, compared to net income of 144,000 during the first quarter of 2005, included approximately 1.3 million related to the impact of revenue growth net of cost of revenue, which was offset by increased spending for sales, account management, and product development.

These increases are consistent with the guidance we provided in our year-end release and relates to additional personnel and enhancements to our platform as well as other new products that Bobby will discuss in a moment.

We experienced more moderate increases than just general administrative amortization and marketing expenses, which were primarily associated with the addition of DMR personnel and certain DMR intangible assets.

Moving to more operational metrics, we continue to experience significant increase in the volume of business which is subject to renewal. As we announced in the earnings release, our first quarter renewal rate was 93% based on the number of subscribers and 100% based on the annual value associated with the renewed contracts. These renewal rates reflect the entire volume of activity and favorable results compared to the first quarter of 2005 which included a renewal rate of 81% based on the subscribers and 71% of annual contract value that was up for renewal.

The other operational metrics that we highlight is DSO or day sales outstanding. Again, as we detailed in our press release, DSO improved to approximately 60 days to the first quarter 2006 from approximately 66 days in the first quarter of 2005.

However, if you exclude the impact of a DMR acquisition, that closed on March 28, 2005 DSOs improved modestly or approximately one day. Moving onto our second quarter 2006 expectations, revenues are expected to approximately 7.8 to 8 million representing an increase of between 1 and 1.2 million or 15 to 18% over the same quarter of 2005.

This increase is expected to result from growth associated with our survey business as well as continued growth in our HLC subscriber base. Our expectations reflect comparable levels of revenue, from the pharmaceutical and medical device business or compared to the second quarter of 2005.

The revenue increase of the first quarter of 2006 is expected to be between 300 and 500,000 or 4 to 7%, which will result in growth in our survey business and HLC subscriber base, but will be partially offset by seasonal declines in the medical and pharmaceutical device, medical device and pharmaceutical business.

Gross margins for the second quarter are expected to be modestly lower or compared to the same quarter of 2005 due to the impact of project based services from the pharmaceutical, medical device base business, as well as growth in our survey business.

When we compare to the first quarter of 2006, the most significant expense change will relate to marketing expenses, where we anticipate incremental spending of approximately $400,000 related to our annual learning summit which we hosted last week at [Loews Vanderbilt] at Nashville.

As Bobby mentioned, this year's record, this year's events reflected more attendance and he'll discuss further, record attendance of both customers and industry partners.

We expect net income for the second quarter to reflect modest improvement with compared to the second quarter of 2005. However, consistent with the seasonal nature of our business, our expectations also reflect a lower level of earnings than experienced during the first quarter of 2006.

We continue to expect full year revenue growth at approximately 13 to 15% with improvement in quarterly revenue compared to the same quarters of 2005 with growth resulting from our survey business and HealthStream learning products.

With the exception of the lower gross margins during the second quarter we expect gross margins to be comparable with 2005 results during the remainder of the year.

We also continue to expect full year profitably to be comparable to 2005 net income levels. But we should know that this includes the impact of share based compensation which adds approximately 600,000 of expense to our full year 2006.

I'll now turn it back to Bobby for closing comments.

Thank you, Susan. And congratulations on your first earnings call in official capacity as our Chief Financial Officer. Both Art Newman in the room, and Susan Brownie were promoted effective with the filing of the 10-K and Art is our Executive Vice-President overall, of our operations, and Susan is Chief Financial Officer. Congratulations to Art and Susan.

Picking back up with the activity levels of Q1 and thinking about how busy we've been in the start of Q2 I'd like to congratulate Jeremy Roberts on his leadership of Summit. This was our 6th annual learning summit. Over 710 participants in the event. All traveled to Nashville from 46 states. Actually, nearly 50 participants traveled from California so we've represented across the country and we had a visitor from Hawaii as well. We just signed the Hawaii contract. So really all of the U.S., we had participation in our Summit.

20 vendors participated this year and the vendor participation is a strong indicator to me of the community we're building around our products. They included industry partners like [Neon Code] and [Backster] and Medtronic that participated as vendors that looked to us to support their products through our Hospital Direct program.

And they included content partners like Pierce and Prentice Hall, HC Pro, [Adam], Advance Practice Strategies, and the National League for Nursing. So what I see happening at our Summit, where we bring all our customers together, increasingly partners are seeking us out to offer their services through HealthStream services to our end user audience of 1.3 million active subscribers, which is very exciting.

The other great thing about Summit is that almost all employees are involved in it. We had over 100 participants that were HealthStream employees. This was their time to be face to face with all of their customers and we think this pays big dividends, as we think, reflected in our renewal rate of our personal relationships with our customers.

One of the most exciting parts about Summit is the introduction of new products as we look forward to second half of '06 and early '07 for the things that can help drive further growth of the company.

And in the opening of the conference, we announced three new products. Dr. Bill Crounse,Microsoft's Healthcare Industry Director, joined me on stage to talk about the launch of HealthStream Virtual Class, which is powered by Microsoft's Live Meeting.

In the last conference call, we talked about the changing market dynamics in the live conferencing and hinted, somewhat, that we'd be moving in a direction of partnership rather than acquisition in this area. Well, we think there is no better partner or no better technology to use than Microsoft in the launching of our synchronist learning tools powered by Microsoft Live Meeting and we're excited to announce both the virtual class product and the fact that it is powered by Microsoft technology, which we think is a good choice in the infrastructure for that product.

Secondly, we introduced the Community Health Education Center, which essentially turns our learning center software inside out. It allows the organizations to now manage the external educational offerings to the community. Like CPR classes that they offer on campuses and hospitals across the country, or birthing classes.

So the Community Health Education Center allows the HealthStream Learning Center to be turned inside out and manage the community education initiatives of hospitals. We think that this product will be an important way for the marketing departments of hospitals to extend their reach to the community and manage these additional educational processes.

Finally, Clive Patrickson, Laerdal, Global Vice-President of Training and Education joined me on stage as well to launch the [hard core life] support courses. It included training and DLS and HCLS. These are programs that are endorsed by the American Heart Association and are built to the guidelines, the 2005 American Heart Association guidelines for training in this area.

This is an area of high need training over two million people recertify every two years in [BLS] and ACLS and this layered all product integrated with our next generation platform is an exciting new addition to our content offerings.

And that brings me to the announcement that we think our customers love the most, which was an extensive upgrade coming in the second half of their already acquired Learning Center. The upgrade includes over a 100 new features, and we were able to feature over 15 of them in the key note address and well received with great applause were these new features that are on the way to these customers. These features will be included in their standard already acquired contracts so we think these features extend the power of the platform, improve the probability of renewal, and further meet the exacting demands of our customers.

Congratulations to Tom Dugger, and Joe Christopher for their leadership of the development efforts of this extended update, which involves over a 0.5 million lines of code and 14 months of development. Development team of 35 people insourced and outsourced are in the process of delivering this next generation learning platforms to our customers.

And we saw the excitement and the energy in our audience last week here in Nashville and that couldn't do anything but energize the 150 HealthStream employees to push forward with our innovative new products and energize our customer base. So as you can see it's been a busy first four months of the year supported by strong financial performance, and positive forward guidance, in my opinion.

And at this time, I'd now like to turn it over for questions.

Ladies and gentlemen at this time we will conduct a question and answer session.

[OPERATOR INSTRUCTIONS].

Our first question is coming from Sean Jackson of Avondale Partners. Please proceed with your question.

Yes. Good morning. Great quarter.

Thanks Sean.

Can you talk about regarding the forward revenue guidance for '06? And is there some seasonality in their especially in the third quarter that perhaps, maybe you expected sequential downturn in that quarter?

Sean, this is Susan. We do actually if you look historically, our revenues have been comparable between Q2 and Q3. However, looking at our growth for 2006, our expectation is that well -- will show significant growth in Q2, and then potentially maybe down over Q2 moving into Q3. But we still anticipate that we will reflect growth from Q3, 2005 to 2006 -- Q3, 2006.

Okay. And then in your press release you talk about the timing of survey business in the second half, and can you just elaborate a little bit more on that?

Yes. The survey business is contracted in annual increments. However, the cycles and the timing of survey services can vary throughout the year. So while a customer has the obligation to provide or to use our survey services contractually, they might vary between the first quarter and the third quarter throughout the year, or from the second quarter to the fourth quarter. So there is, historically, we've had a bit of seasonality in that business with kind of the largest volume of services focused on the second quarter and the fourth quarter. And we reflected those expectations in our revenue guidance as well.

Okay. Thanks. And regarding the three new products that you launched, can you just comment on you know, perhaps, is there any contribution of those products baked into the guidance? And also which one of those products do you anticipate generating revenue the quickest?

The answer to that is that of the three new products, we've announced, only one of them has any real impact at all in this year that is the layered all where we forecasted some increase content sales. The layered all content is the ACLS BLS training product, which we think ultimately over the next two years will be a pretty high demand product, but of course that's unproven. And so we have a minimal year end impact as that's a subscription product as well. And mostly weighted towards the third and fourth quarters. So that's the only one with any forecast for this year.

The other two are dependent upon the successful launch of our upgrade to our main learning platform. And therefore will come in the second half of the year at the earliest. And the sales and marketing for those will start shortly thereafter. Of course we preview the products, announced through relationships at Summit. And so I believe both of those will be early '07 impacts with the first sales occurring probably in the fourth quarter. They -- there are subscription products as well, which means that if we sign one, two or three year contracts on them they will have a [deminimus] impact in any given quarter, and it will take time to have a material impact on the overall financial of the company. So we think that those two are kind of early '07 products with the first sales occurring in the fourth quarter of this year.

Can you comment on the pricing of those two products in particular, I mean, have you thought about -- is it going to be on a per seat pricing or just it going be like an annual subscription fee?

Each product is a little different. The content products are typically per person, essentially per person per year subscription. The Virtual class product, which is a the powered by Microsoft Live Meeting will sold -- be sold at a way that's competitive with way virtual conferencing tools are sold today, which involves a seat and usage type of model. So if you look at the competitors net space, Centra, WebEx, Microsoft Live Meetings sold outside of healthcare, there is an existing model there built around utilization and seats. And so that product will be based on utilization and seats.

And the community health education center will be much like our current authoring center. It will be an add-on based on the size of the institution and be -- and then that will be turned into an annual subscription based on the kind of utilization and the size of the organizations. So all three are subscription products, one of them is a probably a single year subscription. The others we hope will be multi year subscriptions. Two of them are platform extensions, and one of them is a content addition.

Okay. Thank you.

Thank you, Sean.

Our next question is coming from [Peter Waldman] of [Dearfield Associates]. Please proceed with your question.

Hi Bobby. How are you doing?

Morning Peter.

Couple of questions. I know you commented about the -- HCA negotiations in the release.

Yes.

But can you just give us you know any inkling on the tone or whether any more -- anything else could be said about it? I mean things going well?

Well the -- what I can say is that we is exactly what's in the release of course that we are under a one year automatic extension that has a 45 day cancellation clause by either party. And we would prefer a longer term agreement.

We are in active discussions with the teams at HCA that are contacts about establishing a new longer term agreement. But what I would say is that we are operating comfortably under our essentially month-to-month lease until that time as we have a new agreement in hand or hope to.

And of course, if anything changes in our status with HCA, we would immediately report it, you know, that day or certainly immediately, whether it's a change for the better or for the worse. So -

From HCA's perspective are they -- would you guess they're thinking about possibly a competitor, or taking it in-house or judging your performance? What would you think is on their mind?

Well, I really wouldn't comment on what's on their mind. I would just say that our current relationship even as recently as Summit. They had an incredible participation at our Summit with over 85 attendees. And actually organized one of their events that they had over a 100 participants in the day before our Summit in Nashville, to kind of coordinate their internal efforts. And so we believe that our current working relationship with them is very positive, and they are very active -- actively utilizing our current products including different content bundles and our systems. I wouldn't comment on their intent because we just won't know that until such time as they tell us.

Okay. And on a different [text], when you -- are you satisfied with the level of growth, and I am actually wondering do you envision future growth to come organically or are there more acquisition targets out there?

We believe both. One of our challenges right now is our product pipeline is very, very rich. Our Senior Vice-President in Sales and Marketing left us at the end of March or middle of March. And we are actively recruiting a new person to come in and provide the sales leadership that we need over all of these new products.

So we've got our work cut out for us, we have no lack of products and product pipeline to carry us organically into the future. We've got to optimize our selling and marketing efforts in the next year.

But I'd say the answer is that we are expecting organic growth from both existing and new products. And I also say each quarter we are actively looking, and in a financial position to execute on acquisitions if they make sense. And we have a pipeline of things we are looking at. So it's an active process not a passive one. So we're going to look to both organic and inorganic growth in the next two years.

Is it okay if I can ask you one more question. Might seem a little odd. But here I have some customers who ask me questions. And their question to you they read about in the newspapers, the efforts of the government and the industry to integrate healthcare, you know, connecting all, you know, pharmacies, doctors, customers, hospitals, et cetera. Does HealthStream have a role in that process or potentially beneficiary to that process?

Well, there is definitely a couple of ways to look at that. There -- one is that there is going to be a tremendous increase in the overall investment in IT spending, which is a good thing.

The second is that as they adopt these new systems, they face the cultural challenges of rolling out new technologies. And already some of our customers for example CHRISTUS Health in Texas rolling out a new EMR, Electronic Medical Records system has engaged us to provide training and support services round the deployment of that new EMR. And so what I would say is that the increase adoption technology will require an increase in training and support, and we think that favors us in the long run.

Okay, that sounds good. Thank you. And keep up the good work.

Thank you.

Our next question is coming from [Dave Rosenfield of Rate Financials]. Please proceed with your question.

Yes. Good morning. I have two questions. The first is when do you think international -- any international expansion will be feasible?

And the second question is on your operating cash flows is that positive or negative this past quarter?

Thank you, I'll field the first one and let Susan field the second one. International expansion -- we have explicitly decided to focus on the U.S. At one time, we tried a little excursion into Canada, and had a few hospitals there. But decided that we have plenty of market in the U.S. to run and grow. And we need to figure out how to optimize our market share and position in the Continental U.S., and of course we just added in Hawaii. We have some in Alaska.

But we think beside our company requires a lot of focus. So you'll see that we are 100% focused on essentially the 5,000 acute-care hospitals in the continental U.S. with some additions in Hawaii and Alaska. And we think that's where we need to be until we get our market share much higher than where it is today, which is about 20, well, on our Web based platform its about 27% of the market. We would like to see that get on up there.

Okay. Thank you.

I am like, your question with regard, Dave, with regards to operating cash flows, if you look at our press release, we do disclose earnings before interest taxes, share based compensations, depreciation, and amortization which is on page seven of our release, that was favorable moving from 661,000 of positive EBITDA results to 1,342,000 million for the first quarter of 2006. So I'd highlight that improvement. However, the one thing that we did note in the releases well if you look at the total cash investments we moved from 12.2 million at the end of the year down to 12 million. A number of those changes have to do with changes that are highlighted in the balance sheet with respect to the live event business that we have or we basically have more outflows during the first quarter than we have inflows on those and those are generally trued up and collected during the second quarter.

But if you look at where we were compared to end of first quarter in the prior year, cash balances are up a little better than or a little less than 4 million.

Thank you.

[OPERATOR'S INSTRUCTIONS]

Our next question is coming from Austin Louis of Lewis Asset Management. Please proceed with your question.

Mr. Lewis' line has dropped down out of the queue.

[OPERATOR'S INSTRUCTIONS]

We have no further questions in the queue at this time, I would like to pull back over to the speakers.

Robert Frist. Thank you. This is Bobby Frist again, and we certainly appreciate your participation in our conference call and following our progress as a company.

We look forward to reporting the second quarter earnings as they unfold. And thank you to all of our employees for their diligent effort at Congress, Summit and the launch of our new products that we think will carry us forward in the future.

Thank you and have a good day.

Ladies and gentlemen, this concludes the teleconference. You may disconnect your lines at this time. Thank you for participation.