HealthStream Inc (HSTM) 2006 Q2 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the HealthStream Incorporated Second Quarter 2006 Earnings Conference Call.

[OPERATOR INSTRUCTIONS.]

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Robert A. Frist, Chief Executive Officer. Thank you, Mr. Frist. You may begin.

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

Susan, would you read the forward-looking statement please?

Yes. This conference call would contain forward-looking statements regarding 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. 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, which including forms 10-K and 10-Q.

Bobby?

Thanks, Susan. Good morning to everyone, employees and investors alike. We welcome you to our second quarter earnings conference call. We definitely have a lot of exciting developments to cover. I’m going to hit a few financial highlights, a few of the challenges in the quarter, and close up after letting Susan do the details of the financials with some opportunity for the second half.

This quarter we reported record revenues of $8.2 million in the top-line quarterly revenue, which is about 21% over the prior year’s same quarter, and net income of $289,000 compared to $23,000 in the prior quarter. So, on the revenue side, things were strong. Pardon me.

We’ve got a little interruption here. It’ll take us one second to get this under control. We have construction in our building. Pardon us one second.

Okay. We’re back and we’ll try to keep the background noise to a minimum.

The challenges we faced in the quarter. There were two main expenses challenges. The first was we ran a very large live event in the second quarter. And the event was very, very successful for our customer, but financially very unsuccessful for HealthStream. In order to make it successful, we had an at-risk financial model that provided both upside and downside for HealthStream based on certain variables, and we ended up getting the downside of those variable.

And so, that single event cost us about a penny and a half of earnings in the second quarter. We’re going to adjust our models and go forward on these live events to make sure that that doesn’t reoccur, and definitely is a challenge for that live event.

Again, it was very important to note that our employees did a fantastic job. The customer was extraordinarily happy with the event. They had solid attendance at the event, but our financial at-risk model did not work. So, that was a decision responsible by management and it didn’t work out for us in the quarter. Of course, it could have been upside and this time it just came with downside. We will do our best not to let that happen again.

The second thing that happened is also a mixed blessing. The first one had a lesson in it. The second one is our Learning Summit surprised us with record attendance. And we were at a very nice venue and drove our costs up to the tune of another $100,000 more than anticipated.

I view this, while it did affect earnings directly in the quarter of approximately $100,000, as a positive long-term investment that will pay dividends over time.

And so, those two significant challenges in the quarter are what impacted earnings. And that said, we still had a solid net income of $289,000 and record top-line revenue of $8.2 million. And in both cases, they’re one-time events and we learned a lot from them, and we plan not to repeat the same kind of mistake.

Also, at the summit, you should note this is our first time ever where summit attendees paid to attend. So, we invested in our customers. They invested in us. And it was a very exciting summit where we launched four new products we’re going to talk more about in a minute.

So, with those being the challenges in the quarter, the renewal rates-- I’ll turn to the exciting news. Renewal rates are very impressive and very strong. I think they’re reflective in our investments, in our customers and the relationships we’re building.

We had a 93% of subscribers that came up for renewal in the quarter renewed. And those that did renew had meaningful increases in their contract value, 112% of what we call annual contract value. So, we grew the value of the accounts that did renew. And a very high percentage renewed overall, so we’re very, very pleased with our efforts there as a team and as a company.

In fact, one specific example would be CHRISTUS Health, one of our larger systems. And in the case of CHRISTUS Health, they added products and services, and effectively tripled their contract value. It was a three-year contract initially. There’s a new three-year contract. And the second three-year contract was about three times the size of the original contract, which is indicative of organizations adopting an increasing number of our product portfolio.

And finally, our customer base is growing at the base level, which is exciting. We always target adding between 25,000 and 75,000 new subscribers in the quarter and this quarter was no exception. We implemented 51,000 subscribers in the quarter, which brings our billable rate up to 1.309 million. And we also added to the contract backlog by 53,000 in Q2, which brings that total to 1.377 million. So, it’s exciting that we added-- since we implemented 50,000 and added 53,000 new to the backlog. And lots of good wins in that pipeline that we’re very excited to celebrate.

So, with a growing customer base, strong renewal rates, a few one-time financial challenges with lessons learned, and record revenues and solid net income, I’ll turn it over to Susan to help the financial analysts create a strong financial model on the Company. Susan?

Thank you, Bobby.

As Bobby mentioned, our revenues for the second quarter grew by $8.2 million, an increase of $1.4 million or 21% when compared to the second quarter of 2005. $1.2 million of this revenue growth is associated with our Hospital business and split evenly between our Survey and Research products and our ASP-based HealthStream Learning Center product.

The growth rate for the Survey and Research business over the same quarter in the prior year was 50%, while our HealthStream Learning Center product grew at approximately 20% over the same quarter in prior year.

We also experienced growth in the Pharmaceutical and Medical Device business, primarily associated with live events. Bobby mentioned the significant additional event during the first quarter, which did add incremental revenues, but did not produce the intended results.

Total revenues were split approximately 78% and 22%, between the Hospital and Pharmaceutical and Medical Device business during the second quarter of 2006 and 2005. Comparing to the first quarter of ’06, revenues increased by $700,000, with three-quarters of the improvement due to seasonal growth from our Survey and Research products, and the remainder associated with growth from our HealthStream Learning Center subscriber base. The revenue split was virtually comparable as well between the first and second quarters of ’06.

Our gross margin percentage declined over both the same quarter in the prior year and the first quarter of 2006, due to the losses Bobby mentioned from the specific live event.

The second quarter of 2006 also reflected higher marketing expenses compared to the same quarter in prior year as a result of record attendance at our 6th Annual eLearning Summit during April.

Sales expenses for the second quarter of 2006 also increased compared to the same quarter in the prior year due to additional account management personnel. These personnel are those that focus on our largest enterprise accounts, and we began developing this team late in 2004 and continued to add personnel through the beginning of 2006. As Bobby mentioned, specific to the CHRISTUS account, we are beginning to see the return on our investment from this team.

During the second quarter of 2006, our product development expense increased over the same quarter in the prior year due to additional product development personnel. These personnel are focused on development of new products and courseware offerings.

General and Administrative expenses for the second quarter of 2006 also increased over the same quarter on the prior year due to share-based compensation, while depreciation and amortization declined, primarily due to certain assets reaching the end of their useful life before replacement.

Our increased cash and investment balances resulted in improved interest income when compared to the same quarter in prior year as well. Which together, resulted in net income for the second quarter improving to $289,000, or $0.01 per share on a rounded basis, from $23,000 or a breakeven level during the same quarter in prior year.

Improvement in EBITDA was also consistent with the improvement in net income for the aforementioned reasons.

When we compare to the first quarter of 2006, sales expenses were lower, primarily due to the departure of our Senior VP of Sales and Marketing at the end of the first quarter. While marketing expenses increased approximately $0.5 million due to our 6th Annual eLearning Summit.

General and Administrative expenses also increased from the first quarter to the second quarter of 2006 due to increased share-based compensation associated with additional personnel.

Net income and EBITDA decline during the second quarter of 2006 compared to the first quarter of 2006 as a result of the factors previously mentioned, primarily the eLearning Summit event.

During the second quarter of ’06, we also improved our day sales outstanding, or DSO, to approximately 47 days for the quarter, comparable to 60 days for the first quarter of 2006, and also down from 54 days for the comparable quarter in 2005.

As we look at our third quarter of 2006 expectations, we anticipate revenues ranging from $7 to $7.2 million, representing an increase of $200,000 to $400,000, or 3% to 6% compared to the same quarter in the prior year. Our increase is expected to result from growth in the Survey and Research business, as well as continued growth in our HLC subscriber base. Our expectations do reflect lower levels of revenue from the Pharmaceutical and Medical Device business when compared to the third quarter of 2005 due to declines in project-based revenue and activity levels.

The revenue decline over the second quarter of 2006 is expected to be between $1 and $1.2 million, or 12% to 15%, primarily due to seasonal declines in the Pharmaceutical and Medical Device business. Our guidance also may anticipate more seasonal variation in our Survey and Research business than we experienced during 2005, primarily due to the potential-- that the timing and service delivery can vary during the third and fourth quarters of the year.

Gross margins as a percentage of revenues are expected to be comparable during the third quarter of 2006 when compared to the same quarter in the prior year. Our third quarter expectations for ’06 also reflect improvement from the second quarter of 2006 given the one-time loss associated with the specific [unintelligible] event.

When we compare to the same quarter in the prior year, we anticipate increased expenses during the third quarter, both in absolute terms and as a percentage of revenue as we invest in product development, sales and account management personnel, and increase in marketing expenses with new product launches. We also expect increased share-based compensation as we previously discussed.

When compared to the second quarter of 2006, the most significant expense change during the third quarter will relate to marketing expenses, where we anticipate spending will decline due to the timing of our eLearning Summit. However, such decline will be partially offset by increased marketing associated with product launches.

Depreciation and amortization increase are also-- expenses are also expected to increase due to amortization associated with new product launches, while the remaining operating expense categories are expected to increase with the percentage of revenues, but be comparable to expense levels during the second quarter of ’06.

We’ve reset our net income expectations for the third quarter to approximate $50,000 to $250,000, which reflects a decline from the same quarter in the prior year, and either slightly lower or comparable results to the second quarter of 2006.

We continue to expect full-year revenue growth of 13% to 15%, with improvements in quarterly revenues when compared to the same quarters in 2005, with growth resulting from our Research and Survey business and HealthStream Learning Center products.

We expect gross margins to be comparable with 2005 results during the remainder of the year.

As we noted in our release, we continue to expect 2006 profitably to be compared with our 2005 net income, including the impact of share-based compensation, which we updated in our release to reflect an expense estimate of 700,000 for the full year of 2006.

One thing that I’d also like to highlight is the addition of the line of credit that we noted in our press release. We signed this line of credit last Friday and expect that the agreement provides us with additional flexibility and additional capital at very favorable-- based on very favorable terms, and look forward to utilizing this line potentially in the future to look at opportunities to extend our product base or our service offerings to existing customers.

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

Thank you, Susan.

I want to turn our attention a little bit to these new product launch-- the investments in new product launches. At our summit, we announced a series of new products and we had not acquired customers for them. We’ve announced that they are arriving the second half of the year. And I would now update you that, in the case of four new products, we expect to be announcing customers for those products and the launch of those products of the second half of this year.

So, we’ll be watching for news on our Virtual Class product, where we partner with Microsoft; our Community Health Education Center, where we partner with one of our customers, Sutter Hill; our DigitalMed and Clinical Courseware Library, which we’ve partners with Tenet HealthCare on, which is a robust clinical courseware library for nurses and continuing education; and our basic Life Support Training Program in partnership with Laerdal.

All four of these exciting new product offerings were announced at summit to become available in the second half of the year. And I would now note that we’re on target for launching them in the third and fourth quarters. And we never announce products-- or try not to announce products to our investor community until we have customers for them.

So, as we launch these products and get our first customers and get our hands on the expectations for how these will contribute, we will announce those in press releases over the next six months. So, watch for these exciting new product announcements for the remainder of 2006.

Underlying all of that, and also announced at our summit in April to 700 customers and vendor partners, was the announcement of the arrival of our next generation learning platform. Over 18 months in development. While also supporting our current platform. Deployment of this new product begins in Q3 and should serve as a great set of enhancements to all existing customers. We think that these enhancements will further improve our retention rates, our relationships with our customers and, most importantly, serve their needs even better than the current platform does.

So, deployment of that new platform begins in Q3. We’re in the final phases of quality assurance testing and rigorous load testing and remediation of the final issues, and we expect to take our first customers live at the end of Q3 on this next generation platform.

By the way, many of our new products I announced earlier are tied to this platform in that they’re more integrated and work more completely with this new platform.

I’d also like to take a moment to congratulate the leadership time of Survey and Research product lines, [Robin Rose], [Allan Hauck] and [Kevin Kelly] have led that group to improving revenues 50% over the same quarter last year. So, effectively, that leadership team, and now with the addition of Eddie Pearson, our newly hired Senior Vice-President, we’re expecting great things to continue from our Research and Survey product lines in our business.

On the integration front, with regards to that acquisition, I would say we’re getting more and more integrated on a sales and marketing standpoint in approaching the senior officers of human resources at our health systems and pitching a more complete package of assessment, remediation, intervention and development strategies for their employees. And it’s the assessment part that the Survey and Research group provides to HealthStream.

So, we couldn’t be more excited about Eddie joining the Company to lead these efforts with his background. And the next conference call, he’ll be available for you to talk to. And we couldn’t be more excited about the current leadership, Robin Rose, Allan Hauck and Kevin Kelly and their whole team at what was formerly known as Dowden Management Research, the leadership they’ve provided to grow revenues 50% over same quarter prior year.

I’d like to take this time to turn it over to questions for our investors at this time. Thank you.

Thank you. [OPERATOR INSTRUCTIONS.] Sean Jackson with Avondale Partners.

Yes, good morning. On the Survey business, what is the one thing that you attribute the strength to? Is more of a-- the background environment is strong, or you just had good execution? Is it seasonality? Can you just comment on that?

Sean, this is Susan. I’ll address that. About 50% of the growth really came from growth of existing clients. And so, in certain accounts, as a result of transactions in those accounts they actually increased the size of the entity and the number of facilities that use those services.

In addition, I would say, you know, rounding out the balance or the other 50%, a large portion of that would be associated with expansion of services at those existing accounts, with a relatively minor account then remaining associated with sales to new accounts.

Okay. All right. Good. And also, the live event that you did in the second quarter, have you done one of those before? And can you just comment on perhaps what your strategy is with that going forward?

Yes, Sean. About $2.5 million of our revenues-- or $2 to $2.5 million of our revenues in ’05 were on live events management. So, we’ve done this for a long time. We’ve done a couple of things with that line of business. The first is we’ve changed it to a more variable cost model. So on the expense side we’ve tried to get it where the expenses are directly-- there’s less fixed costs in the Company, which we’re excited about that change.

What we did on this Zimmer event was we actually changed the financial model as well, as what we’ll call now a bad experiment, to go at-risk on a couple of variable based on attendance growth. And again, while the event was very successful, our model we had modeled out needed a little more growth to push us through to get the upside of the at-risk model. And historically, we’ve done kind of a cost-plus model on live events, which in reflection now looks to be much smarter than an at-risk model.

So, the Zimmer Dental event was a large event. It was over $1 million in revenue recognized over three or four quarters. And we went at-risk on the financial side and it did not work out. So, we don’t plan currently to repeat that or, at a minimum, learn from that and improve the at-risk model so we come out on the positive side next go-around.

Okay. That makes sense. Also, on the new product launches, which one of the four do you think you have more optimism in, especially near term?

Near term, I would say that the earliest sales will probably be generated from two products of those four, while I’m excited about all of them. The Basic Life Support Training from Laerdal, we’re really excited about. There’s-- essentially, there are mandates around biannual training for a large population within the hospitals for BLS training. And this is a very highly regarded company, Laerdal. We’ve partnered with the American Hospital Association. So, this is a strong program and we expect good uptake on that program.

Right behind that, though, are the other three products; Virtual Class in partnership with Microsoft. You know, I expect announcements on in the next 45 days for initial customer contracts. And even the Community Health Education Center, that’s a little more experimental of a product, but the neat thing about that was it was built with a customer to meet what we perceive as a broader customer demand, Sutter Health. And so, while I don’t know how that’s going to play across our customer base, it seems to be, we think, derived directly from customer need.

So, I would say the BLS program from Laerdal followed by Virtual Class, and then the other two we’ll be cautiously optimistic about.

Okay, thanks. And just lastly, the next generation of learning platform that you’re deploying in the third quarter, what is the difference between the next generation and the older generation?

Sean, there’s a tremendous difference. At its core, it’s moving the platform to a stronger set of core technologies to continue to improve scalability, functionality and speed, and failover. So, the first thing I’d note is that, at its core, it’s going to be a more reliable infrastructure for us to grow on for the next several years.

For the customers, it means hundreds-- and I mean hundreds of new enhancements. We have-- we spend a year and a half consolidating feature requests, prioritizing them, meeting with customers in our user groups. And this release will be the reengineering of our product based on 2 years of customer input and 10 years of experience. So, we think we’re going to meet the heart of what I’ll call the expectations of our customers with this set of improvements.

Okay. Thanks. Good quarter.

Thank you, Sean.

[OPERATOR INSTRUCTIONS.] [Vincent Galachio] with [Notebook] Financial Group.

Nice quarter, guys. A couple questions for you. Overhead increased a bit in the quarter. If I adjust overhead going forward for the incremental increase in stock comp, is that sort of where you should be on a quarterly basis for the rest of the year?

Vince, it’s Susan. I’d characterize two items there in the quarter. We do have additional personnel that we added during the quarter that have impacted stock comp. But, offsetting that slightly, if you’ll recall, we do an annual immediately vested grant to our board of directors. It is more of a one time charge that hits in the second quarter concurrent with the annual meeting of shareholders each year.

So, a little bit of upside-- I think we’ve talked about historically, the stock-based compensation should be comparable for quarters one, three and four; a little bit higher in Q2 because of that grant to the board of directors.

Okay, thanks. The tax rate was a little bit lower than I think we expected. First question is what happened there and, the second is, what rate do you expect for the year?

Yes. We still have not given the benefit to the NOLs that we have out there. But, the tax rate during the quarter actually reflected a benefit on a stand-alone quarter basis because of the tax benefit associated with stock option exercises, where those-- when stock options are exercise, the Company gets a tax deduction associated with that exercise. That’s something that historically we’ve not experienced in a material manner, but during the second quarter that did turn around on us and produce a benefit.

So, I would continue to model a very light tax rate that is reflective of basically a minimum tax approach, or an AMT tax approach for the remainder of the quarter, which would be in the neighborhood of 10% of taxable income.

Do you currently have any--. Can you hear me?

I’m sorry, Vincent. I did not hear that.

Okay. Do you have any-- are you currently committed to any live event services that are under the at-risk model?

No, we do not have any in our current pipeline that reflect an at-risk model.

Okay. What does the-- the content subscription revenue, what kind of growth did you have there in the quarter?

Courseware subscription revenues basically were modestly up, roughly a 2% growth rate. What we’ve seen there is some replacement of HIPAA revenue subscriptions from prior years being replaced with new content titles. But, if you recall the timing of the HIPAA training requirements back in the 2003, 2004 timetable, those have turned around on us so we’ve had to replace those content offerings with new courseware subscriptions as well.

On the PMD revenue side, should we expect a sequential improvement in the fourth quarter given the seasonal impact you’ve had there in the past?

We do not provide specific guidance with respect to Pharma-Med Device for Q4, but we did note that we anticipate growth on a year-over-year basis. I think if you look at the trends that we’ve noticed so far in the year, the expectation would be those revenues would be down slightly on a quarter-over-quarter basis, but up from Q3 moving into Q4.

Okay. Last question then I’ll go back in the queue. On the DMR side, have you yet-- I wasn’t sure. I mean, Bobby may have mentioned this, but are you seeing downstream revenue flowing from the DMR, you know, the C-level contacts you have on the DMR side?

I think what we’re beginning to see is a better access for the learning side of the business, a more senior suite. And so I would say we’re seeing better access. We’re having more frequent meetings with C-Suite executives, especially in the HR area, about the whole portfolio products.

We’re not quite seeing the pull-through we wanted. We’re seeing kind of increases in those accounts that have the learning products. We’re seeing an increased adoption of learning in those accounts with re-certs. We’re seeing increased adoption of research. We’re not quite seeing the cross-sell we want, but we’re still optimistic for it because it’s definitely elevated our dialogue on both sides, up a notch or two on the executive rank levels.

Are you seeing cross-sell into any of the DMR pre-deal clients that were not clients of HealthStream?

Vincent, on that, we characterize that we’re moving through he first budget cycle on a lot of those clients, where we’re taking those--taking proposals to those clients for expanding offerings across the relationship. So, those discussions are ongoing, but I would not characterize that we’ve seen meaningful increments at this time, but feel like we’re well positioned to achieve that going forward.

Okay. Thank you.

I’m showing no further questions in queue at this time.

Thank you. Then I think we’ll use this moment to conclude our conference call. I’d like to thank all of our employees for the hard work in the quarter, and thanks to the investors for continued interest in HealthStream. Look forward to reporting the third quarter to you on the next go-around. Thank you and have a good day.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for participation.