HealthStream Inc (HSTM) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the HealthStream Incorporated third-quarter 2006 earnings conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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. Thank you and welcome to our third-quarter 2006 earnings conference call. Also in the room with me are Susan Brownie, Senior Vice President and Chief Financial Officer, Eddie Pearson, Senior Vice President, and Mollie Condra, Director of Communications, Research and Investor Relations.

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

This conference call will 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, including Forms 10-K and 10-Q.

Bobby?

Thank you, Susan.

We've got many things to cover this morning. Of course, our press release is very detailed and has many, many great facts in it, but I want to pick a few to highlight. First, we had 7.5 million in topline for the quarter, which is about 9.5% better than the same quarter prior year; net income of 474,000 compared to 554,000 in the prior year same quarter. That's including the fact that 2006 was impacted by the recognition of about 166,000 of share-based compensation.

When we look through some of our metrics for the quarter, there are many, many exciting metrics. One area of metrics to report on are our renewal rates. When you look at the renewal rate based on a number of subscribers, we actually reported 117% renewal rate for order value and 104% for subscribers, which means that the subscribers there were up for renewal renewed and several accounts increased the number of subscribers during the quarter. The same thing with order value, those accounts that renewed increased the value of the renewal by adding products and services, or they overall increased the size of the contract.

The customer base is growing. We are within the range we report of adding new subscribers, including the fully implemented subscribers increasing by 25,000 in Q3. We always like to see that number between 20 and 60,000 in a quarter. The contracted subscribers increased by 40,000, which again is within the targeted range of 20 to 60,000 a quarter. Our total under contract now is 1.418 million contracted subscribers.

We announced, throughout the quarter, a couple of important customers, including Resurrection Healthcare, a Chicago-based healthcare system that's part of the Catholic healthcare system, and on the West Coast, Cedars-Sinai Medical Center, both really important regional wins, both with national recognition.

At this moment, I'd like to take a few moments to turn it over to Eddie Pearson to tell us a little bit about the progress of the survey business in the quarter.

Thanks, Bobby.

During the quarter, we had new customers in the research business, primarily coming from Health Management Associates, where we received approval and contracted for and executed projects on physician, employee, patient and community surveys. We also added Capella Healthcare where we also did physician, employee, patient and community surveys.

Thank you, Eddie.

The revenues for the survey and research business were up 26% over the prior year same quarter, and overall, we had a great quarter in the research and survey business. At the end of the session, Eddie will be available for questions and we're real excited about having Eddie on board to continue to grow and perform with that business.

At this time, I'd like to turn it over to Susan for an update on the numbers, and then we're going to close with an update on personnel and new product launches that we mentioned from prior quarter.

Thank you, Bobby.

As Bobby mentioned, our revenues for the third quarter grew to 7.5 million, an increase of 650,000 or 9.5% when compared to the third quarter of 2005. Our hospital-based revenues increased by almost 900,000, primarily resulting from growth in our ASP-based HealthStream Learning Center's subscriber base and to a lesser degree the growth that Eddie mentioned with regard to the survey and research products. The growth for the survey and research business over the same quarter in 2005 was 26%, while our HealthStream Learning Center product grew at approximately 21% over the same quarter in 2005. Our pharmaceutical and medical device-based business declined over the same quarter of 2005, primarily associated with the live event trend that we noted in our press release.

Total revenues reflected a split of approximately 86% hospital-based revenues and 14% associated with our pharmaceutical and medical device-based business during the third quarter of 2006. This compares to an 81%/19% mix during the third quarter of 2005.

Comparing to the second quarter of 2006, revenues declined by 743,000, resulting from seasonal declines in our pharmaceutical and medical device-based business as well as seasonally lower survey and research business revenues.

Live events declined by 477,000, while the survey and research business declined by approximately 158,000. These declined were offset by over 170,000 in continued growth in our HealthStream Learning Center subscriber base. The revenues split also shifted, based on the seasonal trends, from 78% hospital-based to 22% pharma/med device during the second quarter of 2006, to the previously mentioned mix of 86%/14% during the third quarter of 2006.

Our gross margin percentage improved over both the same quarter in the prior year and the second quarter of 2006. Our improvement over the second quarter resulted from the change in revenue mix, as I mentioned, reflecting growth in higher-margin platform-based revenues, as well as improved margins associated with our platform-based products when compared to the same quarter in the prior year. When comparing to the second quarter of 2006, the improvement again resulted from the shift in revenue mix. The seasonal declines in revenue associated with the lower-margin pharmaceutical and medical-based products, including the second-quarter loss associated with a specific live event, together with a growth in percentage of revenues associated with our HLC product, led to improved margins during the third quarter of 2006.

The third quarter of 2006, compared to the third quarter of 2005, did reflect increased expense associated with share-based compensation, as Bobby mentioned previously. This expense is spread across all expense categories. As well, we invested in additional product development, sales, account management and executive personnel.

Increases in amortization expense during the third quarter related primarily to introduction of new content offerings. These increases were all partially offset by increased interest income that was associated with both higher cash and investment balances, as well as improved rates of return. Overall, these changes resulted in net income of 474,000 or $0.02 per basic share, which again includes 166,000 of share-based compensation expense during the third quarter of 2006, compared to net income of 554,000, which rounds to $0.03 per basic share for the third quarter of 2005.

When comparing to the second quarter of 2006, the third quarter reflected modest spending increases associated with product development personnel. Spending on sales and marketing was lower due to the seasonal impact of our annual eLearning Summit, which occurred during the second quarter of 2006.

Depreciation and amortization expense increased due to the full-quarter impact of new content offerings, while other general and administrative expenses increased due to the full-quarter impact of the addition of our executive team member.

Net income improved during the third quarter of 2006 from 289,000 or $0.01 per basic share during the second quarter to 474,000 or $0.02 per basic share for the third quarter. Cash and investment balances were comparable between both September 30 and June 30, 2006, which reflect capital spending at a rate consistent with generation of operating cash flows. These balances are favorable to the 9.9 million of cash and investments that we had at September 30, 2005. Taking into account the full 7 million of availability under the line of credit that we put in place during July of 2006, we now have more than $20 million of availability to invest in growing our business going forward.

Moving onto other metrics, during the third quarter of 2006, we improved our Days Sales Outstanding, or DSO, to approximately 54 days, which reflects an improvement from the same quarter in the prior year of 57 days, primarily related to improved collections from our hospital-based customers. When compared to the prior quarter or second quarter of 2006, DSO is down from 47 days due to seasonal variation during the second quarter, which is primarily associated with our live event business.

As we move to expectations for the fourth quarter of 2006, we expect revenues of 8.2 to 8.4 million, which represents an increase of 200 to 400,000 or 2 to 5% over the same quarter in the prior year. The increase is expected to result from growth in our HLC subscriber base and to a lesser degree increased courseware subscription revenue. Our expectations do reflect lower levels of revenue from our pharmaceutical and medical device-based business when compared to the fourth quarter of 2005, due to declines in project-based revenues and activity levels. The revenue increase over the third quarter of 2006 is expected to be between 700 and 900,000, or 9 to 12%, due to seasonal growth in our survey and research business and modest growth in courseware subscriptions. We anticipate that this revenue will be partially offset by declines in the pharmaceutical and medical device-based business primarily associated with lower live event revenues.

Gross margins as a percentage of revenues are expected to be moderately higher than the fourth quarter of 2005 but moderately lower than the third quarter of 2006, due to the changes in revenue mix. When we compare to the same quarter in the prior year, we anticipate increased expenses during the fourth quarter, both in absolute terms and as a percentage of revenue, as we invest in product development, sales, account management and administrative personnel, and increase our marketing spending. We also anticipate share-based compensation of approximately 150,000, which as we previously discussed is new in 2006.

When compared to the third quarter of 2006, we anticipate increases in absolute terms associated with product development and sales and marketing expenses. However, we anticipate that these expenses will decline slightly or be comparable with our experience during the third quarter as a percentage of revenue, due to the increasing revenues during the fourth quarter. We do anticipate increased depreciation and amortization expense associated with capitalized feature enhancement and content but anticipate comparable general and administrative expenses, which will reflect a lower percentage of revenues during the fourth quarter of 2006.

As we mentioned in the release, net income is expected to approximate $0.02 to $0.03 per basic share, a decline from 2005 levels, due to increased investment in product development, sales and account management personnel. When compared to the third quarter, net income is expected to be comparable with or slightly favorable to the third quarter as we work to balance additional investment to accelerate our revenue growth with maintenance and profitability. We expect full-year revenue growth of 15% with net income comparable to levels in 2005. But please keep in mind that 2006 results reflect an incremental 700,000 of share-based compensation that is not comparable with 2005.

I will turn it back to Bobby for a few closing comments.

Thank you, Susan.

There's three or four categories of updates I'd like to provide. The first is a key contract renewal with HCA. We couldn't be more excited that the six-year ongoing relationship that ended with a prior contract was renewed into a new four-year contract. We look forward to the next four years of growing the relationship with Hospital Corporation or HCA here in Nashville.

Secondly, in the category of people, we've added several important individuals to the Company that strengthen both our Board and our operating team. Gerry Hayden and Dale Polley, as we mentioned in our press release, have both joined our Board, bringing deep financial expertise, and both have been added to our audit committee.

In the area of sales, we mentioned a few quarters back we were on a nationwide search for a sales leader. We're happy to announce that Bruce [Brandes] has joined us as our new Vice President of Sales. Bruce brings about 17 years of experience in selling software and solutions to the healthcare industry. We look forward to his leadership over our sales teams and sales force.

Another category I'd like to cover are products. I think we've mentioned, in the last conference call, that our next generation platform is due to be rolled out here in the fourth quarter. While we are just a little bit behind on the deploy, I'm glad to report to you now that our first customers are live on the next generation platform and we are seeing the first initial transactions being successfully completed on our new platform. That's important for many reasons. One, the product has been in development for almost 1.5 years, close to 2 years. Two, many of our new products are dependent upon the architecture provided by this next generation learning platform. So we're really excited to see the teams that have worked on this so hard deliver that product to the market and celebrate the first successful transactions on the new platform. The next several months, we will be migrating customers off the old architecture onto the new architecture.

The new architecture empowers new products, and as I mentioned in the last release, there are several new products to provide updates on, many of which now have their first sales and first order value. For example, our basic life support and advanced cardiac life support pipeline and partnership with [Laredol] has about $290,000 of order value. More importantly, the customers that have signed up for this product are Johns Hopkins and Yale, so we couldn't be more excited that this flagship product has early contract signings and approximately 290,000 of new order value, so that's a good early start for that new product.

In fact, our Community Health Education Center, which is another new platform extension, again based on the architecture of our next generation learning, also had its first customer. In fact, it was built with a customer and Sutter Health, we hope in early January, will move into the utilization of the product and out of the development phase with us. Again, Sutter has contracted for the use of that new product for three years, so we couldn't be more excited to have built that product in partnership with one of our very best customers, Sutter Health.

Also, our virtual class product that we announced at our customer summit has its first customer and we are very excited that we will be working with (indiscernible) Health to deploy the first application and use of the virtual class product, which again was created in partnership with Microsoft.

So all of those three products have new order value on them in the third quarter and prior to the third quarter. We look forward to growing the sales of those products in the fourth quarter and into the next year.

I think I've covered all the important topics that we would like to cover. At this time, I'd like to turn it over four questions. Thank you.

Thank you, sir. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Sean Jackson, Avondale Partners.

Good morning. Concerning the HCA renewal, can you just comment on the differences in this contract, both whether it be price or scope or whatever metrics you choose to communicate with, versus the old contract?

Sean, we tried to put everything that we can put in the release that indicates those things for you. For example, we've announced that our fourth-quarter contract value, which is a blended number across all the renewals in the quarter, will be in the range of 70 to 80%. That, again, we don't report on any individual contract that is deemed not to be material, and we don't discuss its terms. However, you can see the impact of the HCA renewal, which we mentioned in our press release, in that blended rate across all the expected renewals for Q4. So there you can get some sense for the pricing issues regarding the HCA contract.

Sean, one thing I would mentioned on that, just quickly, the 117% annual contract value renewal rate that Bobby mentioned during the third quarter is specific only to the HLC product, so while we did guide for the fourth quarter of 2006 that our expectation for that metric would be reduced to the range of 70 to 80%, I would also highlight that the trends that we've seen so far this year, for the remainder of the business, actually reflect pricing increases relative to our HLC pricing platform.

Okay, thanks. Also, just the new products that you mentioned, you mentioned contract value. Is that value spread out over 12 months? I mean, how do you define that?

Actually, it can be spread as much as three years and sometimes more, so when we look at new order value, we take the, it's an internal metric except we wanted to report on these few products. It represents the total contract value, so someone who would enter into a three-year, $10,000 a year contract, we would call that 30,000 of new order value in that quarter, which would be spread ratably, monthly over the three-year contract as far as revenue recognition, typically.

Okay. Now, which one of those new products do you anticipate as having the biggest market, and which ones are you seeing I guess the most near-term adoption?

I'm excited about all of them, and there's a fourth one, too, which is our new courseware library that we call a digital med clinical courseware series. The one that's showing the earliest, the most traction the earliest and also the most interest from what I will call marquis or thought-leading customers is definitely the product that we've done in partnership with [Laredol] and American Heart Association, AHA. That product is a fascinating simulation-based training product that teaches basic life support. Rough numbers are that up to 1 million people a year in the hospital and clinical settings have to go through BOS and ACLS training. So with early adopters like Yale, we are hopeful and optimistic that we can start to penetrate that opportunity.

The contract value on a per-person basis can be anywhere from $30 to $60 depending on size and scale of commitment, so we look at that as a great opportunity over the next few years to penetrate that one million person a year that's going through that training, so we are most excited about that product and the partnerships that surround it. [Laredol], a very strong company and American Heart Association, the most recognized brand on this topic.

Second to that, only second to that would be the Community Health Education Center. While we are a little less certain of the market demand for that, we are excited because it has been built based on customer demand, so we will see more about that but again, we've got our early adopter in Sutter Health. It's good to see such a large health system leading the way. This product empowers organizations like Sutter to manage the training that they offer to the community and not just to their employees. So, if they offer birthing classes or (technical difficulty) in their hospital to the community, this software product allows them to extend their reach to the community. It's often viewed as a marketing extension to do those kind of programs. We're hoping we might even tap into the marketing budget for the purchase of this product, as opposed to the current education budget.

So those two I'm going to lead off with and say are promising for Q1 of next year, and we hope to see more traction on them in Q4 as well.

All right, thanks. Good quarter.

(OPERATOR INSTRUCTIONS). Vincent Colicchio, Noble Financial Group.

Nice quarter. On the DMR side, you continue to see pretty healthy growth. What in particular is driving that? I'm assuming the growth has been embedded in your expectations when you bought the company.

It has, and I'm going to turn it over to Eddie Pearson. We're so excited to have added Eddie and his experience in the information business. The team that he is leading is so very strong that we continue to gain ground. I will let Eddie tell you a little bit about how we're gaining ground and how we are positioned there.

Vince, good question. We are very excited about the research and survey business. We think it's a great fit for HealthStream. As it was acquired and has continued to be, as you can see from the results, it's a profitable and growing business. Some of the drivers that continue to fuel that is the fact that we start off with a great customer base, and the results that we measure, the information that we provide is being delivered to the suite executives, so that means that the information we are providing is very strategic to the hospitals that we serve.

Research is certainly a significant part of their quality initiatives for hospitals. That's exactly where HealthStream wants the impact of our training felt, so we feel very good about being at the highest level organization and as part of an initiative that has a lot of focus and has a lot of resources being applied when it comes to trying to improve the quality of our customers.

We think that the research serves as a valuable source of information for our learning programs as well, so we're looking ahead as to what's going to continue to make this an important part of our business. We've recently received approval for a pilot of a survey insert for physicians to provide feedback regarding the need for specific clinical training, which HealthStream may offer today or need to offer tomorrow. So we feel like this is going to continue to be not only important in its business in and of itself, but an important match over to driving and providing a good guide for the type of training programs that are going to be important to our customers.

Our growth is coming from both existing customers and from new customers. We are also pleased. While we are very happy about the fact that we serve some of the largest health systems in the country on the research business, we're starting to also add some of the smaller health systems in our customer base as well. So we've got several things that are working in our favor. Research just continues to be an important part of our hospitals' strategic process, and we think that it's a continued area of growth in and of itself and we think it will continue to pay dividends on the learning side as well.

Can you talk to cross-sell you're seeing with the HLC side?

Yes, there has really been a limited amount of that. I think, wisely, the HealthStream allowed for some time after the acquisition for the people in both organizations to become familiar not only with each other but also with the businesses themselves. This opportunity that I mentioned did come from a cross-selling opportunity, so cross-selling and/or product development opportunities are going to come more, particularly now that we have strong leadership. As Bobby mentioned, we are excited about Bruce Brandes coming on board, and our planning process, going into 2007, is going to include probably a lot more deliberate cross-selling planning.

Okay. The margins were better-than-expected, and I know a lot of that was mix. Is there anything you could say, Bobby or Susan? Are you saying pricing contributed to that?

I would characterize that pricing has been a bit favorable from a renewal-rate standpoint. Again, the 117% annual contract value renewal rate reflects pricing improvement, and I think, as I highlighted, the improvement during the quarter was a mix of the revenue mix itself and then also a couple of point improvement in margins associated with our platform-based revenues, which I think is reflective of the pricing gains that we've picked up, as evidenced by that annual contract renewal rate.

The pricing improvement on renewed contracts, is that a function of clients electing for more of a premium package?

What I would reinforce there is that renewal rate is specific only to the HLC platform, so it's not reflective of expansion of additional services, like add-on of offering, offering pro or additional content bundles. That renewal rate is specific just to the base platform. We are working on extending our metrics to provide a better measure of overall revenue on a user base.

You've talked about the importance of your strategic accounts team. Now, you've hired a new sales director, which is very important, obviously. Are there any plans to expand the strategic accounts team? Where do you stand with that?

Well, of course, we are in the budget-planning process for next year, and I would be surprised if Michael Sousa, who runs the strategic accounts team, didn't come to us with growth plans. So we're looking forward to working through with him the budget planning process. Yes, I would expect that we would like to grow that team as well as many of the other areas of the Company. But it has proven an important team to grow (indiscernible) with our key accounts, and I hope to see it expand next year.

All right, thanks. I will go back in the queue.

(OPERATOR INSTRUCTIONS). Kevin Liu, B. Riley & Company.

I just had one question on the expense side. Obviously the share has been your investments in the business; you guys are rolling out your platform next quarter. I'm just wondering. Looking beyond Q4, are you guys pretty much set in terms of making this level of increased investments, or should we expect to continue seeing this level of investment going into fiscal '07?

Well, we are working on our budgets, as I mentioned, and so we will see. Of course, in a company like this, we have more ideas than we could actually possibly fund to grow the Company, which is great. I'd like to see us continue to invest heavily in R&D and design and build new products, like the three or four that we talked about earlier in the call. We see an opportunity, a parade of opportunities of new products, so I would imagine that our investments will continue and possibly increase. We try to keep it in proportion to our growth in revenues, though.

Okay. The last question, just on the acquisition side, I haven't heard much in terms of any updates there. You guys have obviously been investing in your organic business right now. But is there anything you guys are looking at there, any initiatives that you think might add or complement HealthStream's current business?

Here's what I would say about that is that we have announced, throughout the year, the whole year, that we are actively looking and building a pipeline of acquisition opportunities. Also along the way this year, we have strengthened our ability to execute on that if we happen to find one that fits. You can see that, with our line of credit that is put into place, the 7 million there, the 13 million of cash, we are well-positioned. However, we are obviously being careful and making sure we have products and services that grow our business and fit well. So the best I can say now is that we are actively looking; we are actively building a pipeline; and we are financed well enough to execute on a reasonable acquisition, at least relative to our size. So we will report on acquisitions as we close them, but you should know that we will continue our search for business and product lines that add value to what we're trying to achieve here.

Thank you. There are no further questions.

At this time, then, I'd like to thank everyone for their attendance and congratulate our team and our company on our progress, and we look forward to reporting our year-end results very soon. Thank you and have a good day.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.