HealthStream Inc (HSTM) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the HealthStream, Inc. first quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. A brief Q&A session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. It is now my please to introduce your host, Mr. Robert A. Frist, CEO. Thank you. Mr. Frist, you may begin.

Thank you. Good morning, and welcome to our first quarter 2007 earnings conference call. Also in the room with me are Susan Brownie, SVP and CFO, and Mollie Condra, Senior Director of Communications, Research and Investor Relations.

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

Certainly. This conference will contain forward-looking statements regarding future events and the 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 those forward-looking statements are contained in the company's filings with the SEC, including forms 10-K and 10-Q.

Thank you, Susan. Our primary goal at HealthStream is to support healthcare organizations as they improve the quality of healthcare by providing insight through research and improved performance through learning, and if I look back at the last 90 days and forward to the next 90 days, that period represents a period of great opportunity, and some challenges as well, and we're going to spend the next few minutes going through both of those.

On the opportunity side, we have a host of new products lined up for this year, we have our upcoming summit, we have a new platform we're rolling out to customers, and we have an acquisition, which also supports the launch of our new business unit, HealthStream Research. We'll talk a bit about those in a second. On the challenges side, it can be summed up with really one word, which is "migrations." We're moving customers from the old platform to the new platform.

Before we dive into more detail on both those areas, let's go and look at a few metrics for the quarter. Overall, our quarterly revenues were $8.1 million. They're up 8% over the same quarter in 2006. We delivered a net income of $45,000, with an EBITDA of approximately $900,000. We added 27,000 net new users in the first quarter that were implemented to our core Learning platform, and we added new customers across both Research and Learning, a list of them including the University of Wisconsin Hospital and Clinics on the Learning side and ParadigmHealth on the Research side of the business. So we had a good quarter of new customer acquisition and implementations and delivered a net income in the quarter as well.

Let's look back at the acquisition and the opportunities for the quarter. The Jackson Organization was acquired towards the end of the quarter, a strong organization based just outside of Baltimore, in Maryland. We added strength, capacity and capability to our existing Research business. We entered that business with the acquisition of GMR about two years ago.

Combined, the now HealthStream Research business has a business with 1,100 healthcare facilities across the country, and they focus on the support of measuring -- creating insight about patient experiences, workforce engagement, physician relations and community perceptions of hospital services. We believe that this research provides us a roadmap for organizational workforce development. In other words, you can't really improve what you can't measure, and now, with HealthStream Research, we have a very strong measurement capability in the company, which helps identify problems that can be addressed through our Learning group.

So we're excited about this expanded capability, excited about the acquisition, and we're just a little more than a month into the acquisition and feeling great about the progress, led by Eddie Pearson and the whole team of new executives that came onboard with the acquisition of The Jackson Organization, as well as the combining team from Data Management and Research. So, again, a great opportunity in front of us with this acquisition and the formation of HealthStream Research.

On the challenges side, the migration has proven to be more difficult than initially anticipated, although we're making very steady progress as we plan for the next set of migrations, which we have deferred by about 90 days to come after our customer summit. We'll be using our customer summit as a time of training and orientation so that we can better orient the next batch of customers to the next migration set. So we have had a challenge there in that we've had a deferral, and we decided we wanted more planning time as we lead into the second half migration. In addition, we're adding personnel resources and some technology to support the first half migration, and staff and temporary workers, to push us through this next 90 to 100 days.

In general, we're encouraged by our progress, but again, it has been a challenging time as we've moved over 700,000 subscribers from one platform to another. We're confident in our team's ability to execute these migrations and support all of these customers on this new platform. And I want to remind everyone of the power of this new platform. We've invested in it for years, and it is designed to be an open architecture one that allows us to scale and add new features more rapidly and bring more benefits to our customers in a more expeditious manner as we move forward.

So in general, if we look back and forward, we say it's a period of opportunities and challenges. I think I've outlined both of those for you. We are challenged but excited as we lean into the second quarter.

At this time, I'd like to take a more detailed financial look, with Susan Brownie providing the financial color.

Thanks, Bobby. Because of the changes in our business during the first quarter of 2007 and our focus on both healthcare organizations and the professionals that work in the healthcare industry, going forward, we're going to be presenting the business along two groupings: HealthStream Research and HealthStream Learning.

So during the first quarter of 2007, our increase of $580,000, or 8%, over the first quarter of 2006 included gross of $344,000, or 27%, from HealthStream Research and $235,000, or 4%, from HealthStream Learning. HealthStream Research growth came from the acquisition of TJO, as Bobby mentioned, which we completed on March 12, 2007, while the growth in HealthStream Learning revenues resulted primarily from our Internet-based HLC subscriber base, as well as incremental courseware subscription.

We did have pressure with regard to gross margins, and those margins were impacted by the revenue mix within both HealthStream Research and HealthStream Learning. HealthStream Research margins were lower than expected because of changes in revenue mix, which reflected higher usage of outsourced personnel for telephone-based surveys in our existing Research business, as well as the addition of The Jackson Organization's call center operation. HealthStream Learning margins were also impacted, albeit more modestly, as a result of increased royalties paid associated with courseware subscription revenue growth.

When comparing to the first quarter of 2006, net income declined due to higher amortization associated with feature enhancements and content, mainly next-gen platform and digital [inaudible] content, including, as well, higher personnel expenses for product management and general administrative functions, including individuals that were associated with both our existing business and The Jackson Organization. We've also experienced an increase in costs associated with compliance in our status as a public company.

Our renewal experience for the quarter reflected a strong level of customer commitment, with our subscriber rate reflecting renewals of approximately 95% and our annual contracts value renewal rate continuing the trend that we noted in 2006 of annual contract value renewals in excess of 100%, with the first quarter of 2007 coming in at 102%.

Our DSO, or day sales outstanding, approximated 75 days, but was somewhat skewed by the impact of the TJO acquisition. The calculation reflects the receivables balance without adjusting the average daily revenues for the quarter as well. Excluding the impact of the TJO acquisition, DSO was comparable at 60 days for both the first quarter of 2006 and first quarter of 2007.

As Bobby mentioned, we do expect revenues for the second quarter to improve as a result of the TJO acquisition, with revenues approximating $11.6 to $11.8 million, with $2.8 million or $3 million of the increase coming from the addition of TJO revenues. We expect our second quarter revenue mix to approximate 45% Research and 55% Learning, but do anticipate that future quarterly variation will reflect the seasonal cycles in our business that we've experienced historically. Gross margins for the second quarter are expected to approximate our experience during the first quarter of 2007, but our expectations reflect improvement over the second quarter of 2006.

As we noted in the release, we have increased the resources focused on our next-generation platform transition, both to support transition customers and also to prepare the remaining customers that we are scheduled to transition during the third quarter of 2007.

Our updated expectations reflect an additional $300,000 of spending during the second quarter compared to our original guidance, which has resulted in a revised net income range for diluted net income per share of break-even to $0.01 per share. We have maintained our expectations with regards to the full year, reflecting top-line revenue growth of 40 to 43%, which includes the impact of The Jackson Organization.

We anticipate completing the next-generation transition by the end of the year. Our expectations do reflect an increase in expense of approximately $800,000, as we noted in our release, associated with the incremental next-gen resources, but we believe these to be an investment in our future growth. Giving effect for this additional spending, we've revised our expectation for net income per diluted shares to a range of $0.09 to $0.11 for the full year.

Bobby?

Thank you, Susan. All across the company, our teams are working hard to take advantage of the opportunities delivering successful, great events like the Association of periOperative Registered Nurses Congress, which was held on March 11th through the 15th in Orlando, Florida, another very successful event with teams of HealthStream employees working hard to make sure it was a successful event for our customers.

Also, across the company, of course, people focused on the migration and preparing us for the next set of migrations to occur after our customer summit, and there's nothing like our customer summit to bring and orient our whole company around the customer and the customer experience, and we look forward to another great summit, where we hope to announce the launch of our Competency Center product and begin to show that new product, which we believe is still on schedule for launch and announcement at the congress, at our own summit. So we have an exciting nine days in front of us as we prepare for the migration and we gear up for our own customer summit.

In addition, our upcoming annual shareholder meeting is scheduled for May 24th, at 2:00 p.m. at our national headquarters, and everyone is invited to attend that.

At this time, I'd like to turn it over to the operator for questions. Thank you.

Thank you, ladies and gentlemen. We will now conduct a Q&A session. [Operator instructions] Our first question is from Vince Colicchio, Noble Financial Bank. Please proceed with your question.

Good morning, guys.

Hey, Vince.

Hi. On the delayed implementation of the platform to your second half, your next group of customers, could you give me some more color there? Is the system performing as expected? Is it clients need more training to understand how to use it? What's going on in particular?

Sure, Vince. Well, first, there is a whole paradigm shift, and so there are over 100 new features in the platform, and there is going to be more training. As we launched our first set of customers, we learned the areas where the changing software was considered maybe more different than originally anticipated, so getting everyone oriented around that, we've increased our efforts on training and support to help everyone get oriented around the new feature sets. We believe that once they get more oriented around them, they'll take more advantage of all those features. In fact, several of the feature sets are already showing great traction. On the actual launch itself, we did experience some problems, both hardware and software issues. We've been attacking those aggressively. The performance of the system, as measured by common metrics like completions and utilization and log-ins, has been consistent or better than the pre-migration period, but that doesn't mean they're not experiencing challenges in certain areas of the application where we had challenges in the first 30 or 40 days. We feel like we're addressing these issues, the software errors that may occur with the teams of people and feel like we're stabilizing and moving forward. I think we experienced all the categories you mentioned. We experienced familiarity as a big change. We experienced some errors associated with migration of data. You have to remember, we're moving seven years of historical data for 500 or 600 customers, and there were anomalies in the data that we had to work out and iron out, and that took some time. And then we're spending a lot of time preparing targeted training around the changes in the application for the next set, so we decided it best to defer, increase our investment to make it an even better experience for the next half, and we think we've done those things at this point.

And could you give us some color on the pent up demand for new products? Is that still at the levels you were at last quarter?

Yeah. I mean, clearly we've had to spend the last 45 or 50 days since the migrations in increasing communication levels with customers, which has distracted the attention of our whole company. We've put our whole company to focus on increasing communication, talking to customers about the change and the change in the software and talking them through the challenges we faced as we corrected them, and so there is a lot of pent up demand. As soon as we can turn our attention towards it, we're excited to do that and launch some of these new products at summit and get our sales force back focused on new products instead of communicating about old ones and the migration itself. So it has been a bit of a distraction, but we think we've maintained our customer relationships with high levels of communication and look forward to summit, where we have several products that are tracking for announcement at summit. So we still remain highly energized; we just had a tough 50, 60 days since the last migration.

And amongst your new products -- the fetal monitoring, the BLS, the Laerdal product, and the Competency products -- do they all still look strong to you as a second half event?

I feel good about all of those. Several of them -- a few of them, like the Competency product, are tied to the new platform, so, again, we need to get through these migrations before we start pushing out those products and product concepts. So several of them are tied to this new platform, and we're working hard to focus on that migration first and then product launches second, but there's a whole slew of products we feel just as strong about. The BLS/HCLS product, the Laerdal [inaudible]. Fetal monitoring, the same way. The Competency Center -- we're actually seeing a few pre-orders, which is exciting because this is pre-launch and pre-announcement, even, on the software itself. We're seeing good interest in that product. You have to remember, we attempted to launch a similar product a few years ago and saw a good demand then, so we're working hard to get this launched and the Competency Center product just right, and we feel good about all that. Again, we just have a period of increased investment, a little bit of a distraction, meaning that our teams are focused on existing customers and communication maybe a little bit more than on new products. But we hope that all changes by summit, coming up here at the end of May.

Okay, thank you. I'll go back in the queue.

Thanks, Vince.

[Operator instructions] Our next question is from Sean Jackson, Avondale Partners. You may begin.

Good morning.

Good morning, Sean.

Just, again, getting back to the migration issue and the transition. Can you just explain the magnitude of the additional costs? And also, how long is this investment going to occur? Is it somewhat temporary, meaning that once you get the migration done and get the training done, then the expenses will drop a tad? Just kind of go through all that with us, please.

Yes. Sean, this is Susan. From a projection standpoint, we focused our guidance really on the next two quarters with regard to those incremental expenses. We've brought in additional personnel that are focused on customer care, incremental training resources, incremental training courses, and also, as Bobby mentioned, working through data migration issues, so very targeted work. We do expect this to be a relatively short termination from a long-term business standpoint, but at this point, we have forecasted roughly $800,000 of additional expenses, with $600,000 of those balanced really over the next two quarters, for Q2 and Q3.

Okay. So into '08, I would think you'd have a more normalized expense structure going, correct?

That's correct.

Okay, great. And I guess on the new products front, have you seen any traction at all, or is all the distraction really hurting the growth there? I mean, if so -- I guess I'll ask it another way. Which of those products do you anticipate being significant the quickest?

With regard to the content subscriptions with APS, and Laerdal as well, we did note a favorable experience with regard to content subscription revenues during the first quarter, so we have seen some nice uptakes, again, on both the APS and Laerdal content. However, again, we are linked in the platforms, and some of the operability of that content on a go-forward basis is linked to next-gen functionality, so expect that that will kick in during the next several quarters. And as Bobby mentioned as well, the Competency product is one where we do anticipate -- we haven't projected significant revenues associated with it for the remainder of 2007, but are very hopeful beyond 2007 with regard to Competency adoption and uptake.

Okay, thanks. And lastly, when is your summit, again?

It is May 29th through June 1st, at Gaylord Opryland.

Okay. All right, thank you.

Thank you.

Thanks, Sean.

There are no further questions in queue at this time.

Thank you. Then we'll conclude the conference, and we look forward to reporting --

Oh, I'm sorry, we do have one question that just popped in. I'm sorry, Mr. Frist.

Okay, go ahead.

That question is from Milt Capps from Nashville Post. Please state your question.

Hi, thanks. I was waiting for others to get out of the way so I could add one. I've got a few here, and you could -- let me just say what they are, and then you can take them as you like. There were a number of troubling conditions in the TJO acquisition, and I'm wondering whether all of the performance criteria and due diligence and things like that are being wrapped up on schedule or whether there are any complications in that. That's one question, if you'd like to answer that now, or I can say the other questions.

Hey, Milt. This is Bobby Frist. You're with the Nashville Post, is that correct?

Right.

We generally don't take questions from media during this time. We plan our media interactions. We'll be glad to listen to a few of your questions and maybe plan another session to address those questions. This is reserved for investors and analysts.

Okay, I didn't understand.

So if you want to go ahead and outline a question or two for us, we'll plan a time to get back to you on those questions.

Okay. Yeah, I didn't understand that, but thanks for taking the questions. I was also going to ask what your basic lessons learned were from the first set of migrations, and then I was going to ask whether bringing in extra personnel to deal with the distractions and what have you -- this included outsourcing to technology firms or call center firms or others -- basically, how you were staffing that, and then also whether, given what you've outlined, you could say whether or not you're likely to be doing any further acquisitions in the next year or two given your focus on the migrations and TJO and other things.

Sure, Milt. I'll give you a little color on those, and then we'll plan another session.

Thank you.

We always have an active pipeline for acquisitions. We never project exactly when we may do one, but I always characterize in these calls that we're working on growth, and as we find companies that fit our business model, we'll try to find a way to make them fit into our organization. As far as staffing these initiatives for the migrations, we use some local staffing agencies, and we've trained up temporary workers that we plan to employ for 60 to 90 days or maybe a little longer to help handle our call center operations, and we, again, have trained a pool of resources there and people and drawn on local resources mostly to get that done. Lessons learned? There have been a lot, but our team has geared up around them, and we've learned a lot of things about how to manage paradigm shifts in software when someone's been used to doing something one way for seven years and it changes, and I feel infinitely more prepared for the next migrations that occur in the next 90 days, as we now have a better understanding of how the first half received those changes, in addition to adding resources to address the challenges with the software itself. But again, we feel we are largely making great progress on that and had to add some local programming resources to get that done. We feel a lot of this is temporary. It's a 90- to 100-day challenge, and we feel like we've already made great progress in both understanding and correcting the issues of the last 90 to 100 days. So overall, while a challenging period of increased investment, somewhat unexpected increased investment, we feel prepared as we move forward, and I believe we'll be a stronger company when we come out of the back side of all this based on those lessons learned.

Thanks, Robert.

At this time, Milt, we'll schedule a time with you if there are further questions for the media, and we do appreciate your interest in our company.

Our next question is from Cris Blackman from Empirical Capital. Please proceed with your question.

Yeah, thank you. I appreciate it. You may have already stated it, but how many FCEs or customers do you have migrated to the new platform?

Approximately half, and so if you look at our numbers of both, say, contracted or implemented -- I guess the implemented numbers -- there are about 1,379,000 are implemented on one of our two platforms. Approximately half of that number have moved, which puts it at about 750,000 have moved to the new platform.

750,000. All right. And how many institutions would that be?

A little less than half of the institutional count. They were some of our bigger customers, and so it's a little less than half, maybe about 600,000 to 650,000 customers have moved, including our largest customers.

Uh-huh. All right. The first sets of migration, would those be the easier set of what you're going to do? I mean, are the additional migrations or the next set of migrations going to be more challenging than the first, or do you feel like what you've learned from the first should make the second set easier?

Well, it's interesting because of two things. One, the customers that have already migrated are generally larger, more system-oriented customers and use our software in a more robust way and potentially in more unique ways, and so there we had issues with data migration, historical data migration, the volumes of data, and so, in many ways, I feel like that was the challenging batch. Now, on the other hand, there are more smaller customers to deal with, when you think about call center operations and that kind of thing, for the second half deploy. The first half deploy were larger customers that I feel are generally more demanding and have higher expectations, so in that way, I feel like we're through the tough spot. However, things like call volume to our call center will probably just naturally go up, because the number of customers will be greater in the next migration. So it is an interesting balance, but definitely the lessons learned will help us. We're already designing highly specialized, targeted training modules for some of the paradigm shifts in the software. In other words, we've learned now what people react to in the software, where they need more information, and we're already designing new programs. This is one of the reasons we delayed it, is to get these new programs in the hands of customers so we'll perform better on the next migration.

Okay. Can you speak of any specifics on maybe the customers who have currently migrated or who have completed their migration? Any success on new premium package or additional products or new revenues you're seeing come in because of the migration to the new platform?

Well, I would say not yet. We've really been in a period of high level communication as we remediate these issues, and a lot of both their attention and our attention has been focused on getting through those challenges, getting the data exactly the way they expect it to be, getting the application running exactly the way they expect it to run, and so I would say while we see interest and we do see in some of our very largest accounts the dialogue returning to our monthly planning sessions about opportunity instead of remediation, I would say it hasn't taken hold financially yet from orders and all. So I'm hoping to have large portions of all this behind us by summit, and then shortly after summit, complete these migrations and turn our attention back to growth and new products. And to kind of further color an earlier question, that Laerdal BLS/HCLS content -- parts of that are tied to the new platform, but the interest in that product remains very high, and we remain very optimistic for that product.

All right. So as far as modeling, we can look more or less towards Q3 before we should expect much additional revenue from the new platform.

That is correct, and in fact, I think that's consistent with what we said even prior to the migration, that we expected kind of this year to be essentially a second half-loaded year from a financial performance perspective.

Okay. Any timing of revenue recognition issues at all?

No. With regard to where we are in the migration, we've not had any cancellations to date, and we do feel like we're in good shape from a customer standpoint with regard to where we are right now.

Excellent. Okay, thank you.

There are no further questions in queue at this time.

Okay. Well, thank you for your questions. We remain excited about our new platform, but we've been through a tough couple months here. I really appreciate the efforts of all of our employees as we organize, improve our operations and improve our service to customers, and I appreciate the patience of our customers as we work through this challenging period. I remain personally very confident in both our employees, their ability to overcome all these challenges, and also remain incredibly optimistic about the company in the second half of the year as we push through these challenges. At this time, we'll go ahead and call a conclusion to the conference, and I look forward to reporting the second quarter results in the near future.

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