HealthStream Inc (HSTM) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen. And welcome to the HealthStream second quarter 2007 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 for HealthStream. Thank you, Mr. Frist, you may begin.

Thank you. Good morning, and welcome to our second quarter 2007 earnings conference call. Also in the room with me are Susan Brownie, Senior Vice President and CFO, Art Newman, Executive Vice President, and Mollie Condra, Senior Director of Communications, Research, and Investor Relations. Susan, would you read the forward-looking statement, please?

Certainly. This conference call will contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause 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. Without a doubt, the second quarter of 2007 has been one of the most -- the busiest in corporate history. And I'm going to cover two or three categories in different areas where we've been busy developing and growing the company.

The first is a quick report on the update of the creation of HealthStream Research. We're about 120 days after the acquisition of the Jackson organization and the official announcement of the creation of HealthStream Research. And the teams of the formerly DMR and the Jackson organization have performed tremendously well in integrating the operations of those to form the new HealthStream Research.

We're beginning to see some operating efficiencies. If you remember, we said that the two companies are highly complementary in their operational strengths. We're now beginning to see work that was normally outsourced from one office being sent and executed at the other and vice versa, taking advantage of the relative operational strengths of both companies.

And now, of course, to the market, we're just one company, HealthStream Research, and beginning to get that brand and message out to the market, and have noted some wins in the quarter as well as HealthStream Research. So the progress report on the integration of the Jackson organization, the formation of HealthStream Research, I give a thumbs up to all the team members across the board and the leadership of Eddie Pearson, the President of HealthStream Research, for his accomplishments in the first 120 days.

The second, and it's essentially also an all-company effort, is the progress we're making operationally on the migration of customers to our Next Generation platform. This whole company effort has been an amazing process to watch, a learning process for our company. It has come with some extra expenses along the way and extra investments. But at this time now, with 85% of the customers migrated, the whole company's beginning to feel the confidence of being through more than the majority of the work here.

And in addition, for the remaining 15% to be migrated, our experience levels are very high, and that's beginning to be reflected in our metrics operationally. For instance, we had over a 98% answer rate in under 10 seconds on the call center for the first week post-migration. This is an incredible improvement in the service levels to customers, and we're beginning to have that confidence that we're making incredibly good progress with our migrations.

The third major effort that's been going on, of course, the second quarter is always the quarter of our Learning Summit. And to have all of that happen in the middle of this acquisition and the integration of TGO, the creation of HealthStream Research, the migrations of our customer base, together, 550 of your best customers in Nashville for a week and share our progress operationally, it was exciting to see our new progress being announced there.

Nothing has stopped our new partnerships from coming on board and new products that we're preparing to launch. We began the preview of our Competency Center. We've announced new partnerships with organizations like Lectora, a cutting-edge authoring organization. So it was exciting to have our seventh annual Learning Summit on May 29th through the 31st in Nashville. To have 550 customers come and be able to show them our new products, services, our new partnerships, and in general, our progress as a company.

It's also obviously a period of transition, with the announcement of Susan Brownie's resignation. We're sorry to see her go, she's been a very strong contributor to our growth for over seven years. We're excited to learn more about where she's going and where she'll be growing her next steps. We're also very fortunate to have Art Newman, our former CFO for over five and a half years to be able to step in and ensure a smooth transition of services. So good fortune for Susan and good fortune for HealthStream to have Art on board. We congratulate her for her contributions, and we're proud of her contributions over the last seven years.

And again, Art's in the room here, and this'll be Susan's last official presentation as CFO, and we look forward to hearing from Art in the next presentation, stepping back in as CFO from his 18-month hiatus.

Also, it's important to note that even with all that activity, nothing stopped our sales teams from winning new business, landing one of the largest health systems in the country to come on board with HealthStream in the midst of all that was going on. It was quite an accomplishment, and I would like to compliment Michael Sousa, our vice president over strategic account development and his entire team, and the efforts that went behind swaying this significant, one of the largest health systems in the country, to switch platforms and come on board with HealthStream as a partner. Quite an accomplishment again, given all that was going on, and most excited to see that and other developments like Montefiore all occurring in the second quarter.

What a busy time it's been. And all of that, our company profile has certainly changed with a 47% year-over-year increase largely attributed to the acquisition, but nonetheless, the scale, we think helps our company overall. And to see quarterly revenues over $12 million for the first time, certainly a record for the company, and up 47% over the prior year while also delivering improved net income over the prior year same quarter and an improved EBITDA performance over the prior year same quarter.

So again, it's hard to imagine a busier quarter for all of HealthStream. I'm proud of all the execution given all the challenges, and the steady progress on all fronts. Looking forward to a bright second half of the year, and we'll now move into a more detailed analysis of the financials with Susan Brownie.

Thanks, Bobby. As we've noted historically in our releases in the last call, we've begun in 2007 presenting our results by two distinct segments, HealthStream Learning and HealthStream Research. During the second quarter of 2007, our total revenues increased more than $3.8 million, or 47% over the second quarter of 2006, which included improvement in both HealthStream Research revenue of $3.7 million that was primarily associated with the Jackson organization acquisition as well as growth in HealthStream Learning.

HealthStream Learning increased by $105,000, which included 10% growth, or approximately $350,000 in revenues associated with our HLC subscribers, and a 31% growth rate in courseware subscriptions, or approximately $310,000. But those increases were offset by declines in our live event revenues due to a biannual live event that occurred in 2006 and was not repeated in 2007. This growth is consistent with our guidance and the trends that we've highlighted, which reflect continued expectations of growth in our internet-based subscription revenues, both our HLC platform and courseware subscriptions.

Our gross margins were impacted by the revenue mix, both within HealthStream Learning and HealthStream Research. HealthStream Learning margins improved due to the decline in live events, which generally are lower margin items, while HealthStream Research revenue mix contributed to lower margins associated with higher direct expenses.

When we compare our results to the second quarter of 2006, net income of $0.02 per diluted share, or $425,000, improved over the 2006 levels of $289,000, or $0.01 per diluted share due to the revenue growth, net of cost of goods. But that was also offset by slightly increased personnel expenses, including individuals both associated with TJO and the remainder of our business.

We have experienced as well increases in depreciation and amortization associated with the intangible assets from the TJO acquisition, as well as capitalized software feature enhancements and software license amortization.

The second quarter also reflected positive experience with renewals. We continue to reflect a strong level of customer commitment, with our subscriber rate reflecting a 98% renewal rate. Our annual contract value renewal rate also continued the trend that we've noted historically, reflecting a renewal rate of 113%, which reflects pricing improvements during the quarter.

Another operational metric that we've historically highlighted relates to days sales outstanding, or DSO. This is one area where we do have room for improvement and are bringing additional resources during the third quarter. DSO increased to approximately 57 days, which reflected an increase over the same quarter in 2006 due to slower collections from both HealthStream Learning and HealthStream Research. Again, we are taking steps to improve this metric in the third quarter.

Finally, we successfully increased our availability under the line of credit from $10 million at the end of the first quarter to $15 million just this week. The terms remain the same and include a 10 basis point commitment fee and favorable interest rates.

As we also mentioned in the release, we expect third quarter revenues to approximate $12 to $12.2 million, with $4.5 to $4.7 million of the increase when compared to the third quarter of 2006 resulting from additional TJO revenues. This does include growth over historical TJO levels, but also reflects a mix of revenues of approximately 55% HealthStream Learning and 45% HealthStream Research, which reflects continued growth in HLC and courseware subscription revenues, but does reflect quarterly variation reflecting the seasonal declines and seasonal variation that we have in our HealthStream Research business.

Because of changes in revenue mix, we do expect gross margins during the third quarter to be modestly lower than our experience during the second quarter of 2007, as well as the third quarter of 2006. With the exception of a modest increase in depreciation and amortization associated with increased software licensing expense, the remaining changes in expense categories virtually offset resulting in our expectation of net income ranging from $0.02 to $0.03 per diluted share for the third quarter.

For the full year, we've maintained our top line guidance of 40% to 43% growth, which approximates a range of $44.5 to $45.5 million of revenue. The trends that we've noted for the third quarter are anticipated to continue through the end of the year, which is expected to bring us to fully diluted EPS of 8% to 10% for the full year.

As we noted in the release, these estimates do reflect our expectation of the remaining efforts involved with the remaining transition associated with our Next Gen platform, which are consistent with our previous guidance. Bobby?

Thank you, Susan. I think, again, on the detail of our release, probably the best thing to do at this time is to turn it over for question-and-answers. Go ahead, Moderator.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question is from Mr. Green with Avondale Partners. Please proceed with your question.

Good morning, guys. A few questions about the migration. Are you still devoting a lot of resources to clients that transitioned in the first phase, or are they primarily focused in on the more recent migration?

Well, I guess it's a little hard to tell. All the calls come into one call center. And now there are essentially twice as many people to take calls from about the new product, and so there's been an increase in overall calls about the new product, the new platform. I would say that we're fairly well distributed, supporting all 85% of those customers, handle their calls.

One of the nice trends is that the nature of those calls is different so far, post the last migration, We're able to answer their questions faster and assist in their transition faster. We find a meaningful portion of the calls are orientation and training type questions, and few are about issues with the product and systems itself. So I feel we've made solid progress with the underlying application. We made really good progress with the process of the migration itself. Without a doubt, our systems team executed one of the smoothest transitions as a six day process. And this one, just by all accounts, went much smoother.

The resource levels, we still have the same number of temporary workers overall across the company that are supporting. Of course, they're more experienced now and able to field calls and help us faster. So we have not seen an increase in the investment rate in temporary workers or temporary support staff. In some cases, we've seen a slight decrease already. So that's how I would characterize our overall investment. Generally a smoother process.

Okay, great. Just a quick follow up to that. You had alluded to the onerous requirements in the first quarter kind of requiring everybody across the organization to pitch in and help out. Would you say, particularly with sales, are they now able to refocus back on their day-to-day jobs and kind of get away from customer support, or are they still helping out?

They're definitely helping out, but much more time spent proactively. You can see it in our sales efforts and the new accounts we're winning. So we created something called the advocacy program about I guess a little over two months ago, and that program involved the salespeople calling existing customers. And that took more of their time than lately.

So the advocacy program is still in place, but I'm seeing a meaningful shift in their time towards the sales efforts and less toward support efforts. We had all kinds of tools along the way, that advocacy program with sales people involved, we would take pulse checks of customers that involved weekly calls. Some of those things are still going on, but calls are just far less intense with less frustration by customers, and we just see steady progress going. So I would say the sales efforts are beginning to resume, and attention is shifting towards the future.

Have you seen any significant client departures due to migration issues?

We have not to date, no.

And finally, can you comment a little bit on demand for new products, particularly the Competency Center and content offerings? Particularly in light, and in the context of the recent migration and whether or not that's having an impact on demand, considering that most of them, they're dependent upon the Next Gen platform.

It's very exciting actually, because prior to the release of the Competency Center, we already have advanced orders, which are signed contracts. Susan, what's the NOV?

Just under $800,000.

Of $800,000 on this new, yet to be released product. Those are signed contracts due to begin execution in the fourth quarter and first quarter of next year. And those are in excitement of the product around announcements at Summit, so it's great to see. And some of that is from one of our larger strategic accounts. So we're excited to see them make a commitment, and looking forward to rolling out this new product with advance orders of already $800,000 of signed contracts.

One last question, if I could. Looking at especially the last couple of contracts you've announced, looks like you might be getting more traction with not-for-profit providers. Would you say that's accurate, and could you comment a little on why you might be having more success there?

Well, we are the market leader on learning platforms in hospitals, and most hospitals are not-for-profit in that sector. And so generally, our population is fairly representative of the population of hospitals in general, with a mix. I guess it's probably true to say we did have a little more earlier success with the larger for-profit. We definitely have a strength in the Catholic Health Systems, with Bon Secours and Trinity and Providence, and CHRISTUS. And the recent win of CHI means that we really have incredible penetration into the Catholic Health Systems as well. So yes, I would say that our mix will always be fairly representative of the actual market, given our penetration of approximately 30% of the market. But the recent wins do reflect a few more in the not-for-profit sector.

Okay. Thanks very much for taking my questions.

Thank you.

Thank you. Our next question comes from Mr. Colicchio from Noble Financial Group. Please proceed with your questions.

Good morning, guys. Nice quarter. What can you tell us about the Laerdal product? How does that demand outlook look for the second half?

Well, let's see. One of the Laerdal products is launched and performing very well, and the other has yet to be launched. And we're working hard to catch up with our partners to get that launched. It looks like -- is that NOV, Susan?

Yes.

The newer value on -- which one is it?

Laerdal products, that's primarily BLS.

The BLS product is right at $1 million. And so we feel good about its progress, given its recency as a product. And it's got a lot of components to it, the mannequin interactivity, the simulations, so we're excited to see the early uptake of that product. And we really think it's a product of the future over the next few years, and to see it doing so well this early is, I think, a good sign.

So when does that NOV get delivered? Over what period of time?

There's a large portion of that NOV that's associated with one large strategic account, and that is a multi-year deal that will be kicked off during the second half of 2007.

And just overall expectation on signing more clients in that side for the second half?

On that product?

Yes, on the BLS product.

Vince, this is Art. We have a number of pilots out. Pilots are the expression that we use when large organizations want to cast out the efficiency or the ability to take on one of these new products. And as Bobby said, this thing, it's got a couple moving parts, the simulations and the mannequin components. So several large institutions are looking at it on a pilot basis, and we fully expect that one or more of those would come and place an order later this year.

And typically, those orders are fast starts. In other words, they would start to adopt a product in the year as opposed to any sophisticated implementation that might take us into next year before we realize any revenue. So I think we're pretty excited about the BLS product.

What's the size of one order? What's the range?

They range anywhere from -- the base minimum order is $9,800. And as Susan said a moment ago, we have one large order that was a principal amount of what the NOV was for the second quarter. So we have one that's been adopted throughout a large institution around the country.

Susan, could you give me some more insights on the live event business? If we exclude the biannual event, how did they perform in the second quarter, and what does it look like moving ahead sequentially into the third quarter?

We did highlight that the live event business is down about $540,000. And if you track through our historical releases, the one event that was a biannual event approximated that amount. So it's a little bit higher than that amount, actually. It's about $570,000. So if you exclude the live event business, I'd say that we're virtually comparable in the remainder of the business, which, if you recall, that's kind of a pharma med device piece of the business that does contain some internet-based content as well as other project-based services.

And on the DSOs, should we expect an improvement in the 3Q period?

I would highlight that we're bringing additional resources on board, actually have someone starting on that this week and would anticipate that the efforts would be concentrated over the next 45 to 60 days. So very often, those issues have a tail on them that you can get some quick improvement, but I would probably caution that into Q4 and not promise results directly for Q3.

Thank you. That's all my questions.

[OPERATOR INSTRUCTIONS] Thank you. There are no further questions at this time. I would now like to turn it over to management for closing comments.

Thank you. We look forward to the opportunity to update everyone on the third quarter. We've got our guidance in place, our teams are energized for the second half of the year, and looking forward to executing and reporting on the third quarter soon. Thank you, and that concludes our presentation.

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