HealthStream Inc (HSTM) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the HealthStream third-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 third-quarter 2007 earnings conference call. Also in the room with me are Art Newman, Executive Vice President and CFO, and Mollie Condra, Senior Director of Communications, Research and Investor Relations. Art, would you read the forward-looking statement, please?

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 the actual results to differ materially from those projected in the forward-looking statements. The 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, Art. We're going to keep our update fairly short this morning. We had an exciting quarter; we've got some things to cover on the operational front and the business development front as well. I'll start off with some operational highlights which are mostly self-evident in our earnings release, our detailed earnings release. But if you think about operations and some of the biggest challenges we faced this year, reporting progress against some of those challenges is a highlight of the third quarter.

For instance our transition of our customers to our new learning platform we call the Next Gen HLC is now 95% complete. We're excited to have that task behind us; that's a tribute to the efforts of our staff, team and our customers as well as they worked with us to adopt a new paradigm, the new software and continue to use this new software at rates exceeding the prior platform.

So we are excited to have reached this major milestone of a 95% complete with the migration. There are a few remaining customers with scheduling input from those customers we're going to wait until after year-end surges in use and finish the last 5% in the first quarter of next year. But the vast majority of this task is behind us and will allow our teams to begin to turn their attention to customer orientation and training and customer service on the new platform as we continue to orient our customers to the benefits of the platform and the capabilities of the new platform.

Congratulations to all the teams that helped us achieve this major milestone in the third quarter and we think it's an exciting milestone to reach to get this new platform in place for growth. As you know, many of our new products are tied to the new platform, so we think it sets us up well for next year as we can launch some of our new products tied to the new platform.

If you look at the pure financial metrics, they're also equally strong in the third quarter. A 55% plus -- a 58% plus improvement in revenues on the top line; a 56% improvement in net income over the prior year's same quarter; a 75% improvement in EBITDA over the prior year's same quarter; 77% growth in subscribers, newly acquired subscribers over the prior year's same quarter. So if you look at most all metrics including the cash balance improvement, while making considerable capital expenditure and R&D investments, continue to improve. So overall the third quarter was a pro forma'd quarter for the Company and showed great progress.

Both businesses showed solid progress and Art's going to cover some of the growth metrics for those businesses in just a few minutes. If we think about the learning business and the research business, another exciting milestone was reached for the research business. We completed our first annual HealthStream Research Summit on Saturday, Sunday, Monday and Tuesday of this week, so just coming off of that conference. A very exciting conference where over 120 of our customers for our research business gathered in Nashville with a great energy for the products and services of HealthStream Research.

The leadership of [Jacqueline Franklin] and Christine Gilbert along with Tom Hutchinson and Eddie Pearson made that conference along with several of the HealthStreamers a great, great success. So we congratulate them on that progress and look forward to celebrating the second annual HealthStream research conference this time next year. I'll now turn it over to Art for a few detailed looks into the numbers for the quarter. Art?

Thanks, Bobby. As Bobby mentioned, revenues for the third quarter of '07 were $11.8 million which represents a 58% increase over the third quarter '06. Clearly our acquisition of TJO had a significant impact on this comparison. Although the organic portion of HealthStream Research experienced a respectable 17% growth in the third quarter '07 versus the third quarter of '06.

HealthStream Learning revenues experienced a similar 17% growth in the third quarter of '07 when compared to the third quarter of '06. All of our Internet-based subscription products, which include the HealthStream Learning Center, (inaudible) offerings and hospital direct collectively grew by 15% during this comparable period.

Of note, our implementation and consulting services had revenues of almost $322,000 in the third quarter of this year which is an increase of 181 when compared to the third quarter of '06. These services are tailored to meet the needs of customers who seek additional support from us when rolling out our products within their organizations.

A change in business mix, as noted in our earnings release, has resulted in a shift in HealthStream Research's revenues comprising approximately 42% of total revenues in the third quarter of '07 compared to 22% in the third quarter of '06. The research business has higher cost of revenues which has resulted in a decline in profit margins.

Net income and earnings per share improved in the third quarter, as Bobby mentioned, to $739,000 or $0.03 per diluted share compared to third-quarter of '06 results of $474,000 or $0.02 per diluted share. The increase resulted from revenue growth net of related cost of goods which was somewhat offset by increased personnel expenses including individuals associated with TJO and additional personnel associated with supporting our customers with their transition to the Next Generation HLC that Bobby had mentioned earlier in his comments. We also experienced an increase in depreciation and amortization associated with TJO intangibles and capitalized software feature enhancements.

Days sales outstanding was 60 days at the end of the third quarter reflecting an increase over 2006 comparable quarter due to slower HealthStream Learning and Research collections. We added resources to address this slippage and have made good progress at reducing past due balances in the third quarter. We expect to show further progress by year's end.

Our renewal experience for the third quarter of '07 continues to reflect the strong level of customer commitment with our overall subscriber renewal rate of approximately 100%. The annual contract value of renewals for the third quarter of 2007 was 110% due to both higher subscription fees per subscriber and additional subscribers from existing accounts.

As commented on in the release, we expect our fourth-quarter revenues to approximate $12 million or approximately a 40% increase when compared with the fourth quarter of '06. We expect our fourth-quarter revenue mix to approximate 60% from HealthStream Learning and 40% from HealthStream Research. Within learning we expect continued growth in the HLC and courseware subscription revenues while some of the project-based products are expected to experience quarterly variation reflecting seasonal cycles. Growth within HealthStream Research is anticipated to come primarily from the addition of the TJO revenue stream.

We expect gross margins during the fourth quarter 2007 to be comparable to what we experienced during the third quarter of 2007. With the exception of an increase in depreciation and amortization associated with increased software license expense, the remaining changes in expense categories offset resulting in our expectation of net income ranging from $0.03 to $0.04 per diluted share for the fourth quarter. For the full year we expect our top-line revenue to approximate $44 million or a 39% increase when compared to 2006. For our full-year net income per diluted share we expect somewhere between $0.08 and $0.09. Bobby?

Thank you, Art. It's always fun to take a moment to recognize some other accomplishments and welcome some new customers. On the learning side of our business we added organizations like Baptist Health South Florida, Jewish Hospital and St. Mary's Health Center, Hospital Sisters Health System, Thomas Jefferson Health System, and we welcome all those as new learning customers.

On the research side of our business New York City Health & Hospitals Corp., Halifax Regional Health System and Ohio County Hospitals are all new customers of Research in the quarter and we welcome them to the HealthStream customer fold as well. And as we mention those customers we realize we need to turn our attentions throughout the end of the year to implementation, training and orientation of these new customers with our backlog of unimplemented customers. And now with the migration behind us we look forward to turning even more attention to the training, orientation and hiring in these areas to facilitate more rapid implementations of these new customers.

Finally, I'll close with something that happened also in the third quarter equally exciting with full Board support. HealthStream put a share buyback program into place and this is a result of our look at the Company, the trajectory of the Company, our confidence in the future of the Company and we look forward to reporting in each quarter, each consecutive quarter our progress against the share buyback program.

So we're excited to have all these activities occur in the last 90 days. It's been a busy time. The end of the year will also be equally busy. And we look forward to reporting year-end results early next year. At this time I'd like to turn it over for questions and we'll wrap-up here in the next few minutes and get back to work creating shareholder value and implementing new customers.

(OPERATOR INSTRUCTIONS). Benjamin Green, Avondale Partners.

I was hoping you could provide some color on the status of some of your new offerings. I know particularly the competency center; you had had some success in booking some advance orders as of last quarter. Could you talk about that and maybe the [layered all] product as well?

We can certainly talk a little bit about the competency center products. We continue to see strong interest in that product. The product is not technically launched yet, although we continue to demonstrate the product in its late, final stages. We're anticipating bringing at least one customer live before year-end then ramping up the teams and the new customers beginning early next year.

So it's clearly an '08 product for us, although we've generated good excitement and good orders and do expect to have one customer -- at least one customer live before year-end. So I'd report good, steady progress and we're working hard to continue with that progress and get this product launched by year-end.

Okay, thanks. You touched on this a little bit in your prepared remarks; with having 95% of your client base migrated, at this point would it be safe to say that most of your other resources that were diverted throughout the course of 2007 to help with that are returning to their jobs and going forward, particularly sales, would we see kind of going back to business as usual there?

We're definitely seeing a return -- I wouldn't say it's back to business as usual yet, but certainly the massive energies consumed by just the pure effort of migrating are largely behind us. We have some finish up work to do in the first quarter, as we noted. And so people are returning to jobs, to their prior focus and jobs. However, there is definitely a period here of orientation and training that's still extraordinary, meaning there's a lot of new users on brand new software and many dimensions of that have changed from our whole hardware, our architecture and infrastructure which has been upgraded through this process.

And so I would say fine-tuning, the hardware, architecture and infrastructure, fine-tuning the application, responding to customer inquiries as they learn the new paradigm of the software is still somewhat of an extraordinary situation, meaning not back to normal, still have higher levels of service required to continue making progress. But it's an exciting time to move from energies focused on migration to energies focused on training and orientation and continuous software improvement. So we're entering that phase of this process and we'll make progress on that in the fourth quarter and the first quarter.

The sales organizations are definitely returning back to their sales efforts and I think that's pretty well evidenced in the third-quarter results -- some of our strongest new adds in quite some time. Not sure we'll be able to keep that torrential pace up, 101,000 new subscribers was an impressive quarter. Congratulations to all the sales teams for pulling that off. But we do see the sales organizations returning to a more normal cadence and beginning the upsell process to existing accounts, so we're excited to see that occur as well in the third quarter and on into the fourth quarter.

Okay, great. And speaking of the strength in new subscribers, can you speak a little bit about the implementation cycle, how long it takes to go from a contracted subscriber to an implemented subscriber and therefore recognizing that revenue?

Sure, Ben. Unfortunately that process has gotten somewhat longer with the migration period impacting us and, again, each person involved in the technology of our company pulled into different directions. But as they return back to trying to catch up on this implementation backlog, our history has ranged from a long end of over 100 days to a short end of three to five days on our smallest accounts. And I know that's a very big range.

I would say we're targeting sub 60-day goals on implementation. 60 to 90 might be more realistic right now as we work through this backlog, but we're making steady progress from new customers signing to implementation we'll say a 60- to 90-day cycle is what we're targeting. And in some cases right now we're over that number as, again, we're coming out of these migrations, but we hope to get it back in that range in the next quarter or two.

Okay, great. I appreciate you taking my questions. One final one actually, could you give an update on the CFO search?

It continues. So really the update is that we're extraordinarily comfortable with Art's leadership in this role and we're fortunate Art has decided to support us as long as necessary. So we continue our search to interview candidates. We're excited about Art's willingness and ability to serve us as he did in the five years prior. So we don't have any concern about the pace of that search, we want to get just the right candidate. With the support of our Board and senior team we're continuing the process of what we hope is a very careful selection of our next CFO.

Great. I appreciate it.

Thank you.

Chris Blackman, Empirical Capital.

Thank you. A couple of questions on the research side if I may. First, in the press release you all stated that you had a significant customer survey which had been rescheduled to 2008 I think you were expecting in Q4. Can you speak of the reason for the deferral of that survey?

Chris, sure, this is Art. The customer requested it, they actually were going through a merger of sorts and they wanted to defer the surveys until they had gone through the implementation of the merger. So they didn't want to confuse all the circumstances associated with merging two companies together with a survey in terms of modifying the results or having an impact on the results. So they've told us that they would elect to do that sometime in the first half. We haven't gotten whether it's going to be Q1 or Q2 but it will occur in the first half of 2008.

Do you expect it to be similar in size to what you originally thought or will the merger impact the size of that?

Well, I would say right now conservatively it will be similar in size and if you were talking on an opportunistic perspective we believe that one plus one will equal more than two.

To add a little more color to that, the acquirer and the acquiree were both customers of our research business, but for a slightly different product mix. In other words, we have four different types of research instruments. We're somewhat optimistic that the tool sets we offer will be more globally adopted by the larger, newly merged company as they sort that out. So I would say we're leaning towards the expectation that that account, the existing business from those two accounts which is now going to be one account, will grow in 2008. So while it is a delay we are optimistic that overall that account will grow as we enter into 2008.

Okay, thank you. And then maybe to follow up on that a little bit, can you speak of cross selling opportunities, TJO and research?

Yes, and again not a whole lot of traction on that yet, but we're seeing some interesting developments. For instance, in our research conference we had five or six of our individuals out of our account development and sales organization at the research conference beginning to identify customers that were customers of both or customers that were in the search process for one product or the other from each side of the business. And we're beginning to see the activity now and the dialog improve.

And so at these user groups and at these conferences we're beginning to introduce the other side of the business to the existing customers for any given side of our business. So I wouldn't right now as we -- again, the TJO acquisition is relatively new, we're six months into it, the DMR acquisition is about two years old, those two are really forming up their strengths with the leadership of Eddie Pearson into one company, HealthStream Research, and they're really focused on organizing themselves first.

I would say cross selling would be a higher focus in middle of '08 and on. But we're not standing still; we're beginning to work on the sales force infrastructure, the tools we use to identify cross selling opportunities and beginning to introduce the salesforces to the other customers like at the summit on Monday and Tuesday where we had a good presence from both operations of the Company.

Thank you. And we'll look forward to seeing traction take hold on that. An additional question on the research side, your TJO call center, how is that performing specifically?

Before I address that, Chris, I want to follow a little more up on the second question you asked. One great cross sell that has occurred that, if you look at it very closely, is very exciting. We have two large customers -- we have many large customers, but two of the largest are Catholic Health Initiatives and HCA. And both of those customers are now or are currently customers of both product sets and that was not true as little as six or eight months ago.

If you watch the cadence there for instance with CHI, through the acquisition of TJO we've picked up a rather large customer of our research services. And then post acquisition CHI acquired our learning platform, which was in process before the acquisition, but nonetheless closed about three or four months after the acquisition.

So if you look at the cadence that customer has become a customer of both sides of our business and represents our second-largest customer in the Company today, Catholic Health Initiatives, right there on par with HCA as a customer from a size standpoint. So we're excited about that development. It represents the single biggest cross sell meaning a customer of both sides of the business that happened post merger with TJO.

Okay. Catholic Health, that was a three-year contract when you all announced it I think, if memory serves me, is that right?

Most of our contracts are two to four years. I believe you're correct that that was a three-year contract.

Okay, thank you for that additional color. And then the call centers, how's that performing, the TJO call center?

What do you mean by performance? It's a strong call center that we're continuing to shift some of the business from our prior acquisition, the DMR business, to that call center from outside vendors. And so that call center continues to perform as expected. What kind of --?

There are no metrics to really follow it. I guess that's what I was looking for, that it is performing as you expect.

It is and we have been able to add some of our new business that we normally would have outsourced we've been able to send directly to that center. Also, if you remember that there were relative operational strengths of DMR and TJO, meaning DMR was better at some modalities of research and TJO better at others. And we're beginning to see the work shift to the relative strengths.

So some of the work that was formerly done at The Jackson Organization in Laurel. Our Laurel office is now moving to our Franklin office and vice versa. So we are beginning to see execution on leveraging the relative strengths of those two operational units, but more importantly are beginning to see those two companies form up as one, HealthStream Research. And that was evident at this summit just in the last 48 hours. So we're excited about where we think that's all headed.

Okay, good. And then, I know this may be a hard question to really answer directly, but how do you convert measuring capabilities of HealthStream Research into revenues for the learning group? How can that ultimately be measured?

Well, we hope to see more direct linkages over time and we did have an exciting announcement at our research summit which I'll share with you which will show a little insight into our vision here. At the research summit we announced a learning curriculum tied to a new survey instrument -- the HCAP Survey which is a federally required survey to collect patient satisfaction data. And the learning side of our business has introduced and demonstrated a prototype version of a learning curriculum that's tied directly in with a goal of improving HCAP scores.

So this is an exciting introduction; we showed the first couple of modules of what will become a new content library for HealthStream where we'll map content directly to outcomes from the survey. So if you score low on certain questions in the survey the learning side of our business will be able to step up and be a part of the intervention strategy to improve your scores on the next go around.

And so here you can see an example. And again, this was an exciting new announcement of a new content curriculum we're undertaking where we have a direct tie between the survey instruments and our ability to deliver intervention or training or, as we say, turn insight from research into action from learning. So we're excited about that announcement, it was a new announcement, it is in the development stage but we were able to demonstrate some preliminary modules of that learning curriculum and it will probably end up being a Q1 release for our company as well.

Okay, that's excellent. And thanks for that, I was not aware of that, and that does give a better idea of the vision that you see there and what your plans are. Finally, one more question and then I'll step out of the queue. Your pricing on new content, how does it compare to older content as far as pricing?

Well, content is very much like anything in life, each piece has its own valuation proposition based on the quality of the provider, the demand from the customers. And we work with our content providers; our content providers largely set their prices and we revenue share with them. We help them understand the demand and the pricing model we think will help their content sell the very best into our customer base. And then we help them launch that content through our summits and our user groups and our catalogs and our site itself.

So each piece has its own value proposition, some much higher than others. And we do see a general trend though to higher quality content coming into the market from associations that have more brand cache and therefore command higher prices. So I would say that's a positive trend and we hope to see it continue.

Okay, excellent. Thank you.

(OPERATOR INSTRUCTIONS). Steven Hart, [Heller] Capital Markets.

Besides an internal -- now that you're 95% to one platform so that you've been able to I guess focus more internally on sales again, is there anything you're seeing in the marketplace that's contributing to you being able to add 100,000 contracted subscribers in the market? We've always talked about 5 million acute care hospital workers, so can you answer what are the other 3.4 million that you don't have now, what are they doing? Are they with competitors or are they doing things the old-fashioned way, off-line in classrooms?

Steven, there's a pretty good mix. There are home-grown systems that people are using that, as we uncover them we have a very good value proposition home-grown or house built systems so we definitely see some of that. We definitely see some percentage of the market that is doing it through traditional instruction, using PowerPoints and Excel spreadsheets to track progress, so there's definitely some of that.

We have two strong and respected competitors in Reed Elsevier and Thomson which is now called CenGage Learning which was a spin out from Thomson. And both of them have operating units that sell into this market and they have customers as well. We occasionally take a customer from them and they from us, so it's a respected competition.

And then there are larger enterprise learning providers, I'd say Saba and SumTotal, which generally focus on what I'd call the enterprise level size customers. And occasionally they'll win a customer and they have customers in this space as well. So kind of from three angles, the home built or self-serve model is a certain percentage of the market, the enterprise software providers are a certain percentage, and then the two large medical publishers are out there. And so we see some shift in market share towards us which clearly we picked up a meaningful number in this quarter. And we win a little bit in each bucket; occasionally lose some in each bucket as well.

Right. Who are the two competitors? You said -- what's Thomson's spinout called?

Thomson Learning was sold to I believe a private equity group and is now called CenGage Learning. And CenGage is a very large company with an operating unit called NetLearning. And NetLearning is a direct competitor in the hospital space. Similarly, Reed Elsevier, which is a multinational multibillion dollar company, has in one of their operating units a group called MC Strategies. MC Strategies is a direct competitor to us in the acute care hospital space as well.

Okay. Thanks, Bobby.

Thank you.

Kevin Liu, B. Riley & Co.

Good morning. In terms of the expense outlook for '08, I know you guys can't give any specific numbers at this point, but just given that you guys are moving through the platform migration as well as some higher sales and marketing over the past few years, do you anticipating being able to leverage those expenses in '08 or are there plans for further increases?

Well, we do plan to increase investment in many buckets as we finalize our budget and think about our guidance for next year, so we plan to reinvest in growth. We are actively, for instance, planning to expand our sales organization, having what we're going to call a small market development group that will target smaller facilities through telesales and e-marketing, so we're excited to be gearing up for that.

So you will see increased investment. We hope to, as always, keep it relative to our growth and reinvestment at consistent rates like in the past. So we will see a growth in expenses but we always try to plan to make that responsible growth and in line with our top-line projections. We are finalizing our budget process, as you can imagine, and moving into the end of the year. We'll look forward to providing true guidance on '08 here at our next earnings call.

Okay. And then just a couple of housekeeping questions. Do you have the capitalized R&D number for either the quarter or the nine-month period?

It's about $4 million for the nine-month period.

And then lastly, just the percentage of revenues from the HLC platform during the quarter.

Percentage of revenues from the HLC platform?

The Internet-based percentage of revenues would be $728,000.

Well, that's the gross. For the quarter we had -- bear with me one second. 46% of our revenues came from Internet-based subscription products.

Could you say that one more time?

46% of our third-quarter revenues came from our Internet-based subscription products, which we define to be the HLC platform, the courseware offerings and the hospital direct.

Okay, thank you.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you to our staff, thank you to our employees and our shareholders. We'll continue and right after this call get back to work towards closing out a strong year end and on into '08. Thank you, look forward to reporting our earnings -- I guess it's in February.

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