HealthStream Inc (HSTM) 2007 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the HealthStream fourth quarter and full year 2007 earnings conference call. (OPERATOR INSTRUCTIONS)

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

Good morning and thank you. Welcome to our fourth quarter and full year 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 Industrial Relations. Art, would 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. Information concerning these risks and other factors that could cause results to differ materially from those forward-looking statements are contained in the company's filings with the SEC including forms 10K and 10Q.

Thank you, Art, good morning everyone. Got a lot of news we can cover this morning and of course a very detailed year-end earnings release to get ready to answer your questions for. A lot of exciting things occurred since our last report to you. I'm gong to pull out a few of the highlights and then we'll turn it over to Art for financial review and a little bit of a forward look, and then we'll go to questions. One of the biggest pieces of news for us as a company is the completion of the migration of customers on our Next Gen learning platform. As of February 11th, 2008, all our hospital customers have been migrated to the Next Generation learning platform. It's an exciting accomplishment. It's the fifth of five major migration efforts that occurred beginning in January of last year and concluding February 11th of this year, 2008.

Congratulations to all the teams that made that happen which is a meaningful part of our entire company and the leadership provided by the specialty teams of [Bob Weemer, Tom Dugger and Joe Christopher] that had so much to do with those successful migrations. I'm very excited to have every single one of our hospital customers, over 1500 of them on the new platform. Exciting milestone in our company.

We also are already seeing transactional levels on that new site exceed the transactional levels on the prior generation technology. So we are excited to see it performing well and continuing to accelerate in its utilization and adoption. The quarter-- the fourth quarter in particular was another strong quarter of adding new customers. In the third quarter , we had an impressive 110,000 net new subscribers. Generally in the past several years, I've always commented that we try to add between 20 and 50,000 net new subscribers every quarter. Sometimes I say 20 to 60,000. So, the third quarter was exceptional by many measures doing 110,000.

The fourth quarter also performed well. Delivering over 91,000 additional net new or contracted subscribers. So, in the second half alone, over 175,000 new subscribers were added to our platform in the year total of contracted subscribers being 253,000, one of our strongest years on record. Bringing in new customers in the fourth quarter like Meridian Health System, Clarion Health, Mercy Hospital Medical Center, Community Memorial Hospital and a long list of additional new customers, excited about our new platform, our new technology, our new capabilities. Congratulations to the sales organization for making that happen, another very strong quarter. Our execution on the implementation side is also impressive. With that additional influx of customers in the fourth quarter alone, we implemented 80,000 of our backlog. We still have a strong backlog as we enter into the year. Ande we're working to accelerate through the implementation cycles. But, implementing over 1,000 a day in our implementation teams,so we're impressed with the rate of implementation and the rate of new customer acquisition.

Renewal rates held up strong through the quarter reporting 99% on-- on a full-time equivalent basis for the number of subscribers and 110% of contract value. This shows a little bit of pricing power and also added subscribers for renewing existing accounts. That's exciting there as well. The research side of our business had an equally exciting quarter and completed their research conference on October 21 to the 23rd and had over 130 attendees from 31 different states. The net result of that exciting conference, we continue to add new customers, adding Children's Hospital of Omaha, Stevens Health Care, Multi-care Health Systems, many new research customers coming on board in the fourth quarter. Over 40 existing customers added or extended additional services in the research area of our business. We're very pleased with the overall trajectory of the research business. So many exciting milestones reached in the fourth quarter and full year. At this time I'll turn it over to Art for a few financial highlights and because of the extensive detail of our five-page earnings release, I'll ask Art to just hit the highlights and then we'll move to your questions, 'cause I'm sure you'll have several. Thank you, Art.

Bobby, thanks, and good morning. As Bobby indicated we're going to summarize, try different formats this call and see how it goes. Please give us some feedback. Highlights: fourth quarter revenues were $12 million almost on the nose. 40% over the fourth quarter of '06. Jackson Organizations, which was acquired in March of this past year contributed about 28% of that growth and the remaining growth came from HealthStream Learning. Net income was $0.13 per diluted share, Including the income tax benefit of $0.09. On a footnote to the fourth quarter, we had projected guidance that, in both cases, on both the top line and the net income we achieved, based on what we projected in the prior earnings call.

Full year, revenues were $43.9 million, up 38% over the full year of '06. TJO contributed about 30% of that growth whereas the HealthStream Learning business contributed about 8%. And if you broke that (inaudible) a little more detail, the learning side of the business and our internet-based subscription products, and other growing products contributed about 13%, while our project based products were down about 5%. So, they netted to about an 8% year-over-year increase. Net income for the year was about, was $0.18 per diluted share which included a $0.09 per share of benefit from the income tax. We approximated our prior guidance in third quarter earnings release. We were off about $100,000 on the top line and hit the net income guidance before the income tax benefit. Full year adjusted EBITDA was $7.2 million compared to $5.5 million in '06.

Year-end cash balance and investments was $3.6 million, up over the prior quarter.. And we have $15 million of our line of credit available, which is the entire amount of the line of credit. As we indicated and articulated in the earnings release, we had income tax credit that we recorded in the fourth quarter 07 in the amount of $1.989 million. That resulted from management's determination that it was more likely than not that we would be able to use the amount of our net operation, net operating loss carry forwards to offset future taxable income.

Up until this time, we had our deferred taxes fully reserved. That determination-- what we looked at was a few things. One, that for the past three years, we generated taxable net income beginning in the first quarter '05 and consistently through all quarters in '05, '06 and '07. In addition, we completed our 2008 budgeting process as well as a three-year look out for our strategic planning review. They supported the likelihood that we would continue to have taxable income for the foreseeable future. As noted in the release, we continue to maintain a valuation allowance of approximately $13.8 million for the remaining portion of our deferred tax assets and we'll continue to evaluate the need for the valuation allowance on the remaining deferred tax assets as we proceed through the, 2008 and going forward.

Let me highlight some of the expenses that we indicated related to Next Gen. As Bobby said, we're looking behind us at the transition of our customers. That which was completed in February-- the final customer was completed in February of '08. We are providing guidance, and back in the second quarter that our expected impact-- end year impact of additional support services and what not would be approximately $800,000. As you may have read in the earnings release yesterday, that number was $950,000. We had also thought that we would be more or less out of the woods at the end of the third quarter and the support activities continued through the fourth quarter, which resulted in the additional $150,000 over what our initial guidance was. As a result of that process we went through this past year, we made several changes in our customer support area and the impact of these changes are reflected in our 2008 guidance.

I wanted to highlight HealthStream Research revenues because there have been comments we made both in this release and in prior releases, that mentioned that there are a few things typically seasonality rhythms and on occasion, customers requesting either to delay surveys or in some cases advance the survey process. This desirability has made it a little difficult for us to predict the quarterization of revenue recognition of this past year and may in the future. I wanted to give you some background on the seasonality. As you know, we have four instruments. The patient instrument which accounts for about 50% of the revenue from HealthStream Research is a pretty evenly spread activity that's performed consistently over the quarters by our customers. It is in the employee and physician survey instruments that we see seasonality and it seems to be more focused or bunched in the second and third quarters and to a lesser degree in the fourth quarter. The first quarter is generally a light quarter for customers wanting to perform surveys for their employees or the attending physicians. In the example of the deferment, we mentioned in the past two releases that we had one large customer that wished-- that elected to delay their employee and physician surveys out of '07 and into '08. In this case, it'll end up being a positive because the reason they elected to defer was because they had merged with another facility and in fact will likely pick up additional business from the merged company. Two things, one, all these businesses are under contract, many of which run two to three years in term. So it's not a realization issue, it's more of a timing issue that we're experiencing here. And, we're confident about the business and believe it plays an integral role as a participant on our insight into action focus.

Lastly I wanted to touch base on the 2008 guidance. First, we're excited about the 2008 prospects. Next Gen, as I mentioned, and Bobby mentioned, is behind us. We have new products that are launching, including HealthStream Confidency Center later this year, as well as some other course offerings. We have, in the budget and have hired, six sales reps among the research and the learning side of the business that have already begun. As you know the best time to hire a sales person is January 1, because that's when you get most of the (inaudible) impact of the learning curve and activities.

For the first quarter we indicated that we'll be between 11 and 11.2 on the revenue side, which is up between 36 and 38% over the prior year, due in part to the TJO acquisition and the growth in HealthStream Learning. We're down from the fourth quarter due to the seasonality I mentioned with HealthStream Research business. Net income is expected to be break even to a penny, which is comparable to the prior year-- prior year first quarter. Down from the fourth quarter, again, from some of the investments we're making in our sales and marketing operations. Finally for the full year, we expect to grow between-- top line between 22 and 24% which equates roughly $53.5 million and net income to range between 12 and 15% per diluted share. Bobby?

Thank you, Art for that look a little bit backwards and a little bit forwards. I want to wrap up with a few announcements regarding some new product developments. In spite of all the things going on with migration, we were able to develop and are now beginning to launch exciting new products. Art mentioned HealthStream Competency Center. As of today, we have over $1.85 million in signed contracts for that exciting new product and have begun the official roll out of that product to customers. We look forward to a year of landing new customers for this new, exciting product, HealthStream Competency Center. In fact about $300,000 in order value in the last 90 days of the year came in on that brand new product.

We also, in February launched our new HCAP's curriculum. It's a set of course ware. That is, our remediation and development program linked directly to the HCAP surveying that our hospitals perform. After they gain insights into their challenges through the surveys work we provide, we offer a remediation and development strategy for employees to try to improve their scores. So we look forward to seeing the interest in that type of product that links our-- directly links our research and learning business together. For the first jointly developed product, and we look forward to seeing its reception throughout the year and recording our progress along the way.

Congratulations to the Baltimore and Franklin offices for the creation of HealthStream Research.. The formation in the merger of these two organizations in the HealthStream Research. Eddie Pearson and Tom Hutchison have done a fantastic job leading the team. We have additional new vice presidents, Allison Bailey and Mike Phillips helping charge and lead the way to existing team of vice presidents. They have done a great job building and integrating. So, I want to congratulate that entire team on their progress from last year and looking forward to a very strong 2008 of our research organization. We hope to continue the momentum of adding customers. Although not sure we can maintain the pace of the last few quarters, maybe we can continue to report as I have for three years, 20 to 50,000 net new subscribers per quarter and continue the acceleration of our growth through the launch of new organic products. So we have an exciting 2008 ahead of us. At this time, operator, I would like to turn it over for any questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question is from Benjamin Green with Avondale Partners

Good morning guys. I was hoping you could provide a little more color around revenue growth in 2008. Specifically you guided down first quarter margins due to higher than anticipated research mix. Are we supposed to infer then, with the increase in 2008, as of fiscal year margins, that that mix will be down on the year? Does that make sense?

Let me see, if you, so it's a downed quarter compared to the fourth quarter based on the seasonality of the research business. Principally it's in the physician and survey instruments. Okay, we see that, as I mentioned, growing in the second and third quarters pretty significantly. Again, it's being bunched into the center part of the year. So year-over-year growth of the HealthStream Research is up about 13 or 14%.

Right.

It's the way it's spread that's causing some bumps, if you will, or variations in the top line revenue projections. Also, I think you were, raised the question about the margins and , of the four instruments, the employee and the physician have a higher profit margin than do the patient and the community prox. So when they fall, when they're down over a previous quarter, then you're going to see an impact in the gross profits.

That's helpful, thank you. For contributions on the new products, I know you went into specifically the Competency Center, can we expect some significant contributions in probably the second half of the year? Is that a good way to think about it?

Well, so we were pretty conservative in the contribution and particularly the HealthStream Competency Center. We have it beginning to generate revenue recognition in the beginning of the third quarter. We do have implementation revenues that --- we would pick up in the second quarter. First and second quarter. So we've been conservative in the revenue recognition of the licensing fee for that product, but I think the end year impact is probably under half a million dollars at this point in time. And that's just again, because of the nature of the subscription product. So, if you do it in-- if you started in July, you only get a half year of, whatever the fees that you would charge the customer. So as they (inaudible) go through the third and fourth quarter, there's minor impact in '08, but there'd be, much more significant impact in '09.

Okay, thanks. If you could talk real quickly about the Research and Learning cross selling, any progress you're having there, be it with actual sales or development of your internal resources?

I think the exciting part there is that the launch of this new curriculum. I think it'll take us a quarter or two to spin it up and see the reaction to it. The product is developed and launched as of February. It's the first jointly developed product. It's the first product that both sales organizations can feel comfortable generating leads and selling together. And so, really, it's probably the first opportunity where a person that has expertise on the learning platform can begin to generate leads for research customers and vice versa. I think it will be an ongoing developmental story throughout '08 and we just plant the seed that, as of February, have our first jointly developed and jointly sold product and we'll see how, hopefully that's a well received product, but right now it's just brand new and shiny and on the shelf. We hope to start to move if off the shelf in the months ahead.

Okay, typically are they targeting the same decision maker of the client or for the two sides?

Similar decision groups. A lot of times the learning functions of a hospital organization rolls up under the HR functions. And, many times the HR functions are responsible for employee and community satisfaction surveying. Although the research decision is often spread across different departments. The physician coming out of the quality department, the employee coming out of HR, the community coming out of marketing and so-- so they're spread across departments. There is generally a common touch point in the HR department though, for both learning and research. And so, there's a good opportunity there to introduce products that are relevant to that audience.

Okay, thanks. Finally could you comment on the status of your share repurchase and your CFO search?

The share repurchase, we've determined that we'll release updates to that in the filings. So that'll be coming out what, Art? In a few days?

The end of March.

Okay, the end of March. So each quarterly filing the Q we'll be releasing updates to the share repurchase program and we'll do that, of course, consistently. So we're going to provide no additional comment on that. We're just going to wait for those filings. On the CFO search, it's progressing very well. We have a set of finalist candidates, four or five, all of which we think are qualified and fit our parameters. We're in the decision stage now and the final interview stage, so we're excited. We believe confidently in the first half of this year we'll have a permanent CFO in place and potentially as early as the beginning of the next quarter. So somewhere in the next one to four months we'll have this squared away.

Okay, thanks for taking my questions.

Just for update, it's March 27th on the filing.

Okay, great, thank you.

Our next question is from [Harvey Popel] with Pop Tech.

Yes, thank you very much. I'd like to focus on the earnings per share guidance for 2008. Certainly the revenue growth is very impressive, but the numbers that you're guiding to really are relatively flat with two years ago, 2006 as I recall. And when we went into 2007, I remember your guiding the fact that 2007 would be a heavy investment year and for investors to be patient on the EPS side going-- expecting a better 2008 and the number kind of surprised me as not being higher at this point. Well, I guess two questions. Number one, why isn't it higher? And when will we really start to see the revenue growth reflecting in earnings per share growth?

I guess, Harvey the simple answer is we continue to maybe pour additional investment back into growth. Six additional sales representatives to fuel 22 to 24% growth rate. That's the simple answer. Maybe if we pulled our growth rate back to 15 we could accelerate our EPS, but we're shooting-- we're investing more in marketing and sales each year. Maybe we were a little early in forecasting accelerating margins, but we determined to continue to invest in new product launches and development, additional sales organization, and marketing. And so, by choice, we're trying to balance profitability and growth and this is another year for growth for us where we favor growth over a little bit of profitability and growth. Although profitability is going to improve on operational basis and cash flow. We often focus on the EBIT and EBITDA lines and we're projecting growth in those as well. So I guess it's just always an ever-present balance between investment and growth and profitability in the business.

Can investors expect, as you look beyond 2008, to start to see the EPS growth accelerate?

Well, I think overall, we're looking forward to growth in certain components of our business which have good contribution margins. For instance, the Competency Center has the potential to add to our margins meaningfully as it's an organically developed product. It has--- it's a platform product, has very high, both reoccuring revenues and gross margins. So to the extent-- and again, it's a new product we're rolling out. We've got $1.8 million of order value on it. We've been modest on our revenue recognition forecasts. To the extent that we can get that product out perform. That's the kind of product that can meaningfully add to EPS. And so, but we don't want to get too far ahead. We think it's a product that every one of our existing customers will be interested in. But, we'll just continue to report our progress quarterly on that. On the other hand, if we see in rapid acceleration of the selling of content, content has royalties associated with. And so you can see a change in our gross margin, even though at a gross level, net income, cash flow and EBITDA should all improve, it really depends on which parts of the business accelerates faster on total net income at the bottom. We're excited about both categories of products. It just depends on which one grows at a faster organic rate. We're projecting organic growth for both. And so, each quarter as we report the growth in products like Competency Center with 90% gross margin and growth in content which can have anywhere from a 50 to 70% gross margin, that the mix-- the relative mix of those will determine a lot of the EPS. But both product categories, again, are expected to grow in aggregate and deliver more cash flow to the overall business.

Okay, thank you very much.

Thanks, Harvey.

Our next question is coming from [Ryan Winter with KIP].

Hi, thank you. Few questions. With respect to the core LMS business, can you talk about the opportunities and challenges and selling to new customers and saturation levels? And then my second question is with respect to Competency Center, how do you think about the potential cross sell opportunities with your existing base? Any assumptions on what percent of customers you think you can reach and what sort of timeframe?

Sure, the first one is general learning platform. Clearly our market share-- we are a market leader on the learning platform. We had an incredibly strong third and fourth quarter adding 110,000 subscribers in Q3 and 90,000 subscribers in Q4. Historical pace there was 20 to 50,000 net new subscribers a quarter. So clearly Q3 and Q4 were particularly strong. I would expect us to continue to be able to add between 20 and 50,000 net new subscribers a quarter into the foreseeable quarters of '08 and so, we don't expect the torrid pace of Q3 and Q4 but a steady pace. We are market leader of about 34% market share on the learning platform. We don't see any reason we can't keep growing that in the next four quarters at the rate I just mentioned. As far as the Competency Center, we're very excited about this product. We think they're are both regulatory reasons why it will be of interest to every single one of our existing platform customers, but there are business reasons as well. And, we think it is a differentiated product. It is-- it will soon be fully integrated, as of March, with our core learning platforms. So it'll be essentially another tab that can be activated on our learning platform so that it will be easy to activate. And, implementation will require a little more hand holding and consulting, but the actual activation and the linking relationship between that and our learning platform is very high. So we're very-- we're very optimistic that every of single customer of our learning platform will be interested in the competency platform. We projected a modest revenue recognition on the platform until we see that it lives up to our expectations. But we don't see any reason why the vast majority of our existing customer base wouldn't be minimally interested and hopefully an adopter of this product over the next several years.

Thank you. I just have one follow-up on the first one with respect to the growth. The 20 to 50,000 a quarter, can you talk about trends in size of the new customers and-- and the influence over the timing and sales process, and then I guess, bigger customers have more, obviously, you have more subscribers and the more leveraged fashion though it may be more timely. I'm just trying to understand the trends and subscribers per customer.

Right, well the average hospital has about 950 employees. So, if we add an average hospital at approximately 1,000 subscribers, (inaudible) is going to start to lean towards more in the middle market. We've also added a smaller market team, our express platform team, we added several sales personnel to the smaller hospital market. We're always going after the larger health systems. That creates some of the-- I call it the lumpiness in the adding of subscribers when we win a big health system or two in a quarter.. So we never really forecast that we're going to win one of those per quarter or one per year even, but when we get them, like in Q3 and Q4, it really does boost the IT count. So I would say we have an even sampling across small, medium and large hospitals.

In 08, we expect to see more base hits of the thousand-type person hospitals. We're accelerating our efforts into the smaller market as well. So we like to see our branding present there. In fact, meaningful part of our future growth should be tied to delivering more content down the existing channel and so every hospital we add, adds more potential content subscribers and that's the way we view it. The platform is the entry strategy to then sell more content.

Thank you that is helpful.

The next question is from Steven Hart with Heller Capital.

Hi guys.

Good morning Steve.

Good morning. Bobby, as a follow-up to one of the previous questions involving EPS growth, am I right to say that some of the-- the lack of growth of that is somewhat due to the acquisition and the non-cash depreciation amortization on the acquisition as well as the Next Gen platform? And if that's true, can you talk about an operating cash flow and EBITDA growth for '08 versus '07?

Steven, this is the Art. Good question. Yeah, I think you're first comment was accurate. The non-cash expenses are growing because of the beginning of the amortization of the Next Gen, as well as competence product which we've invested heavily in the last -- well, HLC in the last two years and HCC, Competency Center the last year. Those numbers are going up. As well as the amortization of the TJO acquisition. So yes, those expenses are going up and obviously having an impact on the net income line. We-- we haven't given guidance on the EPS going, in the past, we will consider that as a--

EBITDA.

Excuse me, EBITDA in the past We'll consider doing that going forward. But, that's a valid comment and one that we'll-- we'll consider and follow-up with you on.

Okay, thanks. And with-- okay, that might clear up the situation a little bit better so people could understand the growth-- the healthy growth of the operating business versus just looking at an EPS number. So I would strongly suggest that.

Steve, that's a good observation, in fact if you just look at year-over-year $5.5 million of EBITDA to $7.5 million from '06 to '07 so the core operating measured by cash flows or EBITDA is good measure. We do report it in our full year reporting there, but we don't guide on it. We'll take it under advisement for the next quarter.

Super, thanks a lot.

Thank you

(OPERATOR INSTRUCTIONS) Our next question is coming from [Vincent Callucio with Noble Financial]

Bobby, it's a question for you. I didn't hear you mention the BLS product. Can you give us some color on that?

Sure, we're very excited about the BLS product. We added some additional expertise and selling power to that. Our relationship with the company that has some of the technology behind it. [Lairdol] is growing and strengthening. So, we're expecting it to be our A-category content products for the year. It's an exciting, one of our top category products. So we expect to continue to see production on that product. I don't think a report on it will be for Q 4 for it, but -- I would say that product continues to grow in acceptance and sell through. So, it's an exciting product for us for '08.

I can just add to that that most of the sales we've had thus far have been on the BLS product. Lairdol's plans to launch the web-based version of ACLS product mid-year. We may have commented on this in past calls, but-- going back and adding that as an add-on sale to customers that (inaudible) ACLS is pretty easy to do. You're not reselling the customer, you're just calling up and saying it's now available. They all have the need for the product. It doesn't have the same penetration in the hospital just because fewer people in the hospital have to be certified on ACLS but it should be efficient up selling of the product once it's launched later this year.

And Bobby, a question on the research side. Have you completed the integration with TJO? My understanding was that you were going through some standardization of surveys, for example.

There's a lot of work to be done there. A lot of great accomplishments have been made as well. So we have begun to shift work from our out sourced vendors that provide survey work for us to our in-house survey center. So, we see some leverage coming there already. We made all the shifts in brandings, so we. feel we've made a great presence now for HealthStream Research, one of the leading research firms now in the country in healthcare. So, we feel that many great steps have been made. There are many more to come.

We've begun to organize and add to the sales organization of HealthStream Research as opposed to the separate organizations,which were the two acquisitions, adding a new Vice President of Sales over HealthStream Research recently. So again, many, many touch points indicate that that process is well underway and we're getting some-- we'll begin to get leverage and continue to see growth out of those product lines.

Also, Vince, I think we may have commented in the past, but the Baltimore facility has its own call center, so we're starting the Franklin Group, the MR group uses out service call center resources. We're moving some of those resources into Baltimore and getting efficiencies because we can do an average survey much cheaper in Baltimore than we would by paying a third party vendor. Eddy is driving that integration as well.

Okay, thanks guys.

Thanks, Vince.

We have no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Thank you, we look forward to reporting our next quarter and updating our guidance here in the next conference call. Thank you for your attendance this morning and thank you to all of our employees moving the company ahead in '07 and '08

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