HealthStream Inc (HSTM) 2008 Q3 法說會逐字稿

Good day and welcome to HealthStream third quarter 2008 earnings conference call. Today's call is being recorded.

At this time I would like to turn the conference over to Robert Frist, CEO and Chairman. Please go ahead, sir.

Thank you, good morning and welcome to our third quarter 2008 earnings conference call. Also in the room with me are Gerry Hayden, Senior Vice President and Chief Financial Officer, and Molli Condra, Senior Director of Communications Research and Investor Relations. Gerry, would you read the forward-looking statement please?

Sure, Bobby. This conference call will contain forward-looking statements regarding future events and future performance of HealthStream that involve risks and uncertainties that could causal the actual results could differ materially from those projected in these forward-looking statements. Information containing 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 10-K and 10-Q.

Thank you, Gerry. What I want to do this morning is we're going to walk through the learning and the research business, respectively. You had a mixture of good execution in the quarter on both, a few challenges that I'll talk through and talk a little bit about some new sales and products along the way.

I'll begin with HealthStream Learning. We had a very good execution in the area of implementation in the third quarter. We implemented over 53,000 subscribers. And once a subscriber is implemented on our platform, we begin billing. So that was a positive execution as far as implementing off the backlog of contracted subscribers. That brings the total to about 235,000 that have been implemented in the last 12 months alone. So we're getting, we feel, better and stronger at the execution around implementing new subscribers and the faster cycle times. Also in the quarter we added new HLC customers totaling about 20,000 FTEs, a little on the lower on the end than what we would hope but still positive, and added organizations like Sheltering Arms Hospital in Virginia and Bay Park Community Hospital, Stanley Regional Hospital in North Carolina, Elizabethtown Community Hospital in New York. So we had a list of good customer additions in the quarter and saw decent execution in the sales organization bringing in new business.

On the challenges side, the renewal rate was what at I would call it the low end of acceptable. We've always strived for renewal rates in the 90% -- in fact always delivered in the 95%, 90 to 100% range. And this is the second quarter in the 80s range. So an 82% renewal rate on FTEs and 89% on contract value. I believe that those represent the lower end of acceptable, not our goal, certainly, and not something that we want to continue repeating, but again, on a subscription business, 80% plus we think is good. We always strive for great, and we're going to work hard in the fourth quarter to see that turn around. We had a lower number of FTEs up for renewal in the quarter too, so small losses were larger percentages of the total. And so that was clearly a challenge on an 82% renewal rate in the quarter.

Also the challenge then is, with those losses, the net new subscriber number that we typically report. We only showed a net gain of 4,000 in the quarter. We contracted 20,000 new, and then with 82% renewal rate, the loss only gave us a net again of 4,000 subscribers in the HLC platform, which is a low for us in many, many quarters. So you know, another challenge there, the mix of the ins and outs in the quarter was not as favorable as we would expect. Again it was positive, a net gain of 4,000, but nothing like what we expect as we push through Q4.

Also, and this is on the positive side and specifically related to the +AFs-Com C+AF0- center product, we added four more contracted customers during the quarter, bringing the total to about 17. All 17 of those customers are essentially in the piloting phase of the product, as we finish that and roll it out. And some of them are active, and I would call them late date and active users of the system. But I think significant revenue, or beginning revenue recognition on this product, will start in earnest in January. And the product continues to mature, we continue to release enhancements to the product and sign new contracts on the product. So -- and all of those 17 customers now are advancing through various stages of implementation of the product. So good news on the Com C center. We see it advancing and with a pickup of four new customers for that product line in the quarter.

At this time I'll turn our attention over to the research business. We had a mixture of good execution and a few challenges as well. New research customers in Q3, Lincoln Park Hospital, Jimmy Stewart Medical Center, North Valley Hospital. So we had a list of new research customers brought onboard that were first-time customers. And the sales team did a good job bringing in this new business. Over 60 customers added research services, which is exciting to see them coming back and adding additional services or adding services to their initial contracts. And so that is good for customer relations and the ongoing building relationship with those customers.

On the challenges side, one of our large citizen survey customers did not renew. We did not win in the competition for renewal. That system chose to go with a competitor. We believe they favored a methodology which was stronger for that competitor than our methodology in this case. So we use different methodology for different surveys and we had different relative strengths to our competitors. The mixture of the preferred methodology at this time did not favor us. So that was in the challenges column only research.

Globally, the company -- some other important execution elements, we completed our share repurchase program with our $3 million authorization which concluded in September of 2008. We purchased over 768,000 in shares in Q3, for $1.9 million, a $2.50 share average. And overall at the completion of the program we retired approximately 1.1 million shares for the $3 million, which was a $2.68 average. So the completion of the execution of the share repurchase plan is now done. And, you know, we hope that that proves to be an effective investment in the long run.

At this time what I would like to do is turn it over to Gerry Hayden for some -- a little more detailed look at he financials, maybe a little more comparable look, year-over-year, at some of the things we executed on. And then I'll come back with some conclusions and open up for questions. Gerry.

Thank you, Bobby, and good morning. Again, we provided on prior earnings calls, I'm going to try to give you a new brief highlights in a couple of key areas and then we'll have ample time for questions at the end of the presentation, so I'll have you take your questions at that time.

As you may already know, we had our annual customer Summit conference in September and it was very well received. In 2007, that same event took place in the second quarter, and that placed some mismatches on the quarterly comparison. So I'll try to provide some relevant comparatives jumping from the expenses, to give you some context of our operating performance but first, a few key revenue dynamics.

Our learning business business segment continues to grow, both the number of new subscribers and in content utilization. The number of (inaudible) subscribers was 1,692,000 at the end of the third quarter of 2008, compared with 1,457,000 at the end of the third quarter of 2007. And that is a 16% year-over-year growth rate. The same year-over-year comparison, revenues from the learning business grew from approximately $6.8 million to $8.5 million, which is a 24% increase. The difference in subscriber growth rate is 16%, and the overall learning growth rate of 24% is largely due to the increased content consumption from our subscriber base.

(inaudible) results for both 2008 and 2007 include the investment in our annual customer Summit, so that comparison stands as reported. And as you may have seen, our year-to-date operating income for the first nine months grew by 25% over 2007, which exceeds our 19% overall revenue growth rate. So we have some leverage in operating income. The year-to-date leverage and profitability trend is also entered in the third quarter results when you adjust for the timing of the Summit. For example, operating income for the third quarter of 2008, when adjusted for the $550,000 of Summit expenses, grew by 56% over last year's same third quarter. And adjusting quarterly 2008 -- excuse me --adjusted quarterly 2008 operating income would be $1.1 million (inaudible) thousand in third quarter of 2007. In a similar fashion, net income showed the same kinds of overall year-over-year improvement. Net income would be $1.2 million or 6% greater than the last year's $730,000 of net income.

A full year 2008 guidance on revenue for the fourth quarter is $13.0 million to $13.5 million, which equates to a growth of between 8% and 12% over the prior year's fourth quarter. Our earnings per share expectations for the fourth quarter are between $0.04 and $0.06, which makes the full year outlook between $0.10 and $0.12. This is comparable to the prior year without any income tax benefit from our deferred tax assets.

Finally, I just want to conclude with one highlights that are on the balance sheet. Our cash balances are $3 million, which is taking into account the share repurchases that Bobby had just mentioned. And we are focused on our accounts receivable to further improve our cash balances.

Thanks Gerry. What I will do is wrap up with a few accomplishments that are shared by the whole company. In the last day of the third quarter, a new record level of utilization of our platform occurred within a 24-hour period. Student and administrator logins peaked at 116,000 within 24 hours and over 81,000 courses were completed in that 24-hour period, which was a 9% surge over the previous record which occurred over the prior quarter. So we're continuing to see record utilization, in this case a surge in utilization, at the end of Q3 of the platform. And the platform is proving to hold up well and stable. So we're excited about that accomplishment. It speaks well of our technology teams that support -- that providing for the platform and our customers' growing use of content over the network.

Second, and the whole company should be proud of this, we were -- HealthStream had a debut on the Healthcare and Informatics top 100 list for the first time at number 61. So it's a recognition that we share with our investors and with our employees to congratulate them to debut in the top 100 list. Healthcare Informatics is a healthcare IT firm. We're proud of our opening slot at 61, and we hope over time to improve that.

The third major accomplishment was the Summit, September 2nd through the 5th in Nashville. It was a combined Summit, for the first time in our history, combining the customers or research and learning in one environment. And we used that Summit to introduce new partners, new products and really gear up and tee up the sales organization for 2009, along with building, you know, customer loyalty and customer relationships. The most successful Summit that I can remember, it's our eighth Summit, 730 participants, over 30 partners. 98% of those surveyed, which over 300 filled out surveys, said that they would recommend the Summit to others. And so it was an incredible response from our customers and obviously a significant investment for us. So we were glad to see that 98% favorable rating on the (inaudible) of the Summit. Also at Summit we announced new partners and we welcomed them to the HealthStream Network -- Vivid Learning, Essential Learning, Association for Professionals in Text Control and Knowledge Factor. All of these new partners we are excited to add to our partner list. And for all four of them, we look forward to introducing their products in the market over this quarter and expecting to generate sales together on their products throughout 2009. So exciting new products teed up as well for 2009 at the Summit. At this time, and with those accomplishments in mind, I'd like to turn it over for questions. Thank you, operator.

The question and answer session will be conducted electronically, (OPERATOR INSTRUCTIONS) And we'll take a question from Vincent Colicchio with Noble Financial.

Good morning, guys, Bobby, your contracted subscriber backlog, the growth appears to have slowed a bit, given the bump we had on the new platform. Is there a target number you expect it to grow by going forward? And also on the implementation side, what kind of a number should we look for?

Vince, so we did have a slower on that one called the net new, which is a net again of contracted, minus those lost in the quarter. So we had a little bit of a tougher renewal period and the lower end of our contracted range. So we're expecting, and have a nice queue, for the fourth quarter and we hope to get back in the range of our historical net new number of 20,000 to 50,000 for Q4 and so, getting us back on track in that area. Several large contracts out for competition and we feel well positioned on many of them. So I hope that, and expect that, we'll get back in the range of what we consider acceptable, 20,000 to 50,000 net new subscribers in Q4. On the implemented side, we still have a backlog to work through. And our teams have been executing well, so 40,000 to 50,000 new implemented in the quarter should be attainable. And, of course, implemented is what drives revenue. As long as we can keep filling up the bucket in front of that with the contracts, we should be able to continue implementing through Q4 in the 40,000 to 50,000 range as well. And that is consistent with our last four quarters implementing. So implementing is getting stronger and faster. We got to turn our attention to closing up contracts Q4 to get the net new number up again.

Just a general comment on the competitive environment, have there been any changes out there on the learning side? And, you know, to what extent is price competition becoming more of a factor?

Let's see, there are a lot of small competitors. I wouldn't say the landscape has changed much. Everyone, I guess, is getting more aggressive as the year end comes up, and everyone is shooting for customers. So in some ways, some of our larger competitors, I think, have been weakened while more smaller competitors are emerging that are nipping at everyone's customer base. So overall, though, I would say that the competitive environment remains the same. We remain the market leader in this particular space. And we have exciting new products to bring our customer through. And we used Summit to reenergize that base. And I think you can tell from our attendance at Summit that interest from our base remains strong. And, of course, we invite new customers to the Summit as well each year. And so I remain optimistic about our competitive position in the market, although there are a few new smaller competitors that are coming onto the scene.

And there on the research business, you had 52 contract renewals and 60 clients adding more services. For perspective, how does that compare to previous periods?

These were both the same, same rate.

At the same rate, okay?

Yes.

I'll go back to the queue, thanks.

(OPERATOR INSTRUCTIONS)

f there are no further questions, we'll give it a new more seconds here. If there are no more questions, we'll go ahead and conclude.

We'll return with Vincent Colicchio with Noble Financial.

Okay.

I guess I'll ask a couple more. On the competency center, it sounds like, you know, things are moving ahead. You've got 17 customers progressing, I think you said. What does the sales pipeline look like, and what was kind of -- you know, what would you expect the interest like at the year, leaning summit, competency center?

I think the interest is very high, meaning the pipeline -- the challenge we're had, as you know, with this product, Vince is that over the last several years we've introduced and then drawn back and introduced. So I'd say the sales organization is a little bit hesitant to pull in their existing customers to ramp them up. Although each quarter, Vince, as you can see from our new ad this quarter, four new in Q3 and alone. That's being to wane and we're getting excited about the product's ability to debut strong in January. So all 17 of those customers are beginning implementation. Some are nearing the near of implementation and going live. In fact, some are live and using the platform actively at this point, although we consider them late data stage because we're fine-tuning the application really on a weekly basis. And it's not in this normal or monthly cadence of maintenance update and maintenance on that product. I would say excitement remains high. The sales force is excited, as we show successes with these 17 customers to get back out. The pipeline is strong and we have a great lead pipeline on this product. So I think it's -- it remains a relevant and exciting product. And we have had very slow but steady progress over the last two quarters. And, you know, adding four more customers for this product was exciting for us in the third quarter as others advanced actually using the product line.

And as far as the new products introduced at the learning Summit, how would you characterize the preliminary interest on those versus, you know, the type of interest you've seen in the past with new introductions?

Well the Summit was our strongest in a long time and our use of technical to track leads generated at our Summit was even better. Within 24 hours of the conclusion of Summit, we had loaded in over 650 active leads that were generated across our partner network. They were captured in our vendor hall. Their expression of interest, they were qualified as a, b, c and d leads. And we qualified over 700 or 650 leads, and within 24 hours they were in our sales system and distributed to our sales organization. So I thought we did the best job ever in both collecting leads, qualifying them and quickly distributing them to the sales organization. So I think that bodes well for Q1 of next year and Q2. It will take some time for those to mature. As you know, in Q4 you are generally wrapping up deals that you may have started in Q2 in Q3. So everyone -- you're in execution mode for the next 60 days, but I feel good about the pipeline and Summit really helps energize the pipeline for Q1, Q2 and Q3 of next year.

Okay, and then one last question. The research division, while we're seeing your growth in the 4Q, it is declining sequentially. Is there anything, seasonality, influencing that? What is going on there?

Yeah, there's some seasonality. It's just a general trend of that business. As we add new customers, of course that may change, but that is what it is right now.

Okay, and longer term, I mean what type of a growth rate can we expect from that business, Bobby?

Well, we hope that it gets back to levels like we saw in the Q2. You know, we had that loss of one of the larger physician satisfaction customers in the quarter which, you know, have to fill the bucket and overcome that. And so, you know, we have four key product lines in that area. And in that one area we had that one loss which was a bit of a setback. You know, once that is absorbed and we move on, and as you can see, we continue to add new customers, we believe we'll overcome it. So I don't have a rate yet for that one but we do expect organic growth out of that business. We'll probably report on that in Q4, expectations for next year. But we do expect growth in that business.

Thanks, guys.

[Zack McAdoo]with the [Zanick Group].

Hi guys. I was wondering if you could just go into a bit more detail about why the renewal rate is low -- lower now and why you think it might go back up.

Well, in the third quarter, first, on a number of our key bases, it was a relatively low number up for renewal against our million -- approximately 1.7 million in our customer base. Less than 100,000 FTEs came up for renewal. So the loss of one, you know, 5,000 or 6,000 person account against 1.7 million, you know, swings the percentage more meaningfully than when you have a quarter of a million up for renewal. So, you know, a couple -- relatively smaller losses has a bigger percentage difference when you have an overall low number of FTEs up for renewal. That said, the couple that we did lose, one for competitive reasons, we got beat where I guess the other organization did a better job positioning their product. You know, usually we win those. As you can see, on 80% of the cases we retain and move forward. But occasionally a customer finds a way to position and take a piece of business. That's just outright competition and we got beat. And we'll do everything to prevent that in the future. On another case we had some service delivery problems that we're working to overcome. In general, we feel very good about our service organization. And occasionally across 1,700 customers something slips through the cracks. That may have happened in this case as well. But in general, we deliver over 200 surveys over a week to our customers on their customer satisfaction and monitor it regularly, and score very well in our general customer support and service organization. But again, across 700 customers, occasionally someone is less than satisfied. And that is reflected in that decision. But we pay incredible attention to that data. We react immediately. And as you can see, from our both historical renewals and even in this the quarter at 82%, you know, we generally have favorable results in that area. In the fourth quarter, larger accounts are coming up for renewal. We feel good about our position in those. Obviously we focus tremendously, as some larger accounts come up for renewal, and have worked for over a year to position for those renewals in many cases. And so our confidence remains high that both the number of customers up for renewal is larger. Our profitability of closing them is higher because we really do have a whole strategic accounts program to focus on this accounts, so we generally know many months in advance, if not six to eight months in advance, about renewal. And so that spurs my confidence that we will perform well as the fourth quarter and early Q1 roll in and we hit those renewals.

Yeah, I realize it is only two quarters. The first quarter could easily be an anomaly. Second -- the next quarter, it's only two quarters so that could also be an anomaly. Is there anything that you see, any kind of fundamentals in the business that you see that have changed a little bit to be causing this trend or do you -- would you characterize it more as a blip?

Well, you know two quarters is a little bit more than a blip, so we're paying very close attention to it. However, you know, one thing that we would look for would be, you know, our platform migration ended about a year ago. And as we pulled our customers through that year, that was a challenging year if you remember. This might be a little bit of a tail on that where you attention is focused on our larger systems and larger customers to ensure our relationship with them. And maybe a few slipped through the cracks, and so as they come up for renewal, maybe we're seeing a little bit of that. But in general, I feel good again as we enter into Q4 and Q1 that we have our hands on the renewal situation and that it will move back up to closer to historical norms. And with more meaningful numbers, in the cycle of renewal, Q3 was actually a very low number on a typical basis across our 1.7 million. They're generally kind of three-year contracts. So but their base comes up in the year. Q3 was kind of abnormally low from a number standpoint. So I'm going to say that it's maybe a little more than a blip but definitely not a trend. And we're on top of it and we feel good, as we enter Q4, with the numbers being higher and the performance being better.

Okay, and the service levels if a customer defects because of what they perceive as poor service level, that seems like an easy fix. You can just focus more on providing better service. But on the competitive front what was it about the competitor's product that the customer liked compare compared to yours? And were you providing -- were they happy with your service level? They just like the new feature on the competitor's product?

Well it might be a mixture of both. I think in this one case it was more the customer found a new entry point into the organization through a different buyer in the organization. And they had the appropriate mix of content and system to position them well. And we generally feel we have an answer to that, but kind of they found another way into the organization and found another champion and were able to bring their system in really on top of ours. So, you know, we watch for that and generally we have a good competitive response. But again, occasionally someone out-positions you and out-plays you. But we look forward to preventing that in the future. And I feel we had a product mix to win that one, but the way they entered the account, they beat us.

Well, they didn't really have a feature that you couldn't offer?

No, it was a mixture of content and product and who the buyer was in the organization in this case. And generally we feel we have a competitive mix of content and system almost in every case. But, you know, occasionally one of our content vendors will have a competitor in the market and customers will prefer that competitor's content to the content in our network. So that happens occasionally. Generally we then go out and then try to add that content part to our network to further strengthen our network. So occasionally again, the mixture of product, content and service all come together. And in rare circumstances we get beat. So we own that loss and we turn right back around and add those partners to our network and come back and compete again on the next renewal, which again, our history is very strong in this area.

They were using the competitor's product for some different content maybe at the same time and then just decided to consolidate on the competitor's platform?

Yes.

Okay, all right, thanks very much.

Thank you.

Mr. Frist, it appears we have no further questions. I'd like to turn it back to you for any additional or closing remarks.

Thank you. We'll wrap up the third quarter conference call, look forward to reporting the fourth quarter of 2008 soon. Congratulations to our employees and their continued execution, their recognition on health care. We're top 100 healthcare IT companies. And at this time I would say we look forward to seeing you in the fourth quarter earnings conference call. Thank you for your attendance.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.