HealthStream Inc (HSTM) 2008 Q4 法說會逐字稿

Good day and welcome to the HealthStream fourth quarter and full year 2008 earnings conference call. Today's conference is being recorded.

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

Good morning, thank you and welcome to our fourth quarter and full year 2008 earnings conference call. Also in the room with me are Gerry Hayden, our Senior Vice President and Chief Financial Officer, and Mollie 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 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 10-K and 10-Q.

Thank you, Gerry. This morning we're going to cover a few topics, a few financial numbers, a little bit of an outlook for next year and discuss a few accomplishments, open it up for questions. I'll begin by highlighting that we crossed the $50 million threshold wrapping up the year at $51.6 million which was up 17% over 2007. So we felt we delivered a strong revenue growth in 2008. Importantly a few measures of leverage, year-over-year revenues grew 17% and operating income increased by 29%. We're pleased to see that. The quarter-to-quarter comparisons are also strong with revenue growth of 13% and again delivering leverage by showing operating income improving 29%. So we were pleased to see some of the leverage of our model kick in in the fourth quarter. Fourth quarters are generally seasonally strong for us and this fourth quarter is no exception, which let us wrap up the year strong.

Another metric that we watch carefully are what we call our net new subscribers. We put a lot of disclosure about our subscriber base, its renewal rates. And I believe if you recall back in the prior quarter, we'd had a relatively or maybe even historically low number of net new subscribers, well this quarter, the fourth quarter and we wrap up the year in with a relatively high and maybe even historically high number of net new subscribers at 93,000 in the 90 day quarter. So, we-- we're able to add some really good contracts at the end the year. And knowing our model is a subscription based model largely, that bodes well for the early part of this year as those new subscribers get implemented.

Also looking at our renewal rates. I think in the last few quarters our renewal rates were a little lower than what we like although we think still strong in the mid-80s. This quarter, fourth quarter and wrapping up full year was strong renewal rates of 90% of the individuals up for renewal renewed in 104% of contract value. The 104% of contract value is because generally they add services or we sell at a higher price point. So were again pleased to see that through year end. The full year renewal rate, even blended with the relatively lower second and third quarters was 91% of FTEs and 100% of contract value. So again we're pleased to see again our subscription renewal rate back in the 90% threshold range and even for the full year.

We also had a nice win or two on our new platform, the Competency Center. One of them of note, although it won't be financially significant in '09 because it is a pilot program, a small pilot, it was one a-- one of the largest health systems in the country. A competitive bid, an RFP process, and our Competency Center and Competency Network solutions were selected as the clinical competency system of record by a large health system in the country. And it is a pilot program so we're not expecting too much financial impact in '09 but as we succeed in the pilot we look forward to a strong '10 and more telling though was that the market seems to be favoring our solutions set on this new platform, our approach to measuring competency of healthcare-- of the healthcare workforce. So we're excited to see that development.

Our Research business also had a lot of good facts surrounding it and some not so good. Revenues for the Research business on an adjusted basis were relatively flat year-over-year, so that was a-- we'd like to see us do better with that. But we saw good retention and good customer growth in many accounts. 205 of our customers in Research added services throughout the year and we think that's a good sign they're coming back. And we-- we're looking forward to doing a better job growing the Research business as we enter '09. We added a mix of new customers to our Research business as well in Q4, customers like Lincoln Park Hospital, McAlester Regional Health Center, Decatur Memorial Hospital, Pleasant Valley Hospital, either switching from existing vendors or signing up for HealthStream's new models. In this case we're seeing our new approach to measuring the HCAP's and using our Learning business to intervene to help improve HCAP's scores to be a compelling growth proposition for our Research business.

So with those base metrics in mind, we feel we've wrapped up a strong 2008. At the conclusion and after Gerry talks about the 2008 numbers, I'll speak a little bit about our sentiments as we head into 2009. So I'd like to turn it over to Gerry for a discussion of some of the detailed numbers.

Okay, thanks, Bobby. I just want to give you a few brief highlights and we'll have ample time at the end for questions. There was one more piece of the leverage in our fourth quarter results, I did want to bring to everyone's attention. Our income before income taxes grew by 25% in the fourth quarter but earnings per share, using that same income before income taxes, grew by 31%. Besides better profitability, the equivalent shares in the fourth quarter reflect the benefits of our $3 million share repurchase program which we completed earlier on in the-- this year of 2008.

Two things on the balance sheet. One in these uncertain economic times, days and accounts receivable is a pretty key measure. We saw our days decline to 57 as of December 31st of 2008 and that's a compare-- that's compared against 66 at September 30th of the same year and also 63 at the end of 2007. So we have made a little progress on our accounts receivable. The second thing I'd just like to make a brief comment on is (inaudible) income taxes create some unusual fluctuations in our reported net income but the underlying economics that are really important to keep in mind is that we have $38 million of unused operating loss carry forwards, which means our earnings should be sheltered from income tax liabilities for the foreseeable future. That's a (inaudible) asset we hope to capitalize on certainly.

As you all most likely read in the press release our guidance for 2009 calls for continued growth. We anticipate revenue growing between 13% to 15%. Our gross margin will be similar to 2008 and we expect operating income to increase between 20% and 60%. We believe that the leverage inherent in these operating results will translate into between $0.14 and $0.18 per share of fully diluted earnings. And those numbers, the $0.14 and $0.18 does not include any adjustments for income taxes, it's designed to be offered in comparison with this year. And also we've chosen to (inaudible) at providing quarterly guidance and refer to annual guidance. There's a lot of quarter-to-quarter fluctuations, so we also think that our annual targets are the best measure of our gross trajectory.

Thank you, Gerry. So with that I'll comment a little bit on the market environment. I would say that we've spoken with our employees about the environment, we're certainly waiting to see the impact of the economy on our customers, the hospitals. And there is a lot of mixed messages for those hospitals. We do see already that capital spending in those hospitals has significantly slowed so as a telling indicator of the impact of the economy on our customers. Generally we position our products and services as expense savings and part of operating budgets instead of part of capital budgets. So generally we try to position in a way that even with the capital spending that has been halted in hospitals, we hope we're positioned, at least the best that we can be, coming into the headwinds of this economy. So we're entering '09 with a bit of caution.

Although you heard from Gerry that we are expecting a growth year so we did decide to put out an annual growth goal or guidance. So you can see we're expecting both revenue growth and a significant larger range but significant improvement in net income growth as well for the year. So we have this mixture of messages of caution waiting to see the impact on our customers. And optimism that our subscription model that we're in a regulatory business largely and that we are a low cost method of complying with those regulations so our services, we hope and expect we'll still continue to be needed. We also believe we're a best of class provider of several of those services, so we feel relatively well positioned. Of course the year is not without risk so we have a broader annual range and we are suspending quarterly guidance. You'll have to look at our historical patterns the last four years to see our normal seasonal patterns for those that are interested in quarterizing our performance. But we thought it'd be more productive to give a slightly broader range for the full year and work towards achieving that range for the full year. You also know in the last four years that our history shows that the fourth quarter is our stronger quarter seasonally.

With that said, I'd like to turn to our employees for just a moment and tell them that we surely appreciate and are excited about their attitude as we enter these tough times. It's been impressive to see our employees rally around our expense management programs to see them get engaged in the challenges of this economy with us and the whole Company pulling together. We've got some really impressive employees that are doing some fascinating things making us an employer of choice in this region, making us a great place to be. And I want to call out a few of the things that they're doing just briefly to keep morale high and keep our workforce energized in these times.

We see leaders like Ann Wells and [Kristy Horton] and Craig Calvert, Josh Davis, [Karen Garner], Jacqueline Franklin and [Ty Young], all leading employee driven teams. These teams are working on expense management, event management, our green team leads us on economically friendly business practices, our 'lunch and learn' programs that help educate our program-- our employees and we teach one another. And all of these programs are part of what gives us a strong culture, keeps our employees together, keeps us pushing forward and I wanted to congratulate those team leaders for their energy and leadership. Those are particularly important in times of challenge like this to keep everyone moving forward in a positive way. Congratulations to those team leaders. At this time, I'd like to open it up for questions and Gerry and Mollie and I are available to field your questions. Thank you.

Thank you. (Operator Instructions) We'll go first to [Harvey Poppel] with [Poptech Alkey].

Yes, certainly hardy congratulations on a great year and I'm very pleased to hear your outlook for 2009. You talked about leverage and obviously you've emphasized this in the past. And trying to get some sense of just what that degree of leverage is. In other words, when you look at your forecast for '09, if you were for example to generate another $1 million of revenue how would that relate to earnings? What is the ratio of sensitivity there?

Well we've put out the full year guidance and the inherent leverage in that and you see a little bit of operating leverage there based on the forecasted revenue growth. We generally don't comment on it by kind of buckets and categories in the next million because as we increment our growth and revenues beyond our forecast we sometimes increase our investments and kind of somewhat deleverage by investing for growing. We also-- it depends heavily on product mix that we sell in any given quarter. So some levers-- some quarters show more leverage than others depending on what product mix was sold through. And so again, it's kind of hard to forecast on it based on quarter-to-quarter. So I think you have to look at our inherent leverage that we've just laid out for you in our full year net income guidance which was an operating number before tax effect and our full year revenue growth projection. So I-- you have to look to the numbers and just-- and do your own deductions.

Well can I, can I approach this from a slightly different direction? If we look out several years, what kind of a bottom line before taxes do you target as you look out several years percentage wise?

And I think that's normally a fair question. But again we're such a growth mode and making investments as we go and adjusting our CapEx spend and changing our operating model and approving efficiencies at such a rate that what you right now is we're pulling back a little bit from guidance on most measures and not talking about two and three years out, we're limiting to one year forward look. And you can look at our past three years and see the improving operating leverage and then this year we just disclosed. So I really don't mean to be evasive, but we're limiting our guidance to not looking out two and three years right now to one year and we've disclosed just now our inherent operating leverage that we're forecasting. So I'm sorry I don't mean to sound invasive, that's just where we're standing right now. And it is such a variable thing that we control with our investment decisions at our current scale that you can kind of deleverage a quarter or leverage up a quarter based on how you manage your investments.

Well one final question, or really a comment then. And that is that as I'm sure you realize from the behavior of the stock and other securities, the market now is very much valuing bottom line more than the-- I think they are growth. And I think any appreciation in shareholder value over the next perhaps even several years, my observation is, going to lay more to what you're going to bring to the bottom line as opposed to growth with only very nominal increases in profitability. So with that I'll kind of shut up, but I just wanted to make that point.

Well I think it's a great point and it certainly is kind of a shift, some what of a shift, if you think of our size and our growth objectives. A lot of times at our size, people are looking for scale. And I would say you can see from our results now that we are a little more focused on operating leverage as we're talking about it much more in this call. So I think I agree with your sentiments and hope to continue to show that I agree with your sentiments by focusing on that much more.

Thank you very much.

Thank you.

We'll go next to Vincent Colicchio with Noble Financial.

Bobby, your 2009 outlook, does that assume the economy stays in it's current state of affairs or do-- are you assuming some kind of an improvement later in the year?

Vince, what we've done there is to handle what we hope ends up being the uncertainty, we've broadened our range. So you see a, almost a $0.04 range which is for us at our scale of our profitability level a pretty broad range. We did think it was important to not suspend all guidance and make sure that everyone understood we're projecting growth in both revenue and net income. I would say we've handled the-- we've tried to handle the uncertainty with the broader range. And so we're not necessarily forecasting an uptick, in fact, we're somewhat waiting to see the impact. And so I would say that through Q4, if you look at our sales and our FT growth of 93,000 subscribers, we certainly did not see-- we were able to close deals. I think we're going to see a little bit of a slowing in closing deals, but our same-store sales, I think we can continue to show our customers ROI on the content. So the only way I can answer this, Vince, and again I don't mean to be evasive, but is that to handle what I perceive as the uncertainty and forecasting, trying to predict the impact I can't do. So we just broadened our range of guidance.

You talked a little bit about the Competency Center. Can you-- according to my calculations, it looks like revenue per subscriber increased in the 4Q. I assume that's due to new product, can we expect new product to help us give a lift there in '09?

Well, Vince, the Competency Center is not yet delivering revenues. We have more and more pilots going on it. And so that is not the piece that's creating the leverage, in fact that's one of those-- back to Harvey's questions earlier, that's kind of deleveraging us right now actually because we're investing in it at a higher rate then the revenues coming in. We still believe it has inherent future leverage, so we are continuing our investment there.

The growth in the revenue per subscriber is coming from the sell through of content. And if you're familiar with the book, "Good to Great," a few years ago, we declared operationally we'd be focusing on our hedgehog of selling more content to the channels. We've increased our sales organization in what we call our market development team, which is our direct sales force through largely telesales, from five at the beginning of '08 to over 15 exiting the year, and we plan to continue to add to that. So, again, that's a little bit about how we're growing right now is by selling through more content down the channel. We're seeing same-store sales growth by offering more quality content down the channel.

Moving on to the Research business, you had said you'd like to see better results there. What are some of the things you're doing to improve the growth outlook on the Research side?

Well I think there's quite a lot of good things we're doing there. We're continuing to invest in our marketing programs and our messaging. We're working on our repositioning of one of our core instruments to be better aligned with both the regulations and how hospitals are going to be measured and paid, this is the HCAP's survey. We're integrating the leveraging our Learning business by developing specific educational curriculum that can be sold to a hospital based on their survey scores. So interestingly the Research business is helping grow the content business in Learning. So with sell through of content like our HCAP's intervention curriculum that helps improve HCAP's score. So to improve that business is helping already grow the Learning business. But the repositioning of those product lines we think will grow then in the next year, in '09.

Okay, I'll go back in the queue, nice quarter.

Thank you.

(Operator Instructions) We'll go next to Steven Hart with Heller Capital Partners.

Hi, Bobby, first of all congrats on a great quarter in what's a horrendous environment you've forecasted to grow the business pretty nicely in a-- in '09, so congrats.

Thank you.

You've touched on it a little bit, but given the current economic environment, can you discuss a little more about how it effects your business with the hospitals? Maybe break it down from the Learning side which has a large percentage that is mandated versus the Research side which I'm guessing is more of a discretionary spend by the hospital.

Yes, so the-- it's one of those things that I've gotten in front of our employees and said we'd rather be in healthcare than other industries. And to your point, it was in healthcare we'd rather have our products be part of compliance in the regulatory environment, so you're correct. In the Learning business a large part of our initial business and some of the reasons we got these customers was helping them comply with the Federal regulations of OSHA and joint commission. And so a large part of those products we think are just kind of a lower cost method of compliance which are Federal regulations, which protects us. Now the add on content sales in Learning are a little more discretionary. So kind of the degree to which we're able to grow is dependent a little bit more on elective dollars in showing the efficacy of that content with return on investment calculators, reducing medical malpractice. Those are a little bit harder connections to make but we strive to make those connections and show that content., although somewhat elective, has cost benefits.

The Research business is almost half required now. The patient satisfaction survey business is driven by now the requirement to submit your scores to CMS and their publicly reported data now so, by the Government. So, a meaningful portion, about half of our Research business is also essentially regulatory in nature and fairly consistent. That does though, as with the Learning business, there's an element, a meaningful element in this case that's elective, the employee engagement measurement, the physician engagement and satisfaction measurement businesses are a little more elective. And we might see deferrals in some of those types of surveys. I would expect to see some of the deferrals, hence some of the broader range of growth guidance. So, both businesses have a component of requirement, which is a-- in both cases is a majority and they both have an elective component. That's why we're confident of growth because of those base businesses, but the range of growth is a little hard to foresee with the potential of deferral with the elective purchasing.

Okay, great. And one last thing, Bobby. When I read about Tenant Healthcare selling a couple of hospitals, which I think they recently did, does your working arrangement with them continue with the new owner in the hospitals? How does that work?

There's generally a transition model. We have a transition model and generally those services are provided for some period of time and then it's up to us to go back and sell to that hospital continue the services. So transitions are usually six months and sometimes a year. So they continue for awhile. And sometimes they drop out of our base and sometimes we convert them. And you can see all that in our, what we call our net new subscriber number. Any losses would be reflected in the total contracted number they would be deducted from it. And so that's why we're kind of-- the net new number of 93,000 is a mixture of things it's accounts we don't convert like you just mentioned that are dropped from payroll effectively of our customers. They also grow, so a hospital system acquires and that gets added. We also sell new accounts. And so there's lots of buckets in that net new number. And then we lose some to the market or competition. All of that netted out to net 93,000 positive it Q4.

Great. All right, thanks a lot and great quarter.

Thank you.

We have no further questions at this time. I'll turn the call back over to Management for any additional or closing remarks.

I guess I would like to thank you to re-emphasize that we're entering the year with caution, some careful expense management programs, engaging our employees to help us with that. We are fortunate to wrap up 2008 strong and we are looking forward to a growth year in 2009. But I do want to have some caution around 2009, and more than a little caution, I think it's wise to enter the year very cautious. And so you've seen us broaden our range of guidance to try to accommodate that. And with that in mind, we'll look forward to reporting our Q1 numbers shortly. Thank you for attending this conference call. We'll talk to you all soon.

That does conclude today's conference call. We thank you for your participation.