HealthStream Inc (HSTM) 2009 Q1 法說會逐字稿

Good day and welcome to the HealthStream first quarter 2009 earnings conference call. Today's conference is being recorded.

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

Good morning and welcome to our first quarter 2009 earnings conference call. Also in the room with me are Gerry Hayden, Senior Vice President and CFO; and Mollie Condra, Associate Vice President of Communications, Research and Investor Relations. Gerry will 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 and could cause the actual results to differ materially from those 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. We have got a few quick topics to hit and we will move into the questions as soon as possible. First, one of the themes for had this quarter that is very existing that I'm proud to report on is what I will call our balanced growth we saw across all of our product lines and business units. Calling out specifically our research unit delivering 18% year-over-year organic growth, Eddie Pearson and has team have done a fantastic job growing that line of business for us. The growth was driven by strong renewals, upselling existing accounts, new account acquisitions. So really across all dimensions, and we also saw some operating margin improvements in that business unit due to efficiencies gained in operations. So really would congratulate the research organization at HealthStream for delivering a solid 18% year-over-year top line revenue growth really just good execution across the board.

That was complemented by the growth in learning where we saw growth in platform, strong renewals, strong net new additions to subscribers. So the learning unit grew 20% year-over-year organic, top-line revenue, and it grew through a combination of adding 41,000 net new subscribers in the quarter under contract, activating or implementing 36,000 new subscribers that as you know, as we implement we begin to recognize revenue on those subscribers. So those were revenue additions. We also enter the second quarter with a strong backlog yet to be implemented due to our strong selling season in the fourth quarter of last year, and the net new additions in this quarter. So our backlog of unimplemented subscribers is now 128,000. And our cycle times have improved on implementing that backlog. So we saw improvements there in our cycle times of implementing.

It also really strengthens your position when your renewal rates are strong. In our learning business, we demonstrated a 101% renewal rate due to the fact that the customers that renewed typically added employees or enough to get our renewal rate above 100%. So the subscriber base grew through the renewals. And 98% of the contract value was also renewed which is a strong indication that pricing is holding, and the Company is advancing in those areas. So really my theme that I'm proud for all of our operations teams and our leadership group was how they delivered in this environment, strong balanced growth across both business units and most all product lines. With that as a context I would like to turn it over to Gerry to discuss some of our operating metrics and financial performance.

Okay. Thank you, Bobby. I will try to make a few brief comments and plenty of time for questions at the end of the call here. But a couple of quick things to elaborate on. First of all, the results in both segments are true apples to apples core comparisons. In prior years we have a TJO acquisition and its timing the first quarter affecting the results. That's not the case now in 2008 or 2009. So the growth in research is pure core comparison.

Having said that, the growth in research, business $700,000 of revenue growth happened across all four major product lines. So once again as Bobby mentioned, it is balanced growth as well. The learning segment, some of you discussed in some prior calls, we are still seeing expansion and then of course a number of FTEs, that's obvious but also the revenue per FTE is also increasing which is a sign of more and more penetration into our existing customer base. And also our present services group has also demonstrated some revenue growth as well.

One of the side products of the growth and the quality of the growth is that our overhead as a percent of revenue has declined. Other general and administrative expense is the category we find our corporate overhead on the income statement. And if you look back at 2008, that was 15.5% of revenue. This first quarter of 2009, it is down to 13.9%. So we are showing leverage in the operating units but also in our corporate level as well. One thing important to note, the days receivables did increase from the year-end. At year-end there were roughly 57 days sales in accounts receivable. That did increase to 69 at March 31. There are a couple of unusual items in the quarter end balances. Cash received after the balance sheet date have reduced those receivables but in the second half in the environment that's one of our top priorities is keeping a close eye, and close communication with our customers on our outstanding balances.

Finally, what we did is reiterating our guidance we issued in February about our full-year 2009 outlook. And to summarize that we expect our revenues to grow between 13 and 15%, and our operating income and net income which roughly are equivalent given our income statement to increase between -- for the full year of 2009.

Thank you, Gerry. Wrap up with a few comments here. Really when we look across most all of the metrics for the Company, they're strong indicators for a good first quarter. Even with those we will talk about a few cautionary statements as we are enter the second quarter and second half of the year.

Cash balance improved to $4.8 million. EBITDA was up to $2.3 million which was 54% improvement year over year. Operating income showed real strength going from $44,000 in the prior year to $936,000 in the current year quarter. And we already mentioned things like renewals and new account wins across the quarter. All of those are strong indicators for delivering good results through Q1. And we want to continue to energize our employees as they have been aggressive partners in our cost containment and management programs, in fact very proud of how our employee driven committees are helping us contain and manage costs which I think having their involvement has been key to our success in this quarter. And hopefully on a go-forward basis.

On the cautionary side, we continue to look for the impact of the economic situation on our customers, namely the acute care hospitals. We see some signs and there has been some recent reports really as recent as March that there has been a little bit of an increased crimping of the, of the operating budgets at hospitals whereas we didn't see that last year. We saw a contraction of capital budgets at hospitals last year, and most of our products don't hit the capital budgeting process at a hospital. As we enter into the second quarter, we are beginning to see a little bit of tightening of the operating budgets, although you can see from all metrics, we have sustained a good performance throughout that. But we use that to maintain and reiterate our guidance. Even though we had strong out performance in Q1 we are reiterating our guidance as we had issued it a quarter ago, due to these cautionary statements and the things we're watching, the impact of the economy on our customers.

We continue to get excited and push forward to the time when we will have 2 million subscribers on our platform and that is a motivating goal for all of our employees. We continued with the net new additions to our core platform, had a good clip in the quarter, and as I have stated before, our goal is to add 20,000 to 50,000 net new subscribers and we are within that range. As we continue to grow the subscribers, we have an exciting milestone that we are targeting, and we'll to continue to shoot for that two million subscriber point and report back to you when we hit it. It will certainly be a moment for our whole organization to celebrate. At this time I would like to turn the call over to any questions that we may have and then wrap up the conference call.

Thank you. (Operator Instructions) We will go first to Kevin Liu with B. Riley and Company.

Good morning and thanks for taking my question. Just looking at the pace of implementations relative to the prior quarter as well as the prior year it looked like it slowed down a little bit. I was wondering if that was by customer request or if there were just some implementations that may have taken longer than you expected?

Actually it is the mix of the implementations I believe, because the cycle on the regular accounts have gotten faster but in the end of the year and early in the year we won some very large accounts and those accounts have longer implementation cycles a little bit longer. You see that in the backlog, the 128,000 backlog. We hope to push through a big part of that in the is second quarter as these bigger accounts, an account with 20,000 or 30,000 FTEs gets implemented. It really moves the backlog numbers. Just a bit of a timing anomaly because we signed a lot of good contracts in the last few weeks of December. I do not sense any delay by customers. In fact, I think generally our implementation cycles are improving.

Okay. And then on the dollar value renewal rate, I mean historically it looks like you guys have always been able to get that contract value up above the renewal rate for the FTEs, what are you seeing in terms of competitive pricing and then has there been any change in your approach to either discounting the customers or maybe helping them out in this environment?

Yes, one of the things we have done in a few cases with large accounts, when we have a one or a two-year contract or say a one year coming up for renewal and it might go out to bid in the market we have offered a few and you can see small incentives to strengthen or reenter a longer term agreement, say a two or three year term agreement and get them an end year discount. On very few occasions but we have done that where it makes sense to go for time horizon and security over say end-year savings. If it benefits some of our relationship we think it has been a wise move and you can also see from the numbers it hasn't been very large just a good gesture for our customers. Generally we get something in return for it like a loan or horizon commitment.

With the pricing improved, kind of a year two and year three of the contract or is it relatively flat throughout?

A lot of our contracts the pricing scales over time, and goes up. And at the end of terms there's renewal clauses that have adjustments for auto renewal, it's inflationary adjustments and other adjustments. So, but some are flat and it depends on the customer, the size of the customer and the kind of term relationship we are looking for them. I didn't mean to be vague on the answer but we really have all shapes there. The thing we really shoot for is stability, two and three and four year terms. We prioritize that over a 1 or 2% pricing gain.

I see. And then in terms of your comments on the operating budget cut backs, any sense for whether that would hit your research business first or whether that impacts your ability to add new customers on the learning side?

I think it holds potential a little bit for both. As you can see from the FTE renewal numbers when our hospitals have come up for renewal and they have gone through an acquisition, we have a lot of large health systems that are actually showing employee growth, that directly benefits us. And so we have seen some areas where the operating budgets have been strong in hospitals as they've grown, we have stronger customers.

On the research side. But there are other product sides like electives, purchasing, and content, that may get delayed although generally we believe our content is in line of critical functions in the hospital. And so but there are certain product lines that are you would consider elective that we may see some delays in and then on the research side things like employee surveying, you may see customers decide to push ser says out a quarter or two or three depending on their own economic situation. To be clear we haven't seen that yet. It is just something we are watching for and we have certainly seen all customers negotiate harder and general targeting shorter term contracts in their negotiations which is one of our priorities to get longer term contracts. So those are the things that we have seen that indicate how the economy may impact us.

Okay. Thanks again and congratulations on a solid quarter.

Thank you.

(Operator Instructions) We will go next to Vincent Colicchio with Noble Financial.

Hi, Bobby. Congratulations on the strong quarter. On the research side, obviously a big improvement there. What, if anything, is being done differently on that side of things?

Well, several things are being done differently, from the way our sales and marketing engine is being run. We have organized leadership differently, and have a new structure for growing the sales organization. We made investments in the growth of the sales organization, last year led by Tom Hutchison throughout the end of the year. We have added sales personnel effectively. We have organized our marketing for our whole Company under a new leader, Luther Cale, that is adding strength to our marking across both sides of the Company. We are just seeing general improvement everywhere as we get our kind of merger-related issues behind us over time and show strengthening in our product vision. We have got exciting new advancements in our platform for research coming in the second half of this year. So I would just say generally better better execution, larger sales force and good leadership by Tom Hutchison who leads our sales organizations for research.

Where do you stand in research in terms of harmonizing products, from some of the acquired businesses to the existing health stream business?

Last year was a relatively flat year for research but a lot, that's where all of the progress was made in harmonizing or synchronizing the products, redefining them, so the team was really buckled down last year focused on that very thing. Getting the product lines to work together. Now we have made even more technical advances as our data for all of the research product flows into a single data warehouse across all customer bases, it's something we are looking forward to in the second half of this year. Operationally last year was the focus, sales is the focus this year. Of course that comes in a time of great head winds for some of these types of products that are generally kind of elective but so far so good. The team has done a great job.

Can you provide us with an update on new learning products in terms of what may be in the pipeline and products that are existing in the market?

Yes. We always have a long list of content partners that are, that we're organizing to bring new content offerings to the market. And we see just a constant parade of new product introductions there on the content side. So we are seeing good uptake on new content products and we will be doing some announcements on some of those as well. We are seeing a strengthening of our partnerships around competency, development and measurement, as our competency platform continues to evolve, and we have won a few new contracts in the quarter there. No significant new revenues on competency yet but definitely some significant new wins that will materialize as we implement new platforms in the latter half of this year and early next year. In addition we are finding new partnerships that the competency platform drives. For instance a new partnership with an organization, Lippencott, Williams and Wilkins for new skills training libraries and a new partnership with nursetesting.com to deliver competency testing and different forms of competency measurement tools. We have a nice pipeline of new instruments to sell and new content to sell.

You had mentioned that -- you provided some cautionary comments on the current quarter. We are a bit into the first month of the current quarter. How is the quarter tracking versus the March quarter? Any sense for that?

Yes, we haven't closed up any of the, any of those books and certainly other than the cautionary statements aren't going provide any information on the current quarter. We do look forward to reporting that in 85 days.

Okay. Thank you.

We will go next to Steven Hart with Heller Capital Partners.

Hi, Bobby. Job well done.

Thank you, Steve.

In regards to the new customer wins are they mostly coming from traditional, maybe in-class teachings or are are they coming from competitive platforms?

A little bit of both. We see, we have been able to have some good platform switching, where hospitals and hospital systems have run into a bump in the road and implementation say of an existing vendor and we have been able to show our strength and our health care focus to win them over. The same is true on our research business. Some people have been with the current research vendors for a long time and they look up and want to see the new tools and instruments from our organization and so we've had some nice competitive wins on both. I would say a little less on de novo brand new, particularly in learning in the last quarter or two although we get a lot of new subscribers through I will call them the smaller market development organization, we are picking up in the smaller part of the market. So I would say it is the mixture as I have just described.

Great. And something I have been harping on for a while and you're finally demonstrating some improved operating leverage, according to my calculation, operating expenses was 54.4% of revenue, and this has typically been in the higher 50s to 60 in the past. So what I am getting at is adjusted EBITDA was up to 17.2% from about 12.5% a year ago. Do you have a longer term target in mind for where adjusted EBITDA margins could be?

Hi, Steve. This is Gerry. How are you?

Pretty good, Gerry.

I think we will, as the operating leverage improves it will show in both operating income and EBITDA, obviously. What the maximum amount cold be depends on the business mix and the volumes and so on. So hard to say where it taps out. We are not quite there yet but it is hard to say where it might top out. But there's definitely some more chance for more leverage across the whole organization.

All right. Great to hear. Thanks.

(Operator Instructions) We will pause for just a moment. We will go next to Thomas Haynes with Empirical Capital.

Yes. Just had a housekeeping question. Can you tell me what the cash from operations number for the quarter was and if you bought any stock back at all?

There's no repurchases in the first quarter. The program we had in place, we fulfilled that program back in late 2008. Cash flow from operations, I will have to get that. It is not the press release but I will get that and giver you a call back.

That's great. Thanks.

At this time, we have no further questions in the queue.

Well, thank you everyone. We look forward to reporting the second quarter earnings conference call and thank you again for attending and congratulations to all of our employees for delivering a strong quarter.

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