HealthStream Inc (HSTM) 2009 Q2 法說會逐字稿

Good day everyone and welcome to the HealthStream Inc. second quarter 2009 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Robert Frist, CEO and Chairman.

Good morning and welcome to our second quarter 2009 earnings conference call. Also in the room with me are Gerry Hayden, SVP and CFO, and Mollie Condra, Associate VP 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, and 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.

Good morning everyone. An exciting quarter to be reporting. There were many advances in our business financially and oftentimes financial advances are rooted in underpinning operational metrics. So I would like to start by sharing some numbers I found interesting as I looked across our operational performance from many different viewpoints. I think you will find them interesting as well.

The last month of the quarter was a month of many new records set at HealthStream. If you look at our platform metrics, our learning platform, the month of June, for me it is fascinating that our servers spooled up 170 million pages of content to our customers. That was a record in our history.

Those pages were delivered across 2.9 million logins and those logins resulted in 1.8 million course completions in the month of June alone. All three of those numbers are record highs when we look at performance of our base platform to deliver and spool content to our end-user customers. So it is exciting.

In fact, if you look within that last month of the quarter, even the last day of the quarter several new records were set. Over 8.4 million pages were delivered in that single day of June 30 coming from 143,000 logins to our platform. And we delivered 92,000 courses in a single 24-hour period.

So, just looking at the base operation of the amount of content and information we were delivering out to our customers, exciting to see many things, many [new] records set and giving me confidence in our infrastructure that has scaled in a very meaningful way to deliver this content to our customers.

Importantly, while that was happening, our customer service feedback was also setting records. If we look at our, albeit nonscientific, but at the end of every customer service call we deliver a seven-question survey to our customers that have called our call center. Across over 1300 evaluations that were filled out, we scored a 3.8 out of 4 on a 4-point scale. And that is a 95% customer evaluation score for that period of that last month of the quarter.

So it is exciting to see our record service levels coming out of our customer service facility and the satisfaction our customers have when they call us and interact with our service personnel.

Now, these are not exactly correlated, but concrete metrics associated with financials that do result from steady performance like this are items like our renewal rates. And if you look at our renewal rates on our core platform, we reported a renewal rate of 104% when based on a number of subscribers and 102% of contract value for the 90 day period of the second quarter.

These are strong showings. And the way they get over 100% is that we some of the accounts that renew actually add additional subscribers upon renewal. So, net of any losses and showing all of the accounts up for renewal, we ended up renewing 104% of those FTEs that were up for renewal. So I think, again, another strong and interesting metric to take a look at.

When you look at our execution from an operational standpoint, we also implemented -- which means activated -- 95,000 new subscribers in the quarter. And if you remember, when we activate a subscriber is when we begin billing. So it is exciting to see 95,000 new subscribers that we began billing for in Q2.

But it is indicative of really strong operational execution from the teams that deliver the process of activating and implementing our customers across our professional services organization and our core activation teams, really strong testament to their performance. That brings our total number of fully implemented subscribers, again that means the number of subscribers for which we're billing, to 1.86 million.

Sales also performed well with a contracted number of 49,000 new subscribers in the quarter. And the nice thing about this number is it spread across a lot of solid base hits, which means just steady additions of many, many customers to the pipeline that we have landed under contract. That brings our contracted subscriber base on the core learning platform up to 1.945 million subscribers.

So as we reported last quarter, it is exciting as we step our entire company towards the 2 million mark of contracted subscribers. And as we get near that milestone, we continuously welcome our new customers like Marquette General Health Systems, Delta Regional Medical Center, St. John's Medical Center and Murphy Medical Center -- a small sampling of our new customers in the quarter.

The research division operated admirably across many of its metrics as well. I will highlight some of the sales metrics.

57 of our customers added research services during the quarter, which means upon their renewal they added additional research services during that 90 day window. 35 renewed their contracts for multiple survey products, which means they sample and used more than one of our research products. We are excited to see a broadening utilization of our survey instruments, again resulting in fundamentally strong performance across research and learning operation units of the company.

New research customers added in the quarter -- Advocate Health System, Oklahoma State University Medical Center and University of Pennsylvania Health System are all exciting additions to our core research customer base, and we look forward to working with them to help them measure their engagement and satisfaction levels so they and those hospitals can improve their performance.

So as you can see when you look below the financial numbers that were released in detail when our earnings release, there are exciting metrics underneath it. I congratulate the teams that have delivered these metrics and look forward to their continued performance throughout the second half of the year.

I will turn it over to Jerry for a little bit of a look into our second quarter numbers and then a little bit about our guidance for the remainder of the year.

Thank you Bobby and good morning everyone. The earnings release and the attached financials pretty much tell our financial story in pretty succinct fashion. So I will try to do a few highlights and if I have time at the end for any questions you might have.

The first thing I want to do is just reinforce the leverage theme we have had throughout our financials late last year into this year. The 15% year-to-date revenue growth through the first six months has yielded an increase in operating income of (inaudible) [24%] and net income has grown by 224%. So quite a bit of leverage on the revenue growth.

The year-to-date earnings per share is certainly the results of operations and improvements in our financial performance. But there is one subtlety to the EPS. (inaudible) The equivalent share count is roughly 1.1 million shares lower in 2009 than 2008 and that is a result of our share repurchase program back -- during 2008. And so that fewer share count, while modest, does provide a meaningful 4.7% increase in our earnings per share year to date.

The balance sheet also remains strong. If you look at our working capital the current ratio has improved from roughly 1.07 in December of 2008 to 1.24 times in June 30, 2009. And if you look at the balance sheet closely that includes deferred revenue as a current liability, so we have a sizable current liability offset by current assets.

The cash position has grown by $3.5 million in the last 90 days. We finished the quarter at $8.3 million, which is up from roughly $4.8 million at March 31, 2009.

You saw the press release. We have updated our guidance. And the range of earnings per-share is now $0.16 to $0.19 and we anticipate net income will grow between 35% and [60%] over 2008 full year and operating income between [56%](Sic-see press release) over 2008 levels. And those -- net income numbers are also once again before any kind of income tax valuation adjustments. So it is designed to be comparable numbers.

You saw in the release and Bobby mentioned we've seen our subscriber net fee income showing progress in growth over the first six months, and the patient business line and research has also done quite well in the first six months. Our updated guidance does take into account some fluctuations in our project base, special services revenue streams and learning and the customer driven timing inherent in point-in-time surveys in the research segment.

In addition, during June and July we will begin making investments in our sales force and product development staff, which will add to our cost structures for the remainder of 2009. With these facts in mind we have raised the bottom end of our earnings per share range to $0.16 from a $0.14 and the top end has now gone to $0.19 from $0.18.

Thank you Gerry. I would like to wrap up with a few recognitions for our staff and our employees that are exciting, and it is fun to be included in various indexes and recognition programs.

HealthStream was recently recognized in Healthcare Informatics 100 list where our ranking improved from number 61 to number 54, so this is our second year on the list. We are excited because I think more than anything this recognition shows the power of focus. By staying focused in the healthcare industry we are able to deliver growth even in these tough times. And I think the recognition on the Healthcare Informatics 100 list, the top 100 list, is really a testament to the focus of our company staying true to healthcare.

In addition, Fortune Small Business ranked us number 33 on their FSB 100 list, which are the fastest-growing public small-cap companies in the country. When I think about this, the filters for this ranking and we are very proud of our 33 ranking out of 100, one of the key filters there is profitable growth.

When I think about our company and the discipline we have utilized, for me, this recognition while rewarding for employees is more indicative of our responsible and profitable growth. Many companies execute growth patterns but they don't do them profitably. So I am proud to celebrate the Fortune Small Business ranking of 100. And when I think about what it means, it means to me balanced and profitable growth given that that's a filter for that particular contest.

At this time, I would like to thank all of our employees and shareholders. And we will turn it over for questions and take questions for a few minutes here and then look forward to reporting our next quarter.

(Operator Instructions) Stephen Hart, Heller Capital Partners.

Hi Bobby, how are you doing?

Good morning. Doing well.

Congratulations on a great quarter. It is certainly impressive in an environment where we are seeing almost every US company continuing to struggle.

With what looks to be record gross margins of 64.1% and operating margins of 12.8%, I was wondering if you could give us a longer-term target that we could all look for.

Well, Steven, we haven't really guided at that level. And so we are not going to give a target right now. The best thing I can advise everyone to do is to take a look at our last six to eight quarters when we look at patterns. And they've been fairly consistent in that range of 62 to 65%, I believe, and I will ask Gerry to confirm that for you later. But I believe that is in fact the case.

We are very much a pattern driven company and focus on consistency. So, when you also think about our forward forecast of 16 to 19%, so you can work to derive our gross margins from there.

But we don't -- we're not guiding long-term yet because our product mix continues to change. As we add new products they have different gross margins and so we have new products on the horizon that have different gross margins, and as they take off they will change that gross margin.

Our focus is on what drops to the bottom line. Gross margin is very important for our service lines and our software lines. But as we add incremental products that have different gross margins, for example if content sales continue to accelerate, the gross margins are sometimes lower on those products. So we watch gross margin closely on a product basis. On a blended basis it may mean just a little less.

Okay, fair enough. And thinking of the operating margin and ultimately the net margin, is it safe to assume that as you continue to offer more and more content through your network to your end subscribers that we would continue to see a tick up in that? Not quarter to quarter but certainly over time, spanning years.

Yes. This is Gerry, how are you?

Good.

The answer is yes, you would. The moderating factors would be any kind of any royalties against the content if it is an external source for the content versus internal. But as a general theme, that would be a key driver to expanding that operating margin.

In addition, we see strong sales performance. We're getting much more skilled at identifying buyers for content inside of our network and beginning to see content uptake numbers that are stronger. As I mentioned, as you could see from the amount of content we are delivering just on an absolute basis, that is also reflected in the contract activity on content that is up in many cases 25% over prior year same quarter.

Okay, super. Well, job well done and I look forward to many more quarters and years like this.

Thank you Steven. We will keep working hard.

Vincent Colicchio, Noble Financial.

Good morning Bobby. Nice quarter. This is now I think the second or third quarter where the research division has shown decent year-over-year growth, I think within your targeted range. Could you remind us what you have done to improve that business? And do you think you are kind of in a position where you can consistently drive the kind of growth you expect you would like to see going forward?

Well, certainly we are moving beyond the integration phases which always take longer than you hope when you assemble a new operating unit. But we are beginning to see stronger execution against plan from the whole leadership team there across the research group. So we are excited to see that core operational performance.

We are also beginning to get a little more leverage across using our central services and our generally strong approach is, across the company we're doing a good job of replicating those organizational patterns. So, I think in general I'm very proud of the execution of that team and, yes, we expect them to continue delivering a steady and solid performance.

And can you talk to the new HCAHPS product? Is that a differentiated product or is that something very similar to what your competitors will be offering?

I think every good research company needs to offer a solid solution and a position and a point of view on HCAHPS and its impact. HCAHPS is a set of mandated survey questions that must be reported -- the results of which must be reported to CMS. And I think every good research company needs a solid point of view.

We think we have created a unique mix of strategies for intervention, content for strengthening knowledge and awareness of the HCAHPS program which helps our hospitals score better and be better prepared for their HCAHPS surveys. So yes, we think we have a unique blend across our learning and research products to bring a unique value proposition to our customers as they focus on improving their HCAHPS scores.

It is still early in the game, so we are waiting to see how it all plays out. But it is potentially a very powerful intersection point for our learning and research groups to focus on.

I think I ask you this question every quarter but could you give us an update on the new product side for the learning business?

We always have a steady stream of product and product concepts. If you look backwards, you can think of the HCAHPS courseware being a strong contributor.

Our competency program, we had some releases on that this last quarter. We continue to add contracts but not yet revenues from our competency program. As we sign people up for the -- both software and add valuable content partners like the Lippincott Williams & Wilkins partnership recently announced just a few weeks ago in fact. So, we are very excited about our strategy in that area.

It is taking longer than we had ever expected to generate meaningful revenues from it, but our contracted -- we are up over 30 contracts now on the new platform. Many of those are with large health systems that have agreed to pilot the program, meaning the software and the content. And so we are still very, very optimistic for the competency platform as you look into 2010.

How much revenue would come from 30 contracts?

We have not quantified that because it is a mixture of pilot programs. For instance if you have a large health system with multiple hospitals, they might be piloting at a couple of facilities. So in many cases the contracts could expand meaningfully if we're successful with our pilots. So we have not disclosed the contract value on those 30 contracts.

All right, thanks. I will go back in the queue.

(Operator Instructions). And there are no further questions. I would like to turn the call back over to Robert Frist for any additional or closing remarks.

Thank you to everyone for listening in and participating in our conference call. We look forward to answering your questions over the next few days if you call in and seek a few more details from the senior team. We look forward to reporting our second quarter as we -- third and fourth quarter as we enter the second half of the year. Thank you and we will see you soon.

That does conclude today's conference ladies and gentlemen. Again, we appreciate everyone's participation today.