HealthStream Inc (HSTM) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to this HealthStream, Incorporated, third quarter 2009 earnings conference call. Today's call is being recorded. At this time, I am pleased to turn the conference over to Mr. Robert A. Frist, CEO and Chairman. Please go ahead, sir.

Thank you. Good morning and welcome to our third 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 would you read the forward-looking statement please?

Sure, Bobby. Good morning, everyone. 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. Well, this morning we have some good news to share across the board. Financial performance was good and several new milestones were achieved across the company and throughout our employee population, several successes worth celebrating and communicating this morning.

So I'll begin with discussing a new milestone achieved. Over 2 million contracted subscribers on the Learning Platform. This is one of our core products. We continue to gain market share on the core Learning Platform. And crossing over the 2 million milestone is an exciting achievement across the entire company. We look forward to celebrating that here in the next several weeks inside the company and with our customers.

That means that over the last several years we've been adding, on a steady pace, between 20 and 50 thousand net new subscribers every quarter. And I believe that record now spans about four years now, steady state of growing 20 to 50 thousand net new subscribers each quarter. There may have been one exception here and there exceptionally high or a little bit lower. But the average rate of adding new subscribers has been in that range now for four straight years quarter-to-quarter. So we're very excited about that milestone. We'll look forward to celebrating it as a company and certainly with our customers.

The other nice milestone to celebrate is the achievement of approval from CMS for our Home Health CAHPS, HH-CAHPS survey ability. We're one of 33 approved vendors, and that announcement was in the third quarter as well. So our research operations are now certified to take our products into the home health market, which represents a new market opportunity for us. And we're looking at how to approach that market in a more comprehensive way with both learning tools and research tools as well. So congratulations to our research teams. This is an announcement in our earnings release that we're now certified to pursue the home health market with our survey products. So we're very excited about that milestone as well.

Looking back at the operations for our Learning Unit, many interesting achievements along the way, 52,000 implement subscribers. And the key note there is that as subscribers are implemented, we begin billing for them. So that's a good way to track growth and expected revenue in the following quarters. We also added 63,000 under contract. So again in this quarter, we exceeded the 20 to 50 thousand range. We contracted 63,000 in the quarter. And over 93,000 are in the backlog of implementation. So we have a nice, steady state of backlog we work through every quarter, implementing them at a steady rate. And so those teams have done really well to keep adding subscribers which adds to the revenue.

Renewal rates, importantly, remain incredibly strong, where customers come up for renewal, they are adding subscribers. And if you look at them from the prior Q3 where the renewal rates were a little lower, we've had now three straight quarters of very impressive renewal rates, and this time reporting over 101% of what we call the full-time equivalents, or the number of subscribers per facility, meaning that as facilities renew, they're actually adding subscribers. And the same is true on the contract value, they're adding produce and adding -- we're maintaining pricing power with that 107% of contract value renewed in the quarter as well.

The activity on the platform is really, really high right now. Over 5 million courses were delivered in the 90-day period of the third quarter, over 5 million interactions with learners completing courses over a 90-day period. So we're very excited to see continued high utilization of the core products.

And shifting a little bit to our research side, we had a great sales quarter this quarter, which we hope will reflect in the following quarters. 56 customers added research services in the third quarter, 16 renewed their contracts for multiple products across our research offerings. And so we were pleased to see that activity. And a steady state of welcoming new customers in research along the way.

What I'd like to do now is turn it over to Gerry, our CFO, to discuss some financial highlights, bring it back for a few wrap-up points, and then get to your questions.

Thank you, Bobby. And, once again, good morning, everyone. (inaudible) three or four highlight bullet points, and then, once again, as Bobby mentioned, we'll leave plenty of time for questions. The first theme that -- is earnings leverage, as you've seen in the press release, we grew our revenues by 11% year-to-date, for the first 9 months of 2009. However, operating income has increased by 185%, that same time frame, and then a similar trend, net income's improved by 156% between this year and last year's first nine months. So we're seeing some very strong earnings leverage off the revenue growth.

The second thing Bobby touched on a little bit with the renewal rates, (inaudible) based products of recurring revenue continue to grow at rates above our overall consolidated growth rate. In the third quarter this year, the subscription-based learning products grew by 18% over last year's third quarter, and in the research side of the business, the patient revenues grew by almost $300,000 over last year's third quarter. So we see the recurring revenue offsetting and moderating some of the fluctuations in our project-based services, such as the point in times surveys in the research side. And once again, a contributing factor to that performance is the strong renewal rates that we've seen on the learning side in particular.

The third point is our balance sheet. If you go back and look at last year's September 30th balance sheet, we had a running capital deficit of $285,000. This year, as of September 30th, we're at $6.2 million positive working capital, so roughly a $6.5 million swing over the last 12 months. So we've seen our earnings improvement show up in our balance sheet, our cash balance is a little bit above $10 million, about $10.1 million cash balance. And so we see the entire balance sheet poised for additional growth, both lack of debt and also very strong working capital position.

And finally, you've seen in the earnings release, we changed our -- we've increased our guidance range. The last quarter we had talked about $0.16 to $0.19 earnings per share for the full year, and we have now increased that to $0.19 to $0.21 per share for the full year. And those, both those numbers are before any kind of income tax valuation account changes. So comparable numbers, but, once again, going to $0.19 to $0.21 for the full year.

Thank you, Gerry. Well, let's -- a few more comments on the financial side. The challenges in the project-based business, which we identify as kind of one-time events like live events, we've definitely seen a bit of a slowdown in that part of the business. But it's been overcome by the growth in the subscription products, as Gerry pointed out. So I wanted to kind of put that out there. We hope to see that pick up in the following quarters.

But the employee surveying for research, which is more elective in that it can be deferred out into the future, we've seen some deferrals there, and on the learning side of the business, the project-based work that is a smaller part of the overall business, was a little tighter in the quarter. So those two areas we're working on. They're kind of the nonrecurring piece. But the core recurring revenue piece of the businesses remain strong and have impressive growth rates as Gerry pointed out.

The other thing we're looking to do as we look forward is deploy -- we have this growing leverage in profits in the model. But we're looking for ways to deploy that to continue with the growth. And so we'll continue to see the senior team get more active in the look for merger and acquisition opportunities. If you look at our balance sheet of $10 million and $15 million of an untapped line of credit, we will begin to be more opportunistic as we look for product lines that make sense for our channels and companies that may fit with our overall direction. So we're excited about that.

We're going to get a little more aggressive. We've had -- we haven't done an acquisition in a few years. Again, we'll start building our pipeline and being more proactive thinking how to deploy that capital effectively.

We also began at the end of last quarter when we had our financial out-performance as well, we began to add incrementally to areas like sales and marketing, so reinvesting in growth. And we think that's the thing to continue doing, preserve some of this financial upside by continuing to deliver out-performance on the net income side. As you can tell, we've raised our guidance for the quarter, which we're excited about. But also taking some of those gains and putting them back into growth by adding to the sales organization and the marketing teams that are helping grow the business.

So we'll see some increased investment rates in sales and marketing in the fourth quarter and on into next year. And you'll see -- we hope to see, at least beginning to plan on more activity, and get more active in our development of merger and acquisition opportunities and product additions and product launches. We have a nice pipeline of new product launches between now and year-end, and we'll be announcing those as they come due in the next 90 days.

So we're teed up for an exciting year-end finish with raised guidance, new products, and a more active team looking to deploy the capital that we're beginning to accumulate on our balance sheet.

With that said, we announced two exciting new partnerships in the quarter where we'll be putting some of our energies. Quorum Health Resources named by Modern Healthcare as a top-10 management consulting firm in healthcare. We announced an exciting partnership with them, which will help us market and sell our products to their organizations and introduce their consulting services to our customer organizations. It's a powerful combination of tools to help hospitals improve outcomes, both business and clinical, and streamline their operations, using our learning tools, research tools, and all of the tools of QHR, Quorum Health Resources, which includes powerful consulting services for those organizations. So it's an exciting partnership. We've got a lot of business development to do around the opportunity with Quorum Health Resources. But we look forward to many years of growing our businesses together.

We also announced early in the quarter a relationship with Lippincott, Williams, and Wilkins, a leading provider of comprehensive best-in-class learning tools, particularly aimed at nurse clinical competency. So we're really excited to be working with Lippincott as we form up our strategies for addressing workforce issues, particularly with the chief nursing officers of hospitals nationwide as they look to develop their nursing workforce, identify their critical competency gaps, and shore up the strengths and -- shore up the weaknesses in their educational profile and skill profile.

So the teaming up with Lippincott represents a great step forward in our competency strategy and has a -- brings a set of tools and services that we can offer to the chief nursing officer of our nearly 2,000 hospital customers. So we'll see more of a push in that area as well for the company as we come into the fourth quarter.

Our core relationships with Laerdal continues to flourish, where we're focused on changing the way that basic life support training, which is required of almost a million people a year in acute care hospitals, instead of occurring in classrooms, we are migrating that to the mannequin-based and didactic web-based program. And we believe we're -- we have the right partnerships with American Heart and Laerdal to continue to lead that change in the Industry. Similar to the way we led the change in regulatory compliance for OSHA, we now believe we can lead the change with our partners to a better way of getting certified in basic life support and advanced cardiac life support. And so our relationship with Laerdal and American Heart continues to flourish, and we believe that product line has a promising future as well.

So an exciting quarter overall with an exciting outlook for the fourth quarter and into next year. With that, we'll see if we have any questions, if not, we'll see you on the next quarterly earnings conference call.

Thank you, sir. (Operator Instructions) We'll go ahead and take our first question from Vincent Colichicco with Noble Financial.

Hi, guys. Nice quarter, Bobby.

Thank you.

Could you give us a little more color in terms of which -- what's the key driver in terms of the improved renewal rates on a contract value basis?

Well, it's basically just holding pricing power right now on some of the products. We often, on renewals, we can add a product to the kit. But my understanding is that that represents maintaining the base subscription price upon renewal.

Several customers that maybe have legacy price points, we've been able to move to more market rates upon renewal and that can be offset by negotiated discounts for adding users and volume when accounts grow. The net effect of all that, though, is that pricing power seems to be holding right now in the core products with our renewal customers.

And could you give us an update on the Competency Center?

Competency Center continues to make progress. We added several contracts, about four or five, during the course of the quarter. Again, it's still in a piloting phase with several large customers. I think this is a product that will play out over next year and not in this year. But we continue to add partners, like the Lippincott announcement, which strengthens the offering. That strengthened offering results in winning more head-to-head competitions and bringing business our way. But we're still working on getting them deployed and actualized.

We have several accounts live on the platform now, which means they're actively using it for employee performance assessments and competency assessments of their workforce. And we also see an increasing win rate with our competency partner, Lippincott, Williams, and Wilkins, on these skills libraries, which are a critical part of competency assessment.

So overall very optimistic about this product line. But I think financially it'll still be a phenomena for next year.

Yes. Moving on to research. Are you losing share in the research market, maintaining? What's your sense of things there?

Well, we believe we're maintaining or growing in the patient measurement, which is the most recurring of the four types of surveys. So the -- consistent with our model, subscription-based recurring business, at least the recurring portion of the research business is growing year-over-year. And we continue to add sales resources to that line of business.

The employee and physician surveying, there's a bit more of an elective element to that. For example, we can have a contract and someone can -- and a customer can elect to push it a quarter or two or even into the next year. And so we're seeing more of that, the elective surveying of employee engagement moving forward. Less about loss of customers. We have a loss every now and then. But mostly we've seen deferral in what I'll call the more elective categories of surveying, which would be the physician engagement and the employee engagement.

So I still remain optimistic for all of those lines of business. We think that those deferrals will catch back up in the first quarter of next year. And we continue to add business in the patient satisfaction measurement where we're also adding sales resources.

In addition, for research, we're looking at moving into new market segments. As I announced the home health market represents expanding opportunity for continued growth and research. So we'll see more movement there over the next several quarters.

And the home health market, how large an opportunity is that relative to the current, prior market opportunity you were targeting?

Well, there are about 10,000 organizations to target. They're generally smaller from a number of FTEs per facility. Actually, they're always much smaller. There's just -- there's many more of them. So it's a more fragmented market. And we're not done with our overall market assessment of it. But there are new requirements for surveying in that space which will drive demand for our survey instruments. And we'll look to more update and announce our sales efforts in that market next quarter. And we'll also describe more the market opportunity.

But there are new regulations that create new requirements on those institutions to survey patient satisfaction, and we are now one of 33 vendors able to go after that business. And so we'll see us make a move into that market over the next quarter or two.

And one last question. On the Quorum relationship, have you had similar partnerships in the past? And, if so, what can that tell us in terms of what kind of success we can expect?

Well, we do have similar partnerships on different areas. So I would point to the Laerdal relationship, where we identify a problem set like the training that goes on for basic life support for about a million people a year, and we assemble a solution set, which is their content and mannequin and our delivery vehicle and measurement tools. And we've been able to grow that very nicely. In fact, today we have five dedicated salespeople just to that relationship in addition to our entire sales organization which also sells the portfolio.

And so with Quorum, they have particular expertise in many areas of business operations and hospitals, outcomes, improvements. And so we hope to see a bundling of services and products, and, hopefully, over time, an increased investment in our sales organizations to grow those lines of businesses.

So, yes, we have similar partnerships. When they're good, we really invest in them with both dedicated sales and marketing dollars. And we're at the early stages with Quorum, but the business plan is strong and both partners are excited.

Okay. Thanks, guys.

Okay. We'll move to our next question, and that will come from Cris Blackman with Empirical Capital Partners.

Yes. Thank you. Congratulations, Bobby.

Thank you.

You're welcome. You, speaking of the relationship -- or, I'm sorry, the CMS opportunity, you mentioned that this would be an opportunity for both learning and research side of the business. And I think I understand the research side or the survey business. But would you expand on the learning side? How many subscribers and different courses could you see that encompass? And I assume that business will occur first on the findings of the data and the learning will follow that. And is there any new learning requirements that are currently being mandated for the setting?

Well, we're really working on defining our entry strategy into that market. We know our research products will meet certain new requirements for the market. We know that there are -- there's a large employee population which we will quantify in our next earnings call that we'll be targeting with learning product offerings. We'll need to build out our product suite in that area, find partnerships which we are seeking actively now, so that we'll have a core set of learning offerings to compliment the research offerings so that we can be consistent with our, you know, identify and find the problems and then deploy intervention and development strategies for those organizations.

And so we're confident that this new market is -- represents opportunity for both learning and research. And we will be announcing in our next earnings call kind of our entry strategy, the sizing of the market, and our partnerships to penetrate that market.

Okay.

So I guess it's a little bit more of a teaser right now as we work to quantify it. But the nice thing is, it has the same air of regulatory compliance issues, employee development issues. It's an increasingly important market for our healthcare system customers as well, as they have operations in home health as well.

Okay. I went to the CMS website, and they discuss the current environment of quality measures. And it stated in there that CMS has thus far used quality measures to make provider and plan performance public and to link the payment initiatives to the reporting measures. But I was intrigued when the next sentence said, it will soon extend the use of quality measures as a tool to link payment to actual performance.

Yes. I think what's going to end up happening is the same way the inpatient environment is now governed by H-CAHPS results, you'll see home health reimbursement rates and schedules also governed by the HH-CAHPS results as well.

Because there's so much moving in the policy area that will affect how these healthcare organizations are paid and reimbursed, that we have to kind of reserve comment to wait until we see how all these things play out. But there's definitely a lot of movement. And all of the movement favors measured performance resulting in better outcomes for patients and potentially higher reimbursements for the institutions that provide the quality care. So the movement in the industry is positive for the, in my opinion, for the toolsets that we offer of measurement, learning, and improvement intervention. So we're -- we think the environment is a positive environment for the kind of change and the toolsets that we offer.

Yes. How many settings of care is HealthStream currently approved as a survey vendor? Or is this just -- is this two or three or?

Currently two from a survey research standpoint, so the hospital and acute care markets and now the homecare markets.

So, I mean, you can still look at managed care, outpatient hospital, part D, skilled nursing facility? I mean, the market is for this, I mean, we may just be seeing the beginning of a broad market based on changes in policy also?

Well, we're just going to kind of sequentially right now kind of comment on our strategy. And I think, sure, the whole market is changing in all the provider segments, and measurement is an increasingly important part of all those segments.

Right now our core focus is, of course, the acute care market. And now we're beginning to examine and make moves in the homecare market. So we'll continue to watch all those other spaces as well.

The nice thing is, to your point, there's plenty of expansion room, staying true to our vision in healthcare and focused exclusively on healthcare. There are plenty of other provider segments over time that we can evaluate to enter those markets.

Okay. It seems like with what's happened -- happening in the healthcare industry right now, and certainly given that you've built this 2 million subscriber base -- congratulations on that -- and kind of a mandated piece of business, if you will, and now it sure appears that HealthStream is in -- this could potentially be a game-changer anyway. The increased regulation and [what that could] deliver -- but I guess a question for you on the fourth quarter earnings. Historically that's been a seasonally strong quarter for you. I'm a little surprised on how conservative your earnings guidance is. Essentially, when I think I do the math, it's -- you're looking at $0.02 to $0.04 for the fourth quarter?

Well, the range is, yes, we've indicated the growth. So, yes, you've done the math. And I think that's why I spent a little time talking about increased investment. Every time we grow, we balance growth and ROI to shareholders, which, obviously, have been very, very strong this year, with reinvestment in growth strategy. So I wanted to spend and intentionally spent a little time on this call talking about investment strategies to continue with the growth. So there's plenty of opportunity in front of us. And when we make a little bit more money which returns to shareholders in the available earnings power, we try to invest as much as we can to continue the growth curve. So it's just balanced growth with investment, and we've been steady over that over the years. This year has been an exceptional out-performance on the earnings growth and have begun to reinvest some of that. Probably should have done it a little bit earlier. But we've begun to reinvest some of that now in the third and fourth quarters.

If the mix of business in the fourth quarter doesn't hurt your leverage, will you fall within that $0.02 to $0.04, do you expect? Or is -- how do you have mix calculated in that factor?

Well, we don't report on the mix that we forecasted until the earnings release next time. But we do carefully consider the balance and the projections for all the lines we noted in this call. Some challenges with what we call the nonrecurring business lines of the company. And so, of course, we factor in that as we look ahead.

So we've done our best to factor in all of that in our guidance, and our guidance, we believe, is thoughtful of both that, those conditions and the growth objectives that we just outlined investing in parts of the business.

Okay. Well, more or less, I guess, it just sounded to me like it's going to be, investment in your business is going to draw the earnings down, not necessarily a poor mix. But, okay. I'll drop out of the queue for now. If I have more, I'll pop back in. Thank you.

I think it's a little bit of both because we have -- we announced that some of the one-time businesses, project-based, live events, some of the businesses we've actually been winding down for several years, continue to wind down. And so it is a -- it's a bit of both. It's investment in the business and some of the one-time businesses getting deferred out into the future or we're moving out of those lines of businesses.

How much revenue did you say you have in deferral right now? Did you all comment? I mean --

We don't comment on that, that number.

Will you publish that at some point or do you provide that in the Q?

We could consider it. We don't currently. And so we'll take it under advisement for the next quarter.

Yes, as the number -- as the numbers have gone up so significantly in person. But, okay. Thank you.

Thank you.

(Operator Instructions) And, Mr. Frist, there are no further questions at this time, sir. I'll turn the call back over to you for any additional or closing remarks.

Thank you very much for listening in to our earnings conference call. We look forward to reporting year-end results in the next call.

Thank you, sir. That does conclude today's teleconference. We thank you all for your participation.