HealthStream Inc (HSTM) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HealthStream Incorporated's first-quarter 2010 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Robert A. Frist, Jr., CEO of HealthStream. Sir, you may begin.

Thank you. Good morning and welcome to our first-quarter 2010 earnings conference call. Also in the room with me are Gerry Hayden, Senior Vice President and CFO, and Mollie Connor, Associate Vice President 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 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 to 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've got lots of metrics to share today, and I will start out with an exciting one. Just a few days ago, Thursday morning to be exact, at 7;55 in the morning, HealthStream crossed over delivering its 100 millionth course to our customer base. At 7;55 in the morning on the West Coast, we had one of our healthcare professionals take the 100 millionth course. And of course, we delivered that through our software-as-a-service market-leading platformed HealthStream Learning Center.

Getting to core metrics, we also had a great operational and executional performance during the quarter. Throughout the quarter and throughout the last several years, we've had a goal of adding 20,000 to 50,000 net new subscribers each quarter, and we've gone over four years of consistent performance in delivering in that range each quarter net new. That's net new additions after netting out any losses or cancellations. The first quarter was no exception. We had a net new number of implemented subscribers of 69,000 during the quarter, exceeding our target range.

Also during the quarter, an additional 58,800 were contracted new to the platform. So they go into the implementation backlog and we are excited about that as well.

Renewal rates during the quarter were over 100% again in the first quarter based on a full-time equivalent basis, or an FTE basis. And in contract value during the first quarter, we showed 109%, which was again, a solid improvement; shows a little bit of pricing power through the first quarter of the year.

The strong utilization is a testament, and crossing through the milestone of 100 million course completions, is a testament to the stability of the platform itself. And all the while doing that, maintaining high customer satisfaction ratings. Again, over 1449 customer surveys were delivered after interactions with our support center. And the average score on those surveys was 3.81 out of 4-star rating. Again, this is a quick seven-question survey. We asked our customers about their satisfaction with our service levels. So we are pleased to see that. And we think that that excellent service results in these high renewal rates, historical and current.

Also exciting during the quarter, we began, continued our journey of adding new partnerships and new content offerings. A big part of our future growth we believe is tied to delivering additional content offerings to existing customers as well as adding new ones to our platforms.

During the quarter, we added to the series of BLS HCLS products, which are some of our hottest content products, a new content offering called PALS, the pediatric advanced life support. This is a product offering, a joint product offering, from American Heart Association and [Lerdol], and completes the series of basic life support, advanced cardiac life support, and now pediatric advanced life support. We believe it will meet the needs of many of our customers and will be in high demand throughout the rest of the year. So we're excited for that new content offering.

Also during the quarter, we added the Child Health Corporation of America, a content library from that organization. St. Thomas Health Services is now publishing content through our network, and so we are very excited to see that deliverable.

We have some interesting milestones coming up on our new software-as-a-service offerings, including the HealthStream Competency Center. We added five additional customers during the quarter to the HealthStream Competency Center. Again, this is kind of a beta stage for that product. But we have exciting news now. We have a deliverable date on the enterprise class release, which is the most significant upgrade of this software since its inception. This includes enterprise-level features and advanced usability will be coming out in July of this year. So we now have a delivery date on this new advanced release of the Competency Center.

We think that this new release will service our larger customers well and advance the alpha and beta pilots of some large health systems in a meaningful way. So we're excited about the developments with our Competency Center, which, again, is an add-on platform product to our Learning Center. Excited about that progress.

Also, during the quarter, we've been able to move ahead in our research business. If we think back a little bit, on November 10, we announced the HealthStream Improvement Center, yet another software-as-a-service offering, this time sold through our research customers. And I'm pleased to announce that we have our first contract on HealthStream Improvement Center. It's a three-year contract of using this new software to manage the follow-up to our surveys. Again, the research sales teams are excited to have a new subscription-based software offering to offer to their customer base.

And then, on April 15, we announced our Analytics and Reporting dashboard; shows great advances in the technology used by our research group to make them more competitive. This is an analytics and reporting dashboard capability set. So again, another new and exciting product coming from our research operations.

Also important is that the research operations are beginning to emulate the success of the learning by adding their own content partners that wrap around and we think provide intervention and remediation services once survey results have been collected.

Harvard Business Publishing has joined us as a new content partner during the quarter, as has Ascent SPG, which is courseware for employees to learn how to increase their engagement and satisfaction.

So we are beginning to build what we call the Center Network Model, meaning at the center there's a piece of recurring revenue subscription content and the network is comprised of content partners that wrap around it. And we've been very successful with that in learning. We are approaching over 39 content partners in learning. And in research, we're now getting our first couple of content partners and launching our first subscription-based platform products for the research organization to sell.

All in all, a very exciting quarter, several new product announcements and some deliverable dates pending on the Competency Center. And so everyone in the Company is highly energized and excited to pass certain milestones, like delivering the 100 millionth course during the quarter.

I'd like to turn it over to Gerry Hayden so he can highlight some of the financial performance and then we'll move straight into questions. Thanks, Gerry.

Thank you, Bobby, and good morning, everyone. I'll try to make a few brief remarks and then of course we can always go to questions.

But kind of almost like confirming the operational side, the financial performance shows a lot of leverage, again, this quarter, the same thing we have had throughout 2009.

On revenue growth of about 9%, we saw operating income increase by 51% and EBITDA by 21%. So once again, the same themes of 2009 have played through the first quarter of 2010.

Another place we see some leverage in the results is the relationship between the growth in learning subscribers and the growth of our recurring subscription-based revenue on the learning side.

As you'll notice in the press release, we had a growth of FTEs, implemented FTEs, year over year of 12.7%. However, our subscription-based revenues on the learning side grew by 27%. This is very indicative of more content being consumed and used by our existing subscriber base. This is an important trend for us. We'll have more to say about that as this year goes on.

On the accounting reporting side, on the service net income, appears to be flat between this year and last year. And for those of you who follow the Company closely, you know that the end of 2009, we have released our valuation allowance against our deferred tax assets. And so therefore beginning in 2010, at least on our books we show an income tax provision.

The important thing here to remember is that's not a tax return. We have in NOLs. They still cover our cash liabilities for our actual tax filings. So this is more an accounting principle that we are trying to comply with the tax provision.

So to that end, we've looked to operating income, which is a GAAP measure and EBITDA as the better ways to assess our progress. And as you all know, we reported both those metrics for many quarters into the past and they remain unchanged by the income tax accounting we just discussed.

Finally, the balance sheet, same theme, same trends as the income statement. The cash balance increased by $0.75 million between calendar year end and the end of the first quarter.

And a few quick remarks on receivables. The days sales of A/R look very high at 72. However, there's some large annual billings that are in that balance that have not begun to be recognized as revenue quite yet. And, so that's a little seasonal fluctuation.

The other important thing about our working capital is deferred revenue, which is on the liability side of the balance sheet, is really cash received in advance of services and revenue recognition, so some part of the receivables is offset by cash in advance. It remains an important part of our financial management and working capital management, but we do think we're in good shape on receivables as of right now.

Finally, our guidance remains unchanged from the guidance we gave I guess a month or so ago with our year-end results. And so we still have the same expectations for the year, if you are tracking toward those right now.

Thank you, Gerry. A few more notes before we go into questions.

We've made some progress in launching a new vertical in our organization. During the third-quarter earnings release, the HealthStream Research operations here at HealthStream announced that we were selected by CMS as an approved survey vendor for the Home Healthcare Survey. It's called the Home Healthcare Consumer Assessment of Healthcare Providers and Systems, known as HHCAHPS, HH-Caps, we call it.

And that was an exciting kind of milestone for our research group to be able to begin to deliver research products into the home health market. And during this quarter as well, I'm announcing an additional content partner from our learning group, the Corridor Group, an exciting and well-experienced long-time provider of education and training and consultative services to the hospice and home health industry. So now we have a more complete product offering across learning and research to the home health market. We're excited to be steadily advancing our progress and our strategy.

In almost all cases, it's our goal to offer a recurring revenue subscription-based software-as-a-service platform component to our offering and then wrap around it a network of partners and support services that pull through the sale.

And in this home health market, we've been very deliberate in advancing our capabilities in research to deliver those surveys, which is kind of a qualification process. And now we're beginning to build out our model around that vertical by adding content partners. And we are excited to welcome aboard the Corridor Group to that center network model, as we call it internally.

A few quick announcements. Our summit is coming up May 17-20. We have 554 paid and registered attendees on their way to Nashville, Tennessee, the gate to the Gaylord Entertainment Complex and Hotel. We have over 20 exhibitors and 140 sessions, so we are very excited that our summit, teed up from May 17 to 20, which is an exclusive gathering of our very best partners and customers to share best practices. It's the leading healthcare, education, training, development and research conference we believe in the industry. And again, May 17 through the 20th.

Our shareholder meeting is May 27, 2 PM Central here in the national office. We welcome shareholders to attend and participate. We expect a good participation from our Board of Directors at that meeting. And on May 27 at 9;30 in the morning, via webcast and by personal attendance, I will be presenting an update on our Company on the INVEST Tennessee conference coming up. We'll be doing a press release on that shortly.

And finally, Dr. Jim Daniel, as we announce on our last earnings call, after serving over 15 years on the Board of Directors, and being one of our very first customers of our product and service offerings quite some time ago, has decided not to stand for reelection. I cannot express enough gratitude about his guidance and steady hand in steering our Company to its state of profitability and growth as he has done. From our entire Board of Directors and all of our 350 to 400 plus employees, we are appreciative of Dr. Jim Daniel and his contributions to our Company's growth.

At this time I'd like to turn it over to the operator to introduce any questions you may have for management.

(Operator Instructions). Jack Ripsteen, Potrero Capital.

Thanks for taking my call. Two questions. The first was it looks like on the learning side you guys are sort of spot on with the guidance in terms of kind of getting to the fiscal year end. On the research, it seems to be a little slower at the beginning of the year. Can you kind of give us some idea of what gives you confidence that that will accelerate? And then my second question is just on this Accounts Receivable. Is that a normal pattern in terms of these customers or did they opt for a different billing this time around?

I'll take the first one and maybe Gerry can take the second one. This is Bobby Frist speaking.

In the research side, first quarter was a little slower than we had expected, but we have reiterated our guidance of 10% to 12% revenue growth. The primary thing that happened there is one, a larger customer pushed back their elective employee engagement survey from Q1 to Q2. And so we expect fully to pick up that revenue in Q2. And so we're looking into a stronger opportunity for research immediately in the second quarter. So we have a good degree of confidence in the guidance and the reiteration of the 10% to 12% at this time for the full year for our research business.

It's disappointing that we did have that slip. The good news is that the recurring revenue, more term-based agreements on the patient satisfaction continues to grow. But we have seen the volatility and fluctuations in the elective components of research like employee engagement. In this case directly, one big account moved some work forward. But that work has begun, so we have good confidence in our reiterating our guidance. Gerry, do you want to take the second?

Yes. Jack, it's a seasonal phenomenon. We have one very large customer who opts to pay on an annual basis. And, once they pay, the days in A/R go down so Q2 will drop just by virtue of that. So it's -- most folks pay on a monthly -- on the Learning side, a monthly or a quarterly basis. We have a very small handful that pay on an annual basis but they tend to be larger customers.

Okay, great. Well thank you for taking my questions.

(Operator Instructions). Vincent Colicchio, Noble Financial.

Congratulations on another good quarter in terms of volume growth like the HLC platform. I'm curious, going forward, will we see sequential increases in ARPU on a revenue per user there? And if so, will that be helped along by some of the newer -- some of the PALS and also the Competency Center release coming up?

Yes, Vince, thanks for asking. We are working and expect in the second quarter to actually introduce revenue per subscriber set of metrics. And so Gerry had a little bit of a teaser of that in his introduction. We're trying to make sure we've got really good concrete ways to approach the measurement of that.

We do expect and have seen an historical trend of growing the revenue per subscriber. And that's both through additional content extensions. As we've mentioned here, we call it internally the center network model. The center is the software. And the network are the partners around it pulling through.

But also I think you heard in this call, the announcements around several new software-as-a-service offerings for both learning and research. And competency added five contracts during the quarter. And again, many of those are pilots because of the stage of production of that software. So I think once we get through July and get that new software in the market, those will begin to go live and so we're excited about that.

I mentioned the new PALS content as well, which is exciting. We think it's high demand content, just like the advanced cardiac life support and basic life support from Lerdol and American Heart.

So yes, we expect to A, report a new metric in the second quarter, revenue prescriber. And yes, we expect it to show sequential -- in the last check we have had, we have had sequential improvement in the last several quarters. So hopefully that will continue to be the case.

And sort of a macro question for you, given health care reform, can you talk about what kind of impact that will have on your business? I would think you would have some beneficial impact on the research side?

Certainly a primary driver of a lot of our core recurring revenue businesses are regulatory requirements. The HHCAHPS and the HCAHPS surveys that pay for performance all drive research in that they're required. OSHA and the Joint Commission reviews drive the learning business as we help with compliance and help our hospitals maintain compliance with their Joint Commission reviews. And so in general, the regulatory environment is a core driver of our recurring revenue business.

The stimulus package of $20 billion, we think helps deploy more IT, and certainly have lots of IT offerings, so our point of view is that that can't hurt. In fact, when people deploy complex IT systems, we think they need more training and support on it.

And then finally, the new reform around insurance pay, we think is a net positive for our hospital customers, which probably means they're going to have potentially increased volume of patients and more staff in the coming years. And since a lot of our models are driven off a number of subscribers, we think that's a net positive. In other words, reform seems to be good right now for hospitals, at least that's our read. And what's good for our customers we think is probably good for us.

And Gerry, do you know -- have cash for operations?

I don't; I'll get back to you on that, though, Vince.

Thanks, guys.

Thank you.

(Operator Instructions). Raymond Yung, Dolphin Asset Management.

Good morning. I'm just trying to get some comments on capital expenditure for this year and next year.

I believe we've provided this consistent guidance of a range of capital expenditures. And they are split between upgrading hardware and software development. And our range that we've indicated recently, Raymond, is $3 million to $4 million in 2010. And that's the capitalized portion of software development. We expense a lot of software development. We also capitalize some of the new major releases. And that also covers hardware and software upgrades to our core platform that we use.

You know, it's a software-as-a-service model. We have to host and deliver these services, and so we have to upgrade the hardware. And so for this year we're looking for between $3 million and $4 million throughout the year in CapEx. You still there, Raymond?

Yes. Thank you.

(Operator Instructions). I'm not showing any further questions at this time. Do you have any further remarks?

No. I would like to thank everyone for attending our conference call. Look forward to reporting the next earnings call. Thank you and have a good day.

Ladies and gentlemen, thank you for your attendance in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.