Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

HealthStream, Inc. (NASDAQ:HSTM)

F2Q12 Earnings Call

July 24, 2012 9:00 am ET

Executives

Mollie Condra – Associate Vice President of Investor Relations

Robert A. Frist, Jr. – Chairman of the Board, President & Chief Executive Officer

Gerard M. Hayden, Jr. – Chief Financial Officer & Senior Vice President

Analyst

Richard Close – Avondale Partners, LLC.

Nick Halen – Sidoti & Company

Ryan Daniels – William Blair & Company, LLC

Matt Hewitt – Craig-Hallum Capital

Vincent Colicchio – Noble Financial Capital Markets

Andrew Albert – Invicta Capital Management

Operator

Welcome to the HealthStream second quarter 2012 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded. Now, I’ll turn the conference over to Mollie Condra, Associate Vice President of Investor Relations

Mollie Condra

Thank you for joining us today to discuss our second quarter 2012 results. Also in the room with me are Robert A Frist, Jr., CEO and Chairman of HealthStream and Gerry Hayden, Senior Vice President and CFO. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risk and uncertainties and may 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 the results to differ materially from those forward-looking statements are contained in the company’s filings with the SEC including forms 10K and 10Q. With that, I’ll turn the call over to our CEO Robert Frist.

Robert A. Frist, Jr.

We’ll start by highlighting a few financials and then turn to operational performance and then turn to your questions shortly thereafter. On a financial highlights standpoint consolidated revenues were up 23% to $25.8 million in the second quarter over the prior year same quarter while operating income was up a strong 30% to $4 million in the same time period. Net income was up 33% to $2.4 million in the second quarter over the prior year same quarter an adjusted EBITDA was strong at about $5.9 million in the second quarter which is up 27% over the prior year same quarter. Gerry Hayden, our CFO will go into greater detail on the financials after I do a bit of an operational performance overview.

The sales execution during the quarter was very strong. We added approximately 125,000 new subscribers that were contracted to use the learning platform during the quarter. This performance exceeds the range of our long standing and well stated quarterly goal of contacting 20,000 to 50,000 net new subscribers in a quarter so we congratulation the sales organization for bringing in a strong lift to the counts including [Parkman] Health & Hospital System which importantly also contracted for the HealthStream Competency Center. Sharp Healthcare a large integrated delivery network based in San Diego California, Good Samaritan Hospital Medical Center, Evergreen Healthcare and the Ohio State Health Network were among many others during the quarter, but clearly a strong operational performance from the sales organization this quarter.

We look forward to celebrating with all our employees as we crossover the three million contracted subscriber milestone in the future. The good news also is the sales execution was well supported by execution of our implementation teams. We implemented approximately 124,000 new subscribers that were added to the learning platform during the second quarter. We now have 2.78 million healthcare subscribers implemented. That’s an important milestone because we begin revenue recognition once contracted subscribers become implemented subscribers.

If we look at one gage of satisfaction we see that our renewal rates for the second quarter were 108% based on FTEs and 102% based on contract value. The trailing four quarter period ended June 30, 2012 customers representing 99% of subscribers that were up for renewal did indeed renew while renewal based on contract value over the same four quarter period was 102%.

Turning our attention to revenues from our patient survey business which is the recurring revenue of survey product, revenue from that product line increased 7% over the prior quarter. Growth in the patient surveys however was offset by a decline in what we call our point in time surveys which include our physician, employee, and community surveys which resulted in overall research product group revenue decrease of 1% for the quarter. Clearly not at expectations.

Our HCAHPS products however continue to show steady demand including sales of our new CG-CAHPS Survey which yielded 17 new contracts for the quarter so we see steady demand for the HCAHPS Patient Survey work of our research product lines.

Our talent management strategy was bolstered with the acquisition of Decision Critical which was completed on June 29th, that’s an Austin Texas based company that’s specializes in learning and competency management products for hospitals. We welcome the employees of Decision Critical on board and feel they have much to add to our direction as a talent management company and as the strategy continues to evolve.

Through the acquisition we added to our talent management product suite with the additional of Critical Portfolio. That’s a patented electronic portfolio. The portfolio is used to store and view the qualifications and competencies of the hospital work force. This is important for hospitals for example, that participate in various quality programs, particularly those embarking on the Magnet journey, a designation they can achieve for the quality of their work force.

The Critical Portfolio documents and reports on key personnel information that’s required in the application process of these important designation type recognitions like a Magnet process. We plan to begin selling the Critical Portfolio this quarter as a standalone product and you’ll see increased investment looking to relaunch it as a fully integrated product with our platform early next year. So we’re excited to grab on to this new patented technology and support the efforts of the very creative team in Austin Texas to build it into our core architecture. It is a standalone product as it stands and is effective in that manner but it will be even more powerful as an integrated product early next year.

Adoption utilization of our talent management product suite continued to gain momentum of course based on our learning platform but expanding into our competency and performance center products which helped with the performance review and competency assessments of staff. We contracted 15 healthcare organizations during the second quarter, welcoming new customers like Hutchinson Regional Medical Center, Jamestown Hospital, Jordan Hospital, all of these and many others are coming on board to round out their approach to talent management automating and eliminating the paper from their annual review process and improving the methods they use to assess the staff competency, particularly of the clinical staff so we welcome the 15 new health organizations during the second quarter.

Again, we see we’re gaining momentum with this add on product set as it ties directly into and fully leverages and integrates with our core platform and learning technology that is present in over half US hospitals. The content partner network continues to grow. As distribution grows our ability to add exciting new content for offer to all of our customers grows. In fact, we’re seeing strong momentum in content uptake during the quarter.

One of our leading content products the HeartCode courseware from American Heart Association and Laerdal Medical continues to be in demand in 2012. Revenues from HeartCode products for the first half of 2012 have grown 60% over the first half of last year so you can see continued demand of this HeartCode product suite which assists, improves and lowers the cost of resuscitation training in hospitals. HealthStream also added an updated online version of the American Heart Association’s HeartCode product for pediatrics known as the pediatric advance life support course or PALS we call it.

At midyear we have a total of 128 content partners, that’s an improvement in all three of the categories we track. We’ve added new partners in each of the three areas. We now have 57 partners in what we call our traditional content owner partners. These can be publishers and associations. We’re up to 33 what we call industry content partners, these are like GE, Baxter and [Aleris] that do industry product support through our product line called Hospital Direct.

Then in our SimStore we’ll touch in a minute but we added additional partners to our simulation network in SimStore as well. For example, we recently signed AltusMedical for their MRI safety courses, the Association of Woman’s Health Obstetric & Neonatal Nurses known as AWHONN for their industry standard perinatal orientation and education program. So we’re excited to add, there’s two exemplary types of content partners for us.

We expanded the offerings from additional content partners like the American Association of Critical Care Nurses and the Association of Perioperative Registered Nurses both added content to their offerings that already existed.

Quickly I’ll provide an update on SimVentures. SimVentures is our collaborative arrangement with Laerdal Medical where we derive a 50% interest in the profits of the product portfolio of the venture which today includes four core applications. SimVentures continues to grow and is delivering its fifth consecutive quarter of increases in revenue. HealthStream’s revenue allocation was $392,000 in the second quarter up from the prior quarter and again five sequential quarters of improved revenue out of SimVentures.

Importantly, the venture and all the investments that we’re making in it remain EBITDA positive and therefore a financial contributor to our growth and progress and I’m very excited about that because we still view SimVentures as a product set of the future, one that is growing and with the amount of R&D going into it we’re excited to see that it’s EBTIDA positive. We expect continued financial progress for SimVentures in the second half of the year.

I’d like to turn it over to Gerry for a more detailed look at the financials and then we’ll head to questions.

Gerard M. Hayden, Jr.

I’ll make a few brief remarks about the quarter and then save time for questions at the end. First, we believe our results reflect favorably on both our financial progress and investments in key products of our business. The learning segment posted strong revenue growth this quarter at 34% and Bobby’s remarks provided a solid context for how and why we have been able to achieve those results. The only thing I’d add to his remarks on subscriber counts, renewal rates, and sales force performance is this expansion is entirely core growth.

Over the past several quarterly calls we’ve mentioned investments in our business in key areas such as sales and marketing. If you look at sales and marketing for the first six months of 2012 that line item was 20.6% of revenues versus 19.9% for the same period last year. Our revenue growth, expansive subscriber base are solid quantitative evidence as to the returns on those investments.

However it also demonstrates the focus of these initiatives. One place to look is our G&A expenses, this expense category is just leverage against revenue growth while we invest in our sales force. G&A expenses were 12.2% of revenues for the first half of 2012 versus 13.3% of revenues for the first six months of 2011. This improvement in the G&A ratio is even more pronounced when you account for [inaudible] expenses such as due diligence, legal and banking which we would not incur if we were running strictly our core business. In the first half of 2012 we carried $200,000 of these types of expenses. If you add those expenses back to G&A, the first six months of 2012 would have been 11.48% of revenues or a decrease of 1.5 percentage points versus 2011.

The balance sheet remains strong and our cash is positioned at approximately $92 million before the capital we need to execute our business plans. We continue to evaluate a wide range of acquisitions and development opportunities that we feel are both additive and complementary to our existing business. Finally, you see that our guidance remains largely consistent with the estimates from the end of the first quarter as we expect to grow revenues between 22% and 25%.

You’ll also notice that the revenue growth rate has changed slightly. The lower end has moved from 21% to 22% that we announced at the end of the first quarter while it remains at 25% at the top end. We are reiterating our operating income guidance to a range between 20% and 26% growth over 2011. We believe this guidance range recognizes both our overall revenue growth prospects as well as our efforts to make [inaudible] investments in our key initiatives. Our income tax rate and [inaudible] remain the same as the first quarter as well.

Robert A. Frist, Jr.

As we enter the second half of the year we have plans for continued investment in the products launched in the first half of the year which includes our SimVentures products SimManager and SimView, continued investment in HealthStream Performance Center, along with the products gained from the acquisition of Decision Critical as we work to integrate them into our platform and relaunch them.

We’re hopeful and begin to see we’re catching up on some of our hiring plans but we continue with our plans to add staff as necessary with the business and so we have an important theme here in the second half of continuing to invest in growth as we move forward.

At this time I’d like to turn it over for questions to the operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Close – Avondale Partners, LLC.

Richard Close – Avondale Partners, LLC.

One question I did want to hit upon was sales and marketing expense as percentage of revenue came in pretty significantly below what we had factored in and I was just curious if you had any commentary or any clarity with respect to that line item. In the second quarter were there some timing issues with either hiring or accruing for commissions or anything one time that you can sort of call out on that?

Robert A. Frist, Jr.

Probably the biggest one time variance would be just making sure you got the summit allocation right in the model. Of course, that was in a different period this year than in the prior year. In both absolute dollars and as a percent of revenues our investment in sales and marketing is higher in the first half of this year than in the first half of last year. I think it might be some timing issues potentially around the summit which I believe kind of came close to splitting the line between Q1 and Q2 so you might take a look at that in your model and make sure you got the timing right on that.

Richard Close – Avondale Partners, LLC.

Just looking at it, if you adjust last year’s number for taking the summit out, I think it was $270,000 that takes it down last year to 19.4% of revenue and this year you’re coming in at 18.1% and it just seems like a pretty big delta which is great if you’re receiving leverage on that I just didn’t know if there was other than the summit anything on a timing basis?

Robert A. Frist, Jr.

No, that’s not what our numbers show so let us look back and see what you’re putting into those categories and we’ll try and get more clarity either by the end of the call or afterwards with your question.

Richard Close – Avondale Partners, LLC.

Then just real quick it sounds like good traction on the talent management products. Can you walk us through the revenue model on the talent management and what the average – or what a typical sale is in that area, performance area, talent management area?

Robert A. Frist, Jr.

Well of course the learning system is the core account management and it’s a subscription, a three year product as you know and the price ranges for that vary between $10 and $20 per person per year on a contracted basis. The additional product suites that we’re building out that will now include things like the critical portfolio, the competency center, and the performance center are also from a modeling standpoint a subscription based products and therefore they’re on a subscriber basis. They add dollars per subscriber per year in the same manner so they’re not licensed products they are subscription SAS based products.

So similarly when we add hospitals to that platform if the hospital has 1,000 subscribers we add a per person per product fee to their overall contract for the core platform. We have not commented on the size of those fees. We have mentioned in the past that performance and competency center has kind of a retail price level we try to get about as much as we get for the core learning platform in addition to the learning platform. That is obviously a bundling effect that could lower the price. Also, I should note that the $10 to $20 price on the learning platform includes subscription to small content libraries so you can’t purely see the platform revenues out of that initial subscription.

With those caveats I think you can see that all of those products I mentioned are subscription based recurring revenue on multiyear contracts. They all add dollars per subscribers in an incremental fashion but occasionally there are bundling pricing discounts and it’s not always purely added to the base subscription because there’s some content, a small content bundle, in the base product. I hope that helps although I know you probably just wanted the price point which we’re not going to give today.

Richard Close – Avondale Partners, LLC.

Then final question would be on the patient survey business and the opportunity there. You did talk a little bit about the trends and I guess 13% growth on patient insights in the first quarter that ratcheted down to 7%. How should we think about the patient survey business as we progress through the second half of this year?

Robert A. Frist, Jr.

We clearly can do better here. We wish the results were stronger, we’re taking actions to make the results strong. If you look at the first half also and you remember back to our conference call in February, the first one of the year, we had mentioned that one of our very largest customers pulled back their research services in the patient business by about $1 million. Although that account both grew in overall size and added other products to the mix that specific product line was drawn down by almost $1 million.

I think we had expected to back fill that loss faster than we did and so in that way we wish we had performed better but we have overcome the loss of that account and still shown a 7% growth and so we still have reason for continued optimism on these HCAHPS product lines because they continue to grow even offsetting that draw down of that one product line remember of course that that large account both grew in size and in product mix for us overall. However, on that specific product line it did come down by a straight $1 million which at this scale we’re proud we’ve overcome that growth rate.

We obviously had expected to grow even a little faster than the 7% but it still is a net positive gain and we feel strongly that the CG-CAHPS product line is beginning to take hold. You see it mentioned in our earnings release about adding new customers to that product line as well so we remain positive that that product line will continue to show growth through new customer additions.

Operator

Your next question comes from Nick Halen – Sidoti & Company.

Nick Halen – Sidoti & Company

The first question I have is just in terms of the SimVentures. Obviously, doing a great job of growing that business sequentially for the past five quarters I believe you said. I was just kind of wondering how we should kind of approach modeling that going forward and I guess when do you guys expect, in terms of a timeline, that you think that could become a more significant source of revenue for you guys?

Robert A. Frist, Jr.

Well right now it feels like an early adopter phase for many of these products and we’re glad to see breakthroughs in revenues and mixtures of solid contracts and pilots. So right now I view this as kind of a three year investment, one that we started making about 18 months ago and so it’s good to see – and some of the products remember were just launched in the first quarter of this year so overall we’re pleased with its progress and you can see from the current trajectory that it’s mapping more linearly right now which is more consistent with our thinking through year end for that product set. But still, great promise in it and we’d like to share with the market our excitement around the longer run opportunity with these products but through the end of this year we’re looking at more the steady progress we’ve seen like in the past five quarters.

Nick Halen – Sidoti & Company

I was wondering if you had any updates on some of the mobile strategies you guys mentioned in the past, I guess the HCAHPS monitor app and HealthStream task and things like that?

Robert A. Frist, Jr.

The HCAHPS monitor app is a free app so it’s not a revenue generating app, it’s used for marketing and relationship building so we remain excited about having that in the market as a marketing tool. The task app still remains unlaunched and we’re working still. We still haven’t decided our mobile rollout strategy. We haven’t seen an overwhelming demand for it although an interest in it in certain large enterprises but not an outright demand across our broader base yet. Maybe the full nursing corps haven’t gone fully mobile yet for some of those apps. I would say that component of our strategy is in rapid development but economically we just haven’t declared its direction yet.

We think that the company’s growth trajectory in the next 18 months is better informed by looking at the platform adoptions in the competency center, the performance center, growth in the consumption per person and subscriber revenue for content which you can see really driving our growth. So when I think of short meeting the long term drivers if you take things like content and platform extensions first and things like SimVentures and mobile strategies an push them out by 24 months or so, I think that’s probably a better way to think about how we’re layering in the elements of growth of our business.

Nick Halen – Sidoti & Company

Just lastly I guess where we stand now with the different sources of revenue I was kind of wondering, and maybe this is more so for Gerry, what percentage of your total revenues are currently recurring?

Gerard M. Hayden, Jr.

It would be upwards of 75% to 85% because with all the learning is recurring and in research patient category which is about two thirds is also recurring.

Operator

Your next question comes from Ryan Daniels – William Blair & Company, LLC.

Ryan Daniels – William Blair & Company, LLC

A quick one to start on the HPC and HTC, it sounds like a nice quarter with 15 new clients and I’m curious if those are all cross selling into the existing base or if you actually have the sales force kind of leading with that and getting a net new client that isn’t on learning but signing up for HPC or HTC?

Robert A. Frist, Jr.

I should know that answer but I don’t. I know the majority of them minimally are existing customers but we do have a dedicated team going out to find new accounts. They’re focused on, as you can imagine –have a lot of accounts already but over half of the country so the best opportunity – and many of those are the larger health systems so our best opportunity is to get pilot and sales going in that base. However, to your point we do have a dedicated team that’s calling on new accounts but I just don’t have the mix for you right now of those 15 new accounts. My bet is that over 85% of them are existing accounts.

Ryan Daniels – William Blair & Company, LLC

Then just to be sure I’m clear, when you talk about the new subscriber adds you’re not including any of those 15 accounts in that subscriber number, that’s just for learning right?

Robert A. Frist, Jr.

That’s correct and given that most, if not all of them, are existing accounts we don’t add to the subscriber account when we add that would just add to the revenue per subscriber when they bring on that new subscription to new products but don’t add new subscribers.

Ryan Daniels – William Blair & Company, LLC

Then a couple more perhaps quicker ones, if we look at the Decision Critical acquisition it sounds like today you’re going to be selling that as a standalone product but you’re going to fully integrate it next year as part of the platform. I’m curious as to how the revenue model will morph, meaning will you want to integrate that and charge a higher fee for the platform to offset the revenue or will it be a separate add on to the platform, or just an added value to continue to drive sales and strong retention there?

Robert A. Frist, Jr.

We believe it has a standalone value proposition and will be sold as what we call platform extensions so it can be bought either separate meaning it can be bought individually or in the suite. We believe it add values and will maintain value as a separate component so we will charge for it both separately and put value on it when it’s in a suite purchase. It is sold on a SAS model already, even as a standalone product it is a subscription based web delivered application so that’s good news.

When we talk about integrating we mean things like seamless log on, authentication of users across our network so it’s easier to turn on and activate for new customers that are already on the platform. That will require of course, investment and reengineering a bit but we were pleased to see that the core technology that that application was built in were very consistent in our development both approach, methodology and technology meaning it’s a .net SQL back end and front end and they use a developmental approach that we used as well. So we’re very excited and optimistic that we’ll be able to get it even more leverageable on the core platform.

Ryan Daniels – William Blair & Company, LLC

Two more quick ones and I’ll hop off. Maybe very broadly your approaching about half of the US hospital market if we think of totaled employed in the hospital space and I’m curious as you look forward do you think your growth opportunities are actually accelerating even more? I guess on one side you could say you’re already half penetrated, on the other side I know that penetration gives you such a distribution channel you’re probably attracting a little more content as you said earlier and that makes you a more valuable partner so I’m curious if you think as you look forward over the next few years that the growth can maintain at this pace or any views you have there?

Robert A. Frist, Jr.

As you know we only guide one year out. We’re really excited to see demand for new products that we think present effectively brand new opportunities for the company. So if you think of the performance in competency center for example, we believe that the vast majority of just hospitals are still pen and paper in their performance reviews and their competency modeling for their work force, they’re using checklists and other technologies that are very simplified and paper based. So our view is having an existing relationship on our core platform learning, will help us penetrate new market opportunities that are essentially a refresh of our market opportunity through performance and competency center.

So we feel that there’s plenty of room to run on areas like eliminating the paper out of the process of doing the annual performance review and better automating the competency assessment process that’s required of all the clinical staff in hospitals through the performance center and the competency center. We feel those are just kind of Greenfield opportunities essentially.

Ryan Daniels – William Blair & Company, LLC

Then the last one maybe for Gerry, just to go back to the first question from Richard on the marketing spend, am I correct when you say the summit pressured operating income by $270,000 that’s actually net after the revenue so the actual cost of the summit were higher than that?

Gerard M. Hayden, Jr.

That’s the net expense impact, you are correct.

Operator

Your next question comes from Matt Hewitt – Craig -Hallum Capital.

Matt Hewitt – Craig -Hallum Capital

One of the areas that you showed particular strength in was in the fully implemented and contracted. Last quarter I think there were some questions about the contracted number falling within your aspirational goals 20 to 50. There was a significant jump here in the second quarter, do you think that was related to the timing of the summit or were there other factors that caused that big jump from Q1 to Q2?

Robert A. Frist, Jr.

It’s always a complicated thing to try to key out exactly why when you either over perform or underperform. Clearly, this is an over performing quarter to our goal and range and the way we plan and think about our business so we’re very excited about that. There’s a nice convergence of a few competitive takeaways that we’ve been working on for over a year and I listed a few of those earlier and brand new wins that are entirely new customers to the fold.

I think summit is always a nice catalyst for customers that are considering joining the HealthStream ecosystem and becoming a partner on our platform so that’s certainly one component but really it’s just the convergence of a lot of long leg efforts with key accounts and like I said, occasionally you win a couple of big ones it moves us up out of the range and then you have a quarter where you don’t win a big one it goes back into the range or below the range. It’s just a really nice convergence of a lot of steady efforts of our sales team I would say over the last 24 months, not anything in the last 90 days that we did special.

Matt Hewitt – Craig -Hallum Capital

The hiring progress, it sounds like you made some in Q2. Did you still have contract employees during the second quarter or was that just in the first quarter?

Robert A. Frist, Jr.

We do use contract labor to keep everything moving forward, assist in every area that’s growing and as you can tell almost every area of the company is growing. We use contract labor as a bridge to full-time hiring and to manage specific project initiatives internally like improving efficiency of our internal systems. So contract labor is kind of a permanent part of our overall landscape but it comes and goes based on our efficacy in hiring full-time employees also. So here we see a bit of a catch up in our full-time employees so some of the contract labor expenses can come down a bit but full-time run rate cost of full-time employees will go up as we had in the second half of the year.

I think it’s important for everyone to focus on our need to invest in this growing business and not get too over excited about overleveraging the business. We need to make investments in our acquisition Decision Critical. You can tell from this call we’re investing in our M&A pipeline development so you might make sure that you model those things as ongoing prophecies. When you have new products like competency performance center with 15 new accounts you have to invest in implementation and support to make sure they go well.

I really want to provide strong guidance that we’re excited to reiterate all of our guidance but we should all remain confident that those guidance points are our best estimates of our performance as we go forward on a full year blended basis.

Matt Hewitt – Craig -Hallum Capital

You just mentioned Decision Critical, can you help us understand a little bit what that will contribute in the second half of the year from a revenue standpoint?

Robert A. Frist, Jr.

It’s a very small acquisition and we don’t plan on disclosing the revenues. It was more of a technology acquisition and so it’s a very small component of revenue overall but very exciting patented technologies and a very, very small customer base which gives us an opportunity to cross sell into as well. A small but mighty customer base and a small but mighty product with a great future so really it’s not a material contributor to revenues in the second half but we’re excited about what we can do with the products.

Matt Hewitt – Craig -Hallum Capital

HeartCode, very strong first half for you, I’m wondering what is the penetration of the learning center customer base for that product?

Robert A. Frist, Jr.

That’s a great question. I don’t have that answer at my fingertips here but it would be a good one for either our next conference call or let me see if I can get my hands on that. It’s a strong mix there, we have each of our sales teams, they can target both new accounts and existing accounts so we tend to bring both on for the HeartCode products. The HeartCode product tends to be a great lead in to ultimately winning our platform into the business as well because their platform components are integrated with the HeartCode products in an increasing fashion as well.

The answer is I don’t have the exact split but it does come from both sources it is not just sold to existing customers. We have a dedicated team focused on new account acquisition as well for that product set.

Operator

Your next question comes from Vincent Colicchio – Noble Financial Capital Markets.

Vincent Colicchio – Noble Financial Capital Markets

Just a couple of question for me, given the more uncertainty in the economy have you seen any effects, any signs of sales cycles changing in any areas of your business, or any changes in pricing that were a surprise as well?

Robert A. Frist, Jr.

Most all our products we try to position has having a strong return on investment to help fulfill a mandate or requirement and those mandates or requirements have not gone away even with the challenges in the economy. We’ve seen some financial pressures across our broader network in hospitals, general cost management and cost containment which we think as long as you’re selling on an ROI basis both hypothetical and real meaning calculated and proposed savings, we see continued demand for our products. You can see from our renewal value dollar that prices tend to be holding up fairly well on renewals so most indications are things are holding up pretty well right now.

Vincent Colicchio – Noble Financial Capital Markets

Then on the learning platform side are you starting to see traction with non-hospital type facilities?

Robert A. Frist, Jr.

I guess I do want to come back Vince as I thought through on that first question, the elective surveys for research clearly are underperforming expectations and maybe that has something to do with the macro conditions although I can’t pinpoint it to that. So I would come back and comment that we continue to have challenges now for two quarters with the more elective components of our research products and clearly that’s dragging down the overall performance of the research product group. So I would comment on that without commenting that’s a macro condition thing it has been persistent now for two quarters and we’re going to do what we can to improve that outcome going forward.

On selling into new verticals we continue to land a mixture of accounts and we still haven’t broken out yet of our nearly 2.9 million contacted subscribers the mix, the vast majority of those are in acute care facilities but we have been winning business in the secondary but highly related markets like long term care, behavioral health, home health. So there is a certain mixture within the new account acquisitions that come from those segments. Again, we have not declared any of those segments needing yet higher dedicated sales organizations and marketing organizations to launch at those verticals but their continued affiliation with hospitals and just the general reach of our brand we’re beginning to bring more in in those additional verticals.

One opportunity for growth as we think about investments into the next year and as you think about modeling next year would be to start to think about again, we haven’t declared this, but maybe in our next conference call we’ll give more insight, a renewed focus and maybe a financial investment focus in areas of launching new markets which obviously those investments would precede earnings growth if we were to do those and we’re in our strategic planning process the next four months and out of that may come new initiatives for next year, early next year.

So I wanted to set the stage with that discussion because it’s a great question Vince. We continue to win small parts of business in those areas and are considering a real investment into the growth of those areas maybe as early as next year.

Operator

Your next question comes from Andrew Albert – Invicta Capital Management.

Andrew Albert – Invicta Capital Management

I’m a little new to the story here and I see there’s some great growth coming out of the third party content. I have a little insight into that, I was wondering if you could sort of talk about the range of gross margins across those products as it seems to vary widely? Any insight into how to think about that business going forward from a gross profit perspective would be helpful.

Robert A. Frist, Jr.

It does and it depends on the mix and the brand, we add partners and each partner they have their relative strengths both in assisting in the sales and marketing, the power and presence of their brand, and when we think about how we share in the sales that we put our nearly 65 or 66 person sales force behind their brands and products and contract them into the market we’re clearly adding value to their distribution. It’s constantly a debate, a little bit like a distributor and a content owner, a cable company and a content owner, there’s a continuous debate about the value of each party to the transaction.

We have disclosed a very wide range of royalties paid back to content owners that range anywhere from 10% to 60% and obviously in the process of determining that we try to determine the value that each party bring to the sales and distribution. We have a particular strength in gaining enterprise level contracts with big health systems which many – that’s a well developed channel for us and we have established selling processes and so we believe a lot of value to that proposition.

But I know 10% to 60% is a wide range obviously, the more that the content partner brings to the table and bearing the cost of both content production but also the sales and marketing effort, the power of their brand, all influences where we come out in that negotiation. So I know that may seem too broad and too vague but helpful it helps everyone understand it’s just a constant negotiation and each party brings value to the ultimate win. Regardless of the royalty we pay each new content sale has a nice flow to the bottom line because the incremental cost of delivery once the sale is achieved is fairly low.

Andrew Albert – Invicta Capital Management

If you could also expand a little bit on how often the contracts or the royalty rates come up for renewals? Is that an ongoing fluid basis or is there kickers in there where you hit three million subs obviously your distribution is bigger that that changes the pricing? Any more info would be great.

Robert A. Frist, Jr.

Sure, the content contracts are usually multiyear agreements and occasionally they’ll have things like targets where royalty changes will have slight adjustments based on achieving certain outcomes. More often than not they don’t so generally I’d say they’re multiyear agreements. Now you can see 128 total content partners we’re in a constant process of renewing. The nice thing about it is our distribution has continued to grow and even in this last quarter effectively at a near record pace with 124,000 more people to sell too and so generally that helps our discussion when the audience for the content continues to grow.

Andrew Albert – Invicta Capital Management

Then just as I think about modeling going forward since the range is kind of 10% to 60% which is below the company’s gross margin and you talked about the long term consistency of being between 60% to 65%, do you think that the third party content growth is going to take the company to below the 60% gross margin range? Obviously it’s going to have the positive bottom line benefits but I’m just trying to think about how I model out the company going forward.

Robert A. Frist, Jr.

I think that’s a fair [inaudible] clearly content has lower royalties and is growing at a very good rate. I mean, both are growing at a solid rate, content lately has been growing at a faster rate and has a lower overall margin. I think you pointed out an important piece, that we like it when every piece of content sells because it does add to our overall financial health but at the gross margin level which we tend to focus less on because what we’re looking at is operating income as a key metric for us, but at the gross margins obviously the more we sell content the more gross margins would be pressured.

So it’s interesting to see like this last quarter 15 new accounts on a higher gross margin competency and performance center products is kind of a relative rate of uptake that determines what happens with gross margins which is why I’ve always been impressed that margins have remained as tight as they have because in any given mix period depending on the last few quarters performance it could change the mix. But again, it has been fairly consistent in that 60% to 64% for some time and so that’s about all the color I can provide.

I hope that helps you. Although clearly, 60% growth in our HeartCode products is something to be cognoscente of. We work with American Heart, a strong brand and Laerdal Corporation also has a worldwide presence and HealthStream, it’s a three way partnership and that product is growing very rapidly so it’s something to think about in your modeling.

Operator

Your next question comes from Matt Hewitt – Craig-Hallum Capital.

Matt Hewitt – Craig-Hallum Capital

Just a couple of follow ups, first what was the NRP contribution in the quarter? I know historically those tests are traditionally taken once nurses finish their schooling and then they come back every couple of years to take it around that same time. Was there a big bolus of that business in Q2?

Robert A. Frist, Jr.

There was a great surge of kind of what I’ll call orders and then effectively the revenue has smoothed over the consumption period and basically I’d say that that product is meeting expectations we had disclosed maybe slightly exceeding some of our model expectations, just slightly. For example, I think in our road shows recently we talked about up to $200,000 a year demand at about $15 per person. We’re selling at a slightly higher price point than that because there’s retail channel for content as well as the business-to-business channel and we’re seeing a slightly better contracted rate for bringing new subscribers onto that product than the original $200,000 we had mentioned.

So I would say that product is slightly exceeding its initial goals. Although, it’s also challenging our transaction processing. We’ve never had so many contracts of such a small size come in such volume so we’re working hard to figure out how to get good systems of support this new kind of consumption based $15 per complete type of content [inaudible]. We’re excited about that as a model but also it’s just a new level of kind of contacting that we’re doing that’s challenging I’m sure our back office accounting operations and we need to do more to smooth that process. But overall we’re very pleased with the product, we believe it’s exceeding what we consider the only guidance we provided on it which was effectively it would be about $200,000 a year at $15 per person. So we think we’re going to be slightly ahead of that target.

Matt Hewitt – Craig-Hallum Capital

I guess lastly for me and I don’t want to focus on it too much but the survey business was weaker but I’m curious there was some pretty big storms on the east coast in the quarter and I know historically you have worked with your customers that have been impacted by storms working whether it’s helping get easements on the HCAHPS or pushing out survey business. I’m curious if there was any of that in the second quarter?

Robert A. Frist, Jr.

Thanks for that lead in, I’d love to blame the weather but we just can’t. I think the point in time surveys were just disappointing for the last two quarters and we’ve got some work to do there to get that back on trajectory. I think we can do it and we’ll continue to do it but you can see we really came down in our own expectations, it’s going to take a little more work than maybe we had hoped when we entered the year and we’ve got it at 1% to 3% growing on a blended basis.

The HCAHPS scores, the HCAHPS content continues to perform well with competitive wins again, growing 7% even in spite of what we talked about the draw back from one customer early in the year. So overall it’s going to be a grower and a contributor but certainly not meeting expectations at 1% to 3% as a blended set of products.

Matt Hewitt – Craig-Hallum Capital

I guess last question for me, ICD-10 I’m just curious I believe it was pushed out a year but what kind of adoption are you seeing or is it still really early?

Robert A. Frist, Jr.

Well, we’re seeing with the continued push of the deadlines and now we think we have a date but there’s still some discussion that it could get pushed or just lack of clarity is still hanging out there a bit. We are seeing good contracts come in but there might deferred implementation so the signatures are coming in and in some cases strong at big health systems but the execution they’re going to probably in some cases delay implementation over a period of maybe a year instead of all surging in the next quarter or two. So I would expect revenue recognition to get smoothed out over a two year or three year period for ICD-10 which I believe overall is healthy.

The good news is the orders are still coming in even with some of the uncertainty around the ICD-10, the actual final conclusions that will be made. There’s still some uncertainty around those decisions.

Operator

Your next question comes from Richard Close – Avondale Partners, LLC.

Richard Close – Avondale Partners, LLC.

Just really quick, with respect to the secondary markets I’m curious in terms of you seeing some interest levels there and signing some new contracts, is that mainly coming through your existing hospital relationships that maybe is doing stuff in behavioral health, or surgery centers, home health, etc., or is that standalone home health companies, behavioral health companies?

Robert A. Frist, Jr.

It’s interesting as we explore these new markets I personally have done some I guess you call it cold calling or visits to some of the accounts, the larger accounts, in those spaces so we’re beginning to learn more about that market. I’ve made some trips myself to visit with larger providers in those areas and occasionally responding to an RFP to let them know we’re seriously interested and we think we have good technologies for them.

In addition, our hospitals when they acquire everything from physician’s practices to affiliate with home health facilities we’re seeing a little more of that so our existing sales team is finding themselves in a few more of those deals than they target. So I would say it’s a mixture of both exploratory business development which I’m actively involved in personally and sales team just getting more exposure and overall more exposure to the brand in the provider side healthcare. I don’t mean to be vague, it truly is coming from two or three places we’re picking up a few wins here and there.

Related to that though is just a little bit thinking about next year and again, we don’t provide guidance on next year until February until we finish our budget and planning process but there is a difference between exploring those markets and investing in them. We’re making some investments of time like mine and others to explore but one thought is when and if we declare a vertical like that we would need to hire dedicated teams of people for those verticals and so you can be thinking about that as you think about next year. Again, as we think about how to define our approach to those market segments. We’re very pleased to see the wins coming in and the interest however. It’s a good early part of our planning process.

Operator

Your next question comes from Andrew Albert – Invicta Capital Management.

Andrew Albert – Invicta Capital Management

You may have mentioned this so I apologize, the project based revenue that increased by the $700,000 over the prior year I think about $250,000 of that came from the increase in SimVentures. Can you help me understand what else was in the increase and what exactly goes into that bucket?

Robert A. Frist, Jr.

Let us take a quick look at that because I’m not sure it came from SimVentures. So we’ve just done a quick scan of the SimVentures piece, we don’t believe that any of the revenue in that category you mentioned is from SimVentures. SimVentures has its own line item called out, the $392,000 in revenue. That is a wholly separate from the growth in project based revenue. The project based revenue comes from some occasional developmental work we do for customers particularly in this case development of courseware. We have a long standing skill at helping partners in both hospitals and publishers get their content ready for selling and we project manage to completion some creations of large content libraries.

So in this case both pro services like implementations that grow because we win big accounts they sometimes have the pro services fees, but in this case the $696,000 there’s a large attribution there to what I’ll call one-time project based developmental work typically building content libraries for people who then occasionally end up distributing them or selling them through HealthStream.

Andrew Albert – Invicta Capital Management

Is that with a few concentrated customer that increase or is that broad based across many customers?

Robert A. Frist, Jr.

That is probably largely concentrated in just a couple of customers.

Andrew Albert – Invicta Capital Management

Given the economic sensitivity you think you’re experiencing in the research business, that seems to be acting counter to any economic sensitivity [inaudible].

Robert A. Frist, Jr.

We mentioned that our content orders for example by name GE, Aleris, [inaudible] are all what we call industry partners and industry partners use us to distribute products training through our network and so when they need to build a library of training material for their products they will seek to find someone to build that for them. Occasionally we contract to build that content which then in turn they distribute to our network or hospitals. So I would say this is more industry partners that are investing in creating training content for their product sets which then of course in turn they deliver through our network and so that’s different from our hospital customers building content for their own consumption just to try and clarify that for you.

Operator

I’m showing no further questions at this time. I’d like to turn it over to Mr. Frist for any closing remarks.

Robert A. Frist, Jr.

Thank you all for participating in this call. As you can see our continued focus on growth and acquisition, continued focus on investment in growth areas, a bit of discussion of future market direction for the company. We were glad you were able to join us for this call and look forward to celebrating with our employees crossing the three million mark in the coming year and thank you for your participation. We look forward to the next earnings call.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the program. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: HealthStream's CEO Discusses F2Q12 Earnings Results - Earnings Call Transcript
This Transcript
All Transcripts