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HealthStream, Inc. (NASDAQ:HSTM)

Q2 2008 Earnings Call Transcript

July 23, 2008 9:00 am ET

Executives

Robert Frist - CEO and Chairman

Gerry Hayden - SVP and CFO

Analysts

Vincent Colicchio - Global Financial

Operator

Good day, and welcome to the HealthStream, Inc. Second Quarter 2008 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Robert A. Frist, CEO and Chairman. Please go ahead, sir.

Robert Frist

Thank you. Good morning and welcome to our second quarter 2008 earnings conference call. Also in the room with me are Gerry Hayden, Senior Vice President and Chief Financial Officer, and Mollie Condra, Senior Director of Communications, Research and Investor Relations. Gerry, would you read the forward-looking statement, please?

Gerry Hayden

Sure, Bobby. Good morning. 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.

Robert Frist

Thank you, Gerry. Got a few things to report on and summarize a few of the highlights out of the second quarter earnings release that we did last evening. And then Gerry will make a few comments about our forward look, and I’ll come back around to wrap it up.

So, to make it very simple, revenues were up. EBITDA was up. Net income was up. And that’s true for both over prior quarter and prior year same quarter. Cash was up and debt was down. And we feel our stock was a good investment during the quarter, so we purchased back $1 million of it.

So overall, if you back up from our business and you look at the major indicators, that’s the quickest way I know to summarize our progress in the second quarter.

On the operational side, we have similar kinds of metrics. We set record levels of transactions on our core platform. In fact, on July, 1st of 2008, we had 74,293 course completions on our learning network, which was a record over the previous high on that single day by almost 10%. In addition, we implemented 45,000 net new subscribers during the quarter, so we saw new subscriber growth through implementations. And so, we’re excited about those metrics.

On the challenges side, and this is true for both entering the second quarter and the second half, growing our Research business has been somewhat of a challenge in the last quarter and looks like it will continue to be challenging in the second half. To answer that challenge we’ve begun to invest, in the first half of this year, in our sales forces for both Research and Learning. And we’ve added a net of 10 new sales people across both Research and Learning in the first half of the year.

With those opening statements, I’d like to turn it over to Gerry to get some of his thoughts more specifically about the quarter’s performance.

Gerry Hayden

Thank you, Bobby, and once again, good morning. In keeping with what we’ve provided in our prior earnings calls, I’m going to keep my remarks brief and try to highlight a few key areas. And then at the end we’ll have more than enough time for any questions you might have about the release.

I want to begin by emphasizing the growth reported in our Learning business segment. Our consolidated quarterly revenues increased 8% over the second quarter of 2007, all of which is core growth, but our Learning segment grew by about 30%. The growth in the Learning segment is driven by new subscribers, where we saw the number of subscribers grow from 1,422,000 at the end of the second quarter of 2007, to 1,639,000 million at June 30th of 2008. And that equates to a 15% year-over-year growth rate.

The same year-over-year comparisons – the revenue from our system business grew by 30%, and the increase is also due to the increased content sales to the same customer base.

While we showed a solid revenue growth, the operating income leverage is equally impressive. On a year-to-date basis through June 30, 2008, we showed 142% growth in operating income against the growth of 21% in revenues in the same period.

As we discussed in an earlier earnings release this year, we did experience a decline in revenues of approximately $708,000 from our Research business segment in the second quarter when compared to second quarter of 2007. A couple of factors affected that performance in HealthStream Research. We had one large customer that elected to not repeat an interim survey done in the same quarter last year. In addition, a few of our other larger customers chose to delay some research projects that were slated for the second quarter of 2008.

At the same time, though, we have continued to add new customers and business to HealthStream Research. Among our existing Research customers, 53 renewed their contracts for multiple-survey products, while 57 chose to contract for more Research services in the second quarter to add to their current level of service from the Research group.

In light of all these developments, we have adjusted our guidance for the full year of 2008. In light of the slower than expected sales activity in the HealthStream Research side, we have modified our revenue growth rates from 22% to 24% to 16% to 20%. Our revised earnings per share range is $0.11 to $0.13 for the full year of 2008. Our earlier guidance was $0.12 to $0.15.

Finally, I’d like to conclude my remarks here with some highlights from the June 30th balance sheet, and try to quantify some of the things that Bobby had mentioned a bit earlier. The balance sheet underscores the quality of our financial results and shows improvement and progress in several areas.

Our long-term debt, which is not high, the balance sheet to begin with, has decreased by $400,000 since December 31st, 2007. Accounts payable accrued liabilities have declined by $1.3 million and receivables have dropped from $9.7 million to $8.4 million, all since the beginning of the calendar year, over the first two quarters.

And once again, as Bobby mentioned, we’ve done all of that balance sheet type strengthening while buying back $1 million of our stock and having our cash balance increase by $2.2 million at the same time.

Robert Frist

Thank you, Gerry. I’ve got a few closing remarks and we’ll get on to questions. First, this is our first operating quarter with our new CFO, Gerry Hayden. I’d like to welcome him aboard and we’re pleased with everything you’re doing so far. So thank you, Gerry.

Also, we’re excited as our new CTO is on board. Jeff Doster joined us a few months ago and is already making a difference in how we’re organizing our approach to technology and development and research and development. So we’re excited to have Jeff Doster on board as well.

So, we’re looking forward to the second half, with the challenges already noted, and some of our new sales personnel on board. We’re excited about what they’re going to bring to the table to try to overcome those challenges.

Also, the entire company is gearing up for its first ever combined Summit, where we’re combining the Research and Learning Summit into one, on September 5th through 8th. We already have over 540 registered guests coming in and we expect that number to continue to climb. It should be record attendance and an exciting time for all.

Our theme of “Creating Excellence in Healthcare” we think is a perfect theme applicable to both of our customer bases, and we hope to do a little bit of cross-selling at that event and introduce them to new products and services that they may not have seen before.

So we’re excited about our progress, our early registrations, and look forward to seeing any of you, our investors, shareholders, at the Summit September 5 through 8 in Nashville, Tennessee at the Gaylord Opryland Hotel.

With that said, we’re looking forward to the second half of the year, and I’d like to turn it over for questions.

Questions-and-Answers Session

Operator

Thank you. (Operator Instructions). We’ll go first to Vincent Colicchio with Global Financial.

Vincent Colicchio - Global Financial

Good morning, guys. Bobby, you said that you had 53 – I believe Gerry said 53 new research clients – excuse me, existing clients renew their agreements. How many research clients do you have, to give us a sense for how large a number that is?

Robert Frist

I believe our research base represents about 1,100 U.S. hospitals. That’s over a fewer number of accounts, because several of them are large health systems. But 1,100 hospitals are counted in that number.

Vincent Colicchio - Global Financial

Okay. And in terms of the Research business, the slowdown, to what extent is the economy a factor? Is that an issue or could you give us more color on what you think is affecting things there, if it’s not the economy?

Robert Frist

Well, I’m not sure that it’s the economy. I think it’s obviously new. We’re combining these two businesses over the last 12 months. I think Eddie Pearson, the president of that group, has done a really fine job. Again, we’re growing the sales organization. A lot of new sales people in the first half of the year are just getting their feet on the ground and they are ramping up a little slower than we had hoped and expected. But we’re pleased with them and look forward to their growing, improved performance. So I would like to say it’s probably more of just finishing up integration work and ramping up the sales team slower than projected.

But the business as a whole is a good cash contributor and cash flow generator. And it’s going to be a challenge this year to grow, but I think we can address that early next year as these sales teams ramp up, and we keep looking how to build the sales and marketing engine for that organization. So, it is challenged. I won’t blame it on the economy. We will say that it’s just a challenging ramp-up that we’re having right now in the second quarter, but we’ll get through it.

Vincent Colicchio - Global Financial

Moving on to the learning side of the business, could you give us an update on new products? I know that BLS product is in the market, and the ACLS is something you’re expecting to see in the market, I think in mid-year this year. And I think the Competency Center product is something you hope to have some success with in the second half of the year. Can you talk to those three products?

Robert Frist

Right. BLS product continues to perform. We’re ramping up our efforts there and some of those new sales people are dedicated to its sale. So we’re seeing that continue to do well. The ACLS looks like a September launch on the online version. We can sell a kind of an installed version of it today, but we’re really excited when we get the online version. So that’s delayed.

Our Competency Center continues to be challenged. We’re hoping that our new CTO will get in and make a difference on finishing up the technical development and final QA and launch of that product. We are in mid-stage implementation of some of our first customers on Competency, so we’re pleased with that, that they’re beginning to be implemented. So we’re beyond just shelf development. But it is continue to be challenged. And, as you know, it’s really an ‘09 product. We don’t have much revenue in for the year in Competency in ‘08 at all. And so, we still plan on building our sales pipeline and delivering revenues in ‘09.

But it is, and I announced it was 90 days behind last time. So, I’d say it’s probably another quarter behind yet again. So, we’re looking forward to our CTO having an impact. And hopefully, we get all this corrected before we enter ‘09, and so we’re able to start getting the revenue recognition we expect out of that product line and that investment that we continue to make.

Vincent Colicchio - Global Financial

Okay. Talking to your HCAPS library product, looks like you’ve had some success there, I think it was four new clients. Can you talk to the structure of these deals? Are these annuity-type deals and how large a contributor is a typical deal?

Robert Frist

Well, the gross margins on this content is very high, because we own it. So it’s probably in the 85, 90% range on the gross margin standpoint when we sell this content, since we do own it. And so we’re excited to see the attraction. In fact, when you talk about cross-selling, we’re beginning to see more referrals coming from the research side of the business to the learning purchases. And in this case we count this content sale on the learning side, even though a lot of the lead origination is generating from the research organization.

Nonetheless, we’re excited about that product. We’ve got four health systems that are either piloting, they’ve all contracted for it. And they’re kind of piloting it at a smaller scale. We hope they roll it out even larger. So we’re excited about the product. We’ve got our first true contracts on it and some of them are already taking courses from that library. It is a subscription product. So, it’s an annual basis subscription product. And if they like it, we hope they renew it annually.

Vincent Colicchio - Global Financial

Okay. I’ll go back into the queue. Thanks.

Robert Frist

Thank you.

Operator

Thank you. (Operator Instructions).

Robert Frist

If there are no further questions, we’re prepared to conclude the conference. Of course, we’re available for the next week and a half to any current shareholders or investors that would like to have a meeting with management to get more questions answered. So, we’ll be scheduling those meetings beginning right after this call. And if there are no further questions in the queue, we’ll go ahead and conclude.

Operator

We do have a follow up from Vincent Colicchio with Global Financial.

Robert Frist

Okay. Vincent.

Vincent Colicchio - Global Financial

On the HLC, you took a hit on the renewal rate this quarter, on one of your clients being acquired by another entity. I guess they were on a different learning system. Should we expect those rates to come back to a normal level in the next quarter?

Robert Frist

As we look ahead, I think we see at least one other system level challenge like that in the third quarter, which may make them comparable to this quarter. And then we’re expecting them to go back up after that into the fourth quarter. So, we do see at least one more client, maybe under a similar type circumstance that we’re not sure how it’s going to play out yet. But, we’ll report on that in the third quarter. So, I would say that they would be comparable to this quarter, and then improving hopefully in the fourth quarter.

Vincent Colicchio - Noble Financial Group

Losing another system, I assume that won’t take you off track in terms of net addition of, say, 20,000 to 60,000 new subscribers?

Robert Frist

No, we don’t expect that it will. We’ve got an equal number of exciting things in the pipeline for the second half, and by the way, that’s not a done deal yet. So, we’ll keep working on it.

Vincent Colicchio - Noble Financial Group

Okay. Thanks.

Robert Frist

Alright. Well, thanks Vince.

Operator

And that will complete our question-and-answer session. I’ll turn the conference back over.

Robert Frist

Thank you very much. We look forward to meeting with any of you on the next conference call. And, again, management will take one-on-one sessions in the next week and a half for anyone that wants follow-up questions. Thank you and take care.

Operator

Thank you. And ladies and gentlemen, that will conclude today’s conference. We do thank you for your participation and you may disconnect at this time.

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