A.D.A.M., Inc. Q2 2008 Earnings Call Transcript

A.D.A.M., Inc (ADAM)

Q2 2008 Earnings Call

August 14, 2008 10:00 am ET

Executives

Kevin S. Noland - Chief Executive Officer

Mark B. Adams - Chief Financial Officer

Analysts

Tim Brown - Roth Capital

Adam Fisher - Burnham

Chad Bennett - Northland Securities

Presentation

Operator

Good morning everyone and thank you for participating in A.D.A.M. Inc.'s second quarter 2008 conference call. (Operator Instructions) Kevin Noland, A.D.A.M.’s President and Chief Executive Officer and Mark Adams, A.D.A.M.’s Chief Financial Officer will provide an overview of the company’s operating results and then will be glad to take your questions.

Before we begin this morning’s call, we would like to remind you that except for historical information, all of the statements, expectations and assumptions contained in the press release we issued last evening are forward-looking statements. These statements especially regarding revenue, net income and cash flow forecast involve a number of risks and uncertainties that could cause actual results, performance or developments to differ materially.

Factors that could affect the company’s actual results, performance or development include general economic conditions, development of the Internet source as a source of health information. Prices, actions taken by competitors, demand for the company’s health information and regulatory changes involved and regulations that impact how the company conducts its business and other factors, detailed from time to time in the company’s periodic filings with the Securities and Exchange Commission.

A.D.A.M. disclaims any obligation or duty to update any other forward-looking statements.

And now I’d like to turn the call over to Kevin Noland the President and Chief Executive Officer of A.D.A.M..

Kevin Noland

Thank you and good morning everyone. Thank you so much for joining us and for your interest in A.D.A.M.. I want to provide you with a general overview of our second quarter results and Mark Adams will provide you additional details on our financial results. And we will be glad to take your questions at the end.

We continue to make great progress on all fronts of our business. As I reported to you last quarter, we promote our 20 80 20 goal internally and externally; 20% growth in revenue, 80% gross margin and 20% operating income margins. There’s a balanced approach that we take to protect our profit goals while investing for the future growth of our business.

I am very confident in saying that the market opportunity for our consumer healthcare content and for our Benergy benefits management solutions enables us to readily achieve these 20% revenue goals. We are executing against investments we have made and we are beginning to see the return. This progress is evident in our healthcare content licensing, where we are seeing strong retention rates; 112% in the second quarter and 102% year to date. This contributed to a 21% increase in healthcare licensing revenues for second quarter from the prior year.

The growth in our content licensing business is directly reflective of the investments we made in 2007 in key areas of sales, product and customer support. We expanded our sales coverage from four to six geographic sales territories, enhanced the level of our sales staff, including new senior management leadership and built a dedicated account management team devoted to client retention and growth.

As I discussed last quarter, we have established a separate national account team to focus on increasing our penetration with some of our largest content customers and resellers. I’m pleased to report that this group, which represents about a third of our total content licensing revenues, grew 87% in the second quarter.

Key partnerships such as our distribution relationship with Thompson and others are growing nicely, and allowing us to expand into other areas of healthcare, previously untapped. For our healthcare content, we see strong interest from our markets. We signed a number of new deals in the second quarter, including the Cleveland Clinic Health System. And we have a solid pipeline for new opportunities going into the rest of 2008. As academic medical centers, nationally branded web portals and other leading healthcare organizations, recognize the unique set of assets A.D.A.M. has to offer.

We continue to make smart investments into the products that serve these markets and that will drive revenue growth. We are making investments into what we believe will be game changer products in the not too distant future. Like the work we are doing on mobile platforms, such as Apple’s iPhone, new highly engaging video content and new patient education content that supports the clinical team such as pre-op, discharge and health management instructions.

As we continue to focus on the business needs of hospitals and healthcare organizations, our products will increasingly be designed to serve a recurring role in the daily workflow of the clinical team and help them better educate their patient population and drive better health outcomes.

With respect to Benergy, our licensing revenues were essentially flat with 2007. The second quarter results are obviously not where we want to be. However, it is important to understand that we are successfully putting all the essential pieces together to support a new business model and selling strategy for the employer market. This new model will enable us to tap a significantly larger addressable market with higher per employee per month fees and with a solution that embeds us more strategically with the employer and enables us to execute our vision for offering employers a turnkey consumer-driven health and benefit solution.

Today our current revenues for Benergy are derived almost exclusively from the broker channels, about 85%. Historically Benergy revenues grew because any broker cancellations or downgrades were offset with new brokers being added to the network, a strategy we believe is not effective for long-term sustainable growth. And there were virtually no selling efforts outside the broker network, limiting our ability to connect directly to employers. While our broker channel is critically important to us, I want to make it clear that our model moving forward is very different.

Our model today is a three-pronged strategy. First a nationwide customer relationship management team we have built dedicated to supporting and growing our existing broker network. Second a national account team focused on our top twenty largest Benergy business partners. And finally a nationwide team of sales executives developing and closing opportunities directly with larger employers.

I’m excited to report that we have a solid early indicator that our strategy is working. Even with a newly formed sales team, in fact 50% of our direct sales team was hired in the second quarter, we closed more than $300,000 in direct sales during the second quarter and we have a strong backlog of opportunities going into the third quarter. We expect third quarter bookings for online enrolment, our lead product into the employer market, to increase by more than 50% from second quarter, driven by a maturing pipeline and solid demand for our Benergy communications solution.

In addition we have bolstered our client services group to support the influx of enrollment deals coming in third and fourth quarter, ensuring that our internal resources can accommodate the bulk of business and any incremental business that may come in.

Parallel to our direct sales strategy we have invested in a high performance customer relationship management or CRM team. That provides on the ground support for our broker distribution network. The goal of our CRMs is to increase broker retention levels, drive additional up sell revenues and identify and nurture high performance brokers.

We are seeing positive indicators with this strategy as well. With our CRMs touching our brokers every day we discover more opportunities where we can be proactive. We have been successful in the second quarter at moving several brokers to higher annual commitment levels as a result of providing support for their Benergy clients. We are in a great position to reinforce for our brokers now the growing value proposition of Benergy. We show them how Benergy helps them win new business and retain existing clients. We continue to develop training and support programs to help our brokers.

For example we launched a new service in the second quarter in which A.D.A.M. will build Benergy sites on behalf of brokers who save internal staff and time limitations and want some assistance in reaching more of their client base. We earn the set up fee and recurring monthly revenues from the site. The broker does not need to staff and maintain resources, a clear win-win proposition.

With approximately 600 brokers currently in our distribution network I want to be realistic in that the process for our team to make contact, re-introduced our company and begin a proactive relationship, takes some time and we can expect several more quarters before we see these investments begin to yield a favorable return. But I am confident that the processes and staff we have put in place will get us there as we build our company on a solid foundation for long-term success.

For example, we focused our CRM team on working with the regional offices of several of our larger national account partners to reinforce the programs put in place at the corporate level. This is having a tangible effect. Our national accounts group which represents our largest Benergy customers and 40% of our total Benergy licensing revenue, saw a 15% increase in Benergy revenues for the second quarter. We believe this increase is due in part to the CRM effort. And we expect additional growth as the team forges deeper relationships with those brokers.

So I’m very encouraged by the progress we have made and I especially want to recognize the outstanding work that our sales marketing and support folks are doing. I can tell you that after coming back from our recent sales meeting, our team is 100% engaged and very excited about the prospects for long term success. There is tremendous potential for Benergy to address the key health and productivity concerns of employers. And at the same time connect the dots for employees between the benefits they receive, their finances and their own health and wellness. I believe the early indicators from the employer deals we have secured support my enthusiasm and I believe that our current pipeline of opportunities for health content in a robust product pipeline, will continue to drive us toward our long term 20% growth goal.

With that I’d like to introduce Mark Adams our Chief Financial Officer.

Mark Adams

Thank you, Kevin. A.D.A.M. has a strong business model and during the second quarter we generated an 81% growth margin and an adjusted operating income margin of 18%. Cash flow as measured by adjusted EBITDA was $1.9 million or 26% of revenue. We are pleased that our growth margins as well as our operating income are tracking to our 20 80 20 call. Total license revenues which are predominately recurring monthly revenues from annual and multi-year contract, were $6,330,000, an increase of 8% from the same period in 2007. This growth was driven primarily by an increase in our health content licensing which increased by 21% to $2, 989,000. The gross, as Kevin mentioned earlier, is a result of key investments that were made last year that boosted our customer retention rate significantly and allowed us to sell additional products to current customers and close new ones.

Our Benergy license revenues were $3,340,000 which is basically flat with last year's $3,386,000. And as Kevin indicated about 85% of our current Benergy revenues are derived from annual license agreements that we have entered into with brokers. We have discussed the churn in the broker channel on previous calls and as we have stated our model going forward is not to overcome the churn effect by adding new brokers. But instead it is to build a balanced portfolio that includes emphasis on growing our existing channel, focusing on our largest national Benergy partners, increasing revenues from our key brokers and then by securing direct contracts with large employers.

We saw positive responses during the second quarter from these initiatives. Second quarter license revenues from direct sales, where we lead with our online enrollment solution, as an example, grew 38%.

And we also experienced positive results in the national partner's area where revenues were up 15%. These are the initial focus areas that Kevin discussed earlier. Over time we expect to have a network of key brokers that will use our Benergy communication solutions as a key strategic advantage for their business as an integral part of their value proposition with their employer [inaudible].

Our general operating expenses increased 24% from 2007, primarily as a result of the investments we have made during the first half of 2008 in our sales, customer relations and marketing areas. We believe this repositioning and strengthening of our customer facing side of business will lead to growth in future quarters.

For the full year of 2008 we expect to continue to generate adjusted operated income within the current 18% to 20% range. For 2009 we expect a margin expansion from our increased revenues as we execute the sales plan. And from the leverage we get from our scalable infrastructure.

At the end of June our cash balances were $3.9 million. Since the acquisition of online benefits in August of 2006 we have paid down our acquisition debt by $11 million and $14 million remains open at the end of June.

In summary we continue to make investments that will bring long term sustainable growth. During the second quarter we saw the results of these types of investments with strong growth in health content licensing. We continue to benefit from high renewal rates, an efficient scalable delivery platform that generates 80% gross margins and near 20% operating income margins. That concludes our prepared remarks and with that operator we are now ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tim Brown - Roth Capital.

Tim Brown - Roth Capital

Yes hi morning guys.

Kevin Noland

Morning.

Mark Adams

Morning.

Tim Brown - Roth Capital

I just–maybe we start out with the content side. Sounds like things are obviously doing well. But just a question on why and why the content rate was over, or excuse me, the retention rate was over 100%? [inaudible]. That’s calculated.

Kevin Noland

That’s a good question, in fact it’s funny you said that because Mark and I knew that was going to be one of the first questions we’d get. I can let Mark give you a little bit more detail but it’s, basically looked at the total available contract dollars that were up for renewal during the period. And all of our customers renewed and in addition to having all of our customers renew with us, we were also able to increase the amount of product on their contract, which increased the value of the contract and on a dollar percentage basis that was above 100%.

Tim Brown - Roth Capital

I got you. So when you look at, you know, the 21% year over year growth, you could basically say 12% is coming from current clients and the rest is from new clients, do you look at it that way?

Mark Adams

A portion of the growth is from the renewal rates. Because what this is, those were contracts that were up for renewal in the second quarter. So it doesn’t exactly translate to 12% but maybe somewhat a little bit less than that would come from existing customers.

Tim Brown - Roth Capital

Okay, okay, and then just curious, you mentioned a few areas in the Health Content licensing business and I was just curious what you thought were, you know, I guess bigger revenue opportunities and specifically, for instance the iPhone do you see that as a significant opportunity? Maybe you can give us, tell [inaudible] what you see as the opportunity there?

Kevin Noland

Yes I think that, you know, there’s from a traditional licensing business that we’ve been involved with, the content has been for traditional applications of health information. Our customers taking it and making that a part of their website and really using that as a way to draw traffic to their website to promote service lines and to use it in health management situations. And what we’re seeing is like a clear opportunity of where custom, where healthcare companies and other organizations are trying to make information more applicable to sort of the consumer at, sort of when they need information. So whether that’s they need information on their iPhone because they happen to be traveling. Or they’re getting discharged from a hospital and they need specific information related to discharge. Or perhaps they’re coming into the hospital for a particular procedure and they need specific pre-op information. What we’re seeing are these organizations taking content and really repackaging it for very kind of specific applications. And when you look at that on a broader context for example on mobile phones we see that as a big opportunity going forward. I think more and more people will get information from their hand held than perhaps even from logging onto their computer at home and getting it. And I think we’re witnessing that now through the whole iPhone surge.

Tim Brown - Roth Capital

This is something really organizations have been demanding or they see demand for?

Kevin Noland

Well it’s interesting because I don’t know if it’s necessarily, I mean you certainly hear a lot and discuss a lot of this with our kind of traditional healthcare clients. But we’re seeing interest from sort of non-healthcare entities that are very interested in this, you know, mobile phone makers for example. Other kind of IT organizations that are just interested in getting applications out on these platforms and they see healthcare as a great conduit to do that with. So it’s coming, I think today mostly from a technology side, but as healthcare embraces more of that I think we’ll see a lot more coming directly from healthcare.

Tim Brown - Roth Capital

Okay, and then looking at the Benergy side. I think I was expecting a sequential uptick so I’m curious if you can give a little bit more color on why the licensing revenue is down from Q1?

Kevin Noland

Well I think that Mark maybe will give you a little bit more detail. I think from a kind of a macro perspective it really gets back to this broker centric channel that we have. And you know we made a conscious decision when we organized our sales team. Really in earnest when we made that decision kind of end of last year, that we were not going to continue to add more brokers to our network.

We have a lot of brokers and a lot of our brokers come into the network because they just want to have Benergy because they’re in a situation where if they didn’t have it they can’t win a client. And I’m not so sure that’s the type of broker that we want. We want brokers that are high performance brokers. We want brokers that really understand the value of Benergy and want us to come in and support them as they take that further and further into their book of business.

Those are the kinds of brokers that we want, so we kind of made a decision that we didn’t really want to go add a whole bunch of new brokers. Instead we kind of wanted to almost to a certain degree weed out some of the lower performing brokers. And really concentrate our energies on, you know, building up the CRM team and finding those brokers that over a longer period of time could drive, you know, bigger revenue opportunities for us that were more long term and more sustainable than these sort of upticks and downticks that we were getting every single quarter.

So I think it’s just a decision to not move away from the broker channel but just treat it differently. And as a result what we have seen is continued broker cancellations coming down, each quarter. I think that cancellation rate is beginning to stabilize because we’ve seen a fairly, and Mark correct me if I’m wrong, but I think it’s at 93% –

Mark Adams

93% correct.

Kevin Noland

– 93% retention level with our brokers which is pretty good. But that 7% that we’re not, that down graded is really what you’re seeing in the numbers. And I think over time as that retention level stabilizes and as our CRM team is now proactively working with these brokers. And that we are collectively identifying opportunities and we’re supporting them and we’re building sites for them and we’re really helping them to sell it.

Then what we’re going to see is the churn goes away and then the revenues start to come back up from that core group of brokers. And at the same time, we’re going to be enhancing that revenue stream for Benergy with what we’re doing on our direct sales and what we’re also doing with our large national partners.

Tim Brown - Roth Capital

In Q1 and Q2 did you actually go and raise the minimum, is that what kind of forced the churn among brokers?

Kevin Noland

We have not I think, yes I don’t think we’ve technically raised the minimum, we’ve discussed that a lot in terms just sort of the whole pricing discussion. I think it was just more of a conscious decision not to, again go out and try to overcome that churn by adding a bunch of new brokers to balance it out. Instead we just sort of said okay, well the ones that want to get out because, you know, all of a sudden they lost that client and they don’t really want to pay for Benergy anymore because they lost a client.

I mean I’m not so sure we want to go and spend a lot of time with a broker that’s only going to pay us, you know, a small amount of revenue versus taking the same amount of energy to a broker who is really going to allow us to come in and really support them and really win more deals. And that’s just sort of fundamentally what we’ve done.

Tim Brown - Roth Capital

Right and you think that process is through and stabilized and I guess in Q3 would you expect that licensing in that division to move back up?

Kevin Noland

I think what I said in my remarks is that we have a lot of brokers. We have a team of, you know, we have six territories that we’ve now carved out with the CRM team to support these six geographic territories. It takes a lot of time to get through a network of 600 brokers. That team just got ramped up, you know, through the first half of the year. We’ve got to train those people, they have to start, you know, calling on the, I mean, you know the first thing they have to do is sort of stratify our brokers and kind of tier them out. And once we did that then we’ve got to have our team go out and get meetings. You know it’s all those things that take time. But I think over the next couple of quarters we might experience some more of that churn, but I think that certainly over the next two or three quarters you would expect that that levels out. And then what we see is because of that proactive selling approach that we have, we should see that revenue go back up.

Tim Brown -Roth Capital

Okay and then on the direct sales team, those are the ones going after the larger employers. How, you said, I think you said it equals $300,000 of new business in Q2. Just curious how that compares to Q1 and also in terms of, you know, when you say you closed at $300,000 is that an annual figure or how should we think of that figure?

Mark Adams

Yes good question Tim. The $300,000 is the annual revenue amount related to those contracts that were closed. That was roughly double what was brought in the first quarter in terms of our sales.

Tim Brown - Roth Capital

And those are all on one-year contract or are they multi-year?

Mark Adams

Either two or three-year contracts for enrollment, is our lead product there. As part of our product it allows each employee within a company to enroll and look at their individual benefits online. And they also get the Benergy communications platform which allows them to see what the company is telling them about their benefits and their various options and as well as the A.D.A.M. Healthcare Content.

Kevin Noland

I think what’s just important to note there too that it’s not just so much the $300,000 that’s in and of itself is not that great of a number. But I think what’s important is that number one it increased fairly dramatically from first quarter to second quarter, we should see that again in the third quarter. But this is with a brand new sales team, I mean, we just motored more than half of our sales team up in the second quarter. So if you think about having to bring new people on, and again ramp them up and it takes time to build a pipeline and we’re going into the direct to employer market up against, you know, really big players. And we’re being successful and we’re doing it rather quickly and I think that that is a good indicator that number one, we have a product that can effectively compete. And number two, there’s a market interest in what we’re doing, and number three, that we’ve got folks here that can go out and secure that business. And I think that gives us all here a lot of encouragement for the direction that we’re moving into.

Tim Brown - Roth Capital

Yes that’s my next question but what, you guys have a quota or maybe a figure once that sales team gets ramped up as what you think they can close?

Mark Adams

We do Tim we have quotas of $600,000 to $700,000 per sales person. And we’ll have some people that are above that and some that are below it. But we’ve got, we’re really encouraged by the level and the experiences of people that are coming in and the reaction that they’re getting as they talk to these employers. There’s a real need out there in the employer side of things to communicate better with their employees about their benefits. As we know those benefit costs are increasing and becoming an increasing problem for employers to handle. So to automate the items and then let employees make proper decisions out of the options that they’re getting that’s part of the reason we’re getting the good response that we are from our sales calls.

Kevin Noland

And the fact that we just have a high degree of differentiation because when we go in to sell our enrolment solution it’s not just enrolment but it is the communications around the benefits as Mark just pointed out. And it’s also the health and wellness piece that we bring that really, really adds a whole new dimension to the sales process and one that we’re very excited about and was really our vision when we bought this company. Was to really, you know, bring together a holistic turnkey, consumer-driven health and benefits solution to consumers. And I think that that is a strong value proposition that we take when we’re selling into these accounts.

Tim Brown - Roth Capital

Okay, thanks for taking my question.

Operator

Your next question comes from the line of Adam Fisher - Burnham

Adam Fisher - Burnham

Hello?

Kevin Noland

Hey Adam.

Adam Fisher - Burnham

Hey, just a couple of questions on the content, and then I’ve got some on Benergy. The national account team I guess you said the revenue was up 87%, year-over-year?

Kevin Noland

Yes.

Adam Fisher - Burnham

What kind of customers are those? Is that the Thompson, you know, is that the embedded customer, you know, what other customers are in that line?

Kevin Noland

Well that’s a good question. It is a mix of our reseller partners, our very large reseller partners. And a mix of some of large accounts that we have sort of deemed, I guess strategic if you will to the company. So for example our Google relationship would be in that mix, Thompson would be in that mix, other distributors as well as other large customers that we you know, see around a national scope are strategic to us is in that mix.

Adam Fisher - Burnham

Okay.

Kevin Noland

And it’s also the accounts quite frankly we see as, as where we can get some significant revenue enhancement. So that’s kind of why we categorized a national account list, because we wanted some dedicated resources on those accounts that we thought could really generate some significant upside for us.

Adam Fisher - Burnham

Is Google, are they now kind of paying, you know, the four quarterly or annual amount that we would expect from them for the time being? Or are they still ramping?

Kevin Noland

No I believe that they are now in our revenue number, full revenue number.

Adam Fisher - Burnham

But if they’re in this line your sense is that you think we can grow that number over time by giving them kind of new products and new services?

Kevin Noland

Well I think opportunities like Google certainly present lots of different opportunities for A.D.A.M. to move product into various services that the companies like that are interested in, so yes.

Adam Fisher - Burnham

Is 87% growth, I mean, is 87% growth, I mean obviously you can’t maintain that forever, but as an outlier as you kind of look into the pipeline or should we expect kind of very high growth rates for the next couple of quarters?

Kevin Noland

Well that’s a good question. I mean I think the answer to that is obviously a lot of our customers in these national accounts are really – some of our largest customers are some of our resellers. And resellers such as Thompson and others that we have, we’re starting to get, you know, more traction in terms of, you know, getting introduced to other types of business services within these organizations that really spread A.D.A.M. content products through more places than healthcare. And we’re not having to invest, you know, more sales effort to go do that.

So I think that over time I think that the answer is we should expect to see good, you know, high growth coming out, particularly out of these distributors. Because that’s why we have these distributors and now that we have this dedicated focus you are putting more programs and more incentives in place to work with our distributor partners. I think that will lead to, you know, continued growth from those partners.

Adam Fisher - Burnham

How are we paid on the mobile product, you know I guess the iPhone product, is that like a per download, are we paid at all, who is the content provider. You know I mean who's providing the application to the iPhone is that us or is that somebody else we’re selling the content to?

Kevin Noland

Well the initial kind of public project that we did on the iPhone which was really our symptom navigator application retooled for the iPhone. That is an application that we own and we developed it and then made it compatible with the Apple iPhone Safari browser. So that’s all done internally and we really just sort of did that as a pilot to see, you know, A, if we would do it, B, if there was any interest in our customer base for it. And today we don’t really generate revenue from that. In fact we give it away free. You can go to our website and download it.

The process moving forward is obviously we would look at a licensing type of scenario for other application developers writing to mobile platforms. Whether that’s iPhone or Google’s new platform or whatever it happens to be. We would certainly entertain application developers that were building healthcare applications or other consumer based applications that could involve Health Content or our Benergy content or whatever it happens to be. We would look at a syndication relationship with them. As well as we would look at co-development relationships with developers who might want to revenue share on these applications for mobile.

Adam Fisher - Burnham

And then would we be paid on kind of a per download basis or, you know, have you thought that far through it?

Kevin Noland

Yes I mean we have discussed that there could be some just straight out licensing deals, there could be some straight out kind of web share deals. And there could be some subscription type models, where if a user wanted to pay, just like you would pay for a ring tone or something, we would get a downloaded kind of subscription fee for the application. But I would have to say that we’re just sort of in the early stages of thinking through that right now.

Adam Fisher - Burnham

I know some of the, you know, internationally, some of the countries have, you know, much higher kind of growth rates on the 3G side than we do so far here. What’s the international opportunity for the mobile content?

Kevin Noland

I think it’s very large.

Adam Fisher - Burnham

And then would it be the same business model or, you know, are there alternatives there?

Kevin Noland

I think, I mean for now I think through those points that I outlined in terms of what our business model could be, is kind of what we’re thinking through. I don’t, you know, that could change. But again it’s sort of very preliminary in terms of where we are with all of this. I really can’t answer directly but I would certainly see one of those scenarios come into play internationally for us.

Adam Fisher - Burnham

On the Benergy side, I mean if I kind of read your analogy correctly, you made the investments on the licensing side in ’07 that are driving pretty significant licensing growth this year. We’re making the investments in Benergy now that to drive significant, you know, growth rates, in ’09 and beyond. Is that, I mean that’s kind of the model right?

Kevin Noland

I would say that is the model.

Adam Fisher - Burnham

So what is in your term pipeline in that business look like, would you do a $1,000 worth of deals this quarter still that’s maybe going to be possibly bigger next quarter. Are we going to hit that 20% revenue growth rate next year or, you know, how should I be thinking about that?

Mark Adams

I think the analogy is a very good one because that’s what we’re trying to do here is focus on our customers and help them grow. And as you know with our recurring revenue models, we recognize one twelfth of our contract revenues every month. So it takes a while to get the growth going. So I do see towards the end of next year, that we start hitting our longer term goal of growth rate.

Adam Fisher - Burnham

Okay.

Mark Adams

In terms of year-to-year comparison.

Kevin Noland

One other thing I might want to point you towards is that, right now in our efforts going direct to employers, the lead product is enrollment. Enrollment has seasonality. Obviously our second quarter and third quarter, if you just look at the enrolment business in its totality there is seasonality in the second and third quarter because people are putting in these systems to prepare for enrollment that occurs at the end of the year.

So on the enrollment side, and really where our sales team is positioned right now is leaning towards that, that enrolment product. So what we want to do is to make sure that we kind of balance the other parts of the year, when enrollment might not be as strong. So again this is where that CRM team effect comes into play because we want to have our CRM team working with these brokers who really want to be proactive with us. And who really want to make more introductions for their larger employer clients where our sales people can go in and might not necessarily sell enrolment, but could sell those employers Benergy or other tools and services that we are going to be putting onto the Benergy network. So we want to caution everyone that there are certainly seasonality around enrollment but we are working on balancing that seasonality by redirecting our sales team and sales process for those other quarters where enrollment might not be as strong.

Adam Fisher - Burnham

Just remind me, enrollment are highest revenue product in that business?

Mark Adams

No enrollment is roughly 10%, 10% to 15% today of our Benergy licensing revenues. It’s a high growth area for us and it will drive some other product revenues down the road.

Adam Fisher - Burnham

So, I meant the ASPs?

Mark Adams

The average sales price, yes it is. Our highest revenue per employee is out of the enrolment product because it’s the most complex and has the highest value proposition for the employers.

Adam Fisher - Burnham

So if you look at the pipeline is the pipeline strong enough to get us, you know, how much more do we need to add to the pipeline to get us to, you know, your goal, you know for growth rates or is the pipeline there and it’s just now a matter of executing and [inaudible] it?

Mark Adams

Well certainly the pipeline on the enrollment side is very strong. The key for us to get our gross up is to build out the relationships with the brokers. A good example there is with our customer relations people, we’re now getting invited in to when they have their clients come in. So they might have 20 clients come in and one of our customer relations people would talk to the clients about the value proposition for Benergy. And that leads to a lot more growth within our current customer base. And in that core product of Benergy communications that’s what we need to do in building out the national accounts. Much like what we did with our Health Content national account program. So that is what will take a little while as we build out additional sites and get more revenue up, revenue from our current broker relationships.

Adam Fisher - Burnham

How many customers, clients do we have that are then direct sale relationships?

Mark Adams

Oh, in the neighborhood of about 200.

Adam Fisher - Burnham

And the average employee, number of employees per customer?

Kevin Noland

Oh probably, you know, if you did look at that segment I’d say it’s probably around 250 maybe.

Adam Fisher - Burnham

Okay, so you expect that will, that that number should grow pretty substantially as we sign up some of the bigger customers, right?

Kevin Noland

Yes because remember before we really built this whole sales team out there was just not a lot of, there really was no focus on going after the larger employers. The employers that we got direct were more referrals from brokers for their clients, which typically are not larger employers. Because really in our direct sales process is not designed to create channel conflict with our brokers, in fact it’s really complementary to what the brokers are doing. And so now our sales team is really looking at, you know, they’re really trying to position themselves in the 1,000 life, 750 to 1,000 life and up kind of bracket. So a lot of the new deals that we signed including some of the ones that we signed in the second quarter and some of the ones that will be closing in the third quarter, those are larger clients, like above 750 life groups.

Adam Fisher - Burnham

Okay so if I look at the 300 from this last quarter, how many clients and what’s the population?

Mark Adams

I’m sorry would you repeat the question?

Adam Fisher - Burnham

If there’s $1,000 that, you know, we sold this quarter direct I guess right?

Mark Adams

Yes.

Adam Fisher - Burnham

How many clients was that and kind of what was the average, you know, employee population?

Mark Adams

We haven’t traditionally disclosed that in the past and I don’t have it right here in front of me either, so, I think it was a significant effort for really a new sales force and the new sales team that has just started up, really for the most part this year.

Adam Fisher - Burnham

Okay, just remind me how many sales, direct sales people we have now?

Mark Adams

We have 16 in between the Content and the Benergy side.

Adam Fisher - Burnham

And they’ve been onboard for an average of like six months?

Mark Adams

Well on the – that’s correct on the Benergy side. But on the Health Content side we have much more seniority there. And you’re starting to see the results there in terms of the growth, year to year growth and the new contracts coming in on that side.

Kevin Noland

And it also is a little bit dependent on like, and just make sure we’re on the same page about what direct sales is.

Adam Fisher - Burnham

Right.

Kevin Noland

Because we have a direct sales team like on for Benergy now, we have a direct sales team. And there are six of those and then we have the CRM team, which they’re really, even though they are customer relationship people, they are selling to brokers. I mean part of their compensation is based on selling more products to brokers and really looking at the net growth in their business. And we have six of those people. So it’s more like 12 people on the selling team out in the field for Benergy. It just happens to be that six of them are really focused on going direct to those employers. The other six are really focused on the broker channel.

Adam Fisher - Burnham

Got it. Got it. And –

Kevin Noland

That team by the way Adam, the six folks on the Benergy side, the average tenure there is more like, three months, because we really did add like 50% of that sales team was built up in the second quarter and we just brought our VP on, you know early this year. So it is a relatively new team.

Adam Fisher - Burnham

So that $300,000 number of this quarter that’s like a very basic effort from a very young team, not a basic effort, I’m sorry, but an early effort from a young team. And that number, there’s no reason that that number shouldn’t be significantly higher?

Kevin Noland

Oh absolutely.

Adam Fisher - Burnham

Right.

Kevin Noland

That’s my point, is I think, and that’s it’s not so much the $300,000 as it is we took a brand new team, and we’re going into a brand new market where we don’t have a strong brand presence and we were able to quickly generate, you know, some fairly good deals in the second quarter. And we built up a nice backlog for third quarter and we do have a very young team and we’re just sort of getting out into the marketplace and that’s what I think is very encouraging about what we’re doing.

Adam Fisher - Burnham

Great that’s it for me thanks.

Operator

(Operator Instructions) Your next question comes from the line of Chad Bennett - Northland Securities.

Chad Bennett - Northland Securities

Just a few questions following up on the direct sales question. Where do we think we’ll be at maybe towards the end of the year exiting this year from a direct sales front?

Kevin Noland

In terms of number of sales people?

Chad Bennett - Northland Securities

Yes sorry, yes.

Mark Adams

I think we’re pretty much where we want to be in building out the team right now.

Chad Bennett - Northland Securities

Okay so then what do we think kind of the annual capacity from a revenue standpoint is kind of per sales person. More on, I guess I’m more focused on the Benergy side of things than on the direct side?

Mark Adams

Sure, well we would take our direct sales people; they have quotas of $600,000 to $700,000 per person. So you could easily get to $3.5 million to $4 million a year and that would be the direct to employer marketplace. And as Kevin talked about we do have an extensive broker market today that we have our customer relations people working with. They will also help us bring more revenue out of our current broker channel. So those are the two components that, you know, as you think about revenue growth, we’ve got lots of people working on building those out.

Chad Bennett - Northland Securities

Okay, so it sounds like from an operating expense standpoint kind of backing out seasonality and fluctuations there. We're going to kind of stay at this level for the foreseeable future?

Mark Adams

Well we do expect, I think we needed the second quarter with 122 people and we should end the year around 130. We’ll build out a couple more support people and a few more in terms of our product development efforts as we go forward.

Chad Bennett - Northland Securities

Okay and then Kevin talked a little bit about with respect to the Benergy Channel attrition and whatnot and it sounds like – given out the impression of kind of stabilization there. So should we look at, for the Benergy license piece should we look at in its stabilization from the broker channel here and then incremental growth from both your direct and I think you have a national accounts team on the, or your CRM team on the Benergy side too. Should we assume the growth rates there apply going forward and kind of the broker channel piece of revenue stays flat, if you understand what I’m asking?

Kevin Noland

I think so. Yes, I think if I’m hearing you correctly, and I alluded to this in my remarks, I think given the size of the broker channel and the fact that we just sort of fully ramped the CRM team, it is going to take, you know, a few quarters to really continue to weed through this very large broker network that we have. So I think, you know, our short-term goal is we want to make sure that we stabilize the turn effect if you will with these brokers. We’re probably going to get more churn because again, that model is we want to get down to a distribution network that’s very proactive with us. And we want to focus our energy on growing the business with the brokers that really want us involved in their business.

So that’s going to take some quarters to get through that. In parallel to that we have our direct sales team, ramping up these direct deals and we’ll see the effects of that revenue when we start to implement these enrollment systems. And at the same time we’ve got our folks working on our national business partners, these are our large national accounts like Wells Fargo and our big relationships at the national level. They’re putting in more programs and more support at the corporate level and then in conjunction with now having a CRM team out in the field they can now coordinate between what happens at the corporate level and pushing that down to the field offices for execution. And now we've kind of connected the dots there, so I think we should see good growth coming out of those national partners. So that’s sort of the three kind of parts to the mix there.

Chad Bennett - Northland Securities

And the national partner piece, just making sure I have the number right, of the Benergy segment the national partner piece grew 15% year-over-year is that correct, Mark?

Mark Adams

That is correct, Chad.

Chad Bennett - Northland Securities

Okay. And direct grew 38% year-over-year?

Mark Adams

Yes.

Chad Bennett - Northland Securities

All right and then Kevin can you talk about on the Health Content side, I know maybe every deal is a little bit unique but you know when we’re going in and negotiating pricing and economics and whatnot, do you have any idea of how your Health Content customers or partners view I guess pricing on this content relative to other content they’re offering? Their subscribers, users and so forth, do you have any idea of kind of a relative importance there?

Mark Adams

Yes, I mean I think that pricing is always important to customers but we have generally found that if a customer is just interested in a great price on content they probably would not make a good A.D.A.M. customer. Because we want to have customers that fully recognize the true value of a very unique set of assets, Health Content assets that A.D.A.M. has.

And I think when you look at our client base and you look at the tremendous success that we’ve had with going after very leading, and winning, very leading academic medical centers for example like Cleveland Clinic Health System and others that are in our portfolio. Those folks are not bringing content on because it’s the cheapest content. They’re bringing the content in because the content provider is giving them the assets that they need to really promote and maximize their brand and their market leadership position. So the answer to your question is yes, price is always important but that’s, you know, we typically try to sell a much higher, you know, value strategy when we’re at these clients.

Chad Bennett - Northland Securities

Okay. Thanks guys, that’s all I have.

Operator

(Operator Instructions) At this time there are no further questions. I will turn it back over to you to continue presentation or for your closing remarks.

Kevin Noland

Well great, well thank you all again very much for your time this morning. We’re excited about a lot of the things that we’re doing here at A.D.A.M.. We’re making great traction with a lot of these initiatives, I look forward to coming back to you next quarter and discussing it further. In the meantime if you have any questions, feel free to give Mark or myself a call. Thank you again and have a great day.

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