HSTM

HealthStream, Inc. (HSTM)

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HealthStream, Inc. (HSTM)

Q3 2012 Earnings Conference Call

October 23, 2012 09:00 AM ET

Executives

Mollie Condra - Associate Vice President, Investor Relations & Communications

Robert First - Chief Executive Officer

Gerard Hayden - Senior Vice President & Chief Financial Officer

Analysts

Ryan Daniels - William Blair

Matthew Hewitt - Craig-Hallum Capital Group

Richard Close - Avondale Partners

Nick Halen – Sidoti & Company

Andrew Albert – Invicta Capital Management

Frank Sparacino - First Analysis Securities Group

Chris Blackman - Imperial Capital

Presentation

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the HealthStream Incorporated’s Third 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 and instructions will follow at that time. (Operator Instructions) As a reminder, today’s conference may be recorded. Now, my pleasure to turn the floor over to Mollie Condra, Associate Vice President, Investor Relations and Communications.

Mollie Condra

Thank you. Good morning and thank you for joining us today to discuss our third quarter 2012 results. Also in the room with me are Robert A. First 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 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 the 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. With that, I’ll turn the call over to our CEO, Robert First.

Robert First

Thank you, Mollie. Good morning everyone, welcome to our third quarter earnings conference call. We have got a lot of exciting material to cover and afterwards Q&A. So, I will jump right in with financial highlights that were represented in our earnings release last evening.

We were excited to report consolidated revenues up 28% to $26.4 million in the third quarter compared to the prior year quarter. Operating income was up 39% to $3.7 million in the third quarter compared to the third quarter of 2011. We also delivered well on the bottom line with net income up 10% to $2.0 million in the third quarter compared to the same period in the prior year and adjusted EBITDA was strong a 30% increase to $5.7 million in the third quarter, that’s up about 30% over the prior year same quarter.

Of course, a little later, Gerry Hayden, our CFO will give a more detailed look at the financial data. So, I thought I would look at some of our strong operational metrics again here. On the core platform, we saw subscriber growth grow by about 65,700 that were under new contracts during the period. That exceeds what we call our long standing targeted goal of contracting 20,000 to 50,000 per quarter. So, now we have three quarters sequentially where we are beating our goal and the way we target an engineer, our sales force to try to generate 20,000 to 50,000 net new subscribers a quarter. So, another strong performance period here exceeding our targeting range with hitting 65,700 new subscribers.

The total number of subscribers is also approaching an exciting number. We are approaching 3 million, it actually stands at 2,975,000, which represents well over half of the nation’s hospital workforce and we are beginning to see pickup in a few other areas on non-hospital, as well as hospital affiliate with non-hospital verticals and our sales team is learning to sell into those verticals. So, we are excited to see that number continue to grow and soon crossing the 3 million milestone, just based on trajectories that should be during the fourth quarter will be an exciting milestone to celebrate.

Our backlog of contracted but not yet implemented remains at approximately 106,000, so we will work through as much that backlog as we can during the fourth quarter and that’s exciting because of course when we implement out of the contracted backlog we began revenue recognition. So the fully implemented number – we implemented approximately 85,200 in the quarter, which brings the total implemented subscribers to 2.869 million healthcare users. Again, another exciting number, another great quarter of implementation execution by our operations teams, so I am proud of what they are doing to bring all of these new customers onboard on to our broader talent management platform.

The renewal rates in the third quarter remains strong, as reported in the earnings release, 97% based on full time equivalents or what we call number of subscribers and 95 based on contract value and the renewal rates reflect the addition of subscribers compared to previously contracted amounts, combined with any pricing adjustments that may occur at renewal. About the middle of the year we indicated a new measure renewal, the trailing four quarter period and so for this trailing fourth quarter period in September 30, 2012, customers representing 101% of subscribers that were up for renewal did impact renewal, while our renewal rate based on contract value was 103%. So, the trailing four quarter renewal rates we think are another good way to look at the stability of our platform and performance of our teams.

For the third quarter 2012, revenues from our patient surveys business which is a recurring revenue product in our research operation, increased 8% over the third quarter of 2011, while still not back to where we both expect and are working to get it we are pleased to see it move in this direction and the increase of 8% is an improvement over the prior quarters and the earlier performance in the first half of the year. So, we are glad to see this needle moving in the right direction of this recurring revenue product set.

The importance of the HCAHPS surveying that we are doing for healthcare providers continues to increase, the payment effects associated with evaluated personal program began on October 1 of this year, so just earlier this month. That means there is going to be even more and more attention paid to these scores and the metrics of these patients surveys as we enter into next year, now that reimbursement premiums are tied to these value-based pressing scores, of which the patient satisfaction measurement constitutes 30% of the – essentially the index that’s used to determine those reimbursements.

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