Q2 2019 Earnings Call
Well company.
For the remainder of this year, we do not expect material financial contributions from any of these transitions for the reasons I've articulated earlier.
But we do expect incremental contributions to build overtime.
At this time I think we ought to take a more detailed look at the financial metrics for the second quarter, and then cover the financial outlook.
As updated by Scotty our interim CFO .
Thank you Bobby and good morning, before I go over the results I'll summarize the impact of the stock grants to employees on the second quarter.
Which resulted in $2.2 million of expenses of which $2 million was non cash stock compensation.
Stock Grant resulted in a reduction to operating income of $2.2 million.
A reduction to income from continuing operations of $1.7 million.
A reduction of MTS.
Five cents per share and also a reduction to adjusted EBITDA zero point $2 million.
Now, let's begin with our highlights for the second quarter.
As a reminder, the discussion of our results today will be for continuing operations only and comparisons are against the prior year second quarter, unless otherwise stated.
Our revenues were up 12% to 63.8 million.
Operating income was down 47% to $2.3 million.
Income from continuing operations was down 34% to $2.4 million.
S.
From continuing operations was seven cents per diluted share compared to 11 cents per diluted share in the prior year.
And adjusted EBITDA from continuing operations was up 10% to 11.8 million.
Again. These results include the impact of stock Grant I just mentioned.
Revenues from our workforce solutions segment were $52.4 million and are up 12%.
Our revenue growth came from three areas primarily.
The legacy resuscitation products are proprietary learning and compliance solutions.
And the Provident acquisition.
The legacy resuscitation revenues increased by 17% to $15.5 million.
Compared to $13.2 million in the prior year.
Through the first half of 2019, we have recognized $32.8 million of revenues from these products.
Representing a year over year growth rate of 29%.
We continue to expect revenues from the legacy products to decline during the second half of 2019 compared to the first half of 2018.
With revenues in the second half of this year are expected to range between 26 and $27 million.
Let's also represents a decline compared to the second half of last year.
The decline in revenues will continue through the end of 2020.
While we will support and maintain the legacy resuscitation products through the end of 2020, our sales and operations teams are making progress.
In marketing selling and implementing the new newly launched American Red Cross assesses resuscitation suite products.
Weve sold over $16.5 million of contract order value through the first half of the year.
Several customers have already implemented or are currently going through the implementation process.
While others planned implement after their legacy contracts expire.
We don't expect any material revenues this year from these contracts.
Revenues from the workforce segment also benefited from growth in our proprietary learning and compliant solution.
And the problem acquisition, which occurred in January of this year, which added $1.8 million of revenues during the second quarter.
The financial performance and integration of Providence is progressing in line with our expectations.
Revenues from our provider solutions segment grew $11.4 million and grew by 13%.
Revenue growth is primarily coming from new sales of the Verity platform and professional services for implementation of new customers.
We're still however in the early stages of a multi year migration of existing customers to the new Verity platform.
Our gross margin declined to 58% compared to 59.2% in the prior year.
Which was influenced by the revenue growth from the lower margin legacy resuscitation products and additional stock compensation expense.
Which approximated 700000 and the cost of revenue category.
Our operating expenses, excluding cost of revenues were up 18% across the following categories.
Product development expenses increased by 17%.
Sales and marketing expenses increased by 10%.
Depreciation and amortization increased by 15% and DNA expenses increased by 28%.
The growth in operating expenses is reflective of some of the themes. We have mentioned about investments in the business.
For instance, our staffing levels have increased by 14% over the past year.
And the Provident acquisition has added $1.3 million of operating expenses in the second quarter alone.
We've also made investments in our technology and security infrastructure, including staffing Capex and Opex.
Which is contributing to the growth in depreciation Angie in a expenses.
The relocation to our new corporate office during the second quarter resulted in approximately 500000 of incremental expenses also in depreciation and DNA.
Although the operating income declined by $2 million.
Which was mostly impacted about stock grant our adjusted EBITDA grew by 10% to $11.8 million from $10.7 million in the prior year second quarter.
Now, let's take a look at the balance sheet and cash flows.
Our cash and investment balances ended the quarter at approximately $162 million.
And working capital was $116 million.
Our day sales outstanding were 47 days for the second quarter compared to 54 days for the prior year second quarter.
Our deferred revenues were down $6 million during the quarter, which was due to the revenue runoff from legacy resuscitation contracts.
Our cash flows from operations improved to 37.37 million year to date compared to approximately $16 million year to date in the prior year.
Which is an increase of over 125%.
This increase resulted from improved cash collections and lower dsos as well as incremental cash was generated from operations.
For capital deployment, we incurred approximately $10 million of capital expenditures during the quarter.
It's included over $4 million for our new office in Nashville.
Now, let's turn our attention to guidance.
We continue to anticipate that consolidated revenues will range between 251 $258 million with revenues from the workforce solutions segment, ranging between 207 and $213 million.
And revenues from the provider solutions segment, ranging between 44 and $45 million.
We are also maintaining our operating income guidance range of $11 million to $13 million.
It's important to know, though that our operating our non-GAAP operating income guidance range is between 13.2 and $15.2 million, which excludes the $2.2 million stock grant expense.
There are several factors influencing the second half of the year operating income guidance.
The decline in legacy recession station revenues mentioned earlier.
As expected also result in a decline to operating income.
We plan to continue making investments in product development sales and operations through additions to staffing.
Over 50 open positions that were working to higher in the second half of the year.
And finally, the incremental cost associated with our new office are also expected to increase our operating expenses.
In total we anticipate these factors represent approximately $4 million to $5 million of operating income reductions in the second half of the year.
We still anticipate that capital expenditures will be approximately $36 million for the year.
And then our annual effective income tax rate will now range between 23 and 25%.
This guidance does not include the impact of any acquisitions other acquisitions that we may complete during 2019.
Thank you for your time and I will now turn the call back over to you Bobby Thanks, Scotty Great Financial report and good progress in lot of core metrics I'd like to close by speaking a little bit to our employee base.
As a company driven largely by its culture, which true most companies and their performance driven by variable bye.
By their culture that determines how they approach their work.
We have some exciting announcements in this quarter along with the move into our new corporate office, we published and distributed an updated healthstream constitution for over a decade, we have been guided by the vision the values in the business principles contained in our constitution.
And over 30 employees from all levels of the company worked together for over a year to bring about the updated constitution and grateful for their enthusiasm hard work to bring it to fruition.
At the same time, we launched a new corporate social responsibility program, which we call streaming. Good. This program was developed and launched by employees from the ground up we're excited about the opportunities being created to contribute to the communities, which we serve in.
For the first year with streaming good we're focused on working with and supporting the American cancer Society across the nation in all of our offices. In fact, we have a large community event being planned right now that we expect to be held in October .
In closing I'd like to thank our employees and everyone involved who has been instrumental in these exciting developments in our company culture, We believe that culture drives performance and I am grateful for all employees contribution to these importing.
Groundbreaking advances.
At this time I'd like to turn it over to questions from the Investor community.
Ladies and gentlemen, if youd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
If your question has been answered all your wish to remove yourself from the queue. You may do so by pressing the pound.
Again, that's star then one if you'd like to ask a question at this time.
Our first question comes from the line of Ryan Daniels with William Blair. Your line is now open.
Yes, thanks for the time and the questions Bobby one for you in looking at the New American Red Cross solutions. It appears that those are more adaptive learning capabilities I'm curious if you could discuss a little bit more about what the adaptive learning technology is and then I'm curious if that's something that is applicable to other solutions or perhaps already being used there. Thank you.
Thank you Ryan we believe that these advances in the program are in fact applicable to other programs and there are many dimensions to the newer substation program that we think are great advances in the marketplace in general.
The first is the curriculum itself is adaptive at the individual level. So as an individual user progression through the program. The curriculum Josh what this does it results in more appropriate learning being delivered to each professional and a time savings, which is a huge economic benefit to an organization. If someone can be met where they began with their knowledge and be advanced in their knowledge through adaptive learning then theres a time savings, which is critical for nurses and physicians are still going through the program. So as opposed to a pre tax unopposed tries to evaluate change in knowledge the test and competency assessments delivered throughout our program result in the curriculum adapting to the individual which often results in a shortening.
There are many many advances in the program. Another exciting advanced is we've taken the common science and knowledge of supports frequency of practice is a known positive variable in a competency use you, particularly want to develop refine muscle memory and repeat programs is frequently you can particularly on their physical like gestation and in our program. What we've done is provide the power to organizations to increase the frequency of practice without increasing the cost of participating in the program. So we've been able to do as Weve taken this great.
Working knowledge of the science, which means that more practice results in higher skill and better muscle memory, and hopefully therefore, a better clinical outcomes.
And we've made it a variable on our platform our customers and the new Red Cross visitation suite can choose to determine the practice intervals.
In the program.
And they can dial up or down the the frequency and of course, we recommend.
In prior programs the frequency was as little as every two years, but in the new program you can actually set practice intervals and everything in our system adjusts around the determine practice intervals, which can be by group or division of the organization.
As you can set them as frequently as every 90 days and so effectively in our.
Efficient program it not only adapt to the individual level, but it adapts at the organizational level through determination of the practice intervals. So those are two great and exciting advances in the program. There are actually many many more for example, the program uses real video interactions with real physicians and nurses, which allows the program to be more label then animated characters in the program. So we're getting a great response for these three and many other advances.
As far as applicability to other programs absolutely.
The future of technology is adaptive and powered by artificial intelligence technologies.
Informed by a great databases and data sets and we're working hard to make our other programs more advanced and adaptive in this manner.
In fact, we had some exciting new clinical reasoning.
Products that are coming out.
This year, we've launched and its completed successful pilots of a new program, we call Jane and Jane as our new AI powered platform working with IBM Watson that we think is an industry onest. So the product is new not a lot of expectations in the year, but this is a similar adaptive and intelligent program to help assess the clinical reasoning ability of nurses and we're very excited about the launch of Jane.
There will be more to come on the new Jane technologies in the future. So we believe that that in general that approach to learning is something that should be.
Put into all the different programs that we deliver and we've got a really nice head start in some of our nursing and clinical education products, particularly with the new Jane platform that I mentioned just now.
Okay. That's.
Super helpful detail and then I think you mentioned the 16.5 million in contract value for the New American Red Cross product I'm curious number one is that in annual revenue numbers at a total contract value and then number two.
Just kind of where that stands in regards to your expectations is it kind of ahead of schedule on schedule in regards to new sales and what kind of feedback are you getting in the market from clients that have signed up.
As it relates to that product. Thank you.
Yes, a couple of things. So first of note that as a total contract order value of the multiyear agreements and you noted that one of the large health systems was a seven year agreement, we did a separate press release on that.
It represents new and migrating customers and it represents customers from within the acute care space and in what we call the continuum space, which is a non acute space is so it's a really nice early surprise I would say we've been.
We've surpassed our expectations for early contract order value and have a myriad of customers across industry and across verticals.
Contracting for and adopting the program now from a revenue recognition standpoint, as we mentioned many of those customers are committed to the program 345 and seven years out.
And the reason for that is that the first.
12, 18, 24 months they are running off their commitments to the legacy programs, which you know we are extremely successful selling in the fourth quarter of last year and so these are need to be if they're going to commit to switch to sign longer term agreement and they can run out and execute the finishing of their prior contract on the prior.
A legacy platform.
And so revenue recognition from that 16 half man and in contract order value, which again is a as material up upside to our our initial thinking in fact, I think we weren't planning on selling much of anything in the first half of the year and we're already at $16.5 million, but the revenue recognition will be weighted and began only about after 18 to 24 months from where we sit today in some cases, we'll start earlier is a use parallel adoption of the program, but thats why were saying there's no material.
Impact in this year.
But I do think it's encouraging other $16.5 million of business already under contract.
In many cases, the new customers are beginning implementation now and as we have mentioned, we do have better margins on this product than the prior product. So over time as I talked about three business transitions, we do expect a blended gross margins the company over time driven by the three transitions I talked about this being a primary one to go up.
From their current I believe.
58 about 58%. So we're excited about all those things.
Great. Thank you so much appreciate the color.
Thank you.
Our next question comes from Matt Hewitt with Craig Hallum Capital. Your line is now open.
Good morning, Thank you for taking the questions. The first one relates to the new the eight stream progress that you've made.
Obviously, another big quarter for upgrades I'm curious are those.
Primarily a one for one.
Upgrade from the old metrics that you are providing I think the last time you had provided those we were at 4.9 million of contracted subscribers. So are we seeing almost exclusively we just.
The conversion of that metric or are you seeing some nice incremental new business into the extreme platform.
Yes, great question, Matt because it's actually a little both as I mentioned, the Verity platform now has.
A parallel and similar set of technology, we call.
Eight stream for Verity and so there is enough parallelism and the way the technologies are being deployed now that 122000 of the two points.
Three 4 million subscribers date stream are coming from new sources like Verity. In addition, any brand new customers of the company are going on eight stream and there is a mix of brand new customers in that as well and then of course there are conversions as you mentioned the former number of 4.9 million reflected subscribers to a more narrow set of applications largely our learning center application and as those come up for renewal.
Those customers are getting new capabilities in their old learning platform, because they're renewing and upgrading the core operating system essentially they are upgrading to eight stream.
And then that in turn gives them access to applications like my team and so the majority of the 2.34 million is an upgrade of legacy customers of Healthstream learning center that are getting access to new features through upgrading to the extreme platform. So hope that helps I understand but they are coming from three sources. The vast majority are upgrade as you mentioned from the legacy.
But there are brand new customers to our network that get eight stream and then there are a new source of customers coming from Verity that includes the aging severity platform component in their contracts as well.
Okay. That's very helpful. Thank you and then maybe one.
The second question for Scott as we look at the back half of the year and thank you for providing all the detail there, but as we think about Q3 and Q4, where some of the legacy we're sensitive is falling off and you gave us some good numbers to start with there.
Should we see gross margin lift.
In the back half of the year, even though the revenues are coming down just because of the margin structure for the legacy resuscitation and then it sounds like that will be offset by incremental.
Operating expenses for the new facility the new hiring plans that you have in one up but I just want to make sure we get the gross margin piece right.
Yes, Matt I think your.
Well on the path, what we trying to what we tried to explain about gross modest margin improvement and as the.
The lower margin legacy resuscitation products begin to decline what you're expecting in the second half of the year versus.
Sequential quarters for the first half and from the second half of last year I think there should be some.
Slight improvement in margins now the revenue declines are not as impactful.
As we expect going forward, but you should start to see some slight improvement in margins just related to that.
For that product alone now we do have quite a few other products in the portfolio that can influence margins, but if you looked at this in isolation I think we would assume some and expect some improved margins.
Obviously man when the new products start coming online.
Then you've got a real.
Upward push we believe on the gross margins, but we don't think as we said we don't think the new revenue streams from the newer substation products will start coming on this year.
So, but you know as we model in that.
And the distant future as we talk about these multiyear transitions.
There is certainly going to be a positive upward force on gross margins.
As the new come online in the old continued to drop off.
Understood all right great. Thank you very much.
Our next question comes from the line of Richard close with Canaccord Genuity. Your line is now open.
Yes, just maybe drill down a little bit further on that.
On the margin point is there any way you guys can quantify.
What you think the margin expansion opportunity is.
Once you get through the heart code.
Ramped down.
You know based on the new Red Cross and the the Saf Verity.
That you called out as well.
Well I think it will be a little challenging to do that right now because the three transitions. We talked about are all going to span 20, 436 months and maybe in some cases a little longer.
They all have a positive upward pressure on gross margin, meaning an improvement in gross margins.
And so we do expect in a long long run to shield.
A different gross margin profile of the company.
That said, we're speaking to this year and this year, we expect Diminimus change I mean, we've been in that 58% to 60% gross margin right now for some time and I think Scottish indicated maybe a slight uptake from the 58, we just had in the second half of the year, but we would consider that for this year's modeling purposes. It would be a very slight uptick.
Okay and any thoughts in terms of the news has verity Saf.
And what the differential maybe was from the old offering there understanding that migration will take some time.
They are both fairly high margin products, there's kind of a hybrid component I think a lot of the costs and benefits there.
There will be a slight improvement when you go to the to the new Verity platform from the overall approach to its deployment in licensing and technologies.
The overall improvement in that business will come from the reduction supporting multiple platforms, which is.
Is above and below the gross margin line so supporting.
For effectively for software platforms for that for that customer base.
Our goal obviously is to get down to one platform and that platform is built and deployed has 100 contracts on it for new Verity platform. So our goal there in that line of business, we will see a little bit of gross margin.
Impact from going to the newer technologies, but we'll all see an overall improvement in the <unk> and the probability of business by reducing the number of platforms, we support over time.
That is probably the longer of the three journeys the full migration.
And but but again it is a positive and healthy move at the operating expense level at the gross margin level as we're able to wean customers off the older platforms and upgrade them to the new one.
Okay.
I guess my final question would be on the hard code decline I just wanted to make sure I have those numbers correct did you say.
You expected 2 million decline in the third quarter, and then 300000 additional in the fourth.
Yes, it's kind of interesting.
Scotty gave kind of first half total versus expected second half total so thats very detailed there.
And maybe to repeat those real quick Scott and then I'll do the quarters.
The first half total revenue from the legacy products slowed we delivered $32.8 million.
Legacy revenues in the first half the year were.
Expecting 26 to 27 million in the second half of the year. Fortunately did 15.5 in the second quarter.
So 15.5 in the second quarter, and then building on that I mentioned that we expect a sequential decline of 2 million. So from 15 five to I guess 13 five is about the way you need to model the third quarter on the legacy resuscitation products and then obviously simple math that leaves you the fourth quarter only drop in June 1000. So we thought it was interesting that it plateaued a little bit it'll continue decline in the first quarter of next year and all the way down to zero as we mentioned.
But the way we've sold.
There isn't a little bit of a plateau in here for a couple of quarters, but a $2 million sequential decline from Q2 to Q3.
Okay.
Great. Thank you.
Our next question comes from Frank Sparacino with first analysis.
Hi, guys just one from me on the provider side.
Can you just talk through if I look at the guidance for the year $44 million to $45 million that would suggest the revenue in the back half of the year is flat to down from the.
Q2 level of 11.4 million call. It. So maybe just can you talk through.
What's happening in the second half of the year.
Because the growth rate there would be slowing any year over year basis relative to what you've done in the first half as well.
Yes, I think.
I mean, there's a lot of activity going on there, we're trying to sort and give our best estimate of our of our performance.
New sales continue to come and implementations are going a little slower than we expected.
But we're getting good at it and as I mentioned of over 100 contracts under review. So I think we've kind of been down the middle on this a little bit conservative in our forecast the first half deliverable as a growth rate in the first half.
Roughly 11% to 12%, 12% first half.
We're just projecting based on all the work that's going on in the business a little bit of a flattening of that growth rate for the second half, maybe a little bit of upside to it so.
But I think it's just conservatism, giving them out of migration work, we're doing and the new contract selling we are doing.
I guess, we picked what we think is a fair representation of where we'll land.
And maybe just following up there Bobby.
I guess longer term, what's your view in terms of that.
Part of the business and long term growth.
I think we feel good about it and of course, we guide each year and this year, we're seeing double digit growth in the first first half.
We're seeing good it's narrowly focused product set that we think is best of breed in the market and we we continue to project and when some competitive takeaways.
In the areas of relative strength that we have as a business. So we do expect that to continue to be a grower.
And also we think that its margin profile can be enhanced as we talked about as we get through these migrations in the coming years. So I think it's a good software business with decent margins as is which means at the gross margin level. It's productive it's contributing to cash flows. These are good software businesses, but we are operating in a situation, where we're running essentially four platforms three from the acquired businesses and the new on that we're trying to move everybody to so there is kind of an abnormally high operating.
Costs in the business that our goal is over the next 36 months to take some of those costs down.
That said because we're excited about the products, we're adding in areas as we streamline operational costs to one platform over time, we're adding in areas like sales and marketing to continue the growth because again, it's a good product.
The blend of all of that as a healthy software business with good margins and we hope and improving margin profile overtime.
Thank you.
Our next question comes from the line of Vincent Colicchio with Barrington Research. Your line is now open.
Yes, Bobby.
Apologies if you already answered this I will take you did.
The main reason that the legacy clients this switched to the Red Cross product.
Was that cost was that.
Some of the.
Extra value add you talked about.
What was it.
Well I think that these early.
Customers are really adopting the newer approach and so I think they like the flexibility of the interval dial I think they like the the real time and real professional.
Video instruction that I think is more appropriate for the newer workforce the millennials like to learn that way. So I think that this is a refreshed approach to an old problem that frankly, the prior products. We just havent move the outcomes. Much. So these are early adopters willing to try a new way that we've tried to improve every dimension of it from the hardware deployment being higher Tac and lower cost to the program itself, which we believe is more flexible and more engaging.
From the approach to the content development and then of course, the time savings and therefore, the money savings comes from some of the adaptive features we talked about so overall you know how early adopters are they tend to want to try the new thing to see if it has a positive impact and so I think there.
They are driven by the new approach that inherent in the product itself more than the cost savings that said, it's our commitment and the American Red Cross has commitment which is interesting because American red Cross is maintain their non profit status, whereas the legacy products have created a for profit entity and so I think theres that appeal to a lower cost product because the partners. In this case have maintained their nonprofit status and their contribution to these products. So.
I think overall, we're able to deliver a lower cost products.
Potentially because of some of that.
Okay. That's it for me thank you.
And again, ladies and gentlemen, if youd like to ask a question at this time that's star then one.
We have a follow up question line of Richard close with Canaccord Genuity.
Yes. Thanks.
Thank you detailed there called out four to 5 million in operating income reduction in the second half if I'm not mistaken.
Due to some.
Investments and the headquarters move whatnot is there anything in that four to 5 million that is essentially.
May be considered one time that doesnt necessarily repeat in 2020.
Yes, I think the the continuation of the.
The legacy recess station the clan.
As one that will continue on through the end of 2012.
Yes, the hiring.
That's an expectation that we are trying to fulfill in the second half of the year, which will have a.
Ongoing impact as we retain those employees and staff up.
And then.
Lastly, the.
The new building that we just moved into those are going to be ongoing cost as well. So I'd say they are all ongoing run rate expenses for us not onetime.
That's right okay.
As you remember the rent is going up a couple of million a year and it was the.
More economical of the many choices, including staying where we were the cost of living in Nashville, and the cost for corporate rent is going up but we think that those investments while they will be ongoing.
Are already showing benefit to recruiting and the environment in the culture of the company. So.
All three of those are ongoing expenses. Unfortunately in part of the both kind of the cost of living the environment and our desire to invest in growing the workforce size as well.
As we mentioned specifically for example, adding salespeople to the resuscitation products specifically so we've approved and are immediately have begun recruiting I think already made two offers since we approved them a week ago.
So we are going to continue to grow the sales efforts around products that are performing in the market.
Thank you.
And I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. Frist for closing remarks.
Thank you everyone for your tenants, we hope we got everything in the right amount of detail on our disclosures were excited about many things, but also I characterize these as challenges and opportunities for a reason I think for shareholders that are willing to follow US along we will report our progress on eight stream subscribers, our migration to the new Verity platform and as we've done here at excruciating detail about our progress with our newer substation partners and products. So you can follow these three transactions along for the next I would say 36 months or 12 quarters. Our goal will be to come out of the back into that with a higher margin and more profitable entity, but these all these migrations.
Have both opportunities and challenges in them and I remind our employees to we keep our heads down and stay focused do these migrations and transitions. So that we can be successful in them as we come out and show progress in the coming years that said all you analysts remember these are the challenges are real these revenue declines our concrete.
$60 million or low margin business going to zero is still a $60 million business going to zero. We are really excited and encouraged by our early returns on our new product sets and the improved margin profile of the company, but the challenges and opportunities are both real. So we appreciate you following our story and explaining in detail to all of our 12000 shareholders and look forward to reporting our next quarter to all of you in the coming months.
Thank you.
Ladies and gentlemen, thank you for your participation in today's conference.
This concludes the program and you may now disconnect.
Everyone have a great day.