Frist: Quorum alliance, M&A to boost HealthStream 'earnings power'

By Milt Capps Last updated 4:42 PM Oct. 27, 2009

Published October 27, 2009

Comment

Robert F. 'Bobby' Frist Jr. HealthStream Founder, President & CEO

HealthStream Inc. Founder and CEO Bobby Frist said today his company will be "a little more aggressive" in buying other companies and has begun new-business development efforts in partnership with Quorum Health Resources.

Addressing stock analysts in a conference call this morning, Frist said that with $10.1 million in cash and related interest and a $15 million line of credit available, HealthStream has a $25 million war chest to acquire companies that complement HealthStream's current learning and research businesses.

He said those assets will also help support expanded of sales and marketing of current services, as well as development, acquisition, sales and launching of new products.

Referring to acquisitions, Frist said HealthStream (NASDAQ:HSTM) "probably should have done some of that, earlier," an apparent reference to what most observers see as a target-rich environment for healthcare acquisitions, which are often now available at valuations advantageous to buyers.

At the same time, Frist was cautious in responding when an analyst asked whether, in fact, impending changes in U.S. healthcare and insurance policy might not be a "game-changer" that would accelerate the company's growth.

In response to the analyst, Frist said, "Sure, the whole market is changing" due to legislative and regulatory forces, and overall current events do seem to reinforce the validity of HealthStream's maintaining its "core focus" on the acure-care market and related sectors, such as home health care. "There's plenty of expansion room [available by] staying true to our vision in healthcare," Frist said.

While commending HealthStream management for its latest quarterly results, Noble Financial Group Senior Equity Analyst Vince Colicchio – who has challenged the wisdom of HealthStream combining education and research services under one roof – pressed during this morning's call for more detail on HealthStream's share of the overall research market; asked for an estimate of the magnitude of the opportunity in home health and questioned; and, asked how significant the Quorum alliance should be, financially.

In response, Frist acknowledged some drop in volume of standalone and some recurring research products' sales, but provided no share information; said the company's appraisal of homehealth's potential is still in-process; and, suggested that HealthStream's somewhat analogous partnerships with key healthcare publishers have proven to be good moves – but offered no projections of outcomes from the collaboration with Brentwood-based Quorum. HealthStream and Quorum announced their alliance a month ago. Quorum is widely regarded as one of the nation's "top 10" U.S. healthcare consulting firms, providing management, consulting and education services.

Frist did, however, tell analysts the company is likely to announce some investments or product innovations within the next 90 days, adding that in his view the company is poised for "an exciting year-end finish."

In the third quarter, HealthStream's revenue from its Learning business – which recently passed the 2 million subscriber-user mark – was about $9.45 million, outpacing the $4.65 million earned on the research side of the house.

Frist said 5 million educational courses were delivered to completion in the 3rd quarter. In addition, 3rd quarter Learning contract renewals were valued at 107 percent of base value, whereas a year-earlier the same quarter produced contract renewals valued at 89 percent of base.

This morning, Frist explained that although 56 existing customers added research services to their HealthStream agreements, the research division continues to suffer due to physician and community surveying being deferred by some hospitals. Patient-satisfaction surveying remains strong, he said.

As widely reported yesterday, HealthStream's quarterly results included net income up 68 percent to an even $1 million, on quarterly revenue of $14.1 million, up 3 percent from the period year-earlier. The nine-month figures for the year, thus far, are: $42.3 million, up 11 percent over year-earlier; net income $3.6 million, up 157 percent; and, adjusted EBITDA of $8.2 million, up 46 percent.

At several points, Frist reiterated the company's continued determination to achieve "balanced growth with investment," reinvesting earnings to increase what Frist referred to as "available earnings power."

The Forbes Investopedia offers some comments on the earnings-power concept. ♦