HealthStream Inc (HSTM) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HealthStream, Inc. second-quarter earnings conference call. At this time all participant lines are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. (Operator instructions.) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Robert Frist, CEO and Chairman. Mr. Frist, you may begin.

Thank you. Good morning and welcome to our second-quarter 2010 earnings conference call. Also in the room with me are Gerry Hayden, Senior Vice President and Chief Financial Officer, and Mollie Condra, Associate Vice President of Communications, Research and Investor Relations.

Gerry, would you read the forward-looking statement, please?

Sure, Bobby.

Good morning, everyone. This conference call will contain forward-looking statements regarding future events and future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in these forward-looking statements. Information concerning these risks and other factors that could cause results to differ materially from those forward-looking statements are contained in the Company's filings with the SEC, including Forms 10-K and 10-Q.

Good morning, everyone. There could hardly be a more exciting quarter to report on than the one we just completed. And this morning I'm going to walk us through a few key financial results, then operational results. I'll turn it over to Gerry for a detailed look at the numbers and the forecasts, and then back to me about some exciting new business developments. We'll wrap up with questions.

On all metrics, almost all metrics, in the financial performance category we had a really outstanding quarter. Record revenues of $16.7 million were up 14% over the second quarter of the prior year, while operating income increased 26% over the second quarter of the prior year. So 14% yielded 26%. Very exciting kind of top line and operating income performance.

We also showed internal metrics like 28% in HLC and courseware revenues. These are the revenue subscription components of our revenues, and over the prior year they grew 28%, which is exciting to see the core business of platform and subscription products including content to grow at that rate.

We also generated $3.8 million in EBITDA, which is very exciting and up from $3.3 million in the prior-year same quarter.

And ended up with a strong balance sheet with $18.8 million in cash, up from $13 million at the end of Q1. And Gerry will talk a bit about how that happened, but an incredibly strong and solid improvement in our cash position.

One challenge we experienced during the quarter was although our patient satisfaction revenue grow 11% over the prior-year quarter, the elective surveys, or the ones that we call point-in-time surveys, underperformed expectations. And that's resulted in us lowering the revenue expectations for Research for the remainder of the year in the category of growth of 4 to 6%. So we had one challenge in that area that we didn't quite meet expectations on. And we'll be working to resolve those issues as we move forward in the year.

But on almost all other measures, certainly a quarter to celebrate from a revenue, operating income, cash flow, cash accrual, and balance sheet standpoint -- a great tribute to the strength of our recurring revenue subscription models that we're building here.

On the operational side I'm equally excited because, as I may have mentioned in all prior calls, we have an operational goal of adding 20,000 to 50,000 net new subscribers each quarter. So each 90 days it's been an objective of ours for several years to add 20,000 to 50,000 net new subscribers under contract. And during the second quarter, which was 91 days this quarter, we actually contracted for 125,000 new subscribers. So it was very exciting to see that kind of top-line performance in adding contracted subscribers to our platform.

And, you know, within that number occasionally we get a good bump because we have a good win, a big health system comes our way. And that, in fact, was the case during the second quarter, that a significant new customer win, a large Catholic health system of over 40,000 employees, in a highly competitive situation, decided to go with the market leader in acute care training and education and moved -- they're in the process now of moving, under a long-term contract with us, from an existing vendor to HealthStream. So over 40,000 of those 125,000 came from a large health system decision. We like to see those big wins. It's competitively reaffirming that we are the market leader in our space and there are many good reasons to come with our platform.

Also during the quarter we implemented 80,000 new subscribers. And the implemented number represents when revenue recognition begins. And so that is also a high number relative to our goals and historical trajectories. So we were excited to see the efficiency with which our implementation teams brought customers up on line on our platform to the point of revenue recognition. So that's exciting to now see over 2.1 million active, fully-implemented subscribers and 2.258 million contracted subscribers -- again, exciting, exciting performance in the 91 days of the second quarter.

Also, renewal rates were very impressive, representing 101% of FTEs that were up for renewal did renew. There were a few losses in the quarter, but they were more than offset by gains in existing accounts. So you see that 101% being in excess of the 100% that you normally think is obtainable. But some of our accounts grew, with a few small losses, and the net effect was their FTE subscriber base that was up for renewal grew by 101%. And we also maintained pricing, as indicated in the contract value of renewal being at 107%. Actually did better than maintain pricing. We were able to increase the average price of those being implemented during the quarter.

Exciting developments in our software areas. The new platform launches during the quarter -- we were able to launch the HealthStream Competency Center with the new enterprise-class features at the very end of the quarter. This is an exciting development because we now have over 47 contracts. Several of those contracts represent pilot programs of large health systems that are evaluating the platform for use as their enterprise system of record for clinical competency management. And during the quarter we added six new contracts. And all of that activity preceded the launch of -- launching the enterprise-class feature set. In a SaaS model, as you know, when you launch a features set, all new customers have access to those features. And so now all customers of our Competency Center have access to the new features of the HealthStream Competency Center.

Also during the quarter our new product for Research, which is a SaaS platform product -- we call it Improvement Center. Improvement Center is a software-as-a-service application that allows healthcare organizations to execute their improvement plans. So once a survey is completed, improvement plans are entered into the HealthStream Improvement Center and it allows senior management teams at hospitals to manage execution against these plans to improve their patient, employee, and physician community survey outcomes. And so, we also saw four new customers contracted for that SaaS application with our Research operating unit. So we're excited to see that development for our Research business as well.

In other exciting news, during the quarter we had significant Learning renewals and Research renewals. So large customers came up for renewal and decided to re-up with us under multiyear agreements. And to name a few, Catholic Health Initiatives, CHI, HCA and HealthSouth for Learning all came up for renewal and renewed under multiyear terms. And in Research, again, CHI, who is a customer of Research and Learning, renewed their Research contracts, Capella and Appalachian Regional Medical Center. So we have great examples of big customers coming up for renewal and re-entering into multiyear agreements during this 90-day window.

It's important to note that the HCA renewal was effectively an early renewal. It wasn't up for renewal until the beginning of the fourth quarter. And so the impact of those renewal metrics for HCA will not be in our renewal calculations that I just reported until the fourth-quarter numbers.

At this time, and with all those exciting developments underneath us, I'm going to turn it over to Gerry for a few comments on the financials and then a forward look into earnings and revenue guidance. And then I'll bring it back with a few exciting business developments. Gerry, go ahead.

Okay. Thanks, Bobby. Once again, good morning.

The improved results financially we showed in 2009 have continued for the first half of 2010. A lot of the things that Bobby mentioned about the quarter also pertain to the year to date. Couple of quick anecdotes -- revenue grew 11.7% year to date over 2009, with operating income expanding by 34.5%, roughly. So that's the same thing, very positive development for us.

The balance sheet remains strong. The cash balance has increased to $18.8 million. As important, at least from an operational standpoint, the days outstanding declined from 72 at March 31st to 53 at the end of the second quarter. And that was driven by cash collections, not write-offs. So we had quite an improvement in our quality of receivables.

What makes all this happen? I think Bobby did a good job explaining all the different metrics, the renewals, the FTE growth, the growth in patient revenue in Research. It's all coming together.

A couple of quick comments on accounting. I just want to reiterate our comments from the first quarter. As you all know, we had some income tax accounting items at the end of 2009 where we released our allowance against our deferred tax assets. That creates a book tax provision this year that does not mean cash payments on our income tax return. So we've got a little bit of a mismatch in comparing 2009 and 2010. So that's also in the numbers for the second quarter as it was for the first quarter. But that's also why we discuss operating income, because that is comparable going back in time. It's all consistent with how it was done in the past and it's also a GAAP measure.

So the other thing I'd like to say about the results to date is while we have had leveraged growth, we've also absorbed our first round of SimVentures' expenses. If you recall, the press release discussed $180,000 of expense in the second quarter. That is in our calculations of the leveraged growth, so the momentum in operations is helping us cover things like SimVentures and also the launch of Competency. So once again, we feel very good about our ability to, I'll say, finance our initiatives with our operations.

And the last point I'll make on that same theme is our guidance. If you'll notice, we have improved -- we've increased our guidance on operating income for 2010 over 2009. We now believe we'll be growing between 22 and 30% in operating income over 2009. At the end of the first quarter that was 11 to 13%, so -- I'm sorry -- 10 to 17% on revenue growth of 11 to 13%. So once again, the momentum of the first half of the year, we do see that following through. And also, that number does include absorbing our remaining expenses of SimVentures in the second half of the year.

So all the indicators -- balance sheet, income statement, cash flow -- all point in the same direction. We're very encouraged by the results.

Thank you, Gerry.

I'd like to wrap up with providing a little more color on some very exciting business developments that occurred during the second quarter. The first is we have an exciting new announcement with American Nurses Association. And the American Nurses Association is the only full-service professional organization that represents the interests of the nation's 3.1 million registered nurses. And they do that through their constituent member nurses associations. And during the quarter, HealthStream announced a new partnership with ANA, or American Nurses Association. And we'll be providing a commerce website that will enable the ANA members and other nursing professionals to browse and purchase and complete ANA and other third-party continuing education programs and to learn about ANA membership offerings.

So in effect we've been selected, in a competitive situation, to provide the backbone of educational offerings of ANA to their nurse constituents, which is a very exciting development and represents kind of a new form of distribution channel for us. In fact, it's actually a recurrence of a form that we worked on about five years ago. But we're very excited to see this new channel of distribution come to the forefront.

Also during the quarter we announced a very exciting new venture that is a joint venture, a virtual joint venture, with Laerdal Medical Corporation. And we call the venture SimVentures. Simulation is one of the most exciting areas of training and education developing in healthcare that I think has one of the greatest potentials, or has the greatest potential, for impact on quality of care. And Laerdal Medical Corporation is one of the world's leading providers of patient simulators. They're in fact an international company based in Stavanger, Norway and have international operations in over 25 countries. Being the world's leading provider of patient simulators, their products focus on airway management and mobilization, basic life support, advanced cardiac life support, and pediatric life support, to name a few.

So we're very excited to have entered into a multiyear agreement with Laerdal Medical Corporation to provide a full range of integrated software-as-a-service applications that will accelerate the development and distribution of simulation-based content. The software that we're building with Laerdal Medical will enable enterprise-wide management of simulation centers, which is an exciting new field of training and education in healthcare, and will support the assessment of the effectiveness of those simulations when people participate on the Laerdal mannequins and the didactic simulators that are provided through HealthStream's platform.

So SimVentures is a long-run project, a three-, four-, and five-year project in partnership with Laerdal that will require investment. We do not have any revenues forecast for this venture through year end and will be providing updates on those forecasts as we get nearer to the end or early next year as we provide our forecasts for next year. But it's an exciting R&D area and one of the most progressive areas of training and education in healthcare. We couldn't be more excited to be partnering with Laerdal in this field.

A couple of final notes before we wrap it up for questions. We are excited to have research coverage launched on our company by Avondale Partners. That was June 10th of the last quarter, so anyone interested in reading more about the Company can turn to the Avondale research reports to learn more about their thoughts on our potential as a company. They're joining Noble Financial, which has covered us for several years; again, another great resource for HealthStream investors to learn more about the analysts' opinions of our potential for growth.

During the quarter, HealthStream was ranked number 61 in the Top 100 Informatics list. That's great recognition for the work we've been doing in the last several years. Represents our third year in a row on the list and I think all employees should celebrate that ranking. It's just reflective of all the great work that our employees are doing.

Also, anyone that followed the national news knows that Nashville was hit with devastating and historic floods during the first weekend in May, which resulted in the cancellation of our Summit. And our teams have done amazing -- or had amazing response to these floods, including incredible community outreach and volunteerism, represented by HealthStream employees to help both our own employees recover and the community at large. I'm proud of what our teams have done -- over 560 hours of volunteerism to help with the flood recovery.

And our teams are actively engaged in redeploying the assets that were created for Summit into very small training regional summits throughout the rest of the year that will replace the Summit for this year, will be our training and outreach summits. And so our employees have done a great job recalibrating their efforts at reaching our customers, not through the Summit this year, but through these regional training offerings that they're doing, which is just fantastic. So I applaud our employees on both their individual recovery, group recovery, contribution to the community's recovery, and repurposing of our business focus on the Summit into these regional training events, which I believe we are conducting two or three of them between now and year end.

With that said, we'll turn it over for questions to those that want to ask them.

Thank you. (Operator instructions.) Sean Jackson; Avondale Partners.

Can you talk about the thinking in your change in guidance from last quarter to this quarter? Obviously the operating income guidance change was pretty dramatic. And it's more interesting, in fact, that the revenues guidance was down a bit. So what really changed on the expense side that caused you to raise your operating guidance so quickly?

Couple of things -- we've got a little more productivity out of different parts of the organization. And one of the things that we have seen is the number -- because the Learning platform has gotten more stable since (inaudible) in the last couple of years, the number of open problem tickets has declined dramatically. So there's some leverage at the cost of revenue, as one example of where we've saved some labor.

The Interview Center, which is our call center supporting Research, also in cost of revenues has got a -- has showed some real improvement as well in efficiency. So we're seeing some benefits at the cost of -- at the gross profit line, if you will.

Other parts -- we've done a little better job at royalties. The business mix is a little bit different than we first thought, when we did our first forecast.

The other thing which did take place, our estimate of capitalized software development was a little bit higher in the first half of the year. And that's because of several projects, one of which is Competency, coming to launch a little quicker than we might have thought. So that also has an impact on the operating expenses.

And our capital spending, apart from capitalized software, is a little bit less than budget as well. So the confluence of those three to four major factors all kind of blend together to show that little bit extra performance benefit.

On the revenue side, Sean, clearly we were disappointed to see either some marginal growth or no growth, or in one case a decline, of the three survey types that we mentioned, the employee, physician, and community survey types, which are the nonrecurring or the more elective types of research that we perform. While we did see the patient revenue grow at a good clip, 11%, reinforcing the more important recurring revenue and patient engagement, patient satisfaction, HCAPS work that we do, we struggled more than we expected on the revenue side for those three types of surveys.

And so that resulted in the revised range of growth for those surveys for the remainder of the year, even though we continue to forecast and through contracted wins and known wins growth in the patient satisfaction side of the business which, again, is the more stable, recurring and contracted component of that line of business. So, again, given the challenging news on the other three products, at least the growth was in the right area of the recurring revenue subscription base or contract base to revenue, while also getting the efficiencies on the operating side.

Okay, good. Thanks. As we look through the rest of the year, and given what you've done so far and given the guidance that you have for the rest of the year, are there any one-time expense items, one-time revenue items, or is it pretty much still a stable business for the rest of the year? I guess I'm trying to decipher is there going to be any sequential growth through the rest of the year? Because the guidance seems to be somewhat flat, especially on the bottom line.

I think you have to watch the bottom line and follow our guidance, hopefully, because with such strong financial performance in the first half, we are making intentional investments, including in the sales organization and the SimVentures project, which are -- SimVentures in this case is a pure expense investment, well, capital and expense investment, with no expected revenues. And so you're going to see that ramp up to our guidance levels of $400,000 to $600,000 in the remainder of the year. Obviously we didn't have those expenses in the first half. So you must realize that we're making a meaningful investment in a project that has kind of a three- and a four-year horizon for ROI.

And so the second thing is we're also, at this point in the year given the strong performance, going to be adding to the sales organization as quickly as we can. Several positions we've already targeted. And you'll see that both in the Research sales organization and the Learning sales organization. During the quarter we expect to add positions.

And so on the bottom-line side you just see we're coming off with great confidence from the first half and we're pouring in some investment. And it's not all going to have a -- it's going to have a good present value when discounted for future cash flows. But, again, in the 90-day window or the 180-day window it'll have an impact on the bottom line, as you said.

That's helpful. And lastly, it looks like the pricing environment is pretty strong. Can you go over in detail, as much as you can, on the HCA renewal and what prompted you to renew so quickly? And can you comment on the pricing terms? Was that reflective of the general pricing terms in your other renewals?

Well, so we're very excited to have renewed one of our largest customers, and actually several of them, during the quarter under multiyear long-term agreements, HCA being one of them. We have not historically, and do not plan on, commenting on the pricing in those agreements for competitive reasons. And also, it will be, however, reflected in the blended renewal rates that we report each quarter. In this case, since it is an early renewal, it will not be reflected in this quarter's renewal numbers that I gave you, the 101% and 107% on an FTE and a dollar value. And so you will see any impacts, any changes, on those renewals during the fourth-quarter report, which will occur in the first quarter of next year.

And so it's just a matter of practice and policy that we factor those numbers in in the quarter in which they were up for renewals. And so therefore there's nothing I can comment on at this time because it was an early renewal, except to give the comfort that it was an enterprise-wide multiyear agreement and Management is very pleased with the outcome of the negotiation and the renewal.

All right, great. Thanks. Great job.

Vince Colicchio; Noble Financial.

Nice quarter, Bobby. Just a couple of questions for you. On the Research side, the employee, physician and community surveys, did you lose clients or was business simply pushed out?

Well, those -- maybe a little bit of pushed out and a little bit of not winning as many. It's not a matter of, I don't think, losing any existing customers as much as it is the existing customers push it out. And since once you sign a contract, generally you get -- you kick off a program. There weren't as many new program starts as expected. And so we kind of didn't win at the rate that we expected is probably a better way to say it, and some existing customers pushed out.

So we clearly need to do some work there. We need some more segmentation and more sales strength so that we can grow those product lines as well. Clearly our focus has been on growing the patient and with good success against the competitive environment. We'll continue to double down on patient and begin to add resources to sell those other products which, again, on a relative basis haven't gotten as much attention as obviously they need.

Another question on, this is on the Competency Center. You have 47 clients now. Can you help us think about the revenue potential there? And I assume you've got pilots in place now so this is more of a 2011 revenue source I would assume. Right?

Yes. So the contracts, they're 47 contracts with 47 different institutions. It's important to note that some of those contracts, which are signed contracts, are for pilots. They're subcomponents of large health systems. And so often we think of our platform and how many FTE and subscribers they would have. And so the 47 contracts represents a larger number of potential FTEs. That's the first thing.

The second thing is they're all in various stages of implementation, because some of the core feature sets we needed were just launched at the end of this quarter. And I think now our sales teams and our implementation teams can begin to ramp up. And we do expect to see some revenue growth in the second half of the year, although you're right to point out that, again, the major impact will be in 2011.

In general, we think of the Competency platform as having the potential to double the platform revenue for any given account from the basic HLC. So in most of all of our disclosures the basic learning platform generates between $10 and $20 per person per year on the base subscription amount. Then you add content subscriptions on top of it. Our current pattern is that we expect for the Competency Center to not quite double that amount, but the -- we're targeting to make it a what we call platform doubler.

Okay. And this product could be something that every single client may find useful?

Well, it is in a competitive environment of employee performance reviews and competency development. We think we have a unique approach to it that makes us have a good competitive edge. Conceptually every customer needs these capabilities. But it is a highly competitive environment and other platforms are pursuing this that have market share as well.

Your cash balances are improving. You've got a credit line. Any thoughts on acquisitions? What does the pipeline look like? Is that something we can expect sometime in the near future?

I would say we have an engagement to look for opportunities and have a pipeline. I had hoped that we would have delivered something in the first half of the year, so I was disappointed that we were not able to. A few smaller deals that we were looking at did not go through on valuation concerns on our side. We pulled back. So we'll continue to develop and look for complementary products and services. I would call them -- we are targeting what I'll call bite-size acquisitions. In general our pipeline consists of opportunities between $1 million and $10 million in revenue. And those are the kind of size that we'd like to incorporate into our product portfolio, to take advantage of our sales channel.

So all I can say now is I'm disappointed we didn't deliver one in the first half. We'll continue the pipeline and see what we can develop in the second half.

Okay. Thanks a lot, guys. Nice quarter.

Frank Sparacino; First [Analysis.]

I was hoping you could give some detail on the current sizes of sales force and where you expect that to be by the end of the year.

We don't -- we had our 10-K for 2009. We have, I think, a description of the sales force sizes by Research and Learning. We haven't traditionally given any updates on the sales force size between the different year ends. I think Bobby mentioned adding some people to the sales force, which we expect to do, because that's our best investment into the business right now, given our momentum.

So we would ask you to refer back to the 10-K and that's a number we update annually.

Okay, thank you. That's all I had.

(Operator instructions.) Cris Blackman; Empirical Capital.

Thank you, and congratulations, guys. Let's see. On the SimVentures you're looking at, you mentioned a three-to-four-year window on the ROI. So right now you're more or less you're just expensing and capitalizing, I guess, some of the development. So should we anticipate in 2010 and beyond that being a loss for a period of time? Or when do you expect that to turn profitable? Can you give us an idea?

Yes, Cris. That's a great question, a fair question. Here's what I would say to you in our current situation. For this year we clearly have forecasted losses associated with our ownership stake in the SimVentures project. And we've quantified those expected expenses for the year and also clarified we don't have any revenue expectations. Also, we've clarified that we expect new product launches that would be revenue generating to occur early next year -- in fact, I think we said during the first quarter. And so we do expect revenues to begin on that venture in the first quarter of next year.

We have not provided any financial guidance for next year and we usually do that early in the year as we reset expectations for the year. And so, all we can do is provide the guidance throughout the end of this year and tell you that of course we wouldn't engage in a capital and expense project like that unless we expected an ROI. I would say that the ROIs on this project, it's a little more future oriented than, say, launching a new content partner or something that you would expect an in-year ROI. And so I would say that passing up good, strong corporate hurdle rates and delivering returns on that over a three-to-four-year window would be a normalized expectation with revenues beginning in the first quarter of next year.

That's about all the color we can provide on that now, because our guidance is currently limited to the current calendar year.

And what -- let me -- can you, if you look at a bell curve can you give me some sense of when you think the losses would peak for that?

No, Cris, we're not going to provide any additional guidance on SimVentures at this time.

Okay. All right. On the BLS, what percent of BLS training is done your method, the way you do it? And how much of that market do you anticipate you'll be able to capture?

Cris, we're going to need to do a better job quantifying that. And I'm not going to try to do it right on the call. My estimate, just off the cuff -- and, again, we'll need to probably provide corrected information the next earning release -- there are about 1 million people a year that certify in BLS products. And those 1 million people a year in the acute care setting. We believe that fewer than 50,000 a year get their certifications on our platform. Gerry, I have to turn it over to you.

Yes. So it's a very small amount, roughly, as Bobby said, 50,000. He stepped away but he'll be right back shortly. So there's a huge amount of growth in that area. So it's a great product for us. We have a long way to go to really penetrate the market as best we can, so. Is that -- did it answer your question, Cris?

Yes. I mean, it's a market that you could achieve possibly 40 or 50% penetration? Is that -- ?

Well, I'm sure it's possible. It would certainly be meaningful. If you look at our platform at, what, roughly between 35 and 40%. Because that [hint] of -- as we've said in the past, the BLS has that hint of compliance to it, like our platform does. Folks who handle patients need to be certified every two years. So, yes, I mean, a meaningful penetration at that level certainly is possible. And anything in the 30%-plus would be, I think, very achievable.

Okay. While I've got you on the line, are there -- Gerry, did you all make any stock repurchases during the second quarter?

We'll disclose that in our 10-Q as part of the regular filing requirement. So I'll probably defer to that document filing to give you that update.

Okay. Can you share with me a little bit about the functions of your call center and your employment there? And is that ramping? How many product lines are being inquired through that call center? Could you maybe talk about the call center for us a little bit?

Sure. The vast bulk of the call center is geared toward the patient surveying, which is the HCAP survey primarily. There's a little bit of community work done through the call center, but the vast bulk is the patient survey. And obviously, with the expansion of the patient revenue, which is driven by volume, there has been an expansion in the capacity of the call center, which is headquartered in our Laurel, Maryland office. And it's grown by about a third, the capacity of about a third, over the last year or so.

So we've gone -- some of the things that I think are positive about that -- we've been able to go to a more permanent employee base from transitory or part-time workers. And that stability I think has been a real plus. The continuity that that provides, the leadership it provides, have been a real -- the real reasons behind the improvement in the efficiency of the interview center. It's bi-lingual -- or multilingual, actually I should say, multilingual as well, which is another critical part of being a good interview center.

For the most part physician and employee surveys are done -- mail for physicians and employees sometimes by mail, little bit more and more internet, which we see as a growing opportunity for us as well, the internet delivery of employee surveys.

So if you think about our Interview Center, your best correlation is to think about our patient work for right now.

Okay. Do you see that expanding beyond the patient work to actual product lines, like the SimVentures for example? If there's -- when that's introduced, that product, could those call centers be used also to assist some of your product line inquiries?

They could, although we do have other parts of the Company that would be called support services. One of the things about the Interview Center, because it is CMS-certified for HCAPs, there are some quality standards, some independence standards and opportunity standards we need to adhere to. We don't want to blur those lines of responsibility. And so there's also some other constraints on why, besides business constraints, on why we wouldn't maybe blend those two businesses together.

Okay. And I guess finally -- and Bobby, I hope you're okay.

I'm doing fine thanks; had a little coughing fit, though.

In the past you've talked about similarities in your business with the old days when cable first came out and there was the pipe that was there and just needed content. The cable companies needed content to push through that pipe. It appears some of these agreements that you're starting to announce that there's going to be more opportunities for content to your customer through your pipe. Would you maybe just expand on the value of your distribution, or the pipe that you have? And are there other areas that maybe we haven't thought of that you could share with us as far as how you're going to capitalize on that pipe of distribution you have?

Sure. I'd like to comment -- well, first, the year-over-year increase, the 28% increase in the subscription selling of our products is very exciting and it reflects that growing distribution strength. Second, the ANA agreement represents a new model of distribution, which is actually a revisiting of a model we talked about in our IPO documents, which is more of a business to business to consumer. So it's us supporting the American Nurses Association, supporting their end user nurses on individual purchases. That is a very exciting use of our infrastructure and technology to create a new form of distribution. Instead of through the learning platform to the acute care facilities, it'll be the end user nurses through the ANA's website.

And so I would say our strength in distribution and the use of our platform in this newer model is very exciting. If the hospital model is a business to business, the use of this infrastructure now, a business to business to consumer for ANA, to me -- and again, it's now new because we wrote about this concept in our IPO documents -- but this is the really exciting first step in that direction. So distribution strength and access to end users for our company is definitely growing.

Excellent. Yes, and I think that's -- I'm excited to see that. Congratulations. And finally, quarterly net revenue per subscriber -- that's a figure, a metric, that you should be providing going forward. Is that correct?

Well, we had intended to do that and we did some internal studies on it. And then we decided not to release that this quarter. We just need a little more thought into it, for competitive reasons on the type of information we provide. And so we'll target next quarter again. And so we do apologize for not delivering that number. We had expected to deliver it this quarter. Hopefully you get enough from all of our modeling to continue with good modeling. And we know that'll add additional insight when we can provide it, but at this time, we are not going to provide it. We'll target the next quarter.

Okay. Thank you.

Kevin Liu; B. Riley & Co.

First question here -- you've made the comment in the past on a number of calls of you guys being able to add 20,000 to 50,000 FTEs per quarter. And it looks like you guys actually contracted for much more than that, at least over the past year. So I was just curious, as you look forward here, do you think that with some of the sales additions you're making, what you see in the pipeline, that you can continue at a better than 50,000 rate?

And kind of as a follow-on to that, the question would also be, if not, are you expecting more of your growth to come out of selling the Competency product as well as new content into the existing base?

I would say the latter of what you said is more true. What I would say is, we continue to model the 20,000 to 50,000. In quarters like this one where we have an exceptional win, like a large health system, we get very excited about that, but that's definitely not something we repeat every 90 days.

That said, once on our platform, the exciting thing about our model is the number of new platform and content and subscription products that we have to sell behind it. And so I think you're correct in saying that our growth is beginning to be attributed to our hedgehog of selling more content per subscriber, offering new platform extensions -- and you see that in both Competency and Improvement Center, which you're starting to see traction on that generate incremental revenue per subscriber. And so you'll begin to see upticks in the revenue per subscriber across the network as an important metric for our growth.

Okay. And then, on the Research side, I was just curious if you could give us a sense of what the patient survey revenues look like relative to the employee. I just want to get a feel for how much of that business is recurring versus nonrecurring.

We have not in the past disclosed by different categories the Research revenue. We may do that in the future, but now -- but at this point we do not disclose that.

Gerry, thinking back, I think we did indicate that the patient business is more than half of the total business, I believe.

For Research, not the --

For half of our Research business.

Okay.

And so I think it's fair to say it's more than half. We didn't get specific for competitive reasons, but you should know that the three that are what we call point in time, or nonrecurring, are less than half of the Research business. And we also do disclose the split between Research and Learning, so you'll get a pretty precise picture from that information, I believe.

Yes, that's helpful. And not to harp on the HCA contract too much, since it sounds like you're happy with the terms. I guess my only fear is it's been -- if we go back in time and look at the last time that the renewal happened, the blended rate did take a bit of a hit in terms of the pricing. And so, just wanted to get some comfort that when you guys come out with your next report that we shouldn't expect any material changes in kind of the blended renewal rate on pricing.

Well, we can't provide that, because we've intentionally decided and by form and function and practice that those disclosures would occur in the blended rate that will occur in the fourth quarter. And so what I'll report to you is that the way we think of our model, that the long-term renewal is the most important dimension of the renewal and we're very pleased to have secured long-term renewal of that account.

And our guidance for the second half of the year takes into account all the different -- not just HCA, but all the different activities and renewals you might see. So to the extent that we have revised our guidance we've taken that into account as well.

And operating income guidance was revised upward.

Yes. All right. Appreciate your taking my questions. Thanks.

Steven Hart; Heller Capital Partners.

Hey, guys, congratulations. Bobby, if it says something, we're 45 minutes into a call. That's pretty good for you, right?

It is, yes. We're getting questions. Do appreciate it.

Us guys have been around a long time with you. In regards to the great number -- I think you added 122,000 contracted subs. Is it -- has the market opportunity -- you've always talked about 5 million potential FTEs. Has that expanded or are you just grabbing more and more market share, which I guess you'd be up to close to, I don't know, 45% market share at this point?

Well, we're working to expand the definition of that, but right now the reporting we're doing, and most [fall into] -- there are a few in what I'll call ancillary or post-acute care market. But most of that is still acute care. That large health system win was a large acute-care healthcare provider. So we're grabbing increased market share of the acute-care space, which again is approximately 5 million. The latest number I saw is betw- -- I've seen numbers of between 4.8 million and 5.1 million over the last few years, but -- so that is [reporting into that number.]

That said, we are evaluating ancillary or secondary opportunities for ourselves in behavioral health, long-term care, home health markets, and surgery center markets as well. And we have a little bit of traction in each of those actually. And so we're excited to have a little bit of traction in each of those verticals. We'd like to get more serious about expanding into them, because the net effect of that would double the market opportunity. About 10 million people work across the pre-acute-care, acute-care, and post-acute-care markets and they're all still facilities-based, provider side of the healthcare. So we don't change our definition of our [search.] We just expand the market opportunity. And I would say it's less than formal, but we're beginning to make a push into a few of those segments.

Okay. And it sounds like you had one big win in the quarter, but that plus some other little wins. Are you mostly winning these from competitors as they come off contract? Or are you winning over subs from kind of the old style classroom training?

It's a good mixture, winning new business that are still looking at converting from the old ways to the new ways, and competitive takeaways. In the case of the large health system, it was a competitive takeaway.

Okay. And on the Research side, just more out of curiosity, is the patient survey business, is that from a DMR or the TJO acquisitions in the past?

Well, it's a good question. Actually, both businesses did patient surveying business.

Okay, so it's a mix.

Both did -- that's right, a mix.

And on the Laerdal SimVentures opportunity that you talked about earlier -- so just kind of tell me if these assumptions are kind of close. There's about 1.25 million annual certifications and I think you had talked in the past about projecting around a $35 pricing for this, which brings to about a $40 million-plus annual revenue opportunity to you. Is that close? And is anyone else offering an eLearning or web-based training application for that? Or is that really just your opportunity?

Okay, but let me clarify. That's a great question. First, the BLS opportunity and the HCLS opportunity which we've been developing with Laerdal for four years now is, as you've just described, opportunity. And that was existing before SimVentures. It was -- we have the distribution rights and a partnership with American Heart and Laerdal to distribute the BLS, HCLS and PALS program. We believe, and are quite confident, we are the market leader in distributing those programs. And they do, indeed, have nearly the potential in those product lines that you mentioned.

SimVentures are an additional set of opportunities revolving around the software to manage simulation centers at hospitals. So they're more of a platform extension. And also, the mannequins themselves consume content. And so the SimVentures is creating software that allows the facilitations of the exchange, publishing and selling of content. And so the opportunities of SimVentures, while also with Laerdal Corporation, like the BLS, HCLS and PALS one, represent new and different revenue streams from the one you initially described.

Okay. Great. Thanks for that clarity. I know that, I guess a few months back, I know that your -- well, I think it's supposed to be an annual user and customer conference was postponed or canceled. Is there a plan to have that in the second half of the year or will you now wait until kind of May of '11?

Well, the guidance I can provide is we do not intend to hold one in this year. We are -- and again, our guidance is very careful -- we are reinvesting some of the intended investment in Summit into these regional training summits and other marketing initiatives. And so we want to redeploy some of that capital back to customer-facing initiatives.

And so we have not decided on our actions for next year. And so that will be provided in our guidance for next year. But in this calendar year there will not be a Summit and we will redeploy the cost savings that we were going to invest in the Summit into other marketing and customer-facing initiatives.

Okay, great. All right. Well, thanks very much and congratulations.

Thank you. I am showing no further questions in the queue at this time, sir.

Thank you to everyone. We look forward to reporting our third-quarter earnings call in the near future. And congratulations to all HealthStream employees for delivering such great performance. Thank you and goodbye.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect. And have a wonderful day.