HealthStream Inc (HSTM) 2011 Q3 法說會逐字稿

Thank you for standing by and welcome to third quarter 2011 earnings conference call. (Operator instructions) Please be advised that this conference is being recorded today, October 25, 2011. I would like to hand the conference over to your host for today, Ms. Mollie Condra, Associate Vice President, Investor Relations and Communication. Thank you. Ma'am, you may begin.

Thank you. Good morning and thank you for joining us today to discuss HealthStream's third quarter results. Also in the room with me are Robert A. Frist, Jr., CEO and Chairman of HealthStream and Gerry Hayden, Senior Vice President and CFO.

I would also like to remind you this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks 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 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 Frist.

Thank you, Mollie. Good morning and welcome to our third quarter earnings conference call. We have a lot to cover this morning, including financial metrics, operational updates; we've got some partner updates and some general business announcements, so I'm going to jump right in with some financial highlights, which were evidenced in our earnings release.

It was a particularly strong quarter, financially, with revenues up 24% to $20.6 million and operating income was up 59% to $2.7 million in the third quarter of 2011, compared to the third quarter of 2010. This drove net income up 126% to $1.8 million in the third quarter, compared to $796,000 in the third quarter of 2010 and earnings per share were up 46% to $0.08 per share in the third quarter, compared to $0.04 per share in the third quarter of 2010. So, in all the core financial metrics, we can see a strong financial performance and leverage growth.

Adjusted EBITDA increased 46% to $4.4 million in the third quarter of 2011, compared to $3.0 million in the third quarter of 2010. Importantly revenues from our recurring revenue (technical difficulty) Internet-based subscription products increased 29% over the prior year quarter. We're excited to see that continuation of selling the Internet-based subscription products, which is kind of the subset of products that include our core learning platform and content subscriptions as well. So it's really exciting to see that subcomponent of our business growing at 29% over the prior year quarter.

These fundamentally strong financial metrics were supported with good operating metrics as well. We passed several milestones during the quarter. The number of subscribers that were fully implemented to use our learning platform passed through a significant milestone in the quarter. We know have over 2.5 million healthcare users implemented on a platform. Implementation is an important moment for us, because, once implemented, we begin revenue recognition on those subscribers. Approximately 50,000 subscribers were implemented during the third quarter.

We also added, contractually, an additional 67,000 subscribers, which is another exciting quarter of additions to the platform. We've had a kind of longstanding stated quarterly goal of adding between 50 -- 20,000 and 50,000 net new subscribers a quarter, so it's exciting when we surpass the number as we did again this quarter, at 67,000.

The total number of subscribers is now over 2.65 million, which gives us a backlog to be implemented, and the average contract length is over three years. We turned in renewal rates based on FTEs of 88% in the quarter and a contract value renewal rate of 94% during the quarter.

Operationally, our HealthStream research division added 54 customers that added research services in the third quarter; 25 renewed their contracts for multiple products in the quarter. A 14% increase in research revenues over the third quarter was strong and interestingly, the highest recurring revenue component of that business, the patient surveys, grew 26% over the third quarter of 2010.

We added several new research customers, like Prairie Lakes Healthcare Systems, St. Mary's Health System, Garden County Health Services and a host of others and we'd like to welcome them onboard to our service and product offerings.

I've got some detailed product and partner announcement updates that I want to walk you through. We're very excited about them and it's time to provide more color and information on some of our core content partnerships and the opportunities they present.

In the third quarter of this year we entered into a renewed three-year agreement with Laerdal Medical for the HeartCode suite of products. HeartCode products include the BLS, or Basic Life Support, Advanced Cardiac Life Support and Pediatric Advanced Life Support courseware, which has turned into one of our core content products. So we're excited to have that three-year renewal now under our belt again.

This product is in conjunction with the American Heart Association and Laerdal, core partners with HealthStream. There are three components to the program - the online didactic training, the skills performed on a manikin and the AHA certification card - and HealthStream is the exclusive provider of the Skills Checklist component, making our Company the only place where all three components can be obtained.

In addition, the renewed agreement makes HealthStream the exclusive hosting and delivery provider through December of 2014 for these products. As the exclusive hosting and delivery provider, HealthStream will be compensated for the direct, or indirect, sale of any HeartCode courseware to any end user, so that's very exciting. That means we get a piece of the transaction regardless of channel partner or distribution of those products, in addition to having a unique combination of the assets that doesn't exist anywhere in the market.

So, with this renewal with Laerdal, we've very excited about the added dimensions, protection and support, provided to our customers and to our Company, as we grow with this core products.

In fact, the HeartCode suite of products has proven to be a top content seller among the wide array of content offerings that we do have. Revenues from the HeartCode suite of products will surpass $9.0 million in 2011 and we believe the annual market opportunity, which we've readjusted, is, on the recurring basis, approximately $60 million. So, although the product has demonstrated a significant and strong growth, we're re-characterizing the opportunity to be about $60 million. There's a lot in front of us to continue growing with.

In the third quarter, we were very excited to see one of the largest health systems in the country enter into a multiyear agreement with HealthStream for the full suite of healthcare products and they're to be deployed enterprise-wide across that organization. Again, one of the largest health systems in the country did enterprise-wide adaptation of the HeartCode products under contract during the third quarter. Implementation begins in the fourth quarter and we hope to see this revenue recognition contribution from that large health system on this product set early in next year.

Turning our attention to another important product we've been talking about for a little while, but is now getting closer to the time when it goes exclusive on our platform, the American Academy of Pediatrics offers a product called the NRP. It's a new category of content partnerships for HealthStream, which includes assessments and it comes from the American Academy of Pediatrics.

Late last year, the Academy of Pediatrics selected HealthStream to provide the assessment exam needed to complete their industry-wide recognized neonatal resuscitation program. Since its launch on HealthStream's loading platform in mid-May, I believe we've delivered over 9,000 assessment exams that were completed on our platform.

In keeping with the AAP's decision, the NRP assessment exam will be offered online only and exclusively through HealthStream, beginning in the first quarter of 2012. So we expect a continued and rising demand for this NRP product from the Academy of Pediatrics and we've seen continued growth in that product throughout the last couple of quarters.

Another exciting category and challenge for our customers is related. There's going to be a large movement on October 1, 2013 towards a new billing and documentation model for hospitals called the ICD-10 coding model.

We're now getting closer to understanding that opportunity and what it may present for us and have signed some content partners, including an organization called, Precyse. And we're beginning to see uptake in the ICD-10 content training libraries from Precyse, with several significant opportunities on the horizon, as all healthcare providers need to migrate to the new coding and billing methodologies in October of 2013. So we're excited to have on-boarded this, our new partner Precyse, and look forward to this as a growth area for the Company, the ICD-10 training, the migration from ICD-9 to ICD-10.

So I'd like to turn it over to Gerry, now, for a more detailed look at the financials and then I'll come back. I've got a few business updates to cover at the end, but I'll turn it over to Gerry.

Thank you, Bobby, and once again good morning to everyone and thanks for joining our call. I'll try to hit a few highlights in the financials and then save time for questions toward the end.

The first point is to emphasize is an important dynamics underlying our revenue growth. As Bobby mentioned, we had 29% growth in our Internet-based distribution product line and also a 20% growth in our patient survey revenue. So we're encouraged to see both our recurring revenue streams grow by over 25% this quarter, over the past year's third quarter.

The second thing is our tax rate. As you know, it's gone from our estimate of 41% to 38%. The important thing about this is to reiterate that the fluctuations pertain strictly to our book GAAP income tax accounting. Because of our net operating loss carry-forwards, we pay very little cash income taxes.

The important point about the book income tax rate is to understand how stock option exercises affect that book tax rate. As you may already know, when you calculate your taxable income by either tax return or book taxable income, we take a deduction for the option expense, stock option expense deductions and that is the spread between the exercise price and the grant price. So, with the increase in our stock price, that creates a much larger number than prior years and that, in turn, has a sizable impact on this taxable income we have to report our book tax income. So the book rate, once again, 38% versus 41% estimate for the first three quarters of the year -- first two quarters of the year.

The balance sheet remains strong. Cash balances have increased to $30.3 million, from June -- by -- I'm sorry, $3.7 million for over June 30, 2011 and they're up by $6.5 million since December 31, 2010. That also, once again, would be after our $3.5 million investment in the AVS product back in March of this year.

Against the performance we achieved in the third quarter, we're going to provide some context for the fourth quarter as you consider your financial modeling.

Organic revenue growth was a major driver, with a strong operating income in the third quarter and throughout 2011. Also, turning to operating income, however, there was a lag we experienced in executing our hiring plans in the third quarter. As we go into the fourth quarter, we anticipate better fulfillment rates of our hiring plans and therefore increased expenses associated with the personnel.

Also, please note that our customer summit and the associated expenses are now estimated the first quarter of 2012. This year it was in May of 2011, so, once again, a shift between quarters.

Our performance this quarter has given us confidence in rating our growth expectations for 2011 revenues of between 22% and 24% and to increase our estimates for operating income to 45% to 55% growth over the prior year and also, once again, we have a book -- our book income tax rate will be, we believe, between 39% and 40%.

Thank you, Gerry. I'd like to cover a few more business updates and then go to Q&A.

First, we're excited to announce the promotion of Eddy Pearson during the quarter to HealthStream's executive team, to Senior Vice President and Chief Operating Officer. He is now responsible for the day-to-day operations throughout HealthStream and executive oversight over human resources, consulting, client services, product management and marketing departments.

In his new role, Eddy has executive leadership that now includes management of all the Company products. Having worked with Eddy for five years, I'm very excited that he's assumed this position and leaves behind a strong team to manage all of the product sets that we now offer at HealthStream, but steps up to a broader, more horizontal role managing all of the operations for HealthStream.

We did also announce - and we want to get this out to customers - our summit is now set for March 6th to 9th. It'll be here again, in Nashville, at the Opryland Resort and Hotel and it's been a very successful venue for us to connect with customers. I believe we plan on offering an investor relations day at that as well, so please book and hold that date, March 6th to 9th, 2012. We look forward to see both shareholders, analysts, and most importantly, hopefully, hundreds and hundreds and hundreds of customer will travel to Nashville.

I want to provide a brief update on SimVentures, our virtual joint venture with Laerdal Medical and give you some exciting updates.

The SimStore launched in May of this year and since its launch, the number of content partners for our SimStore and our SimVentures relationship has grown from 15 to 30 as of now and this is essentially another powerful ecosystem growing around our platform. We have over 50 partners that support our learning platform. In addition, now 30 more partners supporting our simulation platform, which brings a total of 80 content partners who are now a part of the HealthStream ecosystem and we're very excited about that.

Right now, the ecosystem of partners supporting SimStore has delivered over 2,500 content assets that are available for sale online in the store and we were able to see the uptake in both transactions of sampling and purchasing and revenue and therefore profits associated with this electronic commerce channel supporting SimVentures we call SimStore.

Also, it's exciting that, as we look our roadmap for SimVentures, the next product launch is planned for January of 2012 in San Diego, at the International Meeting for Simulation and Healthcare. Once again, last January we announced the roadmap for SimVentures and the SimStore, which then launched in May.

This meeting, here in San Diego in January of 2012, we expect to launch SimManager, which provides -- it's an application to manage the new modality of training that includes the manikins. We expect that SimManager will make it easier for hospitals to adopt this new training modality of training using simulation-based manikins, so we're very excited.

Upcoming, a lot of big announcements coming and we're trying to get in front of those, SimManager in January, and our summit in the first quarter as well.

It's also interesting to note that our efforts to accommodate international markets will be supported as we continue to enhance the SimStore in six additional languages, including French, German, Korean, Chinese, Japanese and Spanish. So there's quite a robust pipeline for SimVentures, upgrades to the SimStore and the launch of SimManager, all anticipated here shortly.

Importantly, the collaborative arrangements which govern the virtual joint venture with Laerdal, have a minimum term of approximately five years from today, so we're excited that these are -- this relationship is governed under longtime -- long-term agreements. We had characterized them as multiyear agreements in the past, but we wanted to go ahead and put out there that these are multiyear operating agreements that span five years and then have extensions built in as well. So we're very excited to be operating under long-term agreements with this very important venture.

It's also fun to celebrate - and this will be my closing remark - that just last week HealthStream was ranked number 53 by Forbes Magazine in their list of "America's Best Small Companies" and to our knowledge, we were the only Tennessee-based company to make this top 100 list and we wanted to share that with both investors, the investor community, and also our employees, who should celebrate their accomplishments and attainments throughout the last several years.

Obviously, culminating in a strong financial performance quarter and then to be recognized through the Forbes "America's Best Small Companies" is quite rewarding and I wanted to congratulate all of our employees on that accomplishment and their hard word that has gotten us to that point.

At this point I'd like to turn it over to the operator to open the line for questions.

(Operator instructions) Richard Close, Avondale Partners

Yes, thank you. Congratulations on a good quarter. I was wondering if we could go over a couple of the metrics, Gerry, if you could talk a little bit about the 88% on the renewal rate and the 94% on the contact value. Just give us some dynamics with respect to those numbers, maybe what caused that to dip below the 100% level that you've been trending, here, over the last couple years.

Yes. So let me try to give a couple of points of background. First of all, this quarter was an unusually low number of subscribers to up or renewal and within that context we had one customer, which is Academic Medical Center that was required to switch to a university-deployed LMS learning platform inside the university. So, as a result, this had a disproportionate impact on the quarterly renewal rates.

And the other thing we're going to watch closely is with -- is just how that group does going-forward, but, once again, a little bit of mathematics of a somewhat unusually low [number up] for renewal and one customer having a disproportionate impact on the calculations.

And then, is the third quarter usually or I guess a smaller number of renewals coming in that quarter?

It really -- it's hard, really, to determine that, because it all depends on what contracts have been signed and you have a lot of different factors that could impact on each quarter's renewal properties, renewal base and so on, so there's really no pattern to that that you could really predict.

Okay and then, interesting commentary around the BLS increase in the market size there from, I guess, $40 million to $60 million. What drove that recalculation?

A bit of it is just to further study and look at the market opportunity, but it also is for the full suite of products and so what we've done is we've grouped the BLS product and the Advanced Cardiac Life Support product, or the ACLS, and the Pediatric Events Life Support product and we're characterizing those as the HeartCode suite of products. And it's those three products and a little bit of a relook at the opportunity across our customer base that has led us to characterize that opportunity as a $60 million recurring revenue opportunity.

Okay and then, with respect to ICD-10, you made some commentary there. Obviously that's just getting rolling here for you guys. Can you talk a little bit about the uptake and size maybe of that market opportunity for HealthStream?

I would say that we haven't put a size on it, but it is interesting that all of our customers will go through it and so they'll each adopt different strategies to prepare for it. We plan to -- we're adding additional partners in addition to Precyse.

For example, in the third quarter we signed a new content partnership with a company called Coding Strategies and they'll offer additional libraries of clinical coding education in the areas of radiology and cardiology. So, I think we're getting ready with new partnerships. We see an uptake in interest in some of our initial, and we think strong, contracts coming in around this ICD-10 migration.

So, while I haven't characterized the size of it, I would say that every acute care hospital in the country is a target for our solutions. They may adopt different strategies for getting ready and even from competitors, but we're doing a good job building our content partner network and making sure we're ready for this trend.

And I guess one final one here on the pediatrics, the NRP I think you described it as. What is the market opportunity for that product?

We believe that it's about 180,000 to 200,000 tests a year and I believe the price is about a $15 test each, so it's a several million dollar annual opportunity, exclusive through HealthStream.

Okay. Thank you.

Thank you.

Matt Hewitt, Craig-Hallum Capitol

Good morning, folks, and congratulations on a strong quarter.

Robert A. Frist, Jr. Thank you.

Good morning.

I was wondering if you could give us an update on some of your additional platforms, for example the Competency Center, the Improvement Center. Where do you sit with customer enrollment with those platforms?

Yes, we continue to make good progress, particularly on the Competency Center, and we're looking forward to some announcements in the first quarter of next year related to that product and platform, so we've continued to add customers. We're still, I would say, in the piloting and experimental phase. I think we had hoped that it would be growing a little more aggressively than it is now, but we do see continued uptake and growth of the product. So I think that's all I'll characterize it as now and then we'll look for some new updates in the first quarter of next year.

Alright. Thank you. As far as the Talent Management Academy, should we view that as another platform, like HLC and Competency Center?

No. That is an engagement model with our customers to bring them on the journey of talent and performance management. It's exciting to see so many signing up for that journey. We plan to launch some product and have announcement through the Academy and get a community of customers involved in some very interesting and cutting edge projects.

But it is an engagement model with customers, where we're going to go on a journey together to define the future state of talent management in healthcare. So, it's a little bit of an academic and intellectual exercise, but there will be some exciting announcements coming out of the Academy as well and so you'll watch for those also in the first quarter of next year.

Alright. Shifting gears a little bit to the research, it sounds like you had a very good quarter in the patient or recurring revenue piece. I would assume that there was this typical seasonal lull in some of your other survey business. Should we anticipate that coming back on in the fourth quarter?

I think some of these products, the employee engagement products in particular, do better in the second quarter. I believe it's a stronger quarter for those products.

Correct.

And so, there are four or so core products to the research business and they all have relative strengths and weaknesses throughout the year. In the third quarter, some of these elective surveys were generally weaker, the community surveying and the employee surveying, so I think that's kind of the period when those two are generally a little weaker than the relative strength of the patient and physician surveying.

Alright, one last question for me and then I'll jump back in the queue. We've seen -- well, the economy in general is -- there's a huge uptake in some of the phones, with tablets, the iPads. How -- are your applications and HCL, can hospitals utilize those newer technologies to -- for their education and training?

They can and you're going to see us have, again, several exciting announcements queuing up around the summit time. In fact, we expect our first mobile app to launch during the fourth quarter and so you'll see some of our moves and announcements in the mobile space. We've already gone the process of converting our core regulatory libraries to mobile deployment and so, and again, I don't mean to be too secretive about these things, but we've got a lot queued up for the first quarter of next year.

We've tried to lay out some of that in the SimManager launch, so we've gotten a little bit ahead on that one. Our first mobile app is coming during the fourth quarter and we've begun the conversion of our regulatory courseware libraries, which is some of the most consumed courseware on out network, for mobile platforms. And so, we expect a lot of developments in those areas.

That's great. Thank you. I'll jump back in the queue.

Nick Halen, Sidoti & Co.

Good morning, guys.

Good morning, Nick.

A lot of the questions I had actually have been asked, but just a couple of quick ones. I was just wondering where you guys are in terms of capacity on the research side? I mean, if you guys continue to see this growth, are you going to need to spend more to grow out that infrastructure at all?

We have a fairly scalable model for -- and some of the products are very scalable, like the employee engagement model, which we encourage to be done on the Web. Others, like the patient requires to add scale to the cost center operations, we've got a very good model where that's kind of factored into the cost of goods as we grow and add capacity. We've added capacity to manage that fairly efficiently.

So, I would say yes. As we grow that business, particularly the patient business, we have to add capacity, but I think we've done a good job of that in the last year and expect we can continue managing it effectively.

Okay and then just one more. I mean, I know you guys mentioned you plan on adding to the personnel and I was wondering if you guys could give you a little sense of how many people you're looking to add and I mean, are those mostly sales type positions?

It is a complete blend across the Company. Dozens are positions are both open now and we'll be adding even more in the fourth quarter and particularly in the sales area, but today we're adding, across all areas of the Company, product and product development and the systems teams. We're adding certainly in sales.

This is the time of year when we strengthen and organize our sales organization to queue into next year, so you'll see us adding the sales organization, but also in the service areas of the Company as well, so we're adding in the customer services and support areas, the cost research and learning products.

So it's really kind of a broad-based investment period for us. We like to do this in the fourth quarter so we'll come in strong in the next year, particularly in the sales area where you want, hopefully, a month of orientation before we begin expecting and looking forward to quota production out of the new sales organization.

So this is always a period of time, end of third quarter, fourth quarter, where we evaluate our total strength as a Company and then we begin to open up and add positions, to work hard to maintain both the innovation of our Company, as I mentioned, and the growth rate in sales. As we've mentioned, areas like ICD-10, are areas of specialty focus and so we'll be hiring some experts to help launch in some of those new areas of focus and again, we do this each year at the end of third quarter and the fourth quarter.

Great. Thank you.

Vincent Colichicco, Noble Financial Group

Thanks. A nice quarter, guys. Bobby, could you remind us? I know the patient survey has a seasonally strong quarter in 3Q, but why was it so strong in terms of year-over-year, up 26%?

Patient, I believe it'd be fair to characterize as a more steady product throughout the year. The growth is driven by new contracts over time and as they get implemented and activated. So we brought in some new health system clients and just a steady addition of new customers throughout the year resulted in the higher growth rate in them.

Okay and has there been any changes in the price, in pricing, in the competitive environment overall on the learning side? Anything worth mentioning?

No, I would say that competitive environments across the board to continue to amp up. There is increased interest in healthcare and healthcare IT. I think we have a fairly unique mixture of products and services that are recognized by our customers, so we think we can have a major impact on the human dimensions that effect performance in hospitals and business and clinical outcomes,

So we think our portfolio is fairly uniquely positioned, but it is fair to say that the competitive environment continues to amp up. It seems like just about everybody wants to sell, regardless of their pedigree or background, into the healthcare IT space, so we see new entrants every day.

We see repositioning of learning management companies into talent management companies and just a competitive environment overall. I think that our unique combination of people and focus and products and innovation positions us well, but you're right to say it's an increasingly competitive environment.

Prices have held up fairly well across the board. Occasionally we use price as a strategy, but - and then we add -- make sure we add value where we have it, like under the exclusive products and so occasionally we trade off a little bit of pricing power on one item for market share and/or to sell the other products, which would have more exclusivity dimensions. But, overall, on the platforms, price has held up and that's also true of our content products.

Are you funneling investment into the talent area to better compete? I assume it's to better compete with the talent management companies. Is that a fair assessment?

We are and some of the announcements around our Competency Center products will be related to that. So we continue to make sure that we have the right components to effect business and clinical outcomes, some of which fit the model of talent management and others are just innovative ways of handling classic problems that hospitals face related to managing their people. And so we're not exactly chasing the talent management model, but several of our products will be thematically aligned with that and along with some innovations we think will be differentiating.

So that is a fair statement and we're trying to balance the talent management modules that we build with the unique demands of healthcare to make sure we have a good product set and so the Competency Center continues to evolve in a direction that would probably be viewed as more competing with talent management space.

Okay. Again, nice quarter, guys. That's all I have for now, thanks.

Thank you.

Thank you, Vincent.

Frank Sparacino, First Analysis

Hi guys. Bobby, I don't know if you have any additional color you can add around the subscribers, the 67,000 that were added this quarter, in terms of additions from the base or competitive wins, displacements, etc.?

No, not really. It's a study base hitting and I mean, not to use too much of a baseball analogy, but we continue to a broad spectrum from in each segment we focus on, the small, medium and large health systems. So, when we have a number beyond our 20,000 to 50,000 it usually means won a few more of the mid-size or maybe a health system in the quarter. When we're at the lower end, like the 20,000 range, it's when we just are all doing base hits and bringing on average U.S. hospitals throughout the quarter.

So I would say it continues to be a very strong -- I'd call it a perfect random sample of the opportunity available, which means that we pull from small, medium, and large hospitals. We pull from competitors. But you can see that our market share growth continues to outpace anyone else that's thought of entering into the share, into this specific space, so it's balanced and distributed and at the expense of all of our competitors.

Thank you.

Walter Ramsley, Walrus Partners LLC

Oh. I hit the wrong button. Congratulations, excellent quarter once again. I've got a couple of questions trying to understand -- whoops, sorry about that. My phone's going. The SimManager, could you explain a little further what that is exactly?

Yes I can. When we announced SimVentures, there were four components of software that we intended to build and launch to kind of complete the visionary roadmap of SimVentures. SimStore and SimDeveloper were the tools needed by our now 30 content partners to build and post content to the electronic store and the store itself is a little bit like an iTunes. It's a location to sample, buy, purchase content that runs on these manikins. SimDeveloper, the toolkit that allows these now 30 content partners to post and configure content for sale in this store and those two both have gone live already, throughout the year.

SimManager is a lot like a learning management system, but with specific features and capabilities to manage the virtual and manikin-based training process. For example manikin-based training involves logistics and virtual components.

So, if you have 300 people that need to train on a manikin, by and on two or three different scenarios on a manikin within a 30-day period, the software allows you to manage the intellectual process components from the store to deploy them to the manikins, so you can kind of manage what's on the manikins. It allows you to manage the workflow of the 300 people that need to take the lessons on the manikin, so Bobby Frist is at two o'clock Tuesday and Mollie Condra is at three o'clock on Wednesday.

So, SimManager is like a command and control center to manage this new modality of training, virtual training, on manikins and it has dimensions of a traditional LMS, but also many unique dimensions that are unique to managing the process of simulation training on manikins.

And then finally, we acquired a 50% stake in AVS, an audiovisual system, and we're looking to re-launching that as SimView, the fourth component in the suite. And SimView is the debriefing and educational tool that allows an instructor to sit down with a student who's been through a simulation and show them what they did right and wrong and coach them on better behaviors. And so it collects data from the manikin and video from the incident, the training scenario, and allows it to be replayed to the student.

So SimView is pending, which is a reincarnation of AVS that we acquired in March of this year and SimManager is a very powerful new toolset to manage this new modality of training and it should be launched in January of 2012.

Okay. Can you explain how the pricing will work on all of this stuff?

Well, we're working on the pricing models. We expect them to be subscription-based. They're SaaS-delivered so they're software and service-delivered products. We expect them to be subscription-based, based on the number of subscribers just like our learning platform. And so when a SimCenter, a simulation center adopts the software the number of students that they process through the center will be tied to the revenue for our organization. The specific pricing we haven't announced and so maybe that'll be for the meeting in January.

So there won't be any big upfront licensing revenue?

No. These are SaaS.

Okay.

The SimManager in particular is a SaaS-based model as well.

Okay. Another question I had, the big healthcare system that you referred to earlier. Is that included in the 117,000 subscribers that are in the process of being implemented? Or is that farther into the future?

No. Those are not included in those calculations. That's a new contract and it shows up in the contracted number. We do -- how will it show, Gerry, it's not -- so it's for a specific content product, not for the learning platform.

Right.

So I believe it does not show up in the platform numbers.

That's correct. That's correct. It's not in those numbers because it's content.

Right. So, as a content sale, it's sold with a slightly different modality and so it's not in the subscriber numbers.

Okay. The research business, can you just kind of give you a ballpark idea of how fast that industry is growing and what, I mean, if you're going to start to slow down to that industry growth rate, or if you think you can continue to outpace it?

Well, on the -- on different parts of that business, the first is working to redefine the survey business and research business as an assessment business more broadly and we like to think that some of these products, like the NRP product and a few others on the way that are database-driven. They're driven on a data collection engine. They present national benchmarks or performance benchmarks for comparative analysis fit this category, that kind of formally known as research, increasingly be known as our assessment business.

Any products that collect data and information in the process of delivering them and prepare comparative performance benchmarks will now fit this family of products of assessment business. So we think of it as growing as we add products like the NRP Exam as another form assessment, and we're kind of, as a family of products, grouping those altogether.

And so we think the future is bright as we add additional employee-type of assessments, engagement assessments. We kind of think of them as a new form of content almost and so not only in the patient area, where we're gaining by adding customers, by gaining market share, but by adding a new kind of dimension to how we define that business. We look forward to its continued growth.

Okay. So, the research business is likely to keep growing?

We believe so and kind of effectively reclassifying it, over time, towards a broader set of products that are assessment products. The research products would be a subset of these newer types or products that are database-driving and benchmark-based.

Yes, okay, great. And just one last thing, talking about the HeartCode product. I'm not sure I completely understood the numbers there. You indicated that it had a $60 million opportunity. I mean, that's per year to the Company or what would are you talking about there?

Yes, that is a full market penetration in the acute care space for the full suite of those three products I mentioned that are called the HeartCode suite and, as you can see, we're passing through the $9.0 million mark this year. So we're shy of, I guess, of about a 20% penetration and it continues to grow, as I mentioned, with that large health system adoption, so the annual recurring revenue opportunity, at full penetration, we believe would be about $60 million per year.

To HealthStream? You don't have to split that with the other people?

To HealthStream. And then we pay royalties to Laerdal and American Heart and so the gross margin on this product is less than our typical - because we have two core partners on it, it's less than the 50 that we've articulated; the range of royalties ranges from 10% to 60%. And this is at the higher end of those ranges, because there are more partnerships involved, so the cost of goods is higher on this particular product.

So right now is there a competitive product that it's up against, or is the market opportunity wide open?

Well, there are competing products to the didactic portion, but the unique combination, which is we think is what is its differentiator, it's kind of -- what we've assembled with the manikin-based model is essentially a unique, new way of achieving certification.

And so, while there are other coursed you can take to prepare for your basic life support from other vendors, we think we have kind of a unique combination of assets here that represent a new way of training using all three components. So didactic online and the manikin and then the delivery of the American Heart card. So those three pieces, together, we think are a unique offering.

Yes. Okay. Anyway, it looks great. Thanks again, appreciate the chance to talk to you.

Thanks much.

Richard Close, Avondale Partners

Okay.

Yes, just really quick on the hospital or the full suite with the large hospital client, are they a completely new client, or is this an add-on sale to an existing?

That's a good question and so I'm excited about the answer, because they were not a client of our learning products. They were a customer of our research products and so it -- the relationships built over time, by selling in some of our research instruments, gave us the opportunity to present to the clinical executives of that organization. And they believe in the clinical benefits they're going to derive from the platform, so it was effectively a cross-sell to one of the top five health systems in the country.

Okay, so I guess the follow-up on that answer would did they offer an opportunity with respect to adding subscribers? Because the way you mentioned it earlier, its sounds as though they are not necessarily included in the subscriber number.

Right. They're not on our learning platform, so, for now, we'll be connecting to the platform that they currently utilize, but our track record and history is that this is a good way to open the door.

Okay, great. And then, just really quick, internationally. How soon of an opportunity do you see international now that you're going, I guess, in six languages?

Well, it's interesting. In the SimStore we already see international purchasing happening and you might have noted that our revenues from SimVentures, while it's only second -- it's only our first full quarter of revenue and only our second quarter to derive any revenues from SimVentures, they did approximately double. And in that, we saw hundreds of transactions that were across the globe and so, today, the SimStore itself, its framework is in English and some of the content assets themselves are in multiple languages.

Over time, the SimStore framework will be in multiple languages, which should facilitate additional purchasing, at least make it easier for purchasing to occur. But we already see international transactions are part of the revenue growth in the third quarter and we hope and expect that it will continue into the fourth quarter.

Okay, thank you.

Frank Sparacino, First Analysis

Hey Frank.

Hi guys. Just real quick. Gerry, you'd talked about on the [original] rates, the academic medical center that was switching to a different LMS. Can you be more specific as to why that was happening or what happened in that particular account?

No, this happens sometimes across the market. We occasionally take a health system that we sell into four or five other hospitals and a competitor sells into four or five. Somebody gets the corporate account then and they migrate to one of the other and, largely, we're the beneficiaries of that model, but occasionally it works against us.

In this case, what you have is a university system that owns an academic center and the university was on a separate platform and you know we don't sell into the university market. It requires different features and functionality and that's not a market of ours. So, in this case, the university required the medical center to move to the common platform.

Now, I still have a question on how well that's going to work. We believe that our medical center partners wanted to stay with us, but nonetheless, the university insisted that they migrate to a common platform. We'll watch them and see if they come back around as a business opportunity in the next couple years.

Thank you.

At this time there are no further questions in the queue.

Okay, then we'll conclude the conference and look forward to reporting the next quarter's earnings conference call. Thank you for your attendance and participation.

This does conclude today's teleconference. At this time, you may now disconnect.