HealthStream Inc (HSTM) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HealthStream Inc. first-quarter 2012 earnings call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions).

As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Miss Mollie Condra, Associate Vice President, Investor Relations and Communications. Ma'am, you may begin.

Good morning and thank you for joining us today to discuss our first-quarter 2012 results.

Also in the room with me are Robert Frist, Jr., CEO and Chairman of HealthStream, and Gerry Hayden, Senior Vice President and CFO. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve 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 the results to differ materially from those forward-looking statements are contained in the Company's filings with the SEC including Forms 10-K and 10-Q. With that, I will turn the call over to our CEO, Robert Frist.

Thank you, Mollie.

Good morning, everyone, and welcome to our earnings call. Got a lot of exciting and interesting things to cover this morning, and Gerry and I will be conducting the call and ready for your questions at the end of a short business update.

So first, I would like to cover some of the financial highlights. The consolidated revenues were up 28% to $23.7 million, which is our record during the first quarter 2012. That is compared to $18.5 million in the first quarter of 2011. Sales for the first quarter set a record for that period which resulted in higher commissions but certainly incredibly strong sales results that should power results as we look forward into the near future. Operating income was $2.3 million for the first quarter of 2012 compared to $2.6 million in the first quarter of 2011 and our operating income was impacted by the cost of our annual Customer Summit which we held earlier this year than in prior years and we invested a little more than we have historically, but we got absolutely outstanding results out of our customer Summit in the first quarter. Net income was $1.4 million for the first quarter of 2012 compared to $1.5 million in the first quarter of 2011 and adjusted EBITDA improved to $4.1 million in the first quarter of 2012 up 8% from $3.8 million in the first quarter of 2011. Gerry, in a moment, will take a deeper dive into the numbers, but on the surface very strong revenue driving revenue growth that makes us look forward to the rest of the year.

On business updates we added approximately 40,000 new subscribers. They were contracted to use the learning platform during the first quarter of 2012 which is in the target range of 20,000 to 50,000 that we stated consistently. The total number of contracted subscribers is now approaching 2.8 million. It is about 2.79 million under contract which represents well over half of the nation's hospitals and healthcare workforce in the hospitals. Currently we have a backlog of 130,000 in the queue for implementation. Implementation, one's implemented subscribers we began recognizing revenue; so we are excited to have a strong queue to begin working through here in the second quarter.

Approximately 87,000 new fully implemented subscribers were added to the learning platform during the first quarter. So you can see a real acceleration in adding subscribers or incrementing and activating those accounts and those subscribers; and so now, we have 2.659 million health-care users implemented and implementation is an important milestone because that is where we began revenue recognition for those subscribers.

Renewal rates for the first quarter were 96% based on subscribers and 102% based on contract value. Our renewal rates reflect the addition of subscribers compared to previously contracted amounts combined with any pricing adjustments that may occur at renewals.

As you have noticed, we've added a renewal metric that began in our year end earnings release. In order to develop a deeper understanding of our renewal trends, we added a trailing first quarter recap, in addition to the current quarter description of renewing subscribers and contract value. We feel that one quarter's renewal statistics combined with a trailing year's results is more indicative of the renewal trends underlying our business.

For the trailing four-quarter period ended March 31, 2012, customers representing 97% of subscribers that were up for renewal renewed; and our renewal rate based on contract value was 105%.

For the first quarter of 2012, revenues from our patient surveys, which is the recurring revenue product, increased 13% over the first quarter of 2011, and the HCAHPS scores are important. That is the nature of the surveys because healthcare providers are directly tied to the CMS in the value-based purchasing scoring system and the HCAHPS scores are approximately 30% weighted in the value-based purchasing scoring system.

Payment begins under that program on October 1, 2012, which is a driver for this business as the metrics we have been collecting become actually used in the calculation of their value-based purchasing score. So the October 1, 2012 is an important date for the actualization of CMS's value-based purchasing program.

There are many new drivers for growth underlying an exciting quarter of product releases and product announcements; and we want to cover some of those drivers and talk about how those trends impact our business. Many of our products are driven by regulatory drivers like OSHA, the Safety and Regulatory Training, HIPPA, the privacy practices, HCAHPS, the Government Survey for Patient Engagement and Satisfaction, the Joint Commission that it's auditing.

But a new driver for growth that we have been talking about it was the shift, CMS's decision to shift to a new coding system in healthcare, the ICD-10 coding system.

CMS recently announced that the new deadline for this transition is October of 2014, which is about one year later than the date originally set. Although it has been delayed from what we had originally anticipated, we believe that this one-year deferral will continue to be a steady driver for the training solutions related to the ICD-10 migration. Actually, I think our sales teams believe this gives our customers a little more time to get ready but still leaves that ultimate adoption driver out in front of us in October of 2014.

So we expect now with clarity on that date and time to see an uptake in the ICD-10 training product offerings from HealthStream and our partners. So we were excited to see CMS clarify that deadline, and also that the delay was only about 12 months which, we think again, gives us more time to sell and our customers more time to get ready. But leaving the ultimate driver in place we think is a positive.

So, several of our R&D efforts over the prior year came to fruition in the second quarter with several successful product launches in Q1. One of the most exciting is under our SimVentures program where we launched SimManager and announced the SimView product sets at the International Meeting for Simulation and Healthcare early in the quarter and we did some press releases on that exciting product set.

Those two announcements round out the efforts of our SimVentures, bringing a completeness to the software suite of SimVentures, and represent over a year of research and development. So, we are excited to get those in the marketplace and begin selling them towards the middle of the first quarter.

Also in January, we launched two new Physician Insights Surveys to complement our traditional medical staff survey. Those new surveys allow our hospital customers to obtain input from two different sectors of the physician community -- referring physicians who actually refer to a hospital but do not regularly admit patients and employed physicians who actively refer to a hospital but do not regularly admit patients and employed physicians to our employed by a hospital or a health-care system.

So the employed physicians and referring physicians are the targets of the new Physician Insights Surveys.

The additions of these two Physician Surveys expands our offering to hospitals and provides them with more comprehensive insight from the important segment of their workforce, the physicians that they drive the revenues for the hospitals.

Also in March, we announced the launch of HealthStream Performance Center. This is exciting and innovative. Of course it's software as a service-based performance management solution targeted again towards the hospitals. The Performance Center automates and takes a paper process and makes it paperless, and so it automates the workflow and converts a heavily paper-intensive process of the Annual Reviews for employees and makes it a paperless process.

It also, of course, is built right upon and inside and completely fully integrated with the core learning platform. So, it leverages our market position with our learning platform. So, we are very excited that towards the end of the first quarter to announce and launch in March the HealthStream Performance Center.

So, you can see that, with several successful product launches, we incurred new investments to ramp up underneath those and get ready for selling them, delivering 8% sequential revenue growth, $23.7 million. That is 28% year over year, and these successful product launches position us well for the remainder of the year and into next year.

Some other things that happened during the quarter, we saw content sales really take off, which is really exciting. One of the drivers for growth during the quarter we had talked about the NRP exams in prior calls. The NRP exams became our required gold standard exams and those became -- they were exclusive through our platform and became available really towards the end of last year and we saw a surge in purchasing on the NRP exams throughout the quarter, one of the drivers.

So results are a slightly lower gross margin but a strong contribution to EBITDA and cash flows as content sales took off with products like the NRP exam.

We invested a little more in the quarter in product development and personnel through contract labor, which is a little more expensive than full-time labor while we tried to catch up with hiring during the period. So, again, we view this as a positive investment.

We wanted to keep pace with product development and growth, adding in all the key areas in the Company. And as we have noted in the last few quarters we are a little behind our hiring schedule, and so we've put in some contract labor in the quarter in an effort to keep everything moving forward and keep up with the exciting growth rate we are delivering, and so we think it was a wise investment. We will work hard in this quarter to catch up in our hiring and then manage contract labor.

During the quarter, we did achieve record sales and, again, as I mentioned earlier that resulted in a little higher commissions. But again if you have an expense like commissions that are a little higher than maybe you expected due to record sales during the quarter, we think that is something to celebrate and, given the nature of our business, gives us more future visibility into our revenues in the future.

Then finally, we reiterate our growth expectations for the year. So we were excited that we feel ontrack and strong in our targets for the full year.

So what I am going to do now is turn it over to Gerry and let him reiterate those guidance expectations and cover a little more detail in the finances. Go ahead, Gerry.

Thank you, Bobby, and good morning, everyone. I will make a few brief remarks then I am going to save time for questions at the end and the first thing, once again as Bobby mentioned, we think it was a strong quarter -- record revenues, record sales for the first quarter.

If you look at our growth rate, it was 25% on our recurring product revenues. Some one-time revenue sources such as some of the registration fees pushed that up to 28%. But by either measure, we are very encouraged by the momentum in our revenue growth and once again by either standard, it was a record quarter for us.

There are three key items affecting the comparisons between the first quarter of this year and the same time period last year. Those include Summit, contract labor, which Bobby mentioned, and the privilege shares outstanding. I'll try to give a little more color on the impact of some of those different measurements.

But first of all, on the Summit, as you saw in the press release, our investment in Summit increased our expenses by about $520,000 in the first quarter of 2012. And as you may already know, some of it was in the second quarter of 2011. So it was a little bit of a timing difference between the two years.

But, if you take that $520,000 of incremental expense for this first quarter versus last year, if you apply the 40% effective tax rate for the first quarter and the outstanding shares for the first quarter, the Summit was -- had an impact of about a full $0.01 per share on the results.

Bobby mentioned contract labor, and we have discussed that on previous calls, and during the first quarter, as he mentioned, we did have some higher contract labor while we continued our search for the appropriate full-time candidates. So that was another fluctuation in our overall results.

The equivalent share count using calculating earnings per share has increased since the first quarter of 2011, and the primary reason is our equity offering we did back in November of last year in which we increased -- issued approximately 3.6 million shares to the public. Accordingly, the increase in share count is about 19% since last year. So, although the share count is higher because of the offering, we still think as we started to point out its comparative impact on this quarter's results. If we take this quarter as $1.4 million of net income plus the Summit impact we just discussed a few seconds ago and divide by last year's 22.9 million shares, equivalent shares, the earnings-per-share of the [equivalent] would have been approximately $0.08.

Our cash position continues to grow. Cash and investments as of March 31, 2012, were $91.6 million versus $89.5 million at year-end 2011. This strong cash position coupled with no debt on our balance sheet leaves us well positioned to capitalize on a broad range of growth opportunities, whether it be acquisitions or core expansions.

We continue to be active in sourcing and evaluating acquisitions. But, as we have mentioned in the past we are mindful of both strategic fit and valuation. And we will continue to update you on our M&A progress as 2012 continues.

There has been a lot of interest in SimVentures. We want to take a moment to try to explain our reporting structure for this entity.

Internally, some of the accounting principles were GAAP; this image of the approach is known as a collaborative arrangement and there are several publications defining its use and requirements. It is very common in the pharmaceutical industry where R&D arrangements combine with market and distribution, which is very similar to our business model with Laerdal.

Perhaps the best way to describe the versatile joint venture is to contrast with more conventional notion of the joint ventures related to accounting. First, [SimVentures is different from official joint ventures] in that there is no separate corporation or legal entity. The venture is a contract between the two parties.

Second, for a variety of reasons including consolidation and rate of recognition, joint ventures do establish one-party as the majority owner. The majority owner then consolidates the entity for financial reporting while the minority owner typically uses the equity method of accounting for its pro rata share of operating provisional losses which some folks would call a one-line consolidation. As you know, SimVentures is owned 50-50 by us and Laerdal. So if we were to apply the conventional notion of accounting framework, we would have no recognized revenue but still get our share of operating profits or losses.

This is where the collaborative accounting guidelines create different reporting requirements and require each joint venture party to recognize revenue. The nuance of describing what that recognized revenue represents and here is the next contrast with traditional financial reporting.

Recognized revenue usually pertains to sales of products and services that provide to the third-party customers. The SimVentures represents both any sales we have made to customers plus our share of expense reimbursement and provide a operating profit generated by SimVentures, which is attributable to us.

In addition to sales, it is the amount by which we need to recognize revenues to offset the SimVentures expenses in our income statement and report our appropriate share of operating income. Hence, it is very similar to a cost-plus reimbursement approach you might see in different settings.

So to summarize, we remain encouraged by SimVentures' progress and it also is generating positive EBITDA for us as of right now. So we feel very good about that.

Finally, as Bobby mentioned, our guidance we have -- we iterate our 2012 annual guidance which we published a short while ago which is, we expect to see revenues grow between 20% and 25% and operating income to also expand by 20% to 25% over 2011. Our expectations on effective income tax rate and capital expenditures remain consistent with our earlier published guidance.

In particular, we [stated] book income tax rate between 39% and 40% for 2012 and capital expenditures between $8 million and $9 million. Thank you.

Thanks, Gerry. I'll close with a few comments and we'll go straight to questions. A bit about our Summit. We made a large investment in Summit which we think was extraordinarily worthwhile and is a very exciting event attended by many of the analysts on this call. We had over 600 attendees and 40 prospects in the audience this year, and so we are excited about what this event does for us in our sales pipeline as we move forward.

Over 60 sessions were offered along four different tracks of Leadership, Strategy, Quality, Education, and Human Resources, and were led by many of our customers. We also do active research and development, and so this is a product development initiative during the Summit. We're bringing a core group of our developers, over 50 of them, to interact directly with customers on product design and innovation.

So, the week of Summit is an exciting time of both selling, educating, and conducting product research, and while our investment in this event is great, I can't tell you how excited I am to have made it. It seems like exactly the right thing to have done and a great celebration by customers and informing our product road maps into the near future.

Also during the quarter, a shoutout to all of our employees at HealthStream. We were chosen as a finalist, a winner of the Best of the Best award by the business journal here in the city in companies of 1 to 500 employees. We are building a strong performance-oriented culture that is really being recognized in our peer groups as one that can excel and deliver great results to shareholders. But also strong in our communities for contributing back and being part of the local economic growth.

And so it is great -- with great pride that I commend all of our employees for achieving this Best of the Best selection in the local business journals here in the city.

Then finally, I would like to invite everyone and remind you that our annual shareholder meeting will be held on Thursday, May 24, at 2 PM here at our offices in Nashville which is at Cummins Station here in Nashville. So Thursday, May 24 at 2 PM, we will hold our annual shareholder meeting and welcome shareholders to attend and participate in that event as well.

With that said, I would like to turn it over to the audience here for questions.

(Operator Instructions). Ryan Daniels from William Blair.

Good morning. Thanks for all the color on the moving parts in the quarter. I am hoping to follow up on a few things on the margin front. Just first I want to make sure I understand the Summit cost correctly. Is the $520,000 a net cost so on top of the revenue you received --?

Yes, Ryan. It is Gerry. That is the net cost and that is net of the fees and the expenses.

Okay. Do you have the actual cost for the Summit? I am just trying to get a better feel for the sales and marketing line. Obviously those costs are somewhat transitory in nature. Probably closer to maybe $1 million or so. Is that a fair way to think about that?

Yes, it is about $850,000 to $875,000. Yes.

Okay and then as we think about the gross margin structure going forward, given the very strong content sales you've had -- that is obviously great as it is driving up the lifetime subscriber value. But it does pressure gross margin a little bit. I am curious if you think maybe a 60%, 59% gross margin is a fair target for this year as you look forward?

We did not guide on the gross margin line. But they have been historically stable in the 60% to 64% range. I know that is a lot of movement for an analyst to swallow. But as you know, it depends on the relative movement within the implementation cycle of the higher gross margin platform products with the lower gross margin content sales.

And so, during this quarter the next of revenues and growth rates for content had a nice surge and we mentioned some of the reasons why. But we are still encouraged by the platform potential and have a lot of new platform components that have higher gross margins. So it is one of the hardest lines to look forward on, because it is the relative growth rates and growth mix that moves it around.

But you can see, I mean, we have been in this 60% to 64% range now for, gosh, for years on end. So, we think history is the best indicator for our performance into this year.

That's helpful and, then, maybe a follow-up to that. One of the new platforms that you launched I guess formerly would be Competency Center and I am curious if you can talk a little bit more about that. I know you officially launched it at the User Summit and I am curious what kind of buzz came out of that, and then, maybe more specific to you could address out that's being marketed to new and existing clients. Is that a newer sales team? Or is it existing account managers trying to get clients to turn that platform on?

Yes. So we have added some new structure to our sales organization as we entered this year adding a talent team that focuses on selling into the HR portions of a hospital. They will be taking the new HealthStream Performance Center and the HealthStream Competency Center into the market, again calling largely on the VPs of HR so we have a new group of experts that sell our talent-oriented products that target the VPs of HR in hospitals.

So that new product, one is oriented towards the annual performance review cycle. That is the Performance Center. And the other is for clinical maintenance of competency, which is targeting a little more to the clinical staff, but has slightly different tool sets to help track and maintain the clinical competencies of staff.

So, both of those products will be sold in. Interestingly, they can both be sold in to either the VP of HR or the chief nursing officer and so -- and the products are highly similar but they have differentiating capabilities and we position them carefully to have clear messages about both. One, around the annual performance cycle in automating and making that paperless, and the other about the detailed process of documenting the competencies of the clinical staff.

Okay. That is very helpful color. Then the last one, a quick one and I will pop off. Just curious on the sales force investment. I think you said last quarter there might be more occurring in Q1 than is typical. Have you filled most of those positions or are there still some outstanding as we look forward on the sales front?

Yes. We will always have a few open and we are looking to post a few more here in the very near future across the Company given the strong revenue performance of Q1. We are a little behind. Our hiring expectations both in Q4 of last year and Q1 this year and in order to not let that affect our product development and growth and sales, we went ahead and used some contract labor in some of those areas like customer support and product development.

So we will have to manage that downward as we catch up in hiring and we do expect -- I think on our website now, I think we have close to probably 18 to 20 open positions and we are looking to post another set of positions, given the strong revenue performance of the first quarter. So you can watch that to see the mix. You will see some additional sales positions posted here in the next several weeks.

Okay, great. Thanks again for all the color.

Matt Hewitt, Craig-Hallum Capital.

Good morning and congratulations on the good start to the year. First question for me, the project-based revenues were particularly strong in the first quarter and I am curious is that where the fees related to the Summit hit or was there another -- was there other projects going on in the quarter?

Yes, Matt, it is Gerry. That is where you will find the Summit fees. There's also in one other project-based set of revenues in there as well.

Okay. Then I'm wondering if you could provide a little bit of color on some of the new products that you rolled out at the Summit? If you could give us an early indication of adoption since their launch?

Yes. I would say it is too early to talk about adoption, but interest levels I would say are good and pipelines are building for each product, and so we saw good pipeline developments is probably the best way to characterize these products that are less than 60 days old. We do have actually a couple of initial contracts on each. So, small but exciting interest in a developing pipeline is the way I would characterize where they are today.

Okay, that is great. And then, is there any way that we could -- and I realize this is probably not easy, but can you quantify how much of that -- the contract services, the impact was in the quarter?

You mean the one-time revenues?

No. The costs associated with some of the contract employees that you brought in.

No. We can't. It is just spread in lots of little pockets and so and, largely, we just authorized it so we could fill some of the open -- the needs in certain areas of product development. I will tell you that in general it was in product development kind of R&D areas. We wanted to see keep moving forward while we tried to hire some more into our tech teams. And again largely you can track our labor plans by looking at our open positions on our website and their changes quarter to quarter.

Okay.

What we did was, we invested in R&D and customer support areas. Some implementation areas you can see the backlog is really strong and we'd like to get through that back block to get to the revenue recognition. So used contract in a lot of areas and we had to process a lot of contracts because of the surge in the NRP adoption so a little temporary help in accounting to process just to a whole new level of contract load in our department.

As we smooth out our systems to process those things, we will be able to manage those expenses.

Okay, fair enough. On the research side, another strong quarter in the HCAHPS surveys. I'm wondering, should we anticipate a normal seasonal balance for the other survey business here in the second quarter given that we are a few weeks in? Any guidance that you could give us would be helpful.

Yes. So you are right to note that the court recurring revenue components of research are performing fairly well. I think there's about 13% was the growth rate. So we would like to see a little stronger that it is recurring and multiyear contracts driving that. So we are pleased with that. We would like to see it be a little higher.

The elective pieces I would say I have a little less confidence in. I'd like to see them do better. We are of course meeting to figure out exactly how to get those back on the growth trajectory that we would like to see.

So I think what we are focused on if you think of it in order of priority is the recurring prescription business, the HCAHPS business and the patient business and we see that actually performing well. And then secondarily the nonrecurring or less predictable. We are working on that but it is a little lower priority and a smaller piece of the business.

Fair enough. Then, last one for me -- the last couple of quarters, I think you talked about maybe providing some form of an average revenue per user or some type of metrics to help understand it. Obviously we can see it in the main number, the learning research or learning content number was up smartly.

But I am wondering if you could provide some type of an average revenue per user or some metric to really help quantify the adoption of these extra content pieces.

Yes, we were working on that and got really close to doing that. But then we saw the surge in content and it affected when we looked at a 10-pack it wasn't giving the right -- we have to keep working on the formula and figure out how we are going to report it as a trailing average or a moving average. So, we just still haven't quite figured that out. We saw such a surge in the content consumption that it moved the metric around in a way that didn't, we think, communicate properly. So, we are still working on defining that metric.

I think the easiest proxy for now would be to take the learning revenues minus the one-time events and then of course divide it by the number of implemented subscribers. You are going to get pretty close there without breaking down in great detail the difference in content and platform. But you are going to get a really good number just doing that.

It is pretty simple to do. We are working on whether it is a trailing moving average or a quarter to quarter, and we just haven't quite figured out how to communicate that the way we want to. So we think just using that broad strokes topline earning revenue minus some of the project revenue divided by the number of subscribers is a pretty good proxy.

That's helpful. Thank you very much. I'll hop back into the --

The implement in subscriber base.

Thank you very much.

Richard Close, Avondale Partners.

Just a follow-up on that last question, Bobby. So with respect to the content sales, they wouldn't be attributed to a specific subscriber, correct? And that is why you are saying it might skew that metric a little bit.

Well, one of the things that happened was a full year of demand on the NRP products was experienced since then one quarter and the way we are doing the metrics would have annualized that impact instead of its rightful quarterly impact. So, we didn't like the way that was being calculated so we decided to back off on the metric.

But, so, we had a real strong performance with that NRP and essentially got the years adoption under contract very rapidly in December, January, February, and March. So it had a large impact on the content revenues in the quarter. So we expect that to be representative of the annual demand that spread out more over the year. Again there is opportunities like that events still to drop that metric and so we didn't like its approach.

Okay. You mentioned on the Patients Insights up 13% but you would have liked it to be a little bit better. If I go back to the fourth-quarter report, I think when you guys gave guidance on the research revenue, you talked about a target of 15% on the surveys, the recurring surveys.

Is that correct and is there any timing seasonality or anything like that in the survey business, with respect to the recurring part of it?

No. There are some elective components meaning the size of the samples that hospitals use to take. There is a minimum requirement in they can sample at higher levels if they want to or we encourage them to. So there is that nature of elective.

I mean, there is a minimum sample size per hospital but they can elect to do more. What we see is a strong -- a good pipeline on those patient surveys. So we feel good about the remainder of the year and hope to see that we can move that 13% upward.

But it was 15% that you guys were targeting if I remember correctly.

I think we gave blended numbers for the whole research unit, not by product line.

Okay and then when we think about the physician products that you reference in your commentary, are those recurring in nature as well? Maybe just describe those old but more so we get an idea of how that flows through the income statement.

Yes, I think the ones that I mentioned in today's call are not as recurring. They are kind of the staff employed physicians and referring physicians. So they are not of the same nature of the CAHPS programs which are recurring. I should note though that an area of growth we talked about in the prior call is the CG-CAHPS. The Clinicians and Groups CAHPS which is surveying the patients of the physician office instead of surveying the patients of the hospital.

We feel this opportunity is more open, meaning unpenetrated in general across the market space and in an area where we see good growth coming as we sign up our enterprise accounts to do their CG-CAHPS survey in addition to their HCAHPS survey. By its nature it is recurring and is part of the CMS programming on a go-forward basis.

Okay. On Performance Center, can you walk us through the revenue model on the Performance Center? Is that an annual subscription that you recognize over the course of the year? It sounded as though some of the products would be the year-end performance review. I just want to make sure that that is not like a fourth-quarter event or something.

Oh, great, no. It's a good point. Actually if you think about it, SimManager, Learning Center, Authoring Center, Performance Center, Competency Center, our new resource centers and other products we are working on, all of those are annual subscription-based products that, regardless of the rate of use during the year, they are built and contracted for, contracted for [irratably] over a multiyear period, and build and revenue recognized ratably over those periods.

Okay and then just one final one for me and I will give Gerry a chance here. You know, you honestly called out the first-quarter impact on the Summit. How should we think about the year-over-year comparison on the second quarter now that the Summit is not in the second quarter of this year as it was last year? Should we see improvements on a percentage of revenue of sales and marketing in the second quarter year over year?

Yes, well, we tend to not give line of guidance but I think as a general concept you can assume that the expense [percent] won't be in second quarter. So that would be one adjustment you could consider.

Great. Thank you.

Frank Sparacino, First Analysis.

Just two questions. First is on the NRP. Is there any seasonality to that business? Bobby or Gerry, can you just help me understand how you would sort of project if you can at all that business taking off at the beginning of this year?

No. What happened was there was a moment where everyone needed to sign up when the exam went exclusive on our platform. So there was kind of a rush to sign up. But its consumption and demand curve should be spread fairly evenly throughout from here forward.

So there is kind of an inflection point of everybody moving to our platform across the country, which is very exciting. Now that they are there, we expect to see the consumption patterns which I think we had identified up to about 200,000 tests a year being delivered. We expect those to be spread over time fairly evenly and constant in the years to follow.

Just following up on that, Bobby, what is the price per test?

I believe we have communicated it's in the $15 to $20 depending on volume and that kind of per test.

Okay. Then lastly, Bobby, you referenced this I think in your earlier comments around the VBP program taking effect this year in terms of actual payments. I know in March, CMS released, I believe, some initial results to the hospitals that haven't been made public yet. But I'm curious was there any sort of fall off from that, good or bad, in terms of the hospitals you have seen where they were at at this stage?

No. I would say like a lot of these things though there is a wake-up call and unfortunately some hospitals get behind in their recognition of the impact of these things. So they kind of have this rush to try to figure out how to respond to it. So I would say when these changes hit, there is a surge obviously in interest and execution and not everyone is as proactive in getting ready for the impact of these types of changes.

They've thought about it but they may not have changed their processing systems and it becomes more and more real as these deadlines approach. So it is more what I would call the natural absorption curve of such a change and the reaction to it. You know, people have been collecting and submitting the data. I think they are generally comfortable around the core measures data like they have their processes in hand and have been reporting them for a while, the clinical performance side. They feel like they either understand those or understand how to manage the risk in those areas, or they know they need to get help.

On the HCAHPS, which is 30% of the waiting, I would say that everyone is now searching for strategies to improve it. Mixture of marketing strategies, human capital strategies, process improvements, training approaches. It is what I would say is it is just kind of a wake-up call and makes it more real each month as we advance toward that deadline.

Great. Thank you. That is all I have.

Vincent Colicchio, Noble Financial Group.

Good morning. I'm wondering if you can give us an updated in terms of the HOC. What kind of progress you are making in terms of marketing to ancillary facilities?

Yes, good. We see some of that. We hope sometime during the year to break out some of the areas where we are seeing good penetration when hospitals affiliate or acquire in these other verticals, like we always mention the same four or five. But long-term care, home health, behavioral health, surgery centers, rehab hospitals, and so it is fair to say.

The other thing we see the hospitals doing is extending the platform out to their physician groups; and so, we add subscribers in those areas as well, doing physician education portals for large health systems. We see them adding in volunteer work for us that they didn't used to cover; and so they will extend the platform to cover the volunteers.

So we can see same-store growth, if you will, or same customer growth as they expand and reach into those areas. We haven't broken it down yet by vertical. But in the subscriber number, the nearly 2.8 million, it is a growing mix across the core employees, the extended enterprise as we call it, the volunteer workers, and the physician groups. So we think it is an encouraging trend.

What we need to get our hands on is how much that expands the opportunity by. Because the payroll of the employed population depending on whose numbers you use is between that 5 million and 6 million, but the volunteer workforce, the employed physicians, the affiliated positions extends the opportunity as does long-term care, home health, and behavioral health. So we cope during this year to help clarify more of that opportunity and how we are grabbing it. And it is safe to say each quarter we are adding a little bit in each of those areas.

Thanks, that's helpful, and one last question. My others were asked. In the competitive environment for both learning and research, any changes there?

No. I'd say the competitors -- competitive pressures continue. They are consistent and ongoing. We have seen some M&A activity in the talent management space with both SAP and Oracle acquiring key companies [Taloa] and Success Factors. So we have seen some movement in the M&A front. We don't view that as changing materially to us. It's like their shareholders changed but the product sets and who we compete with is very similar.

On the research side it is really the same core set of five or six competitors. Five or six total. Same ones we have been working against and everybody is working to find their spot in the marketplace. So it is a competitive environment in both areas.

Okay. Thanks.

Nick Halen, Sidoti & Co.

Good morning. I apologize if I missed it, but do you have any updates on the HCAHPS monitor application? And I guess where are you in terms of rolling out any additional applications more tied to your core platform?

Great question. As an HCAHPS monitor, I don't have the data in front of me. It is a free app used mostly for marketing and relationships with executives so we probably need to see how that is being downloaded. I don't have that number in front of me. But it is a free app and not expected to generate revenues.

On the platform side, we have built and demonstrated a new mobile app that is core to our platform called HealthStream Tasks. We are letting customers see it. We haven't worked out the economic model around it yet to release it. So we are letting people see it. It is developed and ready to go. We are trying to decide how it mixes in and what parts of it we may or may not charge for.

So we are well into our mobile strategies, but we are working out kind of our economic and marketing launch plans.

Okay, great. Then just lastly, in terms of renewal rates I mean obviously they are still very strong. But they were down a little bit year over year. I was wondering how we should look at that going forward and I guess what in your opinion are sustainable renewal rates?

Yes, so I don't know. We hope they will continue to be in this exceptional category. I think I have always said now for five years that a good subscription business will be 85% to 90% renewal rate. An excellent one is above that. And we have had excellent results. We feel that it is maybe more natural as competition continues that you may move in that range between 85% and 95%. We have been fortunate to stay in the 95+ category pretty firmly with only a few quarters dipping into the high 80s.

So we think that is a very sustainable range above 85% up to 100%. We have been fortunate to be at the high end and expect and hope to continue to maintain that. But I would say that good subscription models are easily maintained with rates as low as 85. That is why I put 85 and above is good and 90 and above is excellent.

And I just -- we intend to throughout the year and see no reason to believe we would dip below that excellent range that I just gave.

Great. Thank you.

Richard Close, Avondale Partners.

Just a quick follow-up. You've been updating us consistently on the basic life-support penetration. Any update that you can give us there would be great. Up to 60 million opportunity, I think you said.

Yes, fair question. We only provide an annual update on that product line. We will probably do the same this year. But it is a core part of our budget planning process and a core part of our revenues and so I think the easiest way to reflect that and kind of all this mix of expectation is that we are reiterating our strong guidance expectations of 20% to 25% organic revenue growth and 20% to 25% operating income growth.

So I think with the reiteration of guidance you can feel and sense that our major products are tracking as expected.

(Operator Instructions). Matt Hewitt, Craig-Hallum Capital.

One follow-up from me and along a similar line. The hardcode product. Is it given that you've got the two royalties to pay is it safe to assume that you had a strong Q1 for that product and that may have impacted the gross margin line to a degree?

It's a fair question, and some of the costs we identified like just our absolute commission cost because of, again, record sales order value is one area. But in the content area we don't break out by segment, but again the major products are on track. We did have a little exceptional period with the NRP exam that we have been talking about for several quarters. We did in fact see that adoption occur and it is fair to say that the product that you mentioned, the hardcode products, have a lower overall margin for us given that there are American Heart and Laerdal and HealthStream are involved in that product together.

So of our content products, that one in particular tends to have a lower gross margin for us.

All right. Thank you.

Walter Ramsley, Walrus Partners.

I have a question about the Summit conference. The SimVentures exhibit there, could you describe for us what sort of response that had? Was that a really popular affair or just normal or how did that go over?

Well, we had several different themes throughout the conference, and simulation was one of the most exciting ones. We had an incredible lineup of speakers in that area that attracted a lot of national attention. In fact, part of our Summit we believe will be covered on television soon. What, Mollie?

May 21st.

On May 21st.

The Learning Channel, the Little People, one of our guest speakers featured on television and will be at least we believe shown as participating in our Summit. The general -- the booth was well received and the product sets are generating excitement in the marketplace. The primary launch of that product that IMSH was in my view one of the best received launches at that entire convention that attracted nearly, my understanding is nearly 3,000 people. So, overall, we are really excited about where that product is in its trajectory.

So in general are the customers still trying out the technology or have they begun to really implement it full blast?

So, the first wave of adoption of technologies for simulation is around the BLS products which is a simpler form of adoption of the technology. They are called task trainers and you can clearly see that delivering results last year and into this year. The higher end simulation is part of our three and five year road map and we are building out the complete suite of products.

So, what I would say is that we expect steady and continued growth in that product. We are early in the adoption basis of that form of technology the higher-end, high-fidelity trainers. But we have the leading products and the leading partners in that area of growth in healthcare.

So I think I would characterize it as early in the three-year adoption curve and not something that is explosive on the first quarter and the second quarter after launch. But definitely, I would characterize it as the future and us having the leading products in the category.

Just one last thing. You know with that sort of uptake already has -- are there competitive companies that you are aware of that are going to come after you?

There are. In the competitive landscape would be companies like CAE and a company they acquired called METI. They have strong products and they are a good competitor. However with Laerdal as our partner, we've -- and the market share HealthStream has in the acute care facilities in the US we feel well positioned to compete with CAE METI.

Okay, Bobby. Congratulations.

Thank you.

I show no further questions in the queue and would like to turn the conference back to Mr. Robert Frist for closing remarks.

Thank you for your questions. We look forward to reporting the second quarter and congratulations again to our staff in achieving record topline revenues and operating results for the quarter. So congratulations and thank you. See you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect.