HealthStream Inc (HSTM) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HealthStream, Inc fourth quarter and full year 2012 earnings call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Mollie Condra, Associate Vice President of Investor Relations and Communications. Please go ahead.

Thank you. Good morning, and thank you for joining us today to discuss our fourth quarter and full-year 2012 results. Also in the room with me are Robert A. Frist, Jr, our CEO and Chairman of HealthStream, and Gerry Hayden, our 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 risk 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. I would like to start this morning by highlighting a few financial metrics, and then we'll cover operational performance for the Company, and then exciting new product updates. And then after Gerry's financial comments, we're going to discuss our entry into new market opportunity, the post-acute care market. And so we look for ward to discussing those topics with you in the next 20 or so minutes. From a financial highlights standpoint, we had an exciting quarter. Consolidated revenues were up 27% to $27.8 million in the fourth quarter of 2012. They were up 26% for the full year to $103.7 million. Operating income was up 12% to $3.3 million in the fourth quarter of 2012 while it increased 19% to $13.5 million for the full year.

Net income was $1.8 million in both the fourth quarter of 2012 and 2011, up about 2% over the prior year quarter. On operational performance metrics, we have just many, many numbers, most of them in our release, but I would like to highlight a few of them. We are pleased to report that over 350,000 subscribers were newly contracted to use our Enterprise Learning and Talent Management platform in 2012. This is up from last year where we added approximately 300,000 subscribers. We also turned in an exceptional and a strong fourth quarter adding approximately 125,000 contracted subscribers in that 90-day period. This number, 125,000, exceeds our longstanding quarterly goal of contracting 20,000 to 50,000 per quarter. We continue our [string] of [beats] of that targeted range of adds every quarter.

The total number of contracted subscribers is now over the 3 million marker, sitting at close to 3.1 million, and more precisely at 3,099,000 contracted subscribers. Importantly, we'll discuss our implemented subscriber number which helps drive revenue. Over 365,000 subscribers were implemented to our platform in 2012. We now have 2.937 million healthcare users implemented. And again, that's important because that's when we began revenue recognition once these healthcare professionals are implemented onto the Learning & Talent Management platform. Approximately 68,000 subscribers were implemented in the fourth quarter, and we currently have a backlog of approximately 160,000 in the queue for implementation. So we feel well positioned having already had strong selling season to have such a strong Q entering the year that essentially helps provide additional visibility into our revenue streams in the future as we implement the backlog of already sold subscribers.

We had another strong quarter of renewals with rates above the 90% level. The renewal rates for the fourth quarter were 92% based on the full-time equivalents or the subscriber number and 96% based on the contract value. Our renewal rates reflect the addition of subscribers compared to the previously contracted months combined with any pricing adjustments that may occur at the renewal. Also, importantly, the four-quarter period for the trailing four-quarter period ending December 31, 2012, customers representing 99% of subscribers that were up for renewal renewed, while our renewal rate based on contract value was 100%. And so you can see that the cumulative and four-quarter trailing averages held strong. The fourth quarter wasn't -- there weren't as many renewals up during the fourth quarter, and so the average over the four-quarter period remained very strong at 99% and 100%, respectively.

The product line updates is just many exciting things going on in product development and product launches. We've tried to launch our products with a certain cadence that allows us to get our feet grounded in service and support, and we just have a constant parade of new products. It was a very exciting year as looking back. In the first -- at the end of the first quarter last year we launched the Performance Center, and that product continues to perform well and pick up steam in the market. During the fourth quarter of 2012, we continued to expand our customer base for these two important talent management product offerings, the Performance Center and the Competency Center. Again, they're very similar products with a few differentiating characteristics that help manage the annual performance review or the ongoing maintenance of competence of hospital staff.

The rate of new contracts signed in the fourth quarter more than doubled from the prior third quarter. In addition, we exited the piloting stage at large health system and into the adoption phase after the successful -- determination of successful pilot with a large health system. So we feel even stronger about this product set, the Competency Center and the Performance Center, as we enter into '13. For the full year of 2012, we had approximately 4.3 million competency ratings entered into our system by health care professionals, which is exciting to me because, if I reflect back five and seven years ago, it feels like the early ramp periods on our learning platform, where we now complete over a million course completions every 10 days. But it feels exciting to see this product get adopted and be used in the work flow at a growing base of hospital customers.

One of the more recent new regulatory drivers that's contributing to growth, and we believe will for the next 18 to 24 months has been CMS's decision to require a transition to the ICD-10 coding. CMS announced that the deadline for this transition is in October of 2014,. And the transition to this new coding system, which affects how billing occurs, is a tremendous change for our industry, and HealthStream is well positioned to help our extensive customer base through this migration. We believe it will continue to be a steady driver for our training solutions into the foreseeable future. We partner with a company called Precise, who offers outstanding courseware for ICD-10, and we offer hospital customers an effective means of training and preparing the workforce for this change. We have -- the content libraries we offer to our partnership with Precise is appropriate for all hospital employees, including the coders, the physicians, and the clinical staff, and the non-clinical staff for orientation around this new model. And prices range from $30 to $250 per user, depending on audience.

We will be joining Precise exhibit booth at the upcoming HIMSS conference in New Orleans. And during the quarter we closed over 38 new contracts for ICD-10 in the fourth quarter. And that included several large multi-facility health systems. So very exciting product set around a high demand, a high need area to help these large -- really, all health systems through this change -- this new regulatory change, pending over the next 18 months.

We continue to see strong demand for our HeartCode product suite. This product suite is focused on teaching multiple levels of resuscitation skills to healthcare professionals, and it is offered through our partnerships with Laerdal Medical and the American Heart Association. In the fourth quarter approximately 120 facilities chose to purchase the HeartCode libraries of content. So another exciting product area for us. We feel if we reflect back many years ago when our regulatory compliance packages for OSHA began to set the standard, and now over 50% of hospitals use our compliance package for that form of regulatory training, safety training. We now see the uptake in this form, resuscitation skills, a required clinical skill for over 45% of hospital staff. It's a biannual requirement. We think we are setting a new bar there with our partners, Laerdal and American Heart Association, in how people go about training in resuscitation.

SimVentures is our collaborative arrangement with Laerdal medical. It's a virtual joint venture. And together we've developed a solution that makes adopting broader simulation-based training more accessible to healthcare professionals. HealthStream earns approximately 50% -- or earns 50% of the profits from this collaborative arrangement. Laerdal Medical is focused largely on the hardware components of this partnership, while HealthStream is focused on the software components of this solution set. And we believe that over time, and consistent quarter-to-quarter, we're seeing increasing demand for this form of training and education. We believe it's going to prove very important to the future of improving quality and reducing risk in healthcare, and for good reason. It allows healthcare professionals to practice critical life saving procedures in a safe, repeatable environment that doesn't incur risk to patients, as these procedures are practiced on the mannequins and through the software.

SimVentures continues to grow the top line delivering its second -- its seventh consecutive quarter of growth in revenue. And in the fourth quarter, HealthStream's revenue from the arrangement was up 36% over the prior year quarter to $483,000. And for me and for our team it's exciting to see emerging products growing at a faster rate than even our core products, pulling the average up for our top-line revenue growth rate for our learning and talent development solutions. The collaborative arrangement remains EBITDA positive, so it's also important as we launch a new initiative into the long-term post acute care market, that we explain to our investors and shareholders that, when we launch these ventures, we nurture them very carefully and develop them to a strong state of readiness, and in this case cash flow positive, before we launch a new initiative. In this case I will be talking for a few minutes about our long-term care and home health where we call the post acute care initiative we've just announced yesterday with our release and this morning.

The survey of business update is performing better for the full year. We had record number of surveys completed, approximately 1.6 million. It's up about 6% over 2011. The importance of the HCAHPS scores, this form of required surveying again as the regulatory driver component for healthcare providers, is that it is directly tied to CMS's value-based purchasing program where approximately 30% of the Medicare reimbursement rates will be based on the survey scores. So there is, again, the theme of a regulatory driver underneath this core HCAHPS survey business. The payment effects have already begun with patient discharges in October of 2012. So we're beginning to see the pay for performance model become a reality in healthcare as of October, 2012. And, of course, we play a critical role in supporting our customers in meeting these required HCAHPS surveying needs.

In the fourth quarter we extended that product line. HealthStream became fully certified in the CAHPS patient centered medical home as a certified survey vendor by the national committee for quality assurance, or NCQA. We're one of 22 vendors certified for 2013, and the NCQA vendor certification enables us to support medical practices and provider groups that are seeking NCQA's PCMH recognition program, the NCQA's distinction in patient experience reporting designation. Practices use the NCQA certified vendors to identify eligible patients, survey patients and report results to NCQA.

I would like to take a brief break here and turn it over to Gerry for a discussion regarding our financials, and then I will come back around and talk about the exciting new launch of our post-acute care strategies.

Thank you, Bobby, and good morning, everyone. I'll hit a few financial topics, then we'll save some time for questions at the end.

There are two compelling points about revenue performance in the fourth quarter and the full year of 2012. The 33% Learning & Talent Management growth rate for the quarter was driven largely by our core sales, which is our sales force selling the current product offerings, and some of those you hear Bobby just mention. It is also quite rewarding to report the Q4 2012 research growth rate of 11% and 2013 research revenue guidance in the 8% to 10% range. Our resource sales force in particular, along with our entire research team, deserve much credit for turning research back into a double-digit growth business for us. The results in both segments indicate how we can successfully apply our tradition of core sales growth to the post acute care market entry that we announced in yesterday's release, and Bobby will discuss in more detail here in a few minutes. And I am excited about the launch of this new growth engine for us.

At year end 2012, we remain well capitalized with a strong balance sheet. We have $93.3 million in cash and marketable securities and an untapped line of credit of $20 million. We discussed some areas where we may incur expenses to pursue investments in the earnings release. We mentioned mergers and acquisitions, joint ventures and partnerships and acquired product integration and innovation. During 2012, we estimated that our expense in these efforts was about $678,000. Two-thirds of that amount, or about $435,000, was incurred in the fourth quarter of 2012, and the math turns out to be roughly a full penny per share after tax in the quarter.

In addition to engaging outside resources for these efforts, we also started to incur expenses internally for our own human resources. Our in-house Vice President and General Counsel and Physician has been expanded to include business development, as he has extensive experience in this area having played a key role in over 15 mergers and acquisitions prior to his employment at HealthStream. Another Vice President of HealthStream recently transitioned to a new role assuming the leadership of our integration processes following acquisitions.

Strategic fit and business principles outlined in our HealthStream constitution remain primary drivers in the investment decision process for us. Among those business principles we consider are solving big problems, generating recurring revenue, developing product based solutions, and leveraging our position.

We'll be investing in the integration and enhancement of our new products and capabilities gained through acquisitions we completed during 2012. This includes our patented portfolio tool from Decision Critical and our credentialing application from Sy.Med development. We also are making a range of improvements and investments adding capabilities to our existing platforms. So for these foundations of strength, core growth, sales performance, operating cash flow and readily available capital, we have announced our post acute care market entry, the success of which we believe will build on the way HealthStream has historically performed. Our 2013 guidance reflects these themes and trends of continued strong core growth with ranges between 22% and 20% -- 22% -- pardon me, 20% and 22% over full-year 2012 results. This guidance includes what we expect from both our Decision Critical and Sy.Med acquisitions but does not assume any other additional transactions.

We expect operating income to grow between 6% and 10% which does reflect upward investments in the post-acute care market entry we discussed as well as other product development initiatives and sales force expansions. We anticipate our capital budget for 2013 will range between $9 million and $10 million, and, finally, we believe our effective tax rate will also range between 42% and 44%.

Thank you, and I'd like to turn the call back to Bobby.

Thank you, Gerry. So we're excited to kick off 2013 with over 3 million contracted subscribers to our platform, and it's also exciting for our Company to celebrate crossing over the $100 million in revenue mark. And so we have a lot to celebrate about the prior year. One of the ways that we're driving growth is by investing in our sales organization. And we thought instead of waiting for the K, we would give you a little insight into that. At the year end of 2011 we had 61 quota carrying sales reps, and by year end 2012, that number had increased to 76, which is over a 20% growth in the size of the quota carrying sales organization.

We also expect that, before the midpoint of this year, we will add an additional 10 which includes some of the newly posted positions to launch our post-acute care strategy which should be on our website as of right now. So, we're very excited to see one of our core strengths is our ability to get products into the hands of customers that help them solve big problems and generate recurring revenue for our business. We're very excited to see that constant investment and growth of what we believe is a very, very strong sales operation.

And so I want to comment a bit on the acquisition of Sy.Med. We feel that it's an important advancement to our talent management strategy. We added the innovative credentialing applications. Credentialing for us we feel is part of this talent management spectrum that will be largely overlooked by other talent management industry competitors because of its uniqueness to healthcare. The process of credentialing healthcare workers and privileging them, giving them access to provide care and facilities is a unique dimension of the human capital management side of health care. And we've decided to make our foray into that through the acquisition of Sy.Med Development. They are a leading developer of credentialing related software products.

And they serve a broad set of healthcare clients who use the application for approximately 234,000 physicians and healthcare professionals, which includes professionals from over 115 hospitals and integrated delivery networks. So we're excited to see this product continue to grow, and over time we'll be working on how that product integrates with our broader talent management strategies. And I'm pleased to tell that you the Sy.Med product sets and teams were recognized as a Gold Certified Partner for Microsoft in the fourth quarter and this marks the seventh consecutive year that Sy.Med has achieved this distinction. To earn a Microsoft Gold designation, organizations must complete a rigorous set tests to prove their level of technology expertise and demonstrate their delivery of outstanding service to clients. So, I wanted to take a moment to congratulate our Brentwood team out at the Sy.Med organization for achieving the Microsoft Gold designation.

So, now we will turn our attention to the new driver of growth. Two or so years ago we announced our virtual joint venture with Laerdal Corporation. And so we are several quarters into the growth of that growth driver. At the end of the first quarter last year we launched our Performance Center expanding our talent management platform. And we're approximately a year past that launch date, and we're seeing a doubling of the rate of sales closures just during the fourth quarter over the prior third quarter. So we feel very good about those investments. And now after much discussion with investors, beginning as far back as November of '11, when we raised fresh capital in the marketplace, we talked about launching a new tangential but highly related market opportunity, the post acute care market.

And so today is that day. We're focusing initially on long term care facilities and home health agencies, because we believe they're most correlated -- closely correlated to the accountable care needs and the way organizations are now acute care is organizing with home health and long term care to provide a new accountable care model. And so we're very excited to officially put our stake in the ground and begin the launch of this strategy with the hiring of new employees to help drive specific expertise in this area drive growth. Importantly, the market for post-acute care adds about 3 million healthcare professionals to our target audience and for our broad suite of Learning & Talent Management products. We feel we have a very complete set of products to take into that market, and we're looking forward to a warm reception from that market as we make investments in this area over the course of the year.

And you should note that we already have some customers in the space who will be organizing those customers now. It's important to communicate to them our dedication to this vertical, and the way we're going to build out this vertical is by similarly building an ecosystem of partners, both content and technology, that provides for the unique needs of that market. And so we have several exciting announcements pending in the first half of this year regarding the growth of our post acute care strategy. And so our market opportunity now we will be defining instead of the 5 million or 5.5 million, depending on whose numbers you look at, potential healthcare professionals in the acute care space, we add an additional 3 million to that number by adding on a focus to the post acute care market. Again, with an initial focus on long-term care and home health.

That brings the total target market for our portfolio of services and solutions to approximately 8 million. So with much energy and excitement, we look forward to the launch of this strategy. Again, we think it's been a thoughtful entry strategy, and we hope to find great support from our investors and shareholders as we kind of announce this third important growth strategy kicking off this year as a follow-up to a few years ago the move into simulation and last year the move into performance management. This will be our move this year into the post-acute care strategies.

I would like to take a moment and turn it over for questions from our analysts and financial community.

(Operator Instructions)

Jeff Garro, William Blair & Company.

Good morning, guys. Congratulations on a nice quarter.

Thank you.

I want to start off with a few questions on the post-acute care space and that launch. So first I just want to see -- it looks like not much hiring been done yet, but maybe some of your current staff has been shifted over. I wanted to check on the early progress there.

Yes, we do plan -- we've identified an internal sales leader to help with that; and, of course, the senior executive team has been in the planning process. We've been organizing our databases to know which accounts in our current base reflect this strategy. So, I would say a little bit of traction has been made there, and we feel like we have a very good road map of partners and products and some account acquisitions lined up for the first half of this year. So we hope to have some exciting announcements here before the midpoint of the year.

Good to hear.

More financially oriented -- when do you think during the year that will you hit a full run rate of expenses for this launch?

Yes, that's reflected in our guidance, but it's a fair question. I don't know if we've really provided that information by quarter. And one of our challenges in the past has been hiring. As you can see from our website -- we try to direct everybody there -- we have quite a few open positions in all areas, including sales and now this market. So I don't know; we like to do things well, and you can see some leadership positions posted for this vertical, so we plan to take our time.

It certainly won't be in the first half of the year. It would be in the second half of the year, maybe towards the end of the third quarter, as we increase our hiring plans and our launch strategies. And remember, our plans include some increased marketing budgets to get out with this message and bring on new partners. So I hope that helps directionally. We haven't really quarterized that part of our guidance, though.

No, that's very helpful color.

I do just want to check -- the internal launch of the post-acute strategy -- is that going to be mutually exclusive with any M&A activity you might have previously considered in that space?

No, not necessarily. As we've noted, in this release you can see a considerable shift of resources towards those efforts, which I would include in this area. There could be unique technologies or platforms or partnerships that could turn into joint ventures or investments.

And so, no, it will not be mutually exclusive. It might be supplemental over time. We'll take our time and process those opportunities, but I would not exclude opportunities in that space just because we've launched an organic strategy. We might find really good complements on how to help that vertical grow as well.

Great. That's helpful.

Just a couple more on the post-acute care space. You mentioned it in the release, and I think you also said on the call that you are looking to build that content ecosystem for post-acute. But I wanted to dig in to see how much of your current HLC content is transferable, and how much more incremental content needs to be built up or aggregated through new partners.

Right. So the core regulatory library -- we have a base library that we've maintained over time. It needs more development and investment in the regulatory safety library. So we have a long-term care library. It's very basic. It needs to be enhanced and improved, but that's a good starting point.

We'll need to strike out and build relationships with the associations specific to that area. And as we've done in the acute-care space, as we on-board partners some of our early customers we hope turn into strategic partners that help with the publishing of field-specific or topically specific content. And so that's always been a way that we help build the acute-care space. We hope to see some of that in the post-acute and long-term care space.

Great. And my last one -- and I know it's rather early for this, but -- any initial thoughts on how pricing will play out in the post-acute market versus your core acute-care space?

Yes, it's interesting. From our study of it, we believe that some of the competition in that space, the price points are actually higher than our acute care, and that our platform is more complete from a standpoint of features and capability. So we believe we might have some room to have at least an equal if not slightly higher price point and still be below some of the smaller competitors in the space. They're larger in that space but smaller overall.

And so we think we have a really good mix here to help us enter the market where we have a more complete technology platform and we can enter the market with a lower price to competitors but potentially a higher price than our acute-care market space.

Great to hear. Thanks for taking the questions, guys.

Matt Hewitt, Craig-Hallum Capital.

Good morning. Thanks for taking our questions, and we wish you success as move into this new market.

Thank you.

I guess a couple of questions on the new opportunity and then a couple of other items. First, will you be using the core HLC platform as you move into the post-acute care market? Or is it -- are you going to be launching a whole new platform?

Well, thanks for helping me clarify that, Matt. That's important.

Of course, it will leverage our core platform and technology that we've put quite a lot of time into building. They're highly scalable and we believe extensible to this market. In some areas, like reporting, we'll need to customize some of the data output to make sure we meet the unique needs in this market space, but the core platform, and even the competency and performance areas where we've been building out some competency dictionaries to support this vertical, we think are very leverageable into the space.

So most all of the core technologies we think -- we know -- will be utilized and leveraged in this launch.

That's great to hear, that you are not starting from scratch there.

Secondly, you have been at the break out I think the overall market opportunity, 5 million employees in the acute care, 3 million in the post-acute care market. I know that you do already have customers in the post-acute care market. Going forward, will you provide traction split up between those two markets? So the way that you've done already for the HLC as far as the number of contracted and fully implemented customers -- will you do the same thing for this new market going forward?

Yes, we will, and we're going to -- it's going to take us a quarter or two to get our heels down and get our initial starting point, but I think that's a fun way to start. When you start -- you kind of start with a base and you build it up and show what you can do. It will be harder to have the same steady stream of growth initially in the first 12 months, like any new product launch. But we'll ask for a little bit of forgiveness in advance. But, yes, we do plan to report and segment some of the data here so you can get some good visibility into our progress in these areas.

That will be great, and we look forward to that. I guess a couple of more questions, then I will jump back in the queue.

Gross margin ticked up here in the fourth quarter. Obviously, that's good to see. Do you anticipate that, as you are adding more and more of these platforms, getting into new markets, that we could see that tick up over time? Or is it going to kind of be steady state, 58% to 60% gross margin going forward?

I think we see more of a steady state in that, even though we see growth in all areas, the content growth has been fantastic, with new drivers like the ICD-10 and the Laerdal products, the product sets, the HeartCode product sets. But, excitingly, in the fourth quarter -- and much of this isn't implemented yet -- but we see a doubling of the rate of selling our Competency and Performance Centers. And so, again, we haven't given specific numbers there, but I think we just said in the third quarter we did at least one new facility a week during the third quarter; and I think we've just announced that it more than doubled in the fourth quarter. So that is a higher gross margin revenue as we get to implementing those customers.

The implementation cycles on the Performance Center and the Competency Center are a little longer than our highly refined implementation process for the Learning Center, but again, that's in front of us. The revenue streams for that, which are higher and owned and self-developed products that have higher gross margins, are in front of us. So we right now are predicting the blend of those things creates a fairly steady state in the gross margins, although it's just a relative dynamic between the growth in content sales and the growth in platform sales.

Okay. Maybe one more from me, then I will jump back in the queue.

As you mentioned, this moving into the post-acute care market is something that you have been talking about for a while now. Was there something that prompted the move in 2013, either from just a general comfort level with the market, given your relationship with Corridor Group and some of the other opportunities that you the have had to work your way into the market? Or was there something from a competitive dynamic? What prompted the move here in 2013?

No, I think it's just more Management's approach and timing to launching new investments and announcing them. We've tried to sequence things and make sure we have our feet on the ground with prior announcements. And that's been our history, as I've tried to articulate two or three of those sequentially, with the first one being the SimVentures, which is cash flow positive, and growing quarter to quarter.

The second being the Performance Center. You can see finally in the fourth quarter a meaningful uptake of that product in the rate of its uptake; and we get comfort with the implementation and visibility into its growth. And so the time seemed right for us through our plan -- we always also mention that fourth quarter is our planning season. And so we go through with our greater executive team and Board the process of deciding when to announce new initiatives.

We've tried to give several quarters of indications and warnings about increased investments and getting the market ready to understand that this was -- deploying all this capital we've raised is just as much a challenge as building and launching new products. And we think it's the right time now to launch this new market.

So it's more of a cadence and a timing against other strategic initiatives than anything in the market that presented itself.

Great. Thank you. I will jump back in the queue.

Vincent Colicchio, Noble Financial.

Yes, Bobby -- you continue to grow rapidly with the HLC and the hospital market. You're entering a new market here. Do you need to adjust your quarterly growth goal for the HLC, given market expansion and recent results?

You mean the 20,000 to 50,000 subscriber goal?

Yes.

I think I'm going to leave -- I mean, we've been exceeding that now for so long, it might need adjustment, although I've always felt that, that is a good solid rate to communicate. And, of course, we've been exceeding it.

I think for now I'm going stand by that rate. Clearly the floor of that -- we haven't had that experience of 20,000 or below in a long time. So we hope not to see that number. So maybe we can chop the bottom off just a little bit. But I think I'm going to give us a couple of quarters. As you can see, we've just begun the hiring processes and the acute -- the post-acute launch, and before we put any new numbers up and promises, I think I want to get our feet on the ground a little bit longer. And then we will consider it.

But right now I'm going to stick by that 50,000 target.

And on the ICD-10 side -- as you know, many physicians continue to lobby for another delay. Is your ICD-10-related business large enough that, if there was another delay, that, that would have a meaningful impact on your business?

Maybe restate that. So you mean the ICD-10 migration dates?

Yes. If there's another delay in the implementation date, would that have a negative impact on your business?

Yes, I think it's such a growing area that it probably would. However, I would say that a lot of our bigger customers are making commitments now; they don't want to be caught behind the curve, and they see it coming. And so we had an incredibly strong fourth quarter in that particular product set, and those are signed and executed contracts. So we have quite a lot of visibility now into the, at least the 2013 growth as already represented by executed contracts, and largely in the fourth quarter, believe it or not. It was a very strong fourth quarter.

So maybe if there was some delay announcements, it would start to affect the fourth quarter and the first quarter of the next year. But a lot of the growth for this year is already under contract.

Okay. My other questions were asked. Thanks, Bobby.

Frank Sparacino, First Analysis.

Bobby or Gerry -- just following up on the ICD-10 question, is there any way you guys can sort of (technical difficulty) the impact that it's having today, if you just look at a particular contract in terms of how much of the ICD content people are subscribing (technical difficulty) in terms of the reach as well? I'm just trying to get a (technical difficulty). It's not only a gradual progression for you guys, in terms of the (technical difficulty) [ball] market but a gradual progression within terms of the (technical difficulty) the healthcare organizations.

Just a couple of things about that. First, we feel we have a fantastic partner in Precise. They have incredibly high quality products. They've designed their product sets to help educate the entire workforce.

Of course, a focus on the coders, but everyone needs awareness of these changes. They're so material to the revenue recognition of the hospitals that officers, everyone, needs orientation. So the first thing is, the libraries that we're reselling are, we believe, the most comprehensive available in the industry, built by Precise. We've been meeting with their CEO and President to talk about how to make these products more about maintaining competence of the work force over time -- even post the deadline.

So the second comment is that we're seeing -- we had, as I mentioned, an incredibly strong fourth quarter, and most of these contracts are one- or two-year-long contracts for people that are getting ready for this deployment. And a lot of that is already in place. And so our concerns around this product, of course, will begin in October of '14, or if the date moves, because this does have the effect of -- this hard deadline has the effect of a bolus effect. And replacing that revenue in two years from now will be already a focus of discussion of our management team, because we're seeing such success in the traction of it.

So, what I would say, Frank, is we're seeing broad based adoption. The reality of the deadline has hit all of our large system clients, and they're beginning to make investments to be ready. And we think we have great visibility into the next, minimally 12, but potentially 18 months of growth in this product set.

Already shifting our concerns to the 20th month on, on how to sustain. And in regards to that, we do believe there's a sustainment play of competence that the end of the migration date, or the hard deadline, is just the beginning of the problems. We still have to have a certified or a credentialed workforce in this area, and it is going to take more than 18 months to get everyone comfortable with this new system.

So I hope that's enough color and commentary to help. We're really excited about the opportunity. We think it will carry us for another 20 months or so as a growth driver for our Company.

Thank you, Bobby.

Terry Lally, Spotlight Funds.

Can you be more specific on the post-acute care market entry impact on 2013 guidance?

Well, we have a lot of pieces, as you may have seen in our guidance, that we think affect the overall guidance, and so we haven't broken out in great detail. The one thing we have done is, as of this morning, posted four or five brand-new positions of leadership and sales and marketing and market development for that market. So one way to think of it is to try to estimate an average cost per employee and the time to hire those employees.

But other than that, which we think is fairly specific guidance about the personnel investments, which, as you know is a meaningful part of our overall cost of running our business, we haven't broken out any -- we've also called out our investments in trying to organize a team of people in our Company to deploy our capital through M&A, joint ventures, and investments and product development. And so we've tried to break out those two areas and give some specificity, so I don't have anything more to add to the impact of that.

But I would point you specifically to watch the hiring on our website. It will be very reflective of our investment in the acute care space.

So that we can forecast the hiring investment in personnel, that sounds like it would be more of a first half drag -- time to get the sales people up, ramped, building the pipeline. Sounds like it is going to be a second half, probably the back half of the year before it translates into revenues. What about revenues in this area? It sounds like you have a few customers that are ready to be in the launch period, but what's included in the revenue guidance from post-acute care?

I would say really minimal expectations. As we get towards the fourth quarter, we hope, like every new launch, to have some impact. But you also point out, correctly, I think, and characterize correctly the sequencing. Beginning in the third and fourth quarter we'd also have expenses like the marketing expenses as we get the people hired and begin to launch our efforts and go to specific trade shows and things like that. So I think you've really done a nice job characterizing it.

And I would view this first year as the launch year, and the year of investment. Those investments will probably continue on, because obviously you can't run a whole group with just the five hires we've posted today. And so if we see the IRR coming in on those initial sales positions, what we've done in our acute-care space, as you can tell from the numbers I gave you, we've added to the sales teams as quickly as we can essentially cash flow them.

And some of the shortest term investments that cash flow get in IRR are sales personnel, compared to JVs which can take two years, and acquisitions can take two years. Organic launches tend to take longer, as in this one to get your IRR, but they certainly are organic and ultimately have the highest return for shareholders. This will be a longer process for us, but we like to go ahead and put our commitment there. I think you've done a great job characterizing the launch plan and the cost associated with it.

So if it's only a -- if it's a handful of positions, you're in the building pilot period here -- the overall guidance, the 6% and 10% operating income growth on 20% to 20% revenue growth -- we're not getting the operating leverage this year where we had in the past. What's causing that? Is it the other acquisitions, or other investments? Historically we've seen operating leverage in the business greater than revenue growth, and it significantly lags next year.

One of our challenges, of course, is that we have all this capital, and literally dozens of ideas and launches and products to build. And, of course, investments in building those are in personnel or development teams, are expenses that are incurred largely in the year that you incur them. So one of our perpetual challenges is deploying the capital into these initiatives here that's very focused on long-term care, and getting that capital in place where it has higher IRR than the cash that's sitting there, the $93 million, but balancing that against operating income leverage and growth.

And so this year, it's probably fair to characterize that we're actually targeting 10% operating income growth, or 6% to 10%. Not that, that's the best that we can do, but that we're trying to flow available investment dollars back into this capital allocation and expense strategy we've just talked about, which includes M&A expenses. So in order to complete M&A, we have now real people dedicated to that process full-time with the challenge of deploying the capital into effective M&A strategy, and shifting staff into that has an increased cost, which is a bit de-leveraging. But, ultimately, I expect that team to be successful in deploying that $93 million in cash into higher IRR projects. So that's one example.

Of course, the other we mentioned is the sales force growth. They typically have a 9- to 12-month time to get up to speed and up to quota. And you can see from our '11 to '12 growth, 61 to 74 or 76, that we just consistently add to the sales organization, which, again is a bit, in the short term, de-leveraging of operating income. But certainly we're excited about where that puts us 12 to 24 months out. So in a lot of cases we're asking the market and our investors and shareholders to understand that there will be costs to deploying the $93 million, but I think we have a good, long track record of deploying into higher IRR projects, and we're trying to get as much clarity about our cadence to those investments as we can.

So it seems like the 150-basis point margin degradation is primarily attributable to the sales force post-acute and M&A expenses.

No, I think the gross margins are more reflective of the product mix of what's sold, and so it's a relative race between, when we sell content, they have lower gross margins, and when we sell platform it has higher gross margins. Our blended gross margin reflects a relative growth rate of those two items. So content has been performing very strong at lower gross margins. I think our gross margin lines are most affected by the mix of products.

No, I was going to operating margin, because it looks like in facing your guidance that operating margin will decline about 150 basis points next year.

I think there sales force growth, new market launch, marketing -- think of marketing expenses in the third quarter for launching this market -- going to more trade shows; so you will have the traditional investments that run parallel to launching the new market.

Okay, thank you.

Matt Hewett, Craig-Hallum.

Thanks for taking a couple of follow-up questions.

First, the research business has stabilized nicely here. Particularly the other surveys -- the physician, employee, and community-based surveys were up 4% in the fourth quarter. Do you think that we've crawled out of the difficulties and the challenges that, that market has seen, where we could see that slow growth continue? Or is that going to continue to be lumpy?

Well, I think you can see from our forecast, it hasn't surged up to a 20% growth opportunity yet, but we like seeing that we're targeting the double-digit growth. We're seeing a lot of exciting developments. The post-acute strategy, for example, supports our research business, because the HHCAPS, which is the CAHPS requirement for home health providers, can be sold in parallel to this strategy. So we see some leverage opportunity from the HHCAPS survey capabilities we now have aligning with our post-acute strategy launch. And so we see some new drivers in there that we're excited about and continue to invest in the product set to expand them. And so we're working our hardest to get that back on a growth trajectory.

By its nature, though, components of the research business are lumpier, as you've said. The employee surveying business can be seasonal and customers can change their commitment to the frequency of that kind of surveying, which can affect the revenue model there and be lumpy. But we continue to have a lot of belief in the growth opportunities in that area, and excited about things like the HHCAPS surveys aligning with our post-acute strategy launch.

Thank you. Secondly, contribution from Sy.Med and Decision Critical in FY '12 -- even if it's just a ballpark on a percentage of revenues?

Matt, it's Gerry.

I would say that they're both performing very well to our expectations, but the impact on the year has not been quite that big. They're just much smaller compared to the overall core business.

Because of that deferred revenue? You want to comment on that?

We can talk about that, too. First of all, the overall size of the business is quite a bit smaller than the core business, but also we had the discussion about, in the press release, about the deferred revenue accounting at the time of acquisition. And so what that is, to keep it relatively simple, we have to write down or discount the beginning balance of deferred revenue, which means the revenue we have recognized post-acquisition is not quite the same as it was beforehand for accounting purposes. And so that has an impact on the -- let's call it the accounting contribution for both DCI and Sy.Med in the course of 2012.

But they are relatively small compared to the overall business right now. They will grow, but relative size is different.

Okay. I was just trying to back into maybe an organic growth rate. Obviously, last year was a great year, but I was trying to think, was it a couple million dollars of your growth was from these acquisitions? Or is it even smaller than that?

Yes, I think I have to go back to my comments -- the vast preponderance of the growth in '12 is core growth.

Okay. That's good to hear.

And then lastly from me -- as you move into a new market, obviously it's been a challenging market, I think, to find qualified top-notch employees, whether it's in the sales and marketing side or the R&D side, new engineers -- what have you. As you move into a new market, what are your expectations about finding the right people for HealthStream?

I think the market development expertise and people with knowledge of that industry and the sales teams will be somewhat easier to find than, for example, the challenges we've talked about in hiring our technology teams here in Nashville -- the actual programmers and developers. So that remains a consistent challenge in front of the Company, and probably one of the variables that can increase, or that could give us out-performance to our guidance would be essentially the inability to hire at the rate we want to hire.

And so we really are working hard to hire at the rate we've planned so we can get the staff in here. But I would say the hiring associated with the vertical launch will be considerably easier, and we expect to be able to fulfill those positions in a timely manner than the types of hiring related to our technology development platform, for example.

So I hope that helps.

Oh, it does. And it's glad -- I'm glad to hear that you will find that a little bit easier. I know that the whole industry appears to be struggling, especially on that development side, finding qualified employees to bring into the mix. So I'm glad to hear that. Thank you.

Nashville is a very strong city from the operator side of healthcare, and so the provider side and the post-acute side and the -- we have very strong organizations here that have deep, deep talent pools, and we don't need 200 people. We need here, we've identified four or five key players. So Nashville is a very rich community and deep in knowledge in how these markets work. So we feel comfortable finding excited and energetic expertise in the launch of this market.

Very good. Thank you.

(Operator Instructions)

I'm showing no further questions at this time. I would like to turn the conference back to Mr. Robert A. Frist for any closing remarks.

Thank you. Well, we're excited to have the announcements we've done today. We're proud of our teams and organizations, and I look forward to reporting our first quarter here in the near future. Thank you for attending our conference call.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.