HealthStream Inc (HSTM) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your HealthStream first-quarter 2013 earnings conference 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)

I would now like to turn the conference over to Ms. Mollie Condra, Associate Vice President, Investor Relations and Communications. Ma'am, you may begin.

Thank you and good morning. Thank you for joining us today discuss our first-quarter 2013 results. Also in the room with me are Robert A. Frist, Jr., CEO and Chairman of HealthStream, and Gerry Hayden, Senior Vice President and CFO.

I would also like to remind you 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 now turn the call over to our CEO, Robert Frist.

Thank you, Mollie. We have so many business updates and financial updates, we'll just jump right in. The first quarter on financial metrics were -- many or most of those metrics were quite strong.

Consolidated revenues were up 25% to $29.5 million. Operating income was up 36% to $3.2 million and net income was up 37% to $1.9 million. Our measure adjusted EBITDA was up 30% to $5.4 million.

All of those when compared to the first quarter of 2012. So the first quarter of 2013 delivered strong core financial operating metrics.

You saw in our earnings release in addition we introduced a new metric this quarter, and one that most of our analysts had been estimating on their own for quite some time, so we are excited to introduce the new metric, annualized revenue per implemented subscriber.

I think everyone knows that once we implement subscribers that is when we begin revenue recognition. So we think this is a good metric to watch as we have surpassed the 3 million subscriber market and we are seeing an increased emphasis inside of our company of growing revenue per subscriber through our product and solution mix.

This new metric represents the quarter's revenue from Internet-based subscription products divided by the average implemented subscribers for that quarter annualized. The purposes of introducing this new metric; we provided revenue per implemented subscriber for the first quarter of 2013 along with the previous seven quarters.

In the first quarter of 2013, our revenue per implemented subscriber was $28.47, which was 14% higher over the first quarter of 2012. From the second quarter of 2011 to the first quarter of 2013 we've seen a steady upward trajectory in this measurement, and that is indicative of our increased focus on providing more solutions on a per customer, per subscriber basis.

The core operating metrics for the Company also indicate a strength. Overall, we implemented 95,000 subscribers in the first quarter, bringing our total to 3.032 million implemented subscribers.

The implementation rates for the quarter were obviously strong. We contracted a 68,000 additional net new subscribers; that's net of any loss, attrition, or nonrenewal. So we contracted an additional 68,000 net new subscribers -- obviously, the contracted number was slightly higher than that -- bringing our total to 3.167 million contracted subscribers.

Also, importantly, we have a contracted backlog of unimplemented subscribers of 135,000 that are in the process of implementation. And you can see from the implementation metrics, implementing 95,000 subscribers is also incredibly strong, even compared to our history. So our implementation teams are doing a great job of bringing customers live.

Renewal rates for the first quarter of 2013 were 91% based on FTEs and 87% based on contract value, and our renewal rates reflect the addition of subscribers compared to previously contracted amounts combined with any pricing adjustments that may occur at renewal. To increase the adoption of our solutions across the marketplace, we concluded last quarter by talking about adding to our -- overall to our sales team and at year-end 2012 we had 76 quota-carrying sales reps.

In the first quarter we have hired eight more, which brings our total to 84, and we have an active pipeline of additional adds that you can reference in our website. You can see there are still many more to be added across the various product and service lines.

So we think we are getting good execution on bringing in and strengthening the sales organization early in the year, which is, in our view, the way to do that. You want to add those sales personnel early in the year and bring them up on the product so they can have a bigger impact later in the year.

We want to spend a few minutes talking about some core solutions that are performing well and a contributor to this growth in revenue per subscriber. During the first quarter of 2013 we continued to expand the customer base for two of our core talent management solutions. The first is HealthStream Performance Center and HealthStream Competency Center.

Remembering these products are very similar to each other, but they do have defining characteristics and traits that differentiate them. The Performance Center we launched approximately 12 months ago and that product is used to take the paperwork out of the annual performance review. So the product has proven very useful to hospitals as they try to automate processes and eliminate paper from their annual performance review process.

Both of these products together kind of a really strong combination because the process of evaluating clinical competency is often part of the performance review process. So these products can be used independent of one another or alongside of each other, or in some cases one instead of the other.

The great thing is these two products can be sold through two primary entryways into the hospital -- to the Chief Nursing Officer interested in assessing the clinical competency of their staff, which there are definite requirements around documenting competencies, and/or to the HR executive who is very interested in automating and eliminating the paperwork from review processes that are tied to annual raises and other performance reviews. So these two products together continue to perform well, maintaining the momentum of the prior quarter; bringing on an additional two new hospital contracts per week throughout the quarter.

So we are very pleased to see the continued uptake of the HealthStream Performance Center and the HealthStream Competency Center.

The utilization rates, we have some measures of utilization, and just like the early days of the HealthStream learning center, the Competency and Performance Center have indications of use that are not necessarily tied to revenue but show that -- hopefully they show satisfied customers that are beginning to show uptake in consumption and utilization of the platforms.

In the first quarter this year the number of performance reviews completed on our platform grew 88% over the prior year quarter, so we are beginning to see meaningful uptake and utilization of the product from within the hospitals that have purchased them up to a year ago. And the competency ratings themselves, which are elements of the review, grew 70% in the same time period. So as measures of indication of utilization and acceptance of the product, we are proud of these really strong utilization growth metrics. So it has been rewarding to see the customers' feedback is early and positive and showing good utilization of these products.

Also in the quarter, our research business performed well, particularly in the patient insight surveys. This is an area that is important overall to the research business, giving insights into the patient engagement with the hospital.

We saw our patient surveys increase 13% over the first quarter of 2012 and over half the new contracts were for the new CG-CAHPS survey, or Clinicians and Groups Consumer Assessment of Health Provider Survey. It's a mouthful, but it is an important new survey category that is growing.

With the increasing number of newly-formed patient-centered medical homes and accountable care organizations, the need for measuring the patient experiences of care received in the physician and clinical group offices is growing. And we anticipate continued growth of our CG-CAHPS products due to these trends.

Also in the research business, we see increasing interest in using the e-mail methodology for the non-CAHPS-mandated patient surveys, and so this is a service that we are providing at HealthStream. Over time, this service has a lower revenue per complete associated with it but a higher margin per complete associated with it. So it's kind of an important methodology and modality for continued growth in the research business, particularly in the area of the non-CAHPS-mandated patient surveys.

So moving on to the solution sets that are driving the revenue growth per subscriber, I want to cover two areas that provide an update. First is in our resuscitation product set, solution set.

The resuscitation products are branded with the HeartCode brand. They are developed and delivered to the market in partnership with Laerdal Medical and American Heart Association. So the premier brands here have organized a revolutionary model for training and delivering that model in a way that is more cost effective and improves clinical outcomes in resuscitation.

So we think we have the very best partners, the very best products, and we plan to be number one in helping hospitals develop their workforce in a way that ensures a competent workforce in resuscitation, a very important area of reducing risk in a hospital.

It was exciting to see in the first quarter an over 30% growth over the prior-year quarter in the actual revenues delivered from that product set. When we look at the operational metrics as well, the utilization of the products once they are in place, we have measures of completions and utilization of the product.

In the first quarter 2013, for example, the HeartCode BLS Part 1 completions grew 46% and the Part 1 section of the HeartCode BLS, that's the online portion of the program, and we see similar growth rates for the HeartCode ACLS and PALS programs. And so all-in-all we are seeing a great increase in consumption and utilization of these important resuscitation solution products.

Another area we have identified as what I will call a medium driver for growth are our products and solutions that are focused on getting the workforce ready for the migration to the new ICD-10 coding system. In this area we have partnered with the market leader in having the very best and most complete library of training content, that's Precyse. Together we are delivering through Precyse University and through the HealthStream platform really the premier product set for engaging the workforce, preparing them for this important migration that the deadline is in October of 2014.

So we believe this regulatory deadline in October of 2014 will continue to be a steady driver for our training solutions for this new coding/training offering. Again, Precyse has been an incredibly strong partner in our go-to-market strategy.

Importantly, the content that's provided through this solution set is really targeting the full range of needs including the coders, the physicians, the clinical staff, the non-clinical staff. And we've got bundles that are appropriate for these different target audiences that range in price from $30 to $250 per user. So you can see here when a hospital adopts this program on an enterprise-wide basis it helps boost the revenue per subscriber across our network.

In fact, we've been doing a really great job of getting this market-leading product into the market. In fact, in the first quarter over 18 new customer agreements in excess of $100,000 were signed, which tells a few things. One, that generally these solutions are adopted on an enterprise basis. Not just for the coding department or a limited subset of the employees, but really to create enterprise awareness of the ICD-10 migration.

And so we were proud to see the delivery of over 18 -- there are dozens and dozens and dozens of contracts signed, but over 18 of them delivered in excess of $100,000 in order value.

I'd like to take a moment here to reflect on the financial performance in more detail and turn it over to Gerry Hayden, our CFO.

Great. Thank you, Bobby. Good morning, everyone.

Once again, we had a strong quarter. Consolidated revenues were up 25% over last year and operating income increased by 36%. Net income grew by 37% and earnings per share increased from $0.05 to $0.07. Adjusted EBITDA was up 30% to $5.4 million.

So while investing remains a theme for 2013, we are investing from a position of strength. Our revenue growth rates and the underlying dynamics are key indicators of our progress and momentum.

Both business segments supported our overall revenue growth rate at 25%. It's important to reinforce that learning and talent management, the 30% growth rate, remains driven largely by core growth. And the adoption of the CG-CAHPS surveys that Bobby just mentioned propelled research to double-digit growth rates over last year's first quarter.

Furthermore, our two acquisitions from 2012 continue to perform well. Each transaction had a slight incremental impact on this year's first quarter because DCI closed at the end of 2012 second quarter, while Sy.Med closed in the middle of the fourth quarter of 2012.

Results of our new metric are considered with the trend of our reported financial results. It has grown by about 15% year over year and successfully broadened and deepened customer product adoption within our talent ecosystem. Also, we are expanding our subscriber count at double-digit growth rates. So, for example, year over year our growth in subscribers is 14%, so consequently both units in terms of subscribers and revenue per unit increases are indicative of the high quality core growth.

As we look at profitably in the quarter, we need to assess the impact of Summit timing on comparative results. Specifically, when the $520,000 of Q1 2012 Summit costs are added back for comparison purposes and then measured against 2013 operating income, you adjust the year-over-year growth rate 11% versus 36% as indicated by the reported results. As you will recall from our initial guidance for 2013, which we affirmed in our release yesterday, operating income was due to grow between 6% and 10% over 2012.

Although (inaudible) our investment theme throughout 2013, our first-quarter results do show some indications of our efforts over the past year. For example, product development as a percent of revenue was 8.8% in the first quarter of 2013 versus 7.9% in the same period last year.

We continue to review and evaluate actions of business development opportunities and our balance sheet remains well-positioned to meet these opportunities. Our cash balances as of March 31, 2013, were $95.6 million, up from $91.6 million at March 31, 2012. So while we aggressively seek out these opportunities, we do retain our discipline in terms of strategic fit and valuation, and look forward to discussing our M&A progress as we close deals in the future.

Finally, as you saw in our press release yesterday, we affirmed our original 2013 guidance. We anticipate consolidated revenues to grow between 20% and 22% in 2013 over 2012 and the growth rate in learning and talent to be between 24% and 26% over last year, while research we expect to grow between 8% and 10%. We expect that 2013 full-year operating income will be approximately 6% to 10% over full year 2012, capital expenditures will be between $11 million and $12 million, and our effective tax rate to range between 42% and 44%.

Thank you for your time. I'll turn the call back to Bobby.

Great, just a few more updates for everyone. In the first quarter of this year, Sim ventures were up over the prior-year quarter, but they were down slightly sequentially. We had orders for our new SimView products, which began shipping in April. We had hoped would begin shipping before that date, so we had a little delay in the next generation SimView products that affected revenue in the quarter. So they were down slightly sequentially, but up over the prior-year quarter.

In April, we began fulfillment of the new SimView products, so we are expecting a strong record and strong second quarter for SIM ventures as we enter the second quarter and through April.

We also announced about 60 days ago in our year-end release that we were beginning to tune our work force and our product sets to pursue the post-acute care market. And so we made that announcement about 60 days ago.

We have a few announcements. We have begun -� initially on that day that we announced it we posted four positions on our website. We have filled three of those four positions, so we are getting the initial team together to begin that, but again that whole initiative will play itself out over the course of this year. We would expect more impact from these initiatives next year.

But we are beginning to assemble a team and have a deliberate entry strategy into that market which we have estimated at market opportunity of another several million subscribers over the base opportunity in the acute care market.

We continue to study the applicability of our core product sets to that market and believe that they are all applicable. We think we have a very good and thoughtful strategy to enter into the post-acute care market. Again, making some core steps this quarter in the last 60 days to advance that effort.

We look forward to providing updates even throughout next quarter. Announcements; we are working hard on new partnerships and initial customer acquisitions, so we will be excited to announce things over the next 60 to 90 days related to our efforts in the post-acute care market.

As we close the conference call, I would like to take a moment to acknowledge the outstanding performance of our Boston-area hospital customers, which we remain in communication with throughout the extraordinary situation that began last week with the marathon bombings. We're just so appreciative of the excellent work done by the individuals on the front lines, and several of our hospital customers in the area were recipients of patients from that tragedy.

We know they did an outstanding job and all that could be expected of anyone to manage and take care of that situation and take care of the people that were injured and the support around for their families. So, like everyone, we felt the repercussions of that incident across the country and happened, because of our customers, to be more directly affected through our relationships with those organizations and watched their performance throughout that very challenging week.

I would like to remind everyone that our annual shareholder meeting is scheduled for Thursday, May 30, at 2 PM. And that will be held at our corporate office here in Nashville. We would love to have shoulders attend and participate in that meeting. Again, here at our headquarters in Nashville, Tennessee, May 30, at 2 PM Central Time.

At this time, I would like to turn the questions over -- back to the operator to receive questions.

(Operator Instructions) [Jeff Guerra], William Blair.

Congrats on the nice quarter and thanks for taking the questions. My first question is on renewal rates.

We've seen that renewal rates have been trending down a little bit the last few quarters, so I wanted to ask what the reasons are for that. Maybe it's a small number of customers have been up for renewal, or provider consolidation, or maybe something from bundling more components of your platform over the last nine months. So would just like to dig into those numbers little bit more.

Sure, so the renewal rates both hovering right around 90% we think our strong renewal rates for our subscription business model. We also show that the contracted net new subscribers, even net of loss, were 68,000, so overall we feel pretty good about the renewal rates.

They are slightly lower than our historical averages and I would attribute that to many things. One, our success has attracted competition and the landscape is definitely more competitive. Dozens of competitors are beginning to offer talent solutions into the market, and we expect to see more and more from that while we strengthen our product sets and our relationships.

That said, you also did point out a few things that are true about the renewal rate, particularly this quarter. One is that it was a lower-than-typical quarter for the number of subscribers in the denominator, so it was a more sensitive number. About 170,000 were up for renewal and we renewed about 150,000 in the quarter, so you can see again a really strong, 90%, 91% performance.

But the denominator against the 3 million was fairly low. We see some bigger renewals up later in the year that we, at this moment, have a lot of confidence in, so the denominator will be bigger. It will be a less sensitive measure.

When we did look in a little more detail into Q1 we saw some interesting things. For instance, we did lose one customer to a divestiture, so one of our hospital systems divested a hospital and when they divest it goes to somewhere else not on our platform. A lot of times since our market share we divest from one of our customers to another, but in this case it divested out and they were on another platform. So we lost it.

We also lost one for non-payment. So we had one meaningful customer that could not or was so far behind in paying their bills or could not pay them that we had to turn off the system. We are not sure where that will end up in the long run, but we did lose one to non-payment.

And we lost a few to competition. When customers are up for renewal they may be looking for different features than we offer. We stay focused on our core sets in both talent and learning and our core solutions, and that doesn't always meet everyone's needs.

So, hopefully, that's a good enough explanation of the attribute of the market, the competitive landscape, and our strengths and the position in that to address the renewal rates.

That is very helpful. You did mention in competition a little bit more than maybe we have heard in the past there and customers looking for different features. Is there anything that you would point to that is something you see missing from your platform that you want to develop, or do you think your strategy is ultimately superior going forward? Is there kind of -- is there anything that's driving change in your go-to-market strategy?

Well, we are focused on building the tool sets out to facilitate these core solution sets, like improving resuscitation outcomes, improving the on-boarding process. There are other elements in other platforms that are focused more on some of the pure HR functionality. We think, ultimately, that our solutions are more important because they solve specific problems in healthcare and not just generic HR toolkits.

That said, there are other solution sets that have capabilities that we don't currently manage that are HR functionality, some of which we have an eye to building and some of which we will never build, and we will stay best-in-class. So I think some of the doorways we enter it through, like in HR, we will see more people competing. Others, like the C&Os and the head of compliance and risk management, are areas where we continue to be the competitive landscape. We're still more focused and there are fewer competitors.

Great, that was helpful. So to change topics a little bit, I wanted to ask about gross margins. So last quarter we saw gross margins improve, but this quarter they are back down a little bit.

I know you have discussed the impact of product mix and how that impacts gross margins really at length, so I just wanted to make sure that still the key driver. And just also get some kind of idea on the volatility we might see in this metric over the next few quarters.

That is a complicated metric for our company and one that, while we track it, we try to point people to operating income potentially as a better measure, because product mix plays so much in the gross margin. As you know, our content solutions that have a lower gross margin than our platform solutions. Some of our research products have lower gross margins than both of those.

And the relative mix or relative growth rates they are all growing, which is a good thing, but the relative growth rates determines that blended gross margin. I think it has been fascinating from my point of view, given the variability in the product and solution mix, how consistent gross margins have been. And so it's really just a challenge of teasing out the relative growth rates of these different gross margin products. Again, it's been amazing the relative consistency of gross margin.

I like to point a little more to operating income because it's a little better indication of some of the products, even with lower gross margin, have fairly low cost after gross margin. So they are strong contributors to cash flow and operating income.

So that's a complicated answer, but it's just product mix. We have tried to indicate that generally platform products have higher gross margin. You see the number of subscribers we added, the 68,000. As those get implemented they will have higher gross margin.

Products like the resuscitation products and ICM product we have key partnerships where we have royalties, we have a higher cost of goods, but they are strong contributors to cash flow and EBITDA and operating income. So we like to steer everybody to focus a little more on operating income than gross margins.

Great. So I guess as a follow-up there, just seeing the relative strengths that you have discussed this quarter and the drivers for the coming year, it seems like we might be able to definitely hear the message you've been giving on kind of lifetime value of the customer. Could we see a scenario this year where gross margins are at the level they were at this quarter, even lower, but you could still exceed your operating income targets for the year because of the dynamic you discussed?

It really is kind of hard because I opened up by talking about the strength in the Competency Center and the Performance Center, which are pure platform products with very high gross margins, and you saw the talk of utilization and new accounts coming on board, two a week. Again, high gross margin. The speed of implementation will drive when that hits our financials and we talked about strength in implementing.

Right behind that, though, the higher cost of goods products, like the HeartCode and the ICD-10 products, they definitely have the higher cost of goods but they are also performing exceptionally strong. On a relative basis right now, the implementation and revenue recognition cycles are probably a little shorter -- are shorter on the content solutions we mentioned, which would bring their revenue faster into our model maybe than the platform subscribers, which could result in the scenario that you mentioned.

Great, great. One last more kind of housekeeping question on the new revenues per subscriber metric. I just want to make sure I kind of understand all the nuances of this new metric.

Just quick issues like are HPC and HCC users included in this but not double counted, or maybe that depends whether they are on the HLC platform or not? And then just is consulting or custom courseware revenue also part of the numerator? That's the last small issue I had in mind on this is -- are acquisitions possibly impacting the metric and is that possible to quantify at all?

Yes, so let me work backwards a little bit. The acquisitions, for instance, Sy.Med, those revenues are not included in the calculations in any way, numerator or denominator.

The first question I think you asked was how are the implemented subscribers counted and I would say those are unique subscribers to the entire platform. So if you are a customer of the HLC that would count as one. If you are a customer of the HLC and the HPC, that would count as one. Or if you are just a subscriber of the HPC, Performance Center, that would count as one.

We would not double count you if you are on multiple modules, and so you are try to get at this concept of a unique subscriber on the platform.

Then you are using all of the add-on modules, so if you are on the Learning Center and you added the Competency Center, while it would not increment the denominator it would increment the revenue per subscriber, the numerator. And so as you add additional software solutions and/or content solutions those would be added to the numerator from the revenue perspective.

Great. Thanks again for taking the questions, guys.

Matt Hewitt, Craig-Hallum Capital.

Good morning and, first, thank you very much for providing that new metric related to ARPU. As you mentioned, some of us had been trying to back into an approximation, so having a number from you guys is going to be helpful going forward.

Thank you. Yes, we went ahead and backed out project revenue, non-recurring --- non-Internet revenue. We tried to clean it up. I think most analysts including you, Matt, had gotten very close to the metric anyway with your great work. But we thought we would clean it up for you a little bit and take out --- clearly take out the revenue streams that might be too hard for you to get to.

Well, that's very much appreciated. Just a couple questions from me.

Regarding the Competency and Performance Center platforms, looking back historically and the ramp that you've seen in the core HLC platform over your history, how would you compare the trajectory of a ramp for Competency and Performance Center versus that HLC? Are you seeing the --- it took a half-dozen years to get where you are today with the core platform. Are you seeing that timeline shrink dramatically, or do you see a similar type trajectory playing out for those new platforms?

You know, it's interesting. We launched the competency center, which was a visionary product, a few years ago and I would say we essentially struggled to get that properly positioned. It was essentially kind of a visionary way of thinking about performance reviews.

Sometimes when you sell a vision it takes a little longer than you expected. It wasn't until we had the breakthrough of understanding how to properly segment the functionality about a year ago and released the Performance Center that the curve of adoption for both of them has started to take off. So it's almost like it took us a little more time to figure out how to properly position and build out the functionality in a way that would get to the curve that we are seeing now, but we have finally gotten there.

So in some ways the first couple years are a little more frustrating, but in the last 12 months in particular you can see a lot of energy and excitement. I think we are figuring it out and we are seeing adoption curves that I would call similar to the important adoption curves of the Learning Center earlier in its trajectory.

Okay, regarding --- it sounds like there was little bit of a delay with the updated Sim view. Will that account, or does that account for the pop in deferred revenues that we saw here in the first quarter, or where there more customers paying for the full year and for the contract in advance? Help me understand that metric a little bit.

Well, we have been selling the older version of that SimView product for quite some time. And as you get closer to shipping the new product -- and this product is a shipping product. It has software components, but also has some physical components fulfilled by our partner, Laerdal. The delay -- we continue to take in orders, but not be able to fulfill and generate the revenue recognition.

So we have a nice little backlog of orders on the newer SimView product that we began --- we did mention that we started shipping and fulfilling in April. So it was just a timing issue and it did result in the sequential decline in revenues for Sim ventures on the whole. But, again, overall Sim ventures was up over the prior-year quarter and we are expecting a really strong Q2 as we catch up on fulfillment around SimView.

Okay, maybe one more for me and then I will hop back in the queue. Regarding the ICD-10 platform adoption with your partner, Precyse, at HIMSS that was -- in my opinion, the number one topic of discussion at the conference was preparing and getting ready for ICD-10. We've seen a number of different studies and surveys that have indicated that hospitals are behind the curve. Not only in getting the systems in place for the actual coding and billing, but also on that training.

It sounds like you have had pretty strong quarter, actually a couple of quarters now, of adoption of your products. Are you seeing customers adopt --- trying to get their employees trained, even if they don't have computer-assisted coding or some of the other software needed to complete the billing process, but they want to get the employees trained in advance of that October 1 deadline? Maybe just talk a little bit about the landscape regarding ICD-10.

Sure, there's a couple of things here. One, everyone has to be ready for the change even if you don't use --- so there is kind of two forms of training. There is training about the change and educating on the new models for coding and how that will occur, and then there is training on the software that is used to do the coding. The precise library is more the former than the latter, so it fits in that category of training that we believe everyone needs between now and October of 2014.

So I think -- we think we have the right partner and the right relationship and, therefore, the right solution offering that is the most broadly needed and will be in the most consistent demand for the next, I would call it, 20 months. We are very excited that this product will drive --- we think will continue to drive growth between now and that big push in October.

We are more trying to plan for the aftermath of that two years hence, when there might be some sense of dropping off in the utilization of those products after one makes the migration. Although our experience is even today with ICD-9, which happened quite some time ago, there is still a lot of demand for training in that coding system. So we think it's a strong growth catalyst for us for the next 20, 24 months and it's all about developing a competent, knowledgeable workforce on this massive change in how payments will be --- illness will be coded and payments will be made.

We think we have the very best product and partner that's --- and this is the only integrated and exclusive product to our platform. So we have entered into exclusivity for what we believe is a market-leading product with Precyse.

Thank you, I'll jump back in the queue.

Richard Close, Avondale Partners.

Thank you, congratulations on a good start to the year. Gerry, I was wondering if you could talk a little bit about the sales and marketing. I guess the expense came in quite a bit lower than what we were looking for and then on a year-over-year basis, if you take out the user conference I guess from last year, percentage of revenue is quite a bit lower.

If you could just talk in and around that. Then was the $520,000 I think number that you said for the user conference last year, is that all in sales and marketing?

It will be, yes, predominantly in sales and marketing. I think once again the sales, the growth rate in the revenue at 25% has exceeded our hiring in the sales area. So our plans are, as I think Bobby had mentioned, to continue to add people. The folks we added in the first quarter have not been on for a full quarter yet, so over time I think you'll see that line pickup as we hit our hiring plans.

It's a little bit of a nice consequence in some ways of our rapid growth in revenue. That is the driver behind it.

Okay. Then with respect to the Performance Center, Competency Center, the talent management side of the business, I believe you might have said earlier, Bobby, are you still signing about two hospital clients per week on those, in line with what was occurring in the fourth quarter? Did I hear that right?

That's correct. We kind of went from zero essentially from launch that first 90 days where we got our first couple of initial. Then we went to about one week in the next quarter and then two a week and then we have maintained that velocity in this quarter, about two a week.

Okay, great. Then I guess just final question for me, and you hit on this a little bit in terms of talking about the ICD-10 and you are really now trying to plan for the aftermath of that product. When you look inside your business development or product development horizon looking out, do you feel more comfortable that you are going to be able to fill some of these holes once you successfully take advantage of ICD-10, successfully take advantage of the talent management, and some of these other areas?

Like you said on, I think it was the neonatal resuscitation, you pretty much got all of that last year and so that creates a little bit harder of a growth year-over-year comparison. Do you feel good about what the outlook is in terms of additional product add-ons and maybe platform add-ons going out over the next several years?

I do. We've got an exciting mix. The challenges in healthcare are never ending. The solutions that we need to emerge, and we have many that are at different stages of development. So SimVentures, I think, is one of those that is a 36-month journey from where we are today that I'm hopeful that in 36 months that will be the highlights of the calls, whereas today it's ICD-10.

Then they will have steady performers like the resuscitation products. I think that product is just going to keep on going until we get the kind of market share that we have been able to establish in other core products like the learning center. So it's an interesting portfolio kind of question.

The good news is that there is several accelerants now that carry us not just for one or two quarters, but in the case of ICD-10 six to eight quarters. And so it does push that perpetual growth challenge down and out a good bit.

It is a blend issue and we have a lot of projects, short-, medium-, and long-term investments going on to try to continue to have the right portfolio mix. ICD-10 is -- may be surprisingly strong. We expected strength, but surprisingly strong, which makes the challenge in 24 to 30 months bigger.

But we have --- we are working with Precyse now to redefine that product set, even post the go-live, in a new way that we think adds more incremental value to even the ICD-10 journey. This idea of maintenance of competence of the workforce post the ICD-10 period. I think, even once people are oriented, there's going to be the concept of having a workforce that relative to other workforces is more competent in those topics.

So I think overall I feel really good about it. I think I enjoy and I like our subscription models, which gives us time to use R&D and product development to balance out the portfolio. And we feel like we've got enough runway on the current products and the balance to deliver solid growth for the next several quarters.

Okay. Then final question for me would be on Sy.Med. If you could give us a little bit of an update in terms of how their integration has gone, tracked so far, and what you ultimately see as the market opportunity for that product or that offering.

Yes, right now the team at Sy.Med is performing exceptionally well. They are delivering growth in their core applications in their own market channel, which is both hospitals and physician practices. So from an integration standpoint, I would say they are performing very well and some of the core functions of HR and payroll have been integrated.

On the technical front, not a lot of integration has begun. We have more pieces to assemble around the core concepts of credentialing, identity, workforce identity, verified credential sets. And we have kind of a long-range vision there that requires more and more pieces to be added to it before we pursue it.

So right now it's operating fairly independently. We have done the core, the basics of integration that you would expect to get the initial leverage. We have allowed them to begin hiring additional sales people and they are doing really strong and growing their core business.

And I would say I'm going to have to have you wait for four or five quarters to see our vision around where we want to go with credentialing, privileging, and workforce data management. There's kind of more to that storybook ahead of us than behind us.

Okay, great. Thank you very much. I guess one final question would be, Gerry, on the tax rate. Any thoughts on that as we continue to go through 2013?

Yes, you saw our guidance remains unchanged. Your question may revolve around the first quarter's tax rate [which is] around 40% or so. The reason for that is the stock option exercises that took place in the first quarter create both, let's call it, a book income tax benefit. And so, therefore, because they are a discrete item they are required by GAAP to [submit a] calculation for the first quarter's tax rate and, therefore, that's why it's lower for this one quarter. But we still have maintained a trend over time.

Okay, great. Thank you, guys.

(Operator Instructions) Frank Sparacino, First Analysis.

Just curious on two things. One is, with respect to hiring, where you are at right now relative to your 2013 plans. When I look on the website it looks like there's a fairly large number of job postings out there, so I don't know how you progress throughout Q1.

Then second would be, Gerry, maybe just comment on the CapEx for the year. Maybe I have this wrong, but I originally had $9 million to $10 million and it looks like it's jumped up $11 million to $12 million. I'm just curious what the incremental spend is tied to.

The CapEx first. That would be just trying to make more room for all of our investment projects. There's a little more room for our capitalized software development primarily to cover both talent management and research.

On the hiring front, I would say we made steady progress, but not as good a progress as we like during Q1. We took several actions towards the end of the quarter. In fact, on our website you might enjoy going to the job postings area. There's a new video that explains more about our culture and our company to help attract talent. We've repositioned and explained our awards and recognitions better and generally made it more exciting.

Interestingly, it has resulted in a turnaround in that rate of hiring just in the last 45 days. So I believe we extended about 11 offers in the last five business days that were accepted or we had 11 new candidates come on board and in the prior week as well. So I think we are on track now. We may have done a little better, learned from some prior lessons and have more acceleration in hiring.

That's one of the reasons we expect to --- working hard to catch up with the planned hiring that we had. So I would say in Q1 we were still lagging and that had a financial impact that was different than we wanted. We wanted to have the people in and then incur the expenses, so it resulted in a little higher operating income than maybe planned.

As we enter the second quarter, though, we are making every effort, recruiters, better promotional pieces to explain the Company that we are. Again, I think you should take a look at that. You might find it interesting. It's a great three-minute video about our culture and our company and where we are going. And small things like that have made a difference just in the last three weeks.

Great. Thank you, guys.

Thank you. I'm showing no one else in the queue at this time.

Great, thank you. If there are no further questions, we will assume we have done a pretty good job trying to answer everybody's questions and we will look forward to reporting our next quarter on the next quarterly conference call.

Thank you all for your attendance and participation. Congratulations to all HealthStream employees for delivering an outstanding first quarter to 2013.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.