HealthStream Inc (HSTM) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to HealthStream's second-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). As a reminder, this conference call is being recorded.

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

Thank you and good morning and thank you for joining us today to discuss our second-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.

And with that, I will turn the call over to our CEO, Robert Frist.

Thank you, Mollie. Good morning and welcome to our conference call. We'll of course do some financial metrics and highlights, we'll cover operational performance and some product updates as well.

Got to start first with financial highlights. It was a strong quarter, with consolidated revenues up 24% to $31.9 million and operating income up 2% to $4.1 million. Net income came in at $2.4 million in both the second quarter of 2013 and it was the same in the second quarter of 2012. Adjusted EBITDA was up 8% to $6.4 million.

And all these numbers are reflective of a strong and well-planned quarter for HealthStream on the financial performance metrics.

As you may recall, in the last quarter, we introduced a new metric, an additional measure of progress, as we try to capture the growing nature of our solutions sets that we offer to our customer base. The new metric we refer to as the annualized revenue per implemented subscriber. And it represents the quarter's revenue from our Internet-based subscription products, divided by the average implemented subscribers for the quarter, and then annualized.

In the second quarter of 2013, our revenue per implemented subscriber was $29.40, which is about 13% higher than the second quarter of 2012. And from the third quarter of 2011 to the second quarter of 2013, we've enjoyed a steady upward trajectory on this metric. And in our earnings release last night, we put a table in that reflects several of the quarters so you can review the trajectory. The metric itself, we think, helps better capture the fact that so many new products and solutions are being sold into the customer base.

Given the expansion of our suite of solutions over the last several quarters and really the last couple years, we are working to introduce additional new metrics in addition to the annualized revenue per implemented subscriber.

Historically, our HealthStream Learning Center was the single core application on our platform and represented the core product set that we sold to customers. And so we've made it routine to report the number of subscribers on HLC, the HealthStream Learning Center, along with renewal rates that reflect renewals on the HLC, in our quarterly earnings releases.

At this time, however, the range of solutions has significantly broadened and there are now several applications on our platform -- like the Competency Center and the SimManager products and the SimView products -- there are essentially many new ways to join our ecosystem and come onto our platforms. We continue to look for new metrics to capture this phenomena, as most of our historical metrics are really centered around measuring the progress of the HealthStream Learning Center only.

So until that time, and of course, recognizing that we already have one strong, new metric in front of everyone, we will review the traditional -- the more traditional historical metrics.

Overall for the quarter, for example, we implemented 84,000 new subscribers in the second quarter, bringing our total implemented subscriber base to 3.116 million subscribers. We contracted 93,000 new subscribers in the second quarter, bringing the total to 3.260 million contracted subscribers. And that exceeds our long-standing quarterly goal of contracting an additional 20,000 to 50,000 new subscribers per quarter.

So we are excited to have two strong measures of implementation, which is tied to revenue recognition, and contracting new subscribers, which is tied to new sales, as measures of progress on, again, the core HealthStream Learning Center component of our expanding platform.

As a backlog, we currently have 144,000 subscribers that are in the process of implementation. And we continue to make steady quarter-over-quarter progress implementing the backlog of contracted subscribers.

Renewal rates for the second quarter of 2013 were strong. We delivered 102% based on full-time equivalents, or FTEs, and 104% based on contract value. Our renewal rates reflect the addition of subscribers compared to previously contracted amounts, combined with any pricing adjustments that may occur at renewal.

We were particularly pleased to see the high renewal rates this quarter since the number of subscribers up for renewal in the second quarter was one of the highest in the last couple of years. So it was a more heavily-weighted quarter in terms of the importance of these metrics. We have had over 250,000 up for renewal in the second quarter. Since some of our new end customers chose to add subscribers to their contracts, the renewal metric exceeded 100% in the quarter.

For the trailing four-quarter period ending June 30, 2013, customers representing 96% of subscribers that were up for renewal renewed, while our renewal rate based on contract value, again for the trailing four-quarter period, was 97%.

On the operational front, growth comes with some growing pains. For example, in the Middle Tennessee market, it remains challenging to hire the technology personnel needed for our growth. We continue to develop innovative recruiting strategies and continue to grow and add to our base of talent in and across HealthStream, just not quite at the rate that we expected. And so we continue to work in creative ways to move up the rate of hiring.

That said, we are adding and welcomed dozens of new employees in the last quarter, and we want to welcome them and also let them know that our office expansion process is underway in Nashville, so we expect some new office space to come online later in the year, which also requires a capital outlay beginning in the second half of this year.

In other updates, of course, very important progress as we launch our strategy this year for the post-acute market. Again, we officially declared a Company focus on penetrating the market opportunities in the post-acute market space. We announced that in the last-quarter earnings release and we began to set the stage for entering that market really over the last year.

We have announced some new hires and adding to staff that brings particular expertise. And I'm excited to report in the second quarter of this year, just in the last 100 days really, we've contracted for two large organizations that are leaders within their respective spaces in the post-acute market.

Brookdale Senior Living and Almost Family are the two new anchor tenants for our post-acute care market strategy. Brookdale is a public company traded on the New York Stock Exchange under the symbol the BKD. It's the nation's largest provider of senior care services. And they have about 50,000 associates across 650 communities in 36 states. And they have a capacity to serve over 67,000 residents. So we are excited to welcome Brookdale as a customer and really an anchor tenant to our strategy of launching the post-acute care market.

Also important, Almost Family, a public company traded on the NASDAQ exchange under the symbol AFAM, is a leading provider of home healthcare services, employing approximately 5000 employees in 170 branches across 11 states. We welcome the Almost Family organization and their thought leaders as we work together to train and develop their talented workforce across these 170 locations in 11 states.

The length of the contracts for Brookdale and Almost Family importantly are long-term, five and three years, respectively.

Importantly, Brookdale and HealthStream also plan to codevelop new courseware for the expanding senior care market. By joining the largest provider of senior care living services with the largest provider of Learning & Talent Management solutions in healthcare, we believe there is a unique opportunity to create innovative new products, services and courseware for the senior care workforce.

Newly-developed courseware resulting from the partnership will be offered exclusively through the HealthStream system and through our growing ecosystem in that marketplace, and more generally to the post-acute care markets as the content that we build together expands.

We look forward to reporting further progress on the post-acute care space as we continue to build out the full strategy. Again, we believe the post-acute care space is gaining exciting traction and we look forward to more financial progress in this segment next year. This is really our strategy year, our launch year, and getting all the components in place.

Also importantly, our SimVentures collaborative arrangement with Laerdal made significant progress. Revenues from this product suite -- from the SimVentures product suite -- grew 105% over the same period last year, delivering $802,000 in revenues. So a materially higher quarter over the prior year and strong growth rate.

Several pilots for the new SimManager products are now live, and we have three multi-facility health systems contracted for SimManager during the second quarter.

The SimView product, which was a major and important contributor to the revenue growth in the quarter, was the result of fulfilling back orders on a new version of the product. So some of the growth in SimVentures can be attributed to the ultimate shipping of the new SimView products and fulfillment of back orders that have been taken over the last several quarters.

So we don't expect that exact pattern to repeat, but the SimView products were a strong contributor. And that product has a strong forward pipeline as well.

The number of content scenarios and other products sold through our SimStore site continues to increase, showing a 33% increase in the second quarter of 2013 compared to the second quarter of 2012.

Also importantly, to talk a bit about our acquisitions, in the second quarter, our Sy.Med product, OneApp, continued to grow. We added over 32 new clients for the Sy.Med OneApp credentialing product set during the second quarter of 2013. The Sy.Med credentialing solution, we believe, provides a unique dimension to our talent management strategy.

We believe managing the credentialing privileging processes and the paperwork associated with onboarding physicians is an important part of managing the personnel in healthcare. And it's a unique dimension to talent management in healthcare, so we are excited to see Sy.Med make steady and continued progress on their product lines.

Within our Research Product segment, some of the product lines in research were challenged, like the employee and physician surveys. They didn't perform to expectations. But importantly, the majority of the business for the research product lines comes from the Patient Insights product lines, which we saw continued progress on. And those are the product lines in research that generate the recurring and consistent revenues.

The patient survey revenues increased 13% over the second quarter in 2012, and we invested in our online survey infrastructure during the second quarter, expanding our capabilities to support CG-CAHPS, our clinicians' and groups' consumer assessment of health providers and surveys, with a new modality of delivery, the online modality, in addition to the phone modality.

So overall, the more important part of the research business grew a solid 13% in the second quarter, with strong attribution to the CG-CAHPS growth, while also making improvements in the infrastructure to deliver the CG-CAHPS work, introducing the online capabilities, with continued enhancements in that area in the not-too-distant future.

With that coverage, there's still a lot more to go and exciting product coverage in the second half, but we will take a little break here, turn it over to Gerry Hayden, our CFO, to do a more detailed look at our financials and maybe a bit of our guidance for the remainder of the year.

Thank you, Bobby, and good morning, everyone. Bobby has touched on many of this quarter's metrics, but I will provide some additional context around the financial performance.

Consolidated revenues were up 24% over last year's second quarter owing to several key considerations. Learning & Talent Management revenue increases continue to be driven largely by core growth, both in terms of subscribers and revenue per subscriber. Subscribers have grown by 12% since June 30, 2012, and as Bobby mentioned, annualized revenue per subscriber has expanded by 13%. This combination of expanding customer base consuming more courseware is the foundation supporting the overall 30% revenue growth for Learning & Talent in the second quarter.

Our 2012 acquisitions, Decision Critical and Sy.Med Development, continue to perform well, and as you read in the release, Sy.Med contributed $1.1 million to this quarter's revenue. The continued growth of CG-CAHPS survey volumes contributed to double-digit 13% patient survey growth in research, as Bobby just mentioned. The pricing for CG-CAHPS is a bit less than our other patient categories, is creating some margin pressure in the research segment.

CG-CAHPS surveys currently rely on both phone and email methodologies, with phone having a higher cost of fulfillment. However, we are moving to an email modality that has the potential to improve margins. And as Bobby just mentioned and as you already know, the patient category is our largest research product line and is a source of recurring revenue for us.

Year-to-date operating income grew by 14% for the first six months of 2013 versus the first six months of 2012. As our 2013 guidance indicates, and as we discussed in prior conference calls, an important theme for 2013 is investment.

The investment theme shows itself in a variety of ways. One of the more obvious is in the form of higher labor costs, both in terms of employee count and also contract labor. [One] example is product development expenses as a percent of revenue. As a percent of revenue, this income (inaudible) category has increased to 8.8% versus 8.2% for the same period last year, resulting in a 33% increase in absolute dollars over the prior year.

Compared to the prior year in last year's second quarter, we have incurred higher operating expenses and royalties, personnel additions in contract labor, sales commissions, depreciation and amortization, non-income business taxes, merger and acquisition program and other general expenses. In addition, this quarter we accrued $250,000 for Sy.Med contingent earnout payments based on its strong post-closing performance.

We continue to review and evaluate (inaudible) business development opportunities and our balance sheet remains well-positioned to meet those opportunities.

Our cash balances as of June 30, 2013 were $101.4 million, up from $95.6 million since March of this year, March 31, 2013. And while we seek these opportunities, we've retained our discipline, both in terms of strategic fit and valuation.

Finally, our consolidated 2013 revenue guidance is growth between 23% and 25% over full-year 2012. To support this growth range, our segment growth rates are as follows. Learning & Talent Management, 26% to 28% over last year, and Research between 8% and 10% over 2012.

We anticipate the 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 will be approximately 41% to 44%.

Thank you for your time and now I will turn the call back to Bobby.

Thank you, Gerry. So I'd like to dive into some solutions updates and product line updates. During the second quarter of 2013, we continued to see progress for two of our Talent Management product offerings, the HealthStream Performance Center and the HealthStream Competency Center. In the second quarter, we strengthened these product offerings with a partnership with Business & Legal Resources. We are adding their 1000 job descriptions to this product set to be part of the content offerings that support these platforms, so we have a more complete solution set to offer the customers.

The job descriptions that will be included cover the full workforce in hospitals, including clinical and patient care categories. The descriptions are prewritten, they are legally reviewed, they are ADA-compliant and they will be fully integrated with the platform. So it just adds a resource and another unique component to the Talent Management platform components of the HealthStream Competency Center and the HealthStream Performance Center, kind of strengthening the overall Talent Management strategy for healthcare organizations.

The talent management space in general is an exciting and dynamic environment, and our success with these products is definitely attracting increased attention and increased competition in the healthcare vertical. We are focused on building core solution sets for the key challenges facing healthcare organizations, like improving resuscitation rates, improving the onboarding process for new employees, meeting the federal OSHA safety training requirements, and in doing so, building out a robust Talent Management platform underneath it.

Our competitors tend to be more focused on pure HR functionality, and our solutions with combined platform, content and data are important because they solve specific healthcare problems.

That said, there are other vendors emerging that are focused on the HR software component, and they are building capabilities that we don't currently offer, some of which we have an eye to building and some of which we will never build. So in some of the doorways where we enter to sell our services, like human resources, we continue to see more and more competing organizations and businesses. In other doorways, like the CNOs, the compliance and risk management officers, the competitive landscape remains more focused, where our products remain highly differentiated and where there are fewer competitors.

So this exciting and dynamic environment and growth comes with the increased attention of both increased awareness of HealthStream in general and increased competition in the marketplace.

We are expanding our platform and our products in unique and interesting ways to help health organizations achieve specific business and clinical outcomes with their talent. Two of the areas where we are doing this exceptionally well are with our ICD-10 product suite and our HeartCode product solutions.

In the first quarter of 2013, CMS reaffirmed the deadline of October 2014 for the required transition to the ICD-10 coding system. We believe this regulatory deadline will continue to be a steady driver for our training solutions for the new coding system. We have partnered with Precyse, who offers outstanding courseware for ICD-10. And we bring up this joint offering to our collective and growing customer base as a means of training their respective workforces.

Through our partnership with Precyse, we have ICD content for the full range of hospital employees that need training, including coders, clinical staff, physicians, nonclinical staff. And our price points for those different staff and their adoption range -- very broad -- from $30 to $50 per user for the subscription, depending on the audience and the timeframe commitment. The gross margins for the Precyse products are 50%, as we have a 50-50 partnership with Precyse on our ICD-10 product offerings.

We continue to see steady sales patterns for our ICD-10 solution. In the second quarter of 2013, over 80 new contracts were signed for our ICD-10 solution, with approximately 1/3 of them that had new order value greater than $100,000. So again, a strong new contract signing period in the second quarter, on top of a strong first quarter.

The majority of new contracts are approximately a 24-month period, where we could expect revenue recognition and implementation of those contracts over a 24-month period, which is a little shorter than our typical three and four and five year systems agreements.

We are excited to be leading the industry in providing the best ICD-10 training solution on the market. Given the impending deadline, we believe it is reasonable to expect our sales velocity will taper as we approach the deadline of October of 2014. It is also reasonable to expect revenue for the ICD-10 products to begin to taper after the October 2014 deadline, and more likely in 2015.

With strong deadline-driven growth, our challenge in 2015 is to backfill such a successful product offering by developing a maintenance revenue stream and a renewal strategy with regard to this product line. To be clear, we believe our ICD-10 products will continue to drive growth for the remainder of 2013 and throughout 2014.

We continue to see strong demand for our HeartCode suite of products. 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 second quarter of 2013, the total number of HeartCode BLS certifications was 30% higher than in the second quarter of 2012. Among those certifications, we saw a 39% increase in the use of the voice-assisted mannequins for the certification process, which is the unique aspect of HealthStream's joint offerings with American Heart Association and Laerdal, to have this combined online and mannequin-based certification process, is the proprietary combination of services that HealthStream offers. It's great to see such high rates, 30% year-over-year on the certifications and 39% increase in the use of the voice-assisted mannequins in the certification process.

So we have seen similar growth rates in the complementary ACLS and PALS programs for HeartCode, as well as the BLS HeartCode products. So the entire suite of HeartCode products continues to perform well.

Looking forward and as we think about the remainder of the year, we are very excited to be holding our annual customer summit here in Nashville, Tennessee in October, 15th through the 17th, here in Nashville and right in the heart of downtown Nashville. And we will be holding the summit in Nashville's new Music City Center, which is a state-of-the-art, 2.1 million square-foot convention center, which just happens to be located only two blocks from our corporate office. So this will be very exciting to welcome hundreds of new customers to downtown Nashville, just an ear-shot and a short walk away from our headquarters.

We expect an exciting agenda for the attendees. Over 20 exhibitors that are partners of HealthStream will be at the conference, and we have over 100 professionally run and managed and exciting topical sessions for the attendees this coming October.

We look forward to welcoming the customers to this exciting event and providing you further updates in the third-quarter earnings conference call, which will be held the following week post the summit in October.

So at this time, and with all those exciting announcements behind us, and congratulations to our HealthStream employees, over 600 strong, that are helping drive all this growth, service all these customers and manage in rather tight office space, I will add, in the last several months, I will turn it over to the operator for questions from our analysts and financial community.

(Operator Instructions) Jeff Garro, William Blair & Company.

Good morning, guys. Thanks for taking the questions and congrats on the quarter.

Thank you, good morning.

I want to ask a few questions on the Brookdale agreement. So just start off with what can we think about a start date or implementation roadmap?

It will be throughout the second half of this year. It is a new partnership. It's a little different than a normal -- since it is a new market, we will be ironing out the deployment model that they seek and the workforce is a little different, and the nature of the acute care market, across more geographic region and smaller, more remote facilities.

We are also working out the details of the partnership around content development. So I would say it's really throughout the second half of the year, we will be bringing it online at the pace that they are suited with. But I would expect full implementation by early next year.

A lot of this is dependent on how we work to facilitate the entire partnership solution throughout the course of the year and dependent on their desire for speed of deployment.

Great. And given that you are still kind of working on developing the full content platform and bringing them on as a development partner, should we think of a lower HLC fee for this agreement?

There were many elements of this agreement of penetrating a new market, and I think that's a fair assumption. They also bought a more complete bundle of our solutions and we often offer bundled pricing.

In addition, as you noted, there are very unique dimensions to our partnership, which include content development, potentially coinvestment in new solutions. And so the nature of this agreement is different, and therefore it's probably safer to assume a more bundled pricing strategy kind of across the board for that account.

That's fair. So I guess the follow-up is given the unique nature of that agreement, it's fair that this does not change your view going forward on your ability to price products similarly in the post-acute and acute settings?

Well, again, I think what I would say just about the whole market is that we have been very deliberate in our strategy for entering the market, announcing it and beginning the initial hiring in Q1. And then deliberately bringing on two new anchor customers that are really more development partners, as we iron out all of the specifics of what's unique about this market, what do we need to do well. And I would say that kind of all the material financial progress for this marketplace would begin more towards next year than in this year.

And so really, think of all of these steps as laying the foundation and part of the strategic steps to build a hopefully more meaningful opportunity in the post-acute space, which we've defined as employing about 3 million workers.

That's fair. Can you provide a timeline for when the jointly-developed products will be generally available to the larger post-acute market?

No, I think, again, it's a long-term agreement, five years, and I imagine we use the second half of this year just to define the strategies and hopefully begin building some of the new content products. But it's more of an open-ended partnership over a five-year term, and we will be relying heavily on their guidance about the rate of development.

And what we are enthusiastic about is the term commitment and the strength of the partnership at its get-go, but the planning for it and everything is still largely in front of us.

Got it. Then one final question and I will hop off. You mentioned that this was kind of a fuller agreement, and specifically I saw the compliance solution mentioned. I was hoping we could get a little more color on whether that's something that's unique to the post-acute market or initially to Brookdale or not; something we haven't heard a lot about previously, I believe.

Well, we were excited to see their interest in the -- the compliance solution is focused on the regulatory requirements that they face in their market. HealthStream has an adapted library for the post-acute space, including home health and long-term care for the regulatory compliance content libraries.

And they are a little bit smaller libraries than the ones for the acute care space, but they meet many of the regulatory needs. And that library needs to expand and get even more tailored to the market. So the compliance solution is essentially some of the bundled content libraries that come with the platform subscription.

And then we were really excited to see their interest in the clinical competency development for their workforce. So they also are subscribers to HealthStream Competency Center. And there are a lot of implications there about building out the competency dictionary libraries for that market, which we plan to do together. So again, you see very developmental stage concepts here.

But it was exciting to see them go on the compliance journey with us and the Clinical Competency development journey with us, and we are excited to be a part of developing the skills and knowledge of their 50,000-person workforce over the next five years.

Great. Thanks again for taking the questions, guys.

Matt Hewitt, Craig-Hallum.

Good morning and congratulations on the good quarter. Maybe just sticking with the following -- or the prior theme, Brookdale and Almost Family. Congratulations on the anchor tenants.

How has that sales process been different so far, and what insights have you gleaned from that process that will help you as you get into 2014 and really start to make a bigger push into that market?

Yes, it is exciting, because there was a sales process. But I would say given our approach to this market, and again, the deliberate nature of it, and you could call it not a rush to sales, but a rush to strategy development. The negotiations with both organizations was more about partnership or as much about partnership as sales, and getting the right components in place for better content development, understanding the needs of the market. I would expect some of our next moves in the market to be to assemble a strong advisory board. And so hopefully, you get the sense for this whole -- this year around this market.

So the sales process was long, but it included partner negotiations that are atypical of a sale, very atypical. Partnering agreements, for example, on developing competency statements for the workforce in the post-acute space is a unique dimension of the relationship.

Efforts to build and identify content libraries that are needed -- either build or they help us identify where to acquire constant libraries, again. So the nature of the relationship wasn't just a vendor selling software; it was about a journey together to build new and improved solutions for this vertical.

Okay, thank you. And then shifting gears, a couple of follow-ups. Sy.Med, it sounds like had a very strong quarter in the second quarter. What was the dollar contribution or some additional color there that helps us understand what it contributed in the quarter and what your expectations are for the back half of the year?

Right. So Sy.Med had strong performance and had several periods in the last several quarters where they either set new record sales volume or new revenue records or new large account -- larger account acquisitions. So the Sy.Med team has been delivering, it seems like in every quarterly report to me, some form of new record, which is exciting.

We still -- and so we are excited about that, and we hope and expect they will continue to show progress. I think they delivered about $1.1 million of the quarter's revenue in total, which is strong.

That said, our vision for where that product set needs to go is very exciting. We are still very early to leveraging it in other channels. For example, they tend to be stronger in the physician office channel -- in fact, much stronger -- than in the hospital channel. And it's going to be a bit of a journey to continue to add to and develop products to meet the broader needs of credentialing and privileging in the acute care hospital space.

And so we are very excited because they are performing very, very well in their traditional channels and setting new records, but we also want to recognize that there's a lot of additional -- over the next year or so -- R&D work to be done and investment to be made to more sit with the talent management strategy in the acute care space for us.

Okay. Well, no, that is exciting. Last one from me and then I will hop back into queue. The learning guidance for the year, you increased that. But it implies a deceleration here in the back half of the year. I'm just trying to get a sense for is that some conservativism, or was there something else that comes into play here in the back half of the year? Was it -- obviously, it is tough comps, but is there something else at work?

No, I think it's just the ins and outs of all the different product lines, and it's our best estimate of the range that we could provide. You noted that our blended overall growth rate and revenue range was moved up to a whole new range. We moved the segment range up as well for the full year. And so we are really trying to balance full-year guidance concerns with in-quarter concerns, and we still have the same optimism for the segment.

Great, thank you.

Richard Close, Avondale Partners.

Yes, thank you for taking the questions. Congratulations as well. Gerry, I was wondering if you could go over the CapEx. You maintained your guidance. I think it was $11 million to $12 million for the year, but you've only spent a little bit. Obviously, your operating income guidance is maintained. So if you can just go through a little bit maybe some of the buckets for CapEx in the back half of the year to help us understand.

Yes, sure. Well, one thing Bobby mentioned in his remarks about the space additions here in Nashville. That's one thing. We do intend and expect to pick up our investing rate in the second half of the year. It is a year for investment.

The trade-off is of course that operating income, what gets expensed versus capitalized will influence those various pieces of the guidance. And we consider a lot of our investment in people to be investments is also expense. So those are the dynamics. We expect to catch up on our capital spending, and we still continue to want to hire and invest in other projects that will make our operating income remain in that range of roughly 6% to 10% year-over-year.

All right. And the 8.8% versus 8.2%, when you were talking about the -- I think it was contract labor, can you just go over that metric, what exactly that was again? Was it just contract labor?

No, that was the whole category of product development expenses, which is primarily labor. There are two forms of labor in product development. There is our employee count, actual fully-employed individuals. We also rely on some contract labor in that category as well.

And my point was about investment is if you look at the dollars of expense in product development year-to-year for the six months, it was 8.2% of revenue in the first six months of 2012. It's 8.8% in the first six months of 2013. The point being that's one place we are showing some of our investing activities (inaudible) year-over-year.

Okay, great. And I was wondering if you guys could talk a little bit about the pipeline on the post-acute care segment. Maybe a little bit more detail than what you provided here. Obviously, you probably spent a lot of time in securing the anchor tenants, Brookdale and Almost Family. But if you could characterize I guess the state of the pipeline, setting us up for maybe the second half of this year.

We have tried to really be careful to talk about this as a next year and show just hopefully what you view as strategic and steady progress towards that. We have hired just a few dedicated salespeople, not very many -- I believe about three. And so we have begun to hire in this space.

And they are beginning to take some of our products -- we have a broad product set to take to the market. In fact, I think this week, we are looking at some of our research products to take into that market as well. And the pipeline is building. We are making calls every day. We are beginning to have a greater presence at trade shows in the space, but I would call preliminary, kind of finding our way which trade shows do we need to be at.

So just in general, I would kind of caution an overmodeling of this area, but hopefully we maintain just -- we share with everyone the steady progress we are making in each area.

I don't want to ramp up too much more in the sales organization until we organize the content libraries and the tools that we need and a little bit of the marketing and positioning, which is a little bit more what we will be doing in the second half.

So we remain very optimistic for the segment. We are seeking new partnerships for content. And we do -- we are making sales calls every single day, but they are exploratory and the pipeline is growing. But I've also, again, tried to organize people's thinking around this year as a strategic and organizational year more than a market share year.

And how should we think about the revenue per subscriber metric? Obviously, Brookdale and Almost Family, that's only 55,000 subscribers. Just to be clear, are these subscribers factored into your -- the subscriber metrics that you will provide going forward? And then how should we think about the actual revenue per subscriber in the post-acute sector?

I think you are getting to some of our challenges with some of our historical metrics, and the reason we introduced the new metric in Q1 around revenue per subscriber. We have new subscribers coming in through different doors now. They come on to one piece of the platform, not the other. They buy up new component pieces. They are in new verticals, like the post-acute.

So what I would say is the Brookdale arrangement, for example, is not yet in any of the numbers because it closed after the quarter, and we have this quarter to decide how to begin counting of these subscribers. I would expect they would show up in Q3 subscriber counts as members of our ecosystem and on our platform. But to be clear, they are not in the second quarter yet. The soonest they could show up just by term -- by definition of when we executed the agreement would be in Q3. And so hopefully, that gets a little bit to the question you asked.

Yes, but I guess trying to gauge, if all of a sudden you ramped up the post-acute care sector pretty strong or were successful in doing that, does that pull down the revenue or put downward pressure on your revenue per subscriber? Any thoughts there?

Well any time we add to the denominator, the number of subscribers, it's dilutive to the revenue per subscriber, by definition. So it depends on the product mix and the growth and things like add-on sales to existing accounts, whether the revenue, the numerator goes up. That's true of every subscriber we have in any market, hospital -- and where we add to the numerator -- right?

So by definition, adding 50,000 new subscribers is dilutive to that calculation, depending on the product mix they bought.

We were pleased to see a broad product mix initial purchase, but also, we've caveated that these initial anchor tenants are development partners at slightly lower subscriber dollar rates than may be other non-development partner customers.

So I hope that gives you enough color. Again, I keep wanting to emphasize the deliberate and thoughtful steps of entering this market and share that progress, but without over emphasizing the financial impact of it in this year.

Okay, no, that is helpful. A couple more questions from me here. SimVentures, talking about that, you mentioned three health systems. If you can provide any additional clarity there, that would be great.

And then final question would be on HeartCode, where you think the penetration of that market is for you guys.

Sure. We haven't updated penetration on HeartCode in a little while, and so we are probably due for an update. This quarter, we gave really much more detail on the ICD-10 marketplace. So I will consider the HeartCode update maybe for next quarter.

But I will say on the HeartCode product, as we reported, they continue to gain steady market share and market acceptance, and we are very pleased with its continued adoption. We believe it is a revolutionary product that has better clinical outcomes. And so on HeartCode, we are excited to see progress.

On SimVentures, the overall adoption of SimVentures products in the quarter was up, and we are beginning to see -- again -- SimVentures if long-term care is a little bit more of what I will call a medium-term opportunity, years two and three, with this year being a planning year, SimVentures is more of a long-term opportunity, kind of years three, four and five, and is more a bet on the ultimate adoption of high-end simulators across the acute-care space.

And so it's encouraging to see continued and steady uptake of the products of SimVentures. And in this case, three multi-facility health systems have begun to incorporate high-end simulation training as part of their workflow in their organizations. They are most likely to integrate these new methods of training into their onboarding process, and that's a particular area of focus for HealthStream in the future, the process of orienting new nurses or changing them between departments, called transition to practice.

So again, SimVentures products are a little bit more of a bet on a longer-term horizon and a new model of training being accepted and becoming the norm over the next five-year period, 3 to 5 years, in particular.

So it's great to see what I will call early adopters of this high-fidelity simulation training. And my bet is for them is that they will see the benefits of this form of training and it will become more and more a necessity of how they train, develop and onboard new nurses. So I think the new customers we are adding now, I would call them early adopters and thought leaders, and they are looking for real clinic clinical benefits that I think they are going to get.

You see an industry like the airline industry that have incorporated the requirements of recertification of their simulation training processes, and we know the safety records of the airline industry are just amazing. I think and I believe and we know that this healthcare industry needs to move to these new models of training. And so these three health systems, I call them early adopters and thought leaders, and they are going to see the earliest benefits of this form of training in their quality outcomes.

And just finally -- sorry for this -- what were the ICD-10 enterprise contracts, the number? Did you provide that?

We did. I think we said about a third of our 80 new contracts in the quarter, so it's fascinating -- it's almost one a day. A third of them were over $100,000 contracts, which generally indicates a larger subscription to the broader library.

I will also note that I want to get the market in front of this. When you have such a successful product and it's driven by such a large federal mandate, as I think about 2015 -- and I don't know how many of you analysts are thinking about 2015 or the market -- we are going to have, with this great success over the short horizon, considerable opportunity and challenge to build new products to essentially backfill this great success we've had with this product. Because the maintenance use of this product will not be at the same levels as the current volume of adoption in sales.

But again, I want to reemphasize, we are talking about an after the deadline, October of 2014, so into 2015 an issued that management is already thinking about and that we want everybody to be cognizant of. Just a great and successful product. We continue to expect it to grow growth throughout next year. And then it's the year after that in 2015 where our year-over-year comparables will obviously be tough with such tremendous success.

Thanks again.

Frank Sparacino, First Analysis.

Bobby, just wanted to go back to ICD-10, and just curious if you can give us a sense maybe from a competitive standpoint what you've run into as it relates to Precyse content.

And then also curious, I don't know if you've talked about this or willing to talk about it, but when you look at the entire base of subscribers that you have, do you have any sense as to what would be sort of a reasonable fair market share penetration with ICD-10 into the base?

Well, so it's a great area of importance, it's a great and successful product launch for us and we have a great partner in Precyse. And we believe that on the competitive front that the combination of immediate and trackable and quick deployment on hospitals' existing infrastructure, which is, as you know, largely HealthStream, gave us and our partner Precyse a material competitive advantage in deploying these solutions.

If you think about the way we are able to roll out new solutions like this through over 40 user groups nationwide, our annual summit, where Precyse and HealthStream were key partners, our very large and growing and focused sales organization, when something like this happens in the market, we feel we are very well-positioned if we have a good partner to take the message to the market and shift market share to our partner and away from their competitors.

And in fact, I think that's what has happened here. I think we believe we picked the best partner and we believe they have the best solutions and we believe that's reflected in their scores as an organization. They have very high KLAS scores, class scores. And so -- in that combination, with our market share, our sales organization, our user groups, has been really astounding rate of wins against the competition.

Without naming the competition specifically, there are two or three core competitors in the ICD-10 space, and we think we really have been able to barnstorm the market and deliver a better solution in a more timely way, again, a core advantage of having a deployed architecture. And also customers of our ecosystem and our product get meaningful discounts to the product over noncustomers that have to be brought up or are on competing platforms that we connect to.

So again, just a lot of reasons we think we have done really well with this product set relative to the competition and relative to the opportunity.

Thank you.

Terry Lally, Spotlight Funds.

Good morning. I want to go deeper into Brookdale, which I think others are trying to quantify the impact of the contract. You talked about course development. Content development has been running at $2.7 million a quarter. As you roll out the course development, how much would you expect content development to increase for the Brookdale courses?

I'm not quite sure I understood the $2.7 million number. Maybe repeat your question. Give me a little more color on the $2.7 million or the question.

But I think in general, you must understand that with Brookdale, we intend to develop content together, which requires some investment. And then we will -- some of that content will be consumed by Brookdale at no cost to Brookdale, because they are investors in it. And some of that will result in products that we then take to the broader market and sell. And all of that will occur over the period of this five-year engagement.

None of it will occur in the next, say, 90 days, for example, as it relates to content revenue or content potential from the Brookdale relationship. So I hope that helps some, and if I didn't get your question, maybe you could rephrase the question and explain the $2.7 million metric a little better.

I was referring to your product development expenses for the quarter were $2.77 million. So it seems like your current run rate with some of the investment you are making in content is $2.77 million, but it sounds like the Brookdale course development is going to be on top of that. So I was trying to see is product development going over $ 3 million a quarter? What magnitude will that increase as you start to develop courses for this relationship?

I see. Well, the product development expectations are going to go up in almost every quarter of the Company. So one note we made in our conference call here was that we are struggling a bit to hire at the rate that we desire to hire into the technical teams, some of which as we increase the rate of hiring and hire more teams will be capitalized into product development in the second half. So we expect more technical development on our core platform, new modules and capabilities are being developed as we speak and we are adding to those teams. So in the core platform development areas, we expect the CapEx to go up.

In content development, we also expect it to go up, but it's a bit undefined. We expect CapEx to go up in office buildout, which there was really none in the first half of the year and there's more in the second half of the year.

So essentially what we are saying is we are reiterating our CapEx budget of $11 million to $12 million for the year, noting that only $3.3 million in the first half has been spent. So we fully intend, in addition to some hardware upgrades on our system, what are called SANs, which are high-capacity hard drives, will be capital investments in the second half of the year.

So in those four categories, we expect an acceleration in the second half of the year over the first half of the year. And I hope that gives you some sense. So we are reiterating our CapEx plan for the year of $11 million to $12 million, even though only $3.3 million has been deployed in the first half.

You mentioned Brookdale as a launch customer will be at a slightly lower revenue per subscriber. Is that primarily due to the bundle that they bought and the launch pricing discount, or is that a sign of the post-acute bundle and what we should be expecting in the post-acute average customer?

Yes, that is a great question, and we won't know until we get deeper into the market. Some of the pricing that is a little lower than our expected pricing is attributable directly to all variables of the partnership, of coinvestment and the many commitments that both parties made in the partnership that we place value on. And so I would say the specific answer to that question is going to have to play out over next year.

We still, I would say, expect to be able to have slightly higher price points for certain components of our platform in the market than in the acute care space. So that is our expectation.

Again, in these strategic partnerships early on and given all the variables, the deployment models, that didn't turn out to be the case. But we still, I would say, characterize and expect on certain core components, particularly the differentiators, like our Competency Center and our competency dictionary, we expect that we will be able to do better than in some of the post-acute space.

With the codevelopment, is there a royalty rate back to Brookdale and is it similar to be 50-50 split with Precyse?

Yes, we won't share the specifics of the arrangement, but it does involve offsetting and revenue sharing and revenue potential for both partners. And so we will characterize it as a strong partnership that has the potential to generate revenues for both parties or offset costs for the parties in either direction.

Again, it is a more comprehensive development partnership, kind of a market development partnership, that has many ins and outs.

If we take -- go from Brookdale to the overall corporate, [new] revenue per subscriber grew by 13.3%, but gross margins declined by 100 basis points. Was that related to royalty rates, the mix of ICD down at 50% gross margins, content cost? I'm trying to understand where gross margins are going.

Yes, it's affected by really -- well, it's not affected by the Brookdale, because there is no revenues from Brookdale and won't until we implement them, which we noted is kind of a second-half phenomenon of this year. So there is no impact from anything tied to the long-term care market or the Brookdale market.

The gross margin, as Gerry noted in the research product lines, there's a little bit of margin pressure because there's lower price points on the CG-CAHPS product lines, which are a rapidly growing product line that have a lower price point, we believe due to the mixed modality of delivering that the market is taking, meaning not all phone-based delivery, but some email-based. And we are more phone-based currently.

We also -- the Precyse margins are the same as they have always been the last year, and so that's not attributing to the change. But we did give more clarity on that relationship, given its size, to the overall growth for the next -- through 2014, and so you do have more information there as well.

And it is fair to say that since we hadn't disclosed that split before and it is a large number, that split is a little lower than our overall rate for other partnerships that are content partners. But again, that is more of a development partner than a pure content partner. We do joint product development, we do joint sales launches and marketing launches. So the nature of a few of our partnerships are more than just a content reseller. We are actually development partners. We integrate our products, we jointly invest in marketing campaigns. We jointly invest in sales efforts and product development.

So both our SimVentures and Laerdal, Brookdale relationship, and this one with Precyse, they are all a little different than our normal kind of content reseller partnerships, and that's worth pointing out because they are important and material to our overall performance.

Any way to quantify the impact, though, whether the lower margins from research or the ICD-10 Precyse impact? I mean, it seems like there is a mix shift with the growth in ICD-10 towards the Precyse deal, which is at a 50% gross margin. And I guess as we see that through 2015, that seems like it's going to be a headwind in pulling down gross margins.

It is a rapid growth product and it does have a slightly lower margin than other -- again, it is different in its nature than content partnership reselling relationships. So maybe that's a fair observation.

Yes, I would also add that while you focus on the margin, the overall either EBITDA or operating income expansion occurs on both products. It's just that one line item, which is where you see the royalties and the cost of fulfillment.

Okay. And then on the G&A side, I know there are investments to make as you enter post-acute, you added to the M&A team. It sounds like you are trying to fill out IT. Are there other areas of catchup or should we see the $4.8 million quarterly run rate as a good baseline?

Let me see where you are looking at the $4.8 million. The G&A. Yes, so in the G&A, we've moved some officers into the M&A team late last year. We continue to invest in deal costs that would show up in there, that just depends on the rate of pursuit of that pipeline. And we've characterized in the past really year that we have an active pipeline, which means there are deal costs in there on an ongoing basis. As you know, you expense deal costs as you go now, not all of them are rolled into the closing. So we do see increased G&A in that area as well.

So some of those are variable that are hard to predict, based on the velocity of the pipeline, of deals. And some of them are steady-state, as you noted, like adding personnel to that capability in our Company.

So it's hard to -- we keep going back to our full-year guidance, where -- as a reflection of our overall thinking of performance, and we don't do line item guidance.

But in terms of deal costs, I mean, it seems like that's more variable in nature. G&A was 270 basis points deleveraging point. How much would that have been attributable to deal costs versus your core G&A and the investments you've had to make that are more ongoing in nature that we should be projecting as part of your run rate?

Well, the best way to describe the G&A, it's a combination of many things. Labor is up year-over-year. Contract labor is up year-over-year in that category. You mentioned the deal expenses, non-business income taxes, other professional services. So it's a variety of things that are driving that increase. There has been some increase in the capacity of different G&A functions. So it's really investment across the board.

Also, one thing to emphasize too, we remarked about the $250,000 accrual for the Sy.Med contingent earnout payments. That's also in the results of this quarter in the G&A. So there's $250,000 that's just a quarterly item.

I can catch up there. And then the summit costs, I see a footnote that $870,000 for the last year. Is that all going to be in Q3 for this year?

Well, it will be primarily Q4, when the summit occurs, which is October, as Bobby mentioned in his remarks.

Okay, so Q4, but around the same $870,000? It just got shifted from Q2 into Q4.

We haven't provided any details on that, but we have a long history of fairly consistent size event. It has grown a little bit year-over-year. But we haven't provided any detail line-item guidance on the cost of the summit. After the event, we try to break down its revenue contribution and expense contribution, after the event.

But I would think it be fair to think about us modeling it as in past years, and just make sure you get it in the right quarter. Because I guess from an analyst point of view, for better or for worse, it's moved between quarters over the years for different reasons. This year, it's because of our great desire to have it in downtown Nashville, and that was the available timeslot in October that made sense for everyone.

So most importantly, if you model it as in prior years is to make sure you get it in the right quarter, because it is a big expense that hits in that quarter, which will be fourth quarter this year.

Thank you very much.

Richard Close, Avondale Partners.

Yes, just a couple of follow-ups. First, on the Brookdale agreement, I just want to make sure that the bundled pricing, obviously the content relationship, we are not talking this contract being a loss leader, are we?

No, no, this is still a sale and we sold the products. We did not give them away. It's just that there are a lot of ins and outs in the partnership that have revenue opportunities and investments. So no, we did not give the systems away, but there were lots of other components that change the total financial picture a little differently than a typical sale. So yes, that's a good question.

Just wanted to make sure there and get that out there. And then second of all, on the Talent Management side, the Performance Center, Competency Center, in the past couple quarters, you talked about selling a certain number of hospitals per week. Any update there?

No, I would say that the velocity was consistent or kind of between what was the prior two quarters. So we didn't quite achieve the same velocity as last quarter, but it was solid and steady and we see a great pipeline for the product.

And we are working again, as I mentioned really in my opening, about working on new metrics. We are trying to evaluate everything from reporting the number of subscribers coming on to that incremental platform piece versus the velocity of utilization metrics. And we just haven't quite decided which set of metrics to put out there.

But steady, consistent demand, steady market wins on the products and steady new contracting, both subscribers. Also utilization continues to grow quarter-over-quarter as well.

And it's fair to say that if you continue selling the Talent Management area, that's a platform sale; thus, that would have a positive impact on overall gross margins, correct?

That is correct. Generally, the platform components have higher gross margin in general, and so that is a correct statement. We are excited to continue that -- subscribers in that area.

All right, thank you.

Matt Hewitt, Craig-Hallum.

Thanks for taking the follow-ups. Just a couple questions on the research business. First and foremost, if I heard you correctly, the online margins are a little bit less than the phone-based calls. Did I hear you correctly on that?

No, let me work to clarify that a bit. What we worked to say is that the patient instruments are the larger part of all the products sets and research, first of all.

Second, the area of high growth in the patient surveys is the CG-CAHPS survey. The CG-CAHPS survey has generally a lower price point in the marketplace than the CAHPS surveys on a per-survey basis. And we still deliver the majority of those surveys through a phone interview process, which has a higher cost of goods, resulting currently in a lower margin for that high-growth area of CG-CAHPS than maybe you are used to.

In response to that, both the market and HealthStream is moving to a mail methodology, which has the potential to improve the gross margins on the CG-CAHPS product set. We still believe strongly in the phone methodology and think the industry will move to a blended methodology of what I would call a higher cost and therefore a higher price point for those surveys done with the phone methodology, and then a broader-reach, lower-cost but higher-margin use of mail methodology.

So we wanted to share those dynamics with you because we are somewhere in between that migration, between moving to the lower price point but higher-margin email methodology for this high-growth area.

Okay, thank you for that clarification. I must have misunderstood, but that's great.

Secondly, there was a new survey just announced by CMS; they are called D-CAHPS. And it's going to be basically $1.5 million adults over the next three years, figuring out at the early stages of Affordable Care Act. I would assume that you are on top of that and that could represent an additional driver over the next couple years for the research business.

Well, we stay on top of all the trends in each area. We haven't modeled the impact of those types of products yet. We are still absorbing and managing growth in the CG-CAHPS area, and we expect that to be the more -- obviously, the driver right now for growth. So we will talk more about those other instruments in the coming quarters.

Okay. And then one last one from me. And I realize you are still prepping for the summit this year, but as we start to think about our models for next year, have you looked at possible dates for the summit next year, given that it's moved around a little bit the last couple years?

That is a great question. We are actually -- as soon as you sign a contract for one location, you work on the next year. And we have not committed to the space yet and we are trying to find good dates. So we don't have an answer for you on that one yet, Matt, so sorry.

When we get closer to and resolve that and pick the location, we will let you know. But right now, all we have is the date for this year, which is in October.

Okay, all right, thank you.

Thank you. I am showing no further questions at this time. I would like to hand the conference back over to Mr. Robert Frist for closing remarks.

Thank you very much. Again, congratulations to our employee base. They are working hard to deliver innovative products and solutions.

We've tried to paint a fair picture of both opportunities and challenges in front of HealthStream, and we remain very excited about our overall progress and look forward to reporting the next earnings call, as we continue to refine and develop and grow HealthStream.

Thank you very much for your participation and look forward to next quarter.

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