HealthStream Inc (HSTM) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the HealthStream, Inc. third-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 follow at that time. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, 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 to discuss our third-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.

So with that, I will now turn the call over to our CEO, Bobby Frist.

Thank you. Good morning, And welcome. We have many items to cover -- financial metrics, operational metrics, product updates, and then some event updates as well. So we will dive right in.

In the third quarter, just a quick scan of the financial metrics, we feel we had solid performance across the board with consolidated revenues up 28% to $33.7 million. Operating income came in up 4% to $3.9 million. Net income was up 16% to $2.3 million, and adjusted EBITDA was up 10% to $6.3 million.

Just kind of a quick sampling across our financial metrics shows solid and within projections financial performance. As you may recall, as we talk about our business we continue to think about introducing new metrics. And we introduced a new metric in the first quarter of this year, 2013, that took a look at the progress and growing the value of our customer base.

That new metric is our annualized revenue per implemented subscriber. It represents the quarter's revenue from Internet-based subscription products divided by the average implemented subscribers for that quarter annualized. In the third quarter of 2013, our revenue per implemented subscriber was $30.95, which was 15% higher than the third quarter of 2012.

If we look back over the last eight quarters, we've seen a steady upward trajectory, which is indicative of our objective to provide more and more solutions to our customers through the channels we've been establishing through our platform. Given the expansion of HealthStream's suite of solutions over the last several quarters, we are working to introduce additional new metrics that continue to capture what is happening in this ecosystem.

Since historically our HLC was the single core application on our platform, we've made it routine to report the number of subscribers on the HLC, the HealthStream Learning Center, along with renewal rates in our quarterly earnings releases. At this time, however, our range of solutions has significantly broadened to be a more enterprise-class talent management suite, and there are now several applications on our platform that work in combination with our other products to create targeted solution sets.

Our array of solutions has increased as customer relationships have evolved to meet changing expanding market needs. And consequently, we are working to provide additional new metrics that better explain the ins and outs of this more comprehensive talent management platform.

Until that time, as we continue to develop those metrics, we are excited to celebrate this one new metric this year, revenue per implemented subscriber. And we will look forward to introducing additional new metrics that maybe better capture renewal rates and additions to our network as we look forward to the next couple of quarters.

Overall, we implemented over 80,000 new subscribers in the third quarter, bringing our total to 3.196 million subscribers. Importantly, net of loss and attrition, we added 151,000 net new subscribers under contract, and that brings our total under contract to 3.411 million contracted subscribers.

I think you know that for the longest time, I've stated our quarterly goal of net new subscribers is 20,000 to 50,000 per quarter. So obviously, this is an exceptional quarter by any measure, and I think we could provide a little more color on how that looks. Roughly one-third of the new contracted subscribers in the third quarter were from an amalgamation of new healthcare organizations, so spread across the entire spectrum, and so that's consistent with past targets and goals.

So one-third of the new 151,000 came across a whole range of healthcare organizations, hospitals, home care. So we are excited to see that baseline performance. Another one-third resulted from additions specific to select content sales or, in this case, largely ICD-10, which has clearly been a driver of adding new subscribers. Even when they are on competing platforms, we see that we have a market-leading solution for ICD-10 and we are able to add subscribers by attracting them to that solution, which we feel is a great foot in the door with additional market opportunity.

And the third and final part of the 151,000 came from our agreement with Brookdale Senior Living, which we announced last quarter, but it actually got signed at the beginning of this quarter. And now we are well on our way to implementing Brookdale Senior living.

So you can see a really nice balance across these three kind of thirds, 151,000 net new subscribers, one-third from the open market, one-third from bringing in new ICD-10 customers, and one-third from Brookdale Senior living, which is now in the process of implementation.

We currently have a backlog -- this is important because the backlog as we implement, then they turn to where we can recognize revenue -- of 215,000 subscribers. That's 215,000 subscribers that are in the process of becoming or being implemented.

Renewal rates for the third quarter of 2013 were 85% based on full-time equivalents or number of subscribers, and 93% based on contract value. Our renewal rates reflect the addition of subscribers compared to previously contracted amounts, combining with any pricing adjustments that may occur at renewal. During the third quarter, the number of subscribers that were up for renewal was approximately 100,000, which is atypically small relative to other quarters.

For example, last quarter over 0.25 million were up for renewal, and we renewed practically all of them. And when we have a low volume renewal quarter, it makes the measurement far more sensitive. And so we did see a loss of approximately 16,000 subscriptions in the quarter, which largely explains the renewal rates in the quarter.

For the trailing four-quarter period, importantly, ended September 30, 2013, customers representing 95% of subscribers that were up for renewal did in fact renew, while renewal rate based on contract value was 96%, again for the trailing four-quarter period.

I'd like to turn our attention to some business updates. We announced earlier this year we launched our strategy to offer our learning and talent management suite of solutions to the post-acute care market. As you may remember, we reported in our last call that we contracted with two large organizations that were leaders within their space, Brookdale Senior Living and Almost Family.

I'm pleased to report that the implementation of both of those accounts is going smoothly. We are seeing innovative uses of our platform from Almost Family already using social learning and our community capabilities to reach their broad audience across their 10 operating or business units.

During the third quarter we signed additional customer contracts in the post-acute space, which I mentioned earlier, part of the 151,000 that were signed, and we remain active in developing new content partnerships in this area. In fact, we look forward to announcing several new content partnerships in the fourth quarter, which are teed up really nicely here at the end of the third quarter.

Turning our attention to SimVentures, our collaborative arrangement with Laerdal Medical, we delivered a strong quarter. Revenues from this product suite is growing 35% over the prior-year same quarter. We delivered about $565,000 revenue from our SimVentures collaborative arrangement. In the quarter, SimManager was contracted for example by the Children's Medical Center in Dallas, an exciting new addition to customers of our SimVentures product set.

In the third quarter importantly, we also began to bundle SimCenter, which are products of SimVentures. We began to bundle products from the venture with other hot-selling products like our Heartcode solutions. So now when we sell our Heartcode solutions, we bundle the SimManager product -- we call it the SimManager Express -- with the Heartcode solution. So now each time we sell a Heartcode solution, we will also be selling a product of SimVentures. It's a very exciting new way to achieve additional distribution of the SimVentures product sets.

In the third quarter, our adoption of the Sy.Med OneApp application, which is a credentialing and privileging application, continued to grow. Excitingly, we added 24 new contracts to the Sy.Med credentialing product during the third quarter of 2013. Our Sy.Med credentialing solution provides a unique invention into our talent management strategy.

It's kind of this overlooked area of managing talent in healthcare as the credentialing and privileging of the workforce, giving them the rights to access and practice medicine in the various facilities. And this is kind of a detailed process generally managed out of the clinical side of the organization, but it is certainly a talent management function to manage the clinical credentials of your workforce. So we are very excited to see that product run continue to grow, adding 24 new customers.

Within our research business, we performed well in the third quarter, particularly with our Patient Insights surveys, which are the more occurring revenue components of the research business. Our patient survey revenues increased 15% over the third quarter of the prior year 2012. Overall, our research business revenues increased by $1 million or 17% over the third quarter of 2012.

An important driver of this growth is our CG-CAHPS product, that's Clinicians and Groups. That's the survey that focuses on physician and clinician practices. We added 25 new CG-CAHPS customer contracts in the third quarter. Those contracts are worth approximately $2 million in total contract value.

We added new customers like Allegiant Health, Stormont Vail Healthcare, and Pikeville Medical Center to our CG-CAHPS product line in our research business, so we are excited to see research deliver strong double-digit growth, and particularly the performance of the CG-CAHPS product.

In September, we enhanced our patient experience solution also tied to our research business through the acquisition of Baptist Leadership Group. This is a Pensacola-based -- Pensacola, Florida based, consulting practice. The Company, through this acquisition, gained a competitive suite of assessment tools, training curriculum, a staff of experienced coaches and experts. And they are all focused on really one thing, improving the patient centered performance of HealthStream's customers.

So we are very excited to have such a talented team join our Company and add even more dimension to our research business. We look forward to their continued contribution to the growth of our research product lines.

We purchased Baptist Leadership Group, or also referred to as BLG, for approximately $7.2 million in cash and $500,000 in HealthStream common stock. We were excited to complete that transaction. We actually saw a small contribution in the remaining month of the quarter from the BLG product line. So we are excited to get that organization on board and contributing to the growth of our research business. But it was only a slight contribution, only one month of the quarter. We'll see a full-quarter impact of that acquisition in this quarter.

I'll turn it over to Gerry for a more detailed look at our financials, and then come back and discuss some more product updates and some events. Thank you, Gerry.

Thank you, Bobby. Good morning, everyone. Bobby has laid out the quarter's highlights. I'll take a few minutes to add some financial color to our results. The foundation for our solid financial performance lies with revenue growth. As Bobby mentioned, the third-quarter's consolidated revenue growth rate was 28%, with year-to-date results on a similar trajectory at 25%.

The learning and talent management segment has benefited from both an increase in the number of subscribers as well as greater courseware consumption across that subscriber base. Our implemented subscriber count has grown by 11% over last year's third quarter, which equates to an additional 327,000 subscribers we've added to the revenue base over the last 12 months.

The other sort of learning and talent barometer is revenue per subscriber. That metric has expanded from $26.98 in last year's third quarter to its current $30.95, which is a 15% growth rate and reflects that continuing courseware consumption amongst our subscribers. The end result is a 28% growth rate in our recurring Internet-based subscription products in the third quarter of 2013.

As Bobby mentioned, the research segment now includes Baptist Leadership Group or BLG, and experienced a 17% growth rate in the third quarter. The Patient Insight category led the way with a 15% increase on the other survey categories -- employee, physicians and community -- also posted net gains.

The CG-CAHPS surveys, which you've mentioned in previous call this year, were again significant contributors to double-digit patient category growth.

We are pleased that many of our revenue metrics portrayed double-digit growth rates. There are two additional factors surrounding revenue performance that are important to mention. First, we are very pleased with the performance of our acquisitions such as Sy.Med Development and Decision Critical. For example, as you read in our release, Sy.Med contributed $1 million to revenue growth in the third quarter of 2013.

Second, and importantly, core growth remains the most significant driver behind our overall revenue performance. Year-to-date operating income has grown by 10% over last year's first nine months, which is consistent with our guidance. We've been investing continuously in 2013. Labor, both in terms of increased employee count, and contract labor is one of the most obvious forms of investment for us.

One example of how labor investments are affecting our financial performance is the growth rate of our product development category on the income statement. For the first nine months ended September 30, 2013, product development expenses were up 36% over the same period in 2012.

For the first nine months of 2013, we have incurred higher operating expenses in royalties, personnel additions in contract labor, sales commissions, depreciation and amortization, business taxes, merger and acquisition program costs, and other general expenses.

We continue to review and evaluate acquisitions and business development opportunities, and as we mentioned in the past we retain our discipline into strategic fit and valuation. As Bobby has mentioned, we are excited to welcome the BLG team to HealthStream by way of the September closing, and BLG will be an important and exciting addition to our patient experience products.

Our balance sheet remains well positioned to support our development activities as our cash balances at September 30, 2013, were $104.7 million. It's interesting to note that the cash as of June 30 was $101.4 million. So we were able to cover our net $7.2 million cash investment in BLG and generate enough additional cash to increase our balances by $3 million in sequential quarters. As you already know, we have no long-term debt.

One last thing to mention to call your attention is cash flow from operations from the cash flow statement, which shows us a link between our balance sheet and our operating results. Cash flow from operations has grown by 46% for the first nine months of 2013, increasing from $15.6 million to $22.9 million over the first nine months of this year.

Finally, you just saw in the release we are updating our 2013 guidance and anticipate that consolidated revenues will grow between 26% to 28%. We expect learning and talent management to grow between 30% and 32%, with research revenues to grow by approximately 8% to 10%.

We expect operating income to be approximately 6% to 10% over full-year 2012, and capital expenditures to be between $8 million and $9 million. And finally, we believe that our effective tax rate will be approximately 41% to 44%.

Thanks for your time, and I will turn the call back to Bobby.

Thank you, Gerry. I'd like to head into some solutions and product updates of note. We continue to see progress for two of our new talent management product offerings. These product offerings are an integrated part of our enterprise-class SaaS based talent management platform offerings.

Those products are the HealthStream Performance Center and the HealthStream Competency Center. Since our launch of the Performance Center approximately 18 months ago, the number of contracted subscribers has reached approximately 250,000. We are very excited to see the continued uptake and progress of this product set in the market.

The 250,000 represents the subscribers across both Performance Center and Competency Center. Those two products are very similar to one another with slight additions that differentiate them from each other. We added approximately 34,000 of those subscribers in the third quarter of 2013. And as I should note, the average US hospital has a little less than 1000 employees. So you can see we are adding a significant number of new hospital and new customers to the HealthStream Performance Center and HealthStream Competency Center products.

We are also seeing strong utilization of the products, so we're not just selling it well; we are beginning to see metrics come in. For example, in the first nine months of 2013, over 70,000 assessments have been completed, which is derived from 4.5 million competency ratings, individual competency ratings that have been completed through the SaaS-based platform.

So we are seeing a shift, the move from paper to automated performance review and automated competency review, through our platform in the industry. And we are very excited to see continued adoption of those platforms.

Overall, the talent management space is an exciting and dynamic environment, and our success of our product is attracting increased competition. We are focused on building core solution sets for key challenges facing healthcare organizations. For example, we are focused on improving resuscitation rates, improving the clinical on-boarding process, helping hospitals meet their OSHA safety training requirements, the federal requirements.

Our competitors tend to be more focused on pure HR functionality, whereas our system combines platform content and data in ways that address specific healthcare challenges like the three that I mentioned. Our solutions, because they address specific problems in healthcare, are more targeted than just to the HR functionality. That said, other vendors have built out HR specific capabilities that we don't currently offer.

Some of those capabilities we have an eye to building, and others we just simply will never build. So in some of the doorways where we sell, like human resources, we are continuously seeing more and more organizations competing for that business. In other doorways, like the chief nursing officers, the compliance and risk management area, the competitive landscape is more focused and there are fewer competitors for our combined solution sets.

So we see this interesting mix of as we focus more, we can create unique solutions, but also in the HR arena, in the pure talent management space, we are seeing increased competition.

We are expanding our platform and products in unique and interesting ways that help these organizations achieve specific business and clinical outcomes. Two areas where we are achieving great outcomes for our healthcare organizations are through our ICD-10 solution sets, which are helping hospitals prepare for this large migration to a new coding methodology, and our Heartcode solutions, which are targeted to help hospitals improve resuscitation rates.

So on the ICD-10, earlier this year CMS reaffirmed the deadline of October, 2014 for the required transition to the ICD-10 coding system. We believe this regulatory deadline, assuming that it is not delayed, will continue to be a steady driver for our training solutions for the new coding system.

As you know, and as we have mentioned before, we have partnered with Precyse. Precyse offers outstanding courseware for ICD-10. We are able to bring an effective means to training the respective workforces of these healthcare organizations. Through this partnership with Precyse, we have ICD-10 content for the full range of hospital employees that need training, and that includes coders, physicians, clinical staff, executive staff, and nonclinical staff.

Since 2011, over 1 million healthcare professionals have contracted for our ICD-10 training solution through their respective organizations. We continue to see steady sales patterns for our ICD-10 solution. The majority of new contracts that are being signed, even in this recent quarter, are for a 24-month period. In the third quarter of 2013, over 80 new contracts were signed for our ICD-10 solution.

Over one-quarter of those 80 contracts were each valued at over $100,000. So you can see both the velocity is strong and the size of the deals is strong. So, retail prices in our two-year contracts for ICD-10 range from $30 to $250 per user, with the average user price situated near the bottom of that range.

We have a 50-50 arrangement with Precyse, which gives us a 50% gross margin on our ICD-10 solution. We are excited to be leading the industry in providing what we believe is the very 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 2014. It is also reasonable to expect revenue for the ICD-10 products will begin to taper after the October 2014 deadline.

Our challenge in 2015 will be to backfill such a successful product by developing a maintenance revenue stream and renewal strategy with regard to this product line. While many healthcare organizations have adopted an enterprisewide approach to the orientation phase with regard to the new coding system, it is unclear what subset of their employees will require maintenance learning strategy and, therefore, how many will need a maintenance subscription.

We do, however, believe that the ICD-10 products will continue to drive revenue growth for the remainder of 2013 and throughout 2014.

Shifting gears to our Heartcode suite of products, we continue to see strong demand for the 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 contains content from the American Heart Association.

In the third quarter of 2013, we crossed an exciting milestone of 1 million healthcare professionals who have completed the preparatory training for their CPR certification through the HealthStream platform. So it's exciting to achieve a couple of milestones, the 1 million mark now in cumulative subscribers to our ICD-10 and the 1 million mark of healthcare professionals preparing for their CPR certification through HealthStream.

We see these as important shifts that show that when change is in front of us in the industry, the industry will turn to us and our platform to prepare for these important -- to achieve these important clinical outcomes or be ready for these important business objectives like ready for the ICD-10 migration.

Exciting news also, kind of a culmination for the last several months, was our celebration with over 625 customers paying us a visit here in Nashville. They came from across the country to attend our 2013 Summit, which was our 10th summit. It's held right here in Nashville in our new Music City Center in the heart of downtown Nashville.

The event was very exciting, presenting dozens and dozens of workshops, presentations focused on best practices, and other tools to help the healthcare workforce improve quality at their organizations. The [topical on tracks] that we were able to launch include leadership and strategy, human resources, talent management, education, and of course quality themes were throughout the event.

Also importantly, our ecosystem partners participated in the success of this event. Over 20 of our partners participated formally in the exhibition hall, including our core sponsors Laerdal Medical, Lippincott Williams & Wilkins, and Precyse, which are core partners behind core growth products for the HealthStream ecosystem.

They were able to showcase their products and generate new leads for their clinical and business solutions. Attendees had a chance to participate and also receive continuing education credit by participating in the programs, and we had preconference workshops. Overall, one of the most exciting weeks in HealthStream history, one of the most successful gatherings of customers interested in quality outcomes; with a great blend of executives representing HR, representing physician engagement, representing the patient experience objectives of our customers across the country.

So it was a fantastic week. I want to congratulate all HealthStream employees for the continued success of our organization, and certainly the last week was a great time to celebrate that in person with our customers. At this time, I'd like to turn it over to the operator to go to the question-and-answer session.

Thank you. (Operator Instructions) Ryan Daniels, William Blair & Company.

Yes, good morning, guys. Thanks for taking my questions and congrats on a strong quarter. Bobby, I wanted to go back to some of your color on the net subscriber adds. You had indicated that about one-third of them are coming to HealthStream, given some of your proprietary content like ICD-10.

And I'm curious if they are coming over and buying the platform in just ICD-10, or are they coming over and moving more of their learning and talent management programs onto HealthStream right upfront?

Well, some of it -- it's a little of both. Some of them come in -- it always connects to our platform, so we have a connection that allows them to tap into our architecture and use features and functions of our platform to have successful delivery of the platform. So there's no way to really consume anything from our network without tapping in and synchronizing with our architecture infrastructure and platform.

So we are able to generate some revenue from the connectivity to our ecosystem, in addition to the value of the content sales. So I guess the short answer is that they're always connecting to, benefiting from, and using components of our technology architecture when they get access to the content.

Okay. Just so I'm clear, so the roughly third you are talking about, that's just more of a connection versus a full subscription to HLC?

That is correct. It's a subscription to the connection components of the platform, and it provides several of the capabilities. In fact, increasingly we think less about single applications and more about tapping into a license for certain technology workflow engines.

And so we are able to tap into the one that manages delivery and targeting of the content, which is one of the core functions of the HLC.

Okay. Perfect. Then a couple more quick ones, and I'll hop in the queue. I guess one for Gerry; you talked a little bit about the summit. I just want to make sure we have our modeling expectations right for the upcoming quarter.

That's roughly about $1 million in incremental costs; is that the way we should be thinking about it this year?

In the past, we disclosed it's roughly $800,000.

Do we have the numbers for this quarter yet?

We haven't broken out the guidance that way.

Okay, we haven't broken it out.

No. In the past we disclosed -- Ryan, in the past you go back and look at like last year, we disclosed $800,00 in expenses.

So it's safe to assume it'll be somewhat similar to that?

Yes.

Okay. Great. And then you just thinking a little bit more about the move into post-acute care, the momentum you're seeing both on the content side and business development, I want to get, if you will, a little bit of a state of a union on how you are looking at going forward and what kind of investments you continue to need to make into 2014 and beyond versus the growth you might see. How are you balancing that looking forward?

First, I want to go back to the $800,000, the $800,000 is roughly the expenses of putting on the event, but there are offsetting revenues that come as well. So the net expense is not as great as that. So we don't disclose the revenues from the event, but the event also has revenues.

And then back to investments, we just see broad investments across every category. Gerry called out the product development growth. We continue to add capacity and capability to our product development teams. Always about this time, we release and start to target hiring. And we just completed our retreat planning process with our board in the sales organization, so we expect to see some new positions posted here in the next month or two to begin to ramp the sales organization again for next year.

We like to come into the next year with newly-added sales team members for our -- usually in early January, we hold our sales planning retreat with the entire sales organization and marketing organization. So you will see some additional adds in the areas of sales and marketing coming up in the next couple of months.

So really product development, sales and marketing, and then of course service across the board. We continue to strengthen our service organizations. We've added, as you know, to our teams to actualize and help us invest the cash balances we have. So we've added to our G&A through building a stronger M&A team, an integration services team. We are adding some integration services, an integration officer.

So we are really, Ryan, invested in all categories at a rate while trying to maintain the trajectory we said we'd deliver, that 10% operating income growth over the prior year. So I expect many of those patterns to continue as we look forward to the next -- into the future.

Okay, perfect. Helpful color, thanks guys.

Thank you. Matt Hewitt, Craig-Hallum.

Hey, good morning, this is actually Dillon on for Matt. Thanks for taking the questions. Appreciate the color on the renewal rates, so just trying to dig into that a little bit further. Is it purely a fact of just a lower denominator for the quarter, or is there any seasonality?

Obviously, there's competitive dynamics working the industry. Are you guys expecting them to snap back next quarter? Just trying to dig in for a little bit more color on the renewal rates.

Yes, I can provide a little bit more. It was interesting because some of the losses actually just dialed back the number of subscribers of the organization, but really remain customers of HealthStream. So we actually had three accounts that comprised most of this loss of subscribers, each of which remained a customer of HealthStream but dialed back the number of subscribers. At least one of them we know is essentially a cost management; they were taking some hard costs out of the systems and decided to target to a smaller amount of users in their organization.

And of course, there were some competitive losses in there as well. But the majority of this quarter, again, an unusually small number, were up for renewal. And several of those that did not renew were simply customers that dialed back the number of targets, the number of targeted subscribers in their organization.

So three of them were about 15,000, the renewal of the metric, which was the majority -- explains the majority of the drawdown. Actually remained customers but drew down the number of subscribers on renewal that they were targeting with our services. So that was little different than we've seen in the past, but we were glad that they remained customers and remained under contract as an organization but dialed back the number of subscribers.

Okay. On the decreased CapEx guidance, just wondering for some -- trying to get some granularity there. Were there some projects that you guys had initially planned for the year that were taken off the table or just didn't track out to how you guys were expecting it to go?

Yes, earlier in the year we had determined our CapEx budget and we've obviously revised it downward. We had -- in the first half of the year, we had some struggles hiring teams and people at the rate that we had hoped to, and we have done a good job in the past several months catching up.

We've done some really innovating things with our HR group and new recruiting videos that express our culture, and we have experienced a turnaround, both increased retention inside the organization that's been exciting and increased attraction and able to successfully fill open positions a little faster rate here in the second half.

So some projects are not starting at the time that we expected, but we continue to add them as quickly as we can and bring those products online. So it's just essentially pushing a little bit of the CapEx forward.

There's no change in the product roadmaps that we are planning to build or the number of things we are planning to execute on. Some of them just started a little bit later, so we are not going to get to expense them or capitalize them in these periods.

Okay. And then lastly, and I'll jump back in the queue, more of a macro question. Are you guys seeing any trends up, down or sideways for hospital employment? I know healthcare jobs was released today, 7000 for September.

It's been pretty steady throughout the year, but any kind of color you guys are seeing on the hospital employment would be helpful.

Yes, I would say that in the prior three or four years, the industry was one of the few industries that was a strong net -- specifically referring to the hospital, the acute hospitals -- made strong additions to their employment payroll sizes. In the last two quarters, we have seen a slowing of that. I think one was real close to being negative, and so that is a bit of a change.

It never grew really rapidly even in the prior three years, but it was a steady industry, adding steady jobs in the acute care space. I expect to see continued additions in the post-acute space, and the last two quarters we have seen kind of flat growth or slightly down. So that is a contrast from the prior three years, just these last two quarters.

But I expect overall employment in the full healthcare sector including post-acute, ambulatory, surgery, behavior, behavioral to grow. And so earlier this year, I think as you know, in January we declared an increased focus on those verticals as well.

So hopefully, that proves well-timed and we can continue to make progress as the overall employment grows in healthcare services, but we've seen a little bit of a flattening in employment growth rate in the acute care space.

Thank you.

Scott Berg, Northland Capital.

Bobby and Gerry, congrats on a nice quarter. First of all, Gerry, can you give us some financial details on Baptist Leadership Group in terms of what that organization has been doing historically in terms of maybe revenue cash flow or earnings, and what your expectations are for impact for the rest of the fiscal year?

We haven't really in the past disclosed historical performance of our transactions. In the BLG results, our expectations are assumed in our guidance for the remainder of this year.

Okay, fantastic. Bobby, you talked about adding sales headcount going into your sales kickoff next year at the beginning of the year. Do you have any expectations right now in the number that you are expecting to add maybe from the third quarter and the fourth quarter in total?

We don't, but it is simple to track as we add them. We post them almost immediately within 24 hours to our website, and so you will get a clear indication of that. Usually what happens here is we begin to feather in the hires that are intended for the next 12 months, try to get most of the intended hires done in the first quarter. But it never ends up quite that clean where we had throughout the year, even in the third and the fourth quarter.

So we try to get the bulk of that hiring done in the fourth quarter and the first quarter of each year. So we haven't disclosed the exact number. In fact, we haven't finalized it. We now have ranges. We essentially have board supported budgetary parameters laid out, and for the next few months we will be consolidating the ground-up build of our budgets for next year and the release of hiring.

So we are right at that inflection point where we are beginning to release some hiring, but we are finalizing everything. And so most all of that will be reflected in December, and certainly by February you will have a great clarity on the rate of hiring. And if you watch our websites, again, it's easy to track.

Great. And the last question I have is, Bobby, you talked about some of the demand from a content perspective, especially around ICD-10, which has been strong recently. But how about from the core talent, from the learning platform standpoint; are you seeing any noticeable change in trends either positive, negatively, in terms of what your pipelines look like exiting this third quarter relative to maybe six months or so ago?

Well, I think our actual performance has really outstripped most expectations. If you look at the net new subscribers added at 151,000, I mean clearly when we add a really large system like a Brookdale adds 50,000. But even factoring out Brookdale, you have an addition of about 100,000 subscribers across the spectrum of products in a 90-day window.

So we see continued demand the way we are able to bundle that platform, meaning our talent -- features and functionality of our talent platform. We also gave a little more clarity on the rate of additions to some of our platform extensions, so this is new for the first time, the competency center and performance center.

They're now getting up to a mass where they are becoming a market-leading talent management capability. The performance management process and the clinical competency management process, those are core extensions to our platform and we are beginning to add subscribers to that component piece, which is unique.

It's fully integrated, but it's unique in its feature set and capability from a learning platform. So what I would say is we continue to see demand across the capabilities of our platform and continue to have strong subscriber adds in many different buckets. There's just more ways, as the platform expands, for people to become subscribers to our ecosystem, and we are excited to see that move ahead.

Great. Thanks for taking my questions.

Thank you.

Frank Sparacino, First Analysis.

Hi, guys. Gerry, first I wanted to follow up, I think, on an earlier question on Baptist. I know you haven't disclosed details, but the revenue for that acquisition is included in research, but the research guidance hasn't changed. So what should we infer from that?

Well, I think we will see that, once again, we'll be in that range; I think it's 8% to 10% is what we have for the guidance. And that will include, of course, the three months of BLG for the fourth quarter plus our existing research business base. So that's where it's accounted for, where we've done our forecasting is included in that segment.

Just in terms of what the business is, can you just talk about relative -- is it more of a product company, or what's the revenue mix between actual product versus services?

Well, it's really all services. I guess the way to maybe do a little bit of a contrast, they do not complete the traditional HCAHPS patient surveys. It's more of a coaching, consulting type business. The arrangements tend to be multiple-year assignments over a course of a number of quarters. So it's a little bit of an adjunct to a -- we have a small in-house consulting service right now that's part of our business base.

This is a different type of consulting, but it's more an adjunct to that patient experience product, and they do not do survey completion like the flagship part of our research segment.

Okay. Thanks, Gerry. And then, Bobby, maybe for you just on the ICD-10. In terms of the revenue range, you gave per user, I think $30 to $250. I'm curious why we are sort of toward the lower end of that range, and then over time would you expect that number to grow? It seems like people are obviously gravitating toward a certain part of the ICD-10 training today, and I don't know what that is or what that trend would look like over time.

Well, the two-year value of a subscriber is $30 to $250, and we wanted to communicate that the average across all subscribers is at the bottom, the very bottom of that range. So what that means is we are seeing a lot of enterprise-level subscriptions where there are a few people, maybe the coders themselves are at the higher end of the range, but the bulk of the subscription is a bulk subscription for all employees to be oriented on the topic of ICD-10.

So they're obviously at the very low end of that range and comprise the bulk of the number of subscribers. And so bringing the average price point to the very low end, the very bottom of the price range that we gave. So you can think of it as in this window of orientation and training with this new level regulation, we are seeing enterprise level full access to the complete library, with only a few of them needing the detailed training of the higher-priced modules that are contained in that enterprise-class subscription.

So we have tried to describe it, and so that generates the $15 to $125 per person per year over two years, which gives the value of a contracted subscriber over a two-year period of $30 to $250 and the average across the million subscribers.

So if you look at it that way, that a big healthcare organization subscribes to give full access to the full library for all employees, the average is at the very bottom of that range.

And then maybe just one follow-up there, Bobby. In terms of the higher-end training, does that suggest that hospitals are going to a different resource for that? Is that being done more in a different form in terms of on-site, or where is that business going?

No, no, no. It just shows the mix. So if you have 1000 employees in your hospital and you have 20 or 30 people that are full-time, they are in the coding, they do the coding, those are the people that need the robust training. Essentially they have to be retrained on the new system, they actually do the coding.

Everyone else, the executives, they need an orientation. They need to understand what this change is all about, they need to know some of the details, but they are not actually coding. And so it really does shows the mix of kind of coders versus everyone else.

Thank you.

Thank you.

Terry Lally, Spotlight Funds.

Good morning, Gerry. Thank you for breaking out the ICD-10 revenues; that's helpful to isolate the impact. Is there any way to provide past quarters?

We may consider that in the future, but right now the significance of this quarter is why we broke out this one metric for the third quarter.

When you say the significance, is that because it's across 10% of revenue, is at 11.6%, has it been growing at a faster rate than the corporate average so that it's been increasing as a percentage of sales as the year's gone on?

Yes, that's a fair statement because last year was a very low base.

Yes. Any way to quantify how much ICD-10 contributed to revenue growth overall? It was 45% in the quarter. Any way to see what we've done year to date in terms of ICD-10 impact?

We can consider that maybe for future quarters as we get more and more exposure to it. But once again for the third quarter, we opted to give some color on the growth rate or the growth that it contributed for our results. And so that was designed to give us some kind of idea of the trajectory of the ICD-10 revenue curve.

Okay. And then you would expect that to continue through the October adoption date and then taper off; sales to taper as we approach it and revenues to taper after that?

Well, certainly we will give our 2014 guidance as we have done in the past with our year end, which is of course the fourth quarter. I think Bobby had some general remarks about the revenue curve in 2014 and 2015 earlier.

Then switching to the metric, when you mentioned the value per prescriber for ICD-10, it sounded like Bobby had mentioned this was actually a two-year contract value, the $30 to $250, so that the annual is actually $15 to $125?

That's correct.

Then suggesting that was on the bottom end of that range, are we talking $15-ish, is it $20-ish? Is it above or below your average revenue per customer of $30?

We've provided really all of the color we are going to provide on that for competitive reasons on the actual price, but we use the word bottoms very specifically to guide you to the bottom of the range for the average, and we put so much more disclosure in today.

It's about all we can give you without telling the actual price for competitive reasons. So we have 1 million ICD-10 subscribers. We gave you the annual and the biannual value and the average contract length of 24 months. And so we just emphasize the words were very carefully selected. At the bottom of the range is the average price.

Okay. So then if we are looking down toward $15 a person per year, that's actually lower than your average revenue per customer. So it's actually pulling it down. (multiple speakers) So your lift in ARPU per year is not --.

We're not going to comment anymore. That's right. You can draw your own conclusions. We're not going to comment any more on the pricing of that particular product.

Okay. A follow-up to a prior question about the -- with most being towards the bottom. It seems like those are the general population, not the hard-core coders. What would you expect -- you've talked in the past about the maintenance levels being lower post ICD-10.

What would you expect the user renewal rate versus the ARPU? I guess I originally would've thought it was actually going to be more of an ARPU issue versus there's a lot of general folk who just need orientation. What would you expect subscriber renewal rates to look like as we hit 2015?

Well, we just don't know, and we are talking almost a year and a half out. But I believe a couple of things. One, the topic will remain a critical topic for years to come. We just don't know, and that's what we're trying to describe our observations today, but we just don't know. We haven't been through a renewal cycle.

I do believe that there's a difference in this orientation phase of getting everyone aware of ICD-10, and then what we will call a maintenance phase once it is launched. So we are beginning to characterize almost a year and a quarter in advance of any potential changes, just some framework for everyone to grasp onto. But we are really, truly uncertain.

We may see that it is such an important issue they come back for enterprise licensing again, for everyone. Or we may see that they move to a maintenance model for just the hard-core coders, or we may see a blend. And the fact is that almost a year and a half before this becomes an issue for the Company, we just don't know an answer to that question.

Each quarter we will try to provide more clarity and we'll classify our observations of the current quarter trends, and I think we've provided exceptional detail around this particular product set already. So we will keep you informed as best as we can with the best guidance we have, but right now you are asking questions about 2015, and we just don't have visibility into them.

The gross margin side, there's been some volatility and the trend has been down. It's down 90 basis points year over year and 150 basis point sequentially. What's causing the gross margin volatility and where should we expect it to go as ICD-10 and other licensed products increase as a percentage of the mix?

Yes, I think you pointed out the right variable, which is the mix of selling. Some of the platform products have higher gross margins, some of the content products have high gross margins. Some of them have high cost of goods. And so we are seeing now the relative growth rates, everything is growing -- platform, platform subscribers, ecosystem content consumption -- is also growing at a very rapid rate, rapid pace.

So at the gross margin level, it is the blend of the various margin products. And we are seeing, as you know, as we noted, we spent a good amount of time on the Heartcode products, which have a higher cost of goods, and ICD-10 products which have a higher cost of goods being relatively successful. But we also saw adding 39,000 subscribers to the performance center and 151,000 subscribers overall to the core platform.

They tend to come in at a lower initial price point. They buy kind of a platform in a small bundle. And so we think it's exciting when they come on board because over the next 3 to 5 years as has been our history, we are then able to grow the revenue per unit or per subscriber. And so the 151,000 is very important kind of important baseline addition to see, because it allows us to know now we have a broader audience to grow the ARPU.

But you hit on the right variable for gross margins. It's the mix, the relative mix of those things. One other thing I should note is that the research business is also now in the higher double-digit or up to near the 20%. I think we delivered 17% this quarter growth, and we haven't seen that kind of growth in that product line in some time. So it seems now that most all products are firing on all cylinders.

Great, great. Development increased 80 basis points sequentially and 100 basis points year over year. What should we expect there? Is this part of the impact of Brookdale and the new post-acute content development? Are we going to see further increases? How should we be modeling the content development side?

I think we need to clarify. And I think if I'm remembering from the last time that we discussed that our development and product development is largely building platform and platform capabilities, and not building content. Content is largely provided through our ecosystem of over 100 partners, that they build and incur the cost of building content. So when we talk about product development as a category for our Company, we are largely talking about building out technology and platform and capabilities that underlie the delivery and targeting of content or the facilitation of functions like performance reviews in hospitals.

So I did want to describe the nature of it. So we continue to add development capacity, meaning coding teams and developmental teams to our organization.

Now we do build some content, and in our partnership with Brookdale we will be jointly developing targeted content because we are kickstarting the ecosystem in the post-acute space. So we have allocated some capital to build out initial libraries. But also announced in this call that we are looking to add several additional content partnerships where the partner builds the content in the post-acute space in the fourth quarter.

And so we really think we've got that teed up for you in the fourth quarter. So our capital investments are generally limited in areas of content and mostly about technology build.

So it's mainly around the platform. It looked like it increased 500,000 sequentially. Should we expect that to be a run rate; should we expect continued increases off this to add to the platform?

It's certainly a run rate and it's one we continue to add to. So our vision for this ecosystem and platform is very broad. We have a lot of ambition about what we want to do through the platform and through this kind of growing ecology or ecosystem; not only building out the talent management capability sets but extending in other unique ways that let others develop with us.

So basically extending the capability sets that others can benefit from. And so that's an area of constant research and development for our Company.

Okay. And then just finally, the Brookdale contract last quarter, you announced that you are still working out some of the details. When would you expect the post-acute care to be commercialized and hit the market? And is Brookdale actually live on your systems right now? I saw the 50,000 added to the subscribers.

So we've begun activating -- of course it was contracted for already, so they are under contract, and then we have an implementation window. We are in the process of implementing now, bringing up their facilities and individuals live to the platform.

As they go live, we begin to count them in the implemented subscriber bucket and begin billing for them, and so general implementation cycles range over -- right around a quarter for a big account like that, or a little less or a little more. So we will begin to see the full impact of the Brookdale contract in the first quarter of next year, but even some in the fourth quarter as they go live.

It's also important to note that we're implementing both the learning part of the talent system and the competency and performance part of the talent system for Brookdale. So we have multiple implementations going on across the organization, in addition to our strategic relationship where we are outlining the roadmaps for content development.

So there's a lot of exciting activity around Brookdale. I think by Q1, you will see all of their FTEs onboard as implemented subscribers.

Great. Thank you.

Richard Close, Avondale Partners.

Okay. Thank you. I apologize, I missed a bunch of the call with being dropped off here and trouble getting on, so apologies if I repeat anyone's questions. I will keep it short since we're up against the time limit here.

Bobby, obviously you're executing extremely well in a lot of different parts of your business. And I am just curious what you think as you look at the business where is the most improvement that you as an organization can make, in terms of to continue the long-term growth trajectory that you've been executing on over the next several years? Obviously, you highlighted the ICD-10 opportunity and the benefit there, but just trying to also get a feel in terms of where we stand in terms of, I guess, filling that hole when that eventually comes about in 2015, and just your thought process in and around that?

Sure, sure. Well, first of all, I think we are doing a much better job of identifying macro trends and organizing our teams and products sets and platform around the macro trends. We just came off summit where we had a session where all we did was ask our customers for an hour and a half about the big operational challenges that they have.

We had about 200 people or 250 people participate in a session where they simply told us what are the challenges they face and where do they need help from a macro level. So I think the Company is getting better at listening to that and prioritizing future product development and product launches around those trends.

I think that's indicated by how successful we've been with ICD-10. This was a known evolution in the industry for many years, but few prepared for it in 2011. In 2011 late was when we signed our agreement with Precyse, which positioned us well when purchasing began in 2012, but really obviously purchasing began in 2013.

And so I think as an organization, we are getting a little better at asking what is big and important to them and then orchestrating teams and products and evolving our platform in a way that solves the problem. I think that's one of the keys to continue to drive growth.

So we are trying to look out and think about other issues. We see things like cultural literacy improving or increasing on the radar, the need to train across cultural literacy.

We see, of course, the spread of the way services are provided, meaning the move into the post-acute space we think hopefully proves timely as we talked about employment growth rates earlier, where hospitals have seen a little bit of flattening of employment payroll growth versus the post-acute space, which continues to add.

And so we are trying to adjust for that trend as well. Hopefully, that gives you a little sense of how we think.

All right. Would you characterize as you look out over the next several years, you're just beginning to scratch the surface, or has a lot of the heavy lifting or opportunities been harvested here?

I think my personal view is that the industry is facing more change than it ever has and its challenges are greater than they've ever been. And in many ways they're still stuck. For example, a meaningful part of the market still performs performance reviews and competency reviews in a very manual process.

And so by no measure is their full leverage in utilization of technology across the healthcare spectrum and what it can do for improving business and clinical outcomes. So I think the problems and challenges in the industry are very large, and we can be a meaningful part of the solution as we go forward; particularly when it's the workforce that is core to developing the solution. Whether it's retaining, assessing, developing the skills of the workforce, that's a core focus of our organization.

Other organizations focused on workflow or process or they advise on technique, both surgery or medical, but we are focused on the workforce, the human capital side of healthcare. And we think that's a primary driver for how to improve outcomes is through the people that actually deliver the care.

All right. Thank you very much.

Thank you.

Thank you. At this time, I'm not showing any further questions. I would like to turn the call back to management for any closing comments.

Thank you for participation in the call. Again, congratulations to all of our employees on their excellent work as we continue to push ahead. I look forward to seeing you on the next earnings call and report another quarter's progress for our organization.

Thank you very much and enjoy the rest of your day.

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