HealthStream Inc (HSTM) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the HealthStream Inc. fourth quarter and year end 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.

If anyone should require operator assistance, please press star then the zero key on your touch tone telephone. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Gerry Hayden, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you. And good morning everyone, and welcome to today's fourth quarter and full year 2013 results call for HealthStream. With me today in the room is Bobby Frist our CEO and Chairman and, of course, myself Gerry Hayden, CFO.

I want to remind you this conference call may contain forward-looking statements regarding future events, and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause 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'll turn the call over to Bobby.

Thank you, Gerry, good morning. We have a lot to cover. It's a year end update. We'll have business line updates in about four or five areas, of course, financial highlights with Jerry. So we got a lot to cover. I have a bit of a cough this morning so I may turn it over to Jerry at a few points in the script but we'll get started here.

As many of you -- I want to go back a little bit because we've adjusted our nomenclature and how we describe some of our business lines today as we go forward. And so, as many of you know, our earliest solution for healthcare organizations was our compliance solution. Just before we went public in 2000, we began offering hospitals a better way to meet their Joint Commission and OSHA training requirementswhere we blended our learning platform and it was bundled with online regulatory courses.

Our hospital customers use our Joint Commission OSHA solution to maintain compliance, with mandated safety training for their employees. They generally deploy the system enterprise wide. Today we believe our Joint Commission OSHA solution is the most adopted in the industry. We built our network of customers for this solution and, over time, we began offering more and more courseware products to meet a wider range of their training needs. So the model has been established.

Along the way we established over 130 content partnerships and hundreds and hundreds of content products. In the same time frame we've added multiple applications to our platform so that now today we have the Learning Center, the Performance Center, the Competency Center, SimManager, Authoring Center, HealthStream video are all features and applications of the core technology offerings from HealthStream. So for HealthStream a solution is a combination of products and or services where we provide healthcare organizations a blended platform and content solution to achieve a specific business or clinical outcome.

And today we offer market leading solutions in compliance, which we just talked, about our foundational products, Resuscitation, ICD-10 training are three core areas where HealthStream has offered market leading solutions . Consequently, we've updated our nomenclature to better reflect our business as it is today. Our learning and talent managing segment we now refer to in a broader sense as our workforce development solutions,as we just talked.

The segment, we believe, more accurately encompasses the broader scope of the solutions, and our research segment is now referred to as our research slash patient experience solutions segment. You can see a little more focus within what was defined as a research segment as now focused on improving patient experience through patient experience solutions.

So these two rebrandings are largely consistent with our historical segment reporting but we think are more reflective of the product sets and solution sets that are now broader than they were many years ago when we identified the segments as learning and research. You saw in our earnings release that we were also updating our subscriber count metric. We're reporting the total number of individual end users of HealthStream's subscription-based solutions, which will be referred to as total subscribers.

Each individual end user (inaudible) utilized as least one HealthStream subscription based solution will be counted as one subscriberregardless of the number of subscriptions contracted by or for that end user. For example, if one of our hospital clients purchases for each of its 1,000 nurses a subscription to the HealthStream Learning Center and the HealthStream Competency Center, the Resuscitation Solution and ICD-10 training solution those 1,000 nurses will count as 1,000 total subscribers despite the fact that each of them is contracted for four HealthStream subscriptions.

At December 31, 2013, HealthStream had approximately 3.39 million total subscribers implemented to use its subscription-based solutions. Approximately 3.71 million total subscribers have contracted to use one or more subscription based solutions from HealthStreamas of December 31, 2013. Overall in the year we contracted over 600,000 new subscribers to our platform in 2013, which is a 73% increase in new subscribers over the prior year.

In the fourth quarter alone, we contracted approximately 289,000 new subscribers, which obviously far exceeds the quarterly range we've historically targeted of adding 20,000 to 50,000 new subscribers per quarter. So our historical target range, which we continuously communicate, we think, is a good run rate to be consistently targeting to grow our network but, obviously, we have an exceptional fourth quarter with 289,000 new subscribers.

Among the 289,000 new subscribers that were contracted during the fourth quarter was the addition of one of the top five largest health systems in the nation, who entered into a long-term multi-year enterprise wide contract for our base HLC system. And, again, it's a multi-year agreement so we're very excited. Again, an exceptional quarter but really in the last month of the quarter we saw really some incredible sales and one very, very large health system obviously skews the number in a positive way but adds subscriptions under a multi multi-year agreement.

We're very excited to extend our network in this way. As you may recall we introduced a new metric in our first quarter of 2013 earnings release that provided additional measure of our progress in growing the value of our customer base. That new metric is our annualized revenue per implemented subscriber. It represents the quarter's revenue from subscription based products divided by the average implemented subscribers for that quarter annualized.

In the fourth quarter of 2013, our revenue per implemented subscriber was $32.41, which is 20% higher over the fourth quarter of 2012. The last eight quarters we've seen a steady upward trajectory, which we believe is indicative of our progress selling more and more solutions to the existing customer base. Given the updating on our nomenclature and the introduction of our performance metric total subscribers we're retiring our HLC renewal metrics for our public reporting in 2014.

Since our total subscribers metric encompasses the entire scope of our workforce development solutions, it provides a more comprehensive view of our business than the HLC renewal rate, the HealthStream Learning Center renewal rate, which is, by definition, limited solely to HLC subscriptions. For the new renewal rate the new subscriber rate has been adjusted. It's largely similar to the old one because most all of our customers have at least the based HLC subscription.

And so as we add new subscribers they have revenue per subscriber but not new subscribers. So we added in unique subscribers for some of the other platform pieces but, again, most customers, as you'll see, already subscribe to the base subscription. To round out the year with consistent metrics, however, we're going to offer the metric here for the last time. The trailing four quarters ended December 31, 2013. Customers representing approximately 97% of subscribers that were up for renewal did renew.

While renewal rate based on the annual contract value was approximately -- was also 97% for the fourth quarter of 2013. I'm sorry that's the prior year. For the fourth quarter of 2013 101% of subscribers that were up for renewal did renew while renewal rate based on the annual contract value was approximately 98%. That must have been in the prior year quarter. So this quarter's renewal rate is based on the old calculation where 97% per subscribers and 101% per value. So very strong numbers.

Furthermore, two of our largest health system clients that were up in 2014 -- So as we've entered the new year two of our largest health system customers that are also in the class of accounting in our top ten largest customers for HealthStream that were coming up for renewal in 2014 have already renewed in four plus year contracts. So you know, again, since we're dropping the metric we thought we can give a little bit of clarity on 2013, how it wrapped up.

And then in 2014 looking ahead just a little comfort that as of -- as we sit here today, the two largest customers that were up for renewal in 2014 have already renewed and, in fact, they're also among our top ten largest customers, too, so that's kind of an exciting way to be here in February. Let me hit a few financial highlights for the quarter than turn it over to Gerry for some detailed financials.

Consolidated -- all the following quarterly numbers show our results in the fourth quarter of 2013 compared to the fourth quarter of 2012, and the full year numbers show the results for 2013 compared to 2012. So here is some of the comparisons. Consolidated revenues were up 33% to $37.1 million for the fourth quarter while they were up 28% to $103.7 million for the year. Operating income was up 5% to $3.5 million in the fourth quarter, while it increased 9% to $14.7 million for the year.

Net income was $1.8 million in both the fourth quarter of 2013 and 2012 while it increased 10% to $8.4 million for the year. Adjusted EBITDA was up 7% at $5.9 million in the fourth quarter, while it increased 13% to $23.9 million for the year. So strong performance on revenues, operating income, net income, and adjusted EBITDA all up over the prior year comparable periods. I'll turn it over to Gerry for more detailed discussions of our financials.

Thank you, Bobby. Once again, good morning everyone. Bobby has laid out the quarter's highlights. I'll take a few minutes to add color to our financial results. First I'll comment on four areas of the income statement. Revenue growth, gross margin, operating expenses and income taxes. The foundation to our financial performance lies in organic revenue growth.

You've seen that our overall growth rates were 33% for the fourth quarter, and 28% over 2012 full year. This quarter is, of course, our year end and a good time to draw some perspective on our progress. The year 2013 marked the third consecutive year that we produced 20% plus revenue growth driven, in large part by, once again, that organic growth.

The workforce development solutions segment has benefited from both the increase in the number of total subscribers as well as greater course rate consumption across that same subscriber base. Our new metric, total [individual] subscriber count, has grown by 15% during 2013 and the contracted total subscribers have grown by 19% over the same time last year, over 2012.

And once again, as Bobby mentioned, we added 600,000 subscribers to that base over the course of 2013. You (inaudible) as you did in Q3, our fourth quarter release includes information about our ICD-10 product. Significantly we called out the ICD-10 product contributed about $5 million to fourth quarter revenues or about $3.7 million more than last year's fourth quarter.

This product has been a strong performer for us but we also want to point out that fourth quarter 2013 grew by 21% if you exclude the ICD-10 results. So in addition to the ICD-10 revenue growth, we continue to see positive results in other key product areas. Once again, such as (inaudible) and other categories. The end result of these dynamics is growth in the revenue per individual subscriber metric, which, as Bobby mentioned, shows a 20% increase year-over-year, growing from $27.04 in the same time last year to $32.41 in the fourth quarter of 2013.

In sum our workforce development solutions business has expansion in both total subscribers and also the key metric revenue per subscriber. The research patient experience solutions segment has also shown progress. The most notable metric is the 11% growth rate in the patient insights category, which includes both HCAHPS and also the new [CG caps] product which already introduced during 2013. As you already know the fourth quarter also includes results of our September 2013 acquisition Baptist Leadership Group or BLG.

Overall the research patient experience segment grew by 20% in the fourth quarter and BLG was a contributor to that performance. While high gross margin platform products performed well during 2013, as evidenced by the 600,000 subscriber additions, lower gross margin courseware projects grew even faster, which is ultimately a gross margin decrease from 59.8% in 2012 to 58% this year.

We're pleased to deliver 9% operating income growth over last year which was towards the high end of our guidance range for 2013. As you've read, our 2014 guidance calls for higher operating income growth in the 10% to 15% range. This year's fourth quarter comparisons are influenced by the timing of our summit, which occurred in this year's fourth quarter as opposed to 2012, when it took place in the first quarter. Summit was well attended this year and well received by the folks who did come.

We did manage to stage a great event for $100,000 less than the (inaudible) in 2012. For the full year 2013, we incurred higher operating expenses in a variety of categories, royalties, personal additions and contract labor, sales commissions, depreciation and amortization, business taxes, merger acquisitions and program costs and other general expenses.

For example, a product development category, [our income statement], was up 36% over the year ended December 31, 2012. (Inaudible) to increase our development capacity necessary to pursue our expanding product road maps. During the year we added product managers, application developers, project managers, business analysts and contract labor across all of our development teams. Our effective [book] tax rate declined slightly between 2013 and 2012.

The rate in 2013 was 43.3% and was 43.7% for 2012. The Q4 2013 effective tax rate was higher than the full year rate owing to a variety of factors, including such things as the reconciliation of book estimates we filed, tax returns, the timing and (inaudible) exercises and other normal year end adjustments. It's also important to reiterate, however, that these are -- these effective income tax rates are for GAAP book accounting purposes only.

We have limited federal cash income tax liability because it tends to utilize our net operating carry forwards that remain available to us. Our balance sheet remains strong. We are well positioned to support our development activities. As of December 31, 2013, our cash balances were $108 million, and that's up from $93 million at the end of December 2012. And as you already know we have no long-term debt .

One last financial metric to call to your attention is cash flow from operations, which shows there's a link between our balance sheet and operate results. Cash flow from operations has grown by 17% for the full year 2013 over 2012, increasing from $22.5 million to $26.3 million in 2013. With our core business growing and a strong balance sheet, Michael Collier, our Vice President of Business Development, and I are running an active (inaudible) business development program.

We continue to review and evaluate a variety of acquisition and business development opportunities while maintaining our discipline in terms of strategic fit and valuation. Finally in our release you saw in our guides for 2014,we anticipate our revenues will grow between 22% and 26% on a consolidated basis.

We expect Workforce Development Solutions (inaudible) to increase in the 23% to 27% range, with Resource Patient Experience revenues to grow by approximately 18% to 22%, part of which growth includes revenues from our BLG acquisition, which, once again, closed in September of 2013.

We anticipate operating income will grow between 10% and 15% over full year 2013, and capital expenditures will be between $9 million to $12 million and our effective income tax rate for book accounting to be between 42% and 44%. So thank you for your time and now I'll turn the call back to Bobby.

Good. Good. Thank you, Gerry. One highlight. Back in my financial highlights there was a typo in part of my script that I wanted to correct. The consolidated revenues were up 33% to $37.1 million in the fourth quarter over the prior year fourth quarter and they were up 28% to $132.3 million for the full year. I think earlier I said $103.7 million. So I wanted to make that small correction.

Now I thought we would go into operating updates and maybe a quick look at competitive landscape before we go into product line and business updates. So the workforce development space or the talent management space, as it can be known, is an exciting and dynamic environment that includes talent management platform companies, HR service companies and content publishers. And our success focused on the healthcare vertical is attracting increased competition into the healthcare vertical.

We are focused on building core solutions that's for key challenges facing healthcare organizations. Like the need to meet joint commission and OSHA training requirements, over the need to improve resuscitation rates, or to help an organization prepare for the transition to the new ICD-10 coding system.

Many of our competitors, instead of using the workforce development nomenclature use the talent management nomenclature. And they're focused exclusively on software functionality. In contrast we believe that the outcomes that we need to achieve are achieved through the workforce not a piece of software. But our solutions incorporate software infrastructure, SAAS delivered content into our solutions areas.

Our approach assumes a more complete definition of a solution, which we conceptualize as including a combination of products and services that together are used by the workforce to achieve specific business and clinical outcomes. And, of course, we've chosen to focus on the massive challenge of our massive healthcare industry. Our sales approach reflects this critical difference as well.

Our competitors tend to sell exclusively to the HR group and we tend to sell to heads of compliance, the head of clinical quality, the head of revenue cycle and finance, the head of nursing, the CNO, CMO and also to the head of the HR department. So with that as a landscape, I thought I would take a look at some of how our platform and solutions are performing.

The HealthStream Performance Center and HealthStream Competency Center, which, again, are very similar products but tweaked to do slightly different things, are two of our workforce development applications. Approximately 310,000 subscriptions have been sold cumulatively for either the HPC or the HPCR both. Approximately 60,000 of those subscriptions were contracted in the fourth quarter.

The vast majority of the new subscriptions to those two products were sold to existing subscribers, which include organizations like Salem Hospital, University of Louisville Medical Center, (inaudible) Health Care System, (inaudible) Health. So we're seeing strong uptake within our customer base of the HPC, HTC solution, and we're seeing strong utilization of the solution as well, which is exciting.

Of course, getting it sold is important, getting it implemented is equally important and then having the customer benefit from the application is the ultimate measure of success. And the full year of 2013, over 5.8 million competency ratings were completed through the platform. I'll turn our attention a bit to our research and patient experience solutions. The business performed well in the fourth quarter, with our patient insight surveys, which are the survey research products that generate recurring revenues.

The patient survey revenues increased 11% over the fourth quarter of 2012, for the full year 2013 approximately 1.5 million patient surveys were completed fulfilling our customers' HCAHPS requirements supporting CG caps initiatives and providing important patient experience feedback across other care settings. Overall our research patient experience business increased revenues by $1.4 millionor 20% over the fourth quarter of 2012.

Included in this fourth quarter financial results are the revenues of approximately $1 million from the Baptist Leadership Group, which we acquired in September of 2013. So, obviously, a significant contributor to the year-over-year growth through the acquisition of BLG but also a nice double-digit growth on the patient survey revenues, up 11%.

The integration of BLG progressed well during the fourth quarter, which includes the operations and functions of finance, HR and marketing as well as the addition of the BLG sales team to our Patient Experience Solutions sales time. So our sales team has expanded through the acquisition.

During the fourth quarter the Research Patient Experience team collaborated to publish the inaugural issue of our new newsletter, the PX Advisor. I advise all interested shareholders to get a download of that. It's on our web site, it's a PDF. It's a beautiful 45 page hard copy, thought leading document, on various important critical topics in healthcare. And you can get a little bit of a thought of where we're headed as a company and where our customers expect us to be by reading through the PX Advisory.

Again, it's a quick download from our corporate web site. It's a highly visible channel for thought leadership and regarding the important goals of improving patient experience, which is its theme each quarter. We plan to publish it quarterly.

On January 28th and 29th we launched the HealthStream Patient Experience Symposium, which is an exciting new development. It's a national conference series which provides attendees with knowledge, resource and tools designed to improve the patient experience. And we're already off to a great start with over 75 participants attending the first couple of events representing 31 health organizations across 14 states.

So it's a great opportunity to have a dialogue about the patient experience and outreach, and throughout the year we'll be hosting many of these events. I think the next event looks -- it's March 4th and March 5th in Orlando, Florida. So we're very excited about this new series that comes through our relationship and acquisition of BLG, Baptist Leadership Group.

Want to turn our attention to the post acute care opportunity. This is an example of an area where we share with investors the journey. We believe in clicking the flywheel incrementally and we share with investors the incremental investments we make as we make them and our plan for how to execute in the market. We believe this is a medium term plan, it's going to span multiple years and we began that journey in January of last year as we announced that we would focus on that space.

And after announcing the focus, we were able to bring in two large customers which are also partners in the development of our opportunity Brookdale Senior Living and Almost Family. And, by the way, the implementations of our solutions at those organizations are going well and they're up and using them. So it's very exciting to see our anchor tenants up and running in 2013.

And then throughout the year we focused on acquiring new content partnerships to build out our product and solution offerings. And, in fact, just a few weeks ago announced three new exclusive partners to help us focus on the post acute care opportunity. Professional Care Education, QueTech and Mather Lifeways are three new exclusive partnerships bringing over 900 courses to our library, allowing us to better position in the post acute care opportunity.

But it's still at the click on the flywheel. It's another step towards an opportunity that will develop over time, and we're excited to continue to add both employees and strength to our efforts there. And we'll share the journey as it unfolds with shareholders. But we're excited about our strengthening presence and tool kit and product sets for the post acute care market. We believe that, over time, it will develop into a steady contributor to top line [gross] and expand opportunity for core products like our Heartcode products or ICD-10 products into a new channel.

But again, far from hyping the channel we're working very hard to build it incrementally and share the journey of our investments so you can understand where our capital investments and hiring is directed over this year and next year. We're working hard to develop the opportunity but it will span multi-years as we develop that opportunity. ICD-10 is kind of the opposite of that.

It's an effort that, through thoughtful planning a few years back, we were able to catch a huge opportunity to help America's healthcare workforce prepare for ICD-10. And I think we were both progressive in our adoption and understanding this will be a major issue. I think we picked exactly the right partner in Precise, that has award winning products in this area.

And I think we delivered it in a timely way, proving the value of our distribution network. We believe that the current state was 1.2 million subscribers tothis product set that we're, clearly now, with our partner Precise, we're the market leaders in helping America's hospitals ready for this opportunity. We've talked about this opportunity, it's both a bit of a blessing and curse when it comes so fast and it's built around a mandate.

It creates an opportunity you can't refuse but also a challenge for us in the future to back fill the revenues with innovations , and continuous work to build innovations and new products in this product setso there will be an ongoing revenue stream. The CMS mandated deadline of health organizations to transition to the ICD-10 coding system goes into effect in October of this year, and we believe that that deadline, along with our market leading product, will continue to drive sales for the ICD-10 training solution up through and to the deadline and little beyond as well.

Since 2011, approximately 1.2 million healthcare professionals have contracted for ICD-10 solution, through their respective organizations, with over 100 new contracts entered into during the fourth quarter of 2013. And just by way of update, January of this quarter was also strong and that's exciting because any new sales from this point forward on two-year contracts helps with the back end of this adoption curve in 2015, so we're excited that sales continue strong in January.

Revenues from ICD-10 training were approximately $5 million in the fourth quarter of 2013 and approximately $13.9 millionfor the full year 2013. We have a 50-50 revenue sharing agreement with Precise. It's a great partnership, very successful, and that relationship and the way we take it to market gives us a 50% gross margin in ICD-10 solution sales. So, again, very pleased with our ability to generate market penetration and market share with Precise in this area.

Retail prices for ICD-10 sales generally range from $15 to $125 per user per year, with the majority of contracts being two-year terms. So, again, this business has come faster than other product lines, which is exciting. But it's a little shorter term contract, which is a bit of a challenge. Two-year contracts are typical contracts for other solutions range three to five years, so it's faster and shorter.

So it has that effect of faster revenue recognition . The average price point across all of subscribers, these 1.2 million, is at the very bottom of the price range, which, to me, indicates that they're more buying enterprise class licenses to provide broader access to their employees to orient the healthcare workforce to ICD-10.

We believe that after the deadline, and for some time after the deadline, there will continue to be an orientation need but it will diminish over time and it will revert to more of a training of the hard core coders and the turn over staff. And so we believe there will be a maintenance revenue stream but it's too early to tell what that revenue stream looks like and we're working hard to figure that out. But right now we're still in the selling season and have a strong sales with ICD-10 products.

So given the impending deadline we believe it is reasonable to expect our sales velocity for ICD-10 training will decrease as we approach October 2014. We don't know that, but we believe that's a reasonable expectation, because, again, it's such a deadline driven initial opportunity. It's also reasonable to expect revenue for the ICD-10 solutions will begin to decline after the October 2014 deadline. That said, there are many -- there are some clients that will need to renew and will purchase solutions to address ongoing ICD-10 compliance needs.

In fact, if you think about it, for over 15 years we've been on ICD-9 and there's still a substantive business of training people on ICD-9 even as ICD-10 is being adopted nearly 15 years later. So -- but determining exactly what that looks like is a definite uncertainty and a challenge for management that we have been discussing with investors now for almost a year, or maybe a little longer than a year.

Along with our partner Precise we're in the midst of developing new solutions to help our clients meet the ongoing needs that we believe will occur after the deadline is achieved for our customersto improve ICD-10 compliance, which will remain well after the compliance deadline passes. Additionally, we've bought new ICD-10 training solutions to the market that are tailored to the physician practices and post acute care organizations and we're beginning to test those channels as well, which we believe could provide additional sales to this product set.

My final update is in the area of our Heartcode products. Heartcode products are resuscitation solution. They're generally content and science provided by the American Heart Association, mannequins and content and technology provided by our longstanding partnership with Laerdal Medical and, of course, delivery targeting sales and marketing through HealthStream.

The Heartcode product suites, we believe, are revolutionary. The science is bearing out that they're clinically more effective, that clinicians trained using the Heartcode product sets and the simulation mannequins get better clinical outcomes over time, and they maintain their skills, sharper skills in the event of a resuscitation.

So we believe we have the strongest go to market and the best brands solution, and as of December 31, approximately 1.1 million healthcare professionals, cumulatively, have completed their online CPR training through HealthStream. So the number continues to grow for this cutting edge and scientifically more powerful clinical training solution.

We believe that our penetration for the (inaudible) product is approximately 30% of the acute care market and we're beginning to test its applicability to the post acute market as well. So, again, that will be a part of the click of the flywheel as we explore the opportunity in post acute. We think there is some relevance for the CPR resuscitation products in that market as well.

And exciting news also in the fourth quarter, right at the end of the year into the third quarter, early fourth quarter, we executed a contract with the VA, which looks to be a system wide adoption of the HeartCode product. So a great win adding a significant contract with the federal government and the veteran's administration to use these cutting edge and clinically more effective resuscitation training solutions, which, again, blend and are delivered and targeted through some of our core platform components like our HealthStream Learning Center.

So very exciting to see early adoption or adoption of that product across the VA. In conclusion, I want to take a moment to thank our 700 plus employees. They delivered a strong year. The revenues -- the revenue growth was very, very powerful and we were able to invest in many things, while maintaining within our range of targeted operating income.

Of course we would like that to have been a little bit higher but we are excited to be able to deliver such strong top line growth while maintaining profitability. And as our employees and our team looks forward to be able to boost our operating income target range for this year is powerful, as you can tell from all these products lines, we'll be putting investment back into all these opportunities and exploring them so we can click the flywheel incrementally in the good to great parlance, and try to continue to build a business as we've described it. Thank you to our employees. I would like to turn it over now for Q&A.

Thank you, sir. (Operator Instructions). Our first question comes from Richard Close of Avondale Partners. Your line is now opened.

Yes, thanks. Just curious if you guys could elaborate in terms of how much revenue did [SciMed] contribute in the fourth quarter? I know you gave the growth number, but just what was that contribution ?

Yes, we don't do product line disclosures of revenues, only occasionally under new acquisitions. But it's meeting expectations and it's folded into our Workforce Development Solution segment and so, Richard, we haven't provided that level of detail for that group. The group continues to perform well and is operating under earn out and continuing to hit goals so we're excited about that but we haven't disclosed product line level details on SciMed.

Okay.

And, Richard, we have some exciting plans for that product set as we move forward into the year, so we're excited about the continued steady performance .

[It's also the key product position] ICD-10 marketing as well.

Yes. We've begun to offer the ICD-10 product through their sales organization to that channel, and we're getting a little bit of initial traction. We don't know yet how it will play out but we're excited that the sales team is integrated in offering some cross selling of products.

And then just to follow up on the subscriber numbers, I just wanted to make sure I have those correctly. Can you just go over -- I mean, obviously, those numbers don't compare to the previous learning subscribers that you gave, I think, inthe past. So can you just -- so we're all on the same page in terms of what the subscriber numbers were this quarter versus a year ago?

Sure. And just let me explain. First of all, the way it was defined earlier and the way it's defined now resulted in -- as of right now, which is why it's a good time for a transition, in a very similar outcome from a calculations standpoint, and here is why. Most customers are subscribers to the base HLC. And so most were already counted in that metric.

We were getting to have a few product lines like the Competency Center, where the few customers subscribe to that and nothing else at the company and they were not in the prior metrics, very few. But, again, most customers that bought HLC, as you can see from the last quarter, over 90% of the people that bought it were already on HLC. So they don't count as new subscribers.

If you look at our press release, for example, ICD-10, 93% of customers that bought ICD-10 are customers of other products of HealthStream. So you can see from that metric, as well, that, again, while it added additional revenue per subscriber it didn't add many net new subscribers, and ICD-10 counted in the new way. And so the metrics are -- at this inflection point, which is good news, I think, are largely similar although definitionally different to the prior years.

Again, because if every one of the prior numbers we reported on HLC are for each of these new products are the buyers of the additional products then it doesn't add new subscribers. So you can fairly confidently look at the past year's numbers and, with small adjustments here and there -- For example, we added several thousand new subscribers in this new calculation, from a few hospitals that were bought just to HTC but weren't on the HLC, and so -- and you can, obviously, can see that about 7% of ICD-10 subscribers would now be counted as new subscribers, but 93% of ICD-10, the 1.2 million subscribers, were already in the number.

So I hope that helps because, again, we're at this inflection point where the way we calculated in the past is largely similar although there's new ins and outs to it as the way we're going to calculate it in the future. And that is largely because we've done such a really good job of upselling existing customers other products. Does that make sense and does that help?

Yes. But didn't Gerry give numbers? I just want him to go over that again real quick.

Which numbers, Richard?

I thought you gave a 600,000 number or I'm sorry --

Yes, I'll give you -- do you have that page there?

Yes, 600,000 subscribers. That was the new additions during 2013.

And of the 600,000, 289,000 were added in the fourth quarter alone. So about half of the year's adds of new subscribers came in the fourth quarter.

Okay. And, just to be clear, is that contracted? That's the contracted number, not the implemented number, correct?

That's correct. That's correct.

Okay. I just wanted to make sure on that. My final question, and thanks for being patient here, but with respect to renaming the two divisions, research to research and patient experience, and then workforce, the workforce name change. Is this foreshadowing that you guys are maybe looking at a more I guess wide area or wider area of potential acquisition targets as you discuss your business development operations?

Are you looking at maybe things more on the workforce side, labor management, that type of stuff? And then on the patient engagement side, is it foreshadowing anything in terms of -- ?

Yes. We'll talk about it. It might be a little bit because, definitionally, here is what we believe. We believe that talent management has become firmly associated with the concept of buying just software. And when people talk about talent management vendors they talk about modules of software.

And, by definition, we believe that the way we go to market and the way we position with our customers and the way we sell our value proposition includes more than just software. Software is an underpinning of our ecosystem, it's an underpinning of every solution but, really, as we thought about what we're becoming, it's how software content and data blend to help a hospital fix something, get a clinical or business outcome that they're striving for.

And so as we -- we thought that it might help better understand the way we sell our value proposition and how we position and the different buyers for our solutions. If we said that, look, our vision statement, which has been the same for nine years, to improve the quality of care by developing and assessing the people that deliver care, we thought that workforce development -- Basically we help achieve outcomes through developing the workforce, which, to us, is broader than just selling software to HR, although that's a critical and an important component.

So you can think of it as foreshadowing, as a bit of a widening of the definition or more encompassing or more description, a better description of the way we think about our value proposition and the way we think about how we sell as opposed to just -- people viewing it just as a software sale.

And then on patient experience?

Yes, similar thing there. If you think about -- as we entered the research market it was really a data collection business and then it turned into data collection and analysis. And now it's data collection and analysis but we blended some learning elements. We have curriculum, we have some consulting through BLG and the idea of a patient experience solution is to help actually move the needle on an HCAHPS score, not just collect the data and report the data.

So we think, by redefining that area slightly here, as a first step, that it's a more complete thought to say that, yes, we collect HCAHPS's data and we're a certified CMS vendor. And, yes, we report that data and we help customers understand it but then we deploy educational resources, consultants to be an ally to hospitals in moving the needle on their patient experience outcome.

And so, again, we think it just better captures, instead of an HCAHPS survey business or just pure research, we think it's more of a patient experience solution. So, again, it talks to the completeness of the way we think about going to market, and our differentiation in how we provide value to our customers.

Okay. Thank you.

Thank you. Our next question comes from Matt Hewitt of Craig-Hallum. Your line is now open.

Good morning and congratulations on a great 2013.

Thank you.

Thank you, Matt.

Quick question on ICD-10. Obviously, you commented on some of the challenges and, given the deadline and the mandate and how it forces rapid adoption, could create some issues on the back end. I'm curious. Some of the initial contracts that you signed in Q4 of 2012, Q1 of 2013, have you had an opportunity to go back to those customers and maybe get an indication from them what their intentions are when those contracts come up for renewal?

We've had just a few renewals. Remember the deadline has moved a few times. So, again, there's a lot of uncertainty in all this. We believe, for example, that the deadline is not going to change because in the current environment, there's now a cost of changing it almost as much as not, the risk of people not being ready.

But the whole -- there's a lot of uncertainty around the ICD-10 for hospitals that have -- that current research shows that many of them are not prepared. So we've only had a few renewals because some people signed a couple of years ago before the deadline moved, and they come up for renewal and for those we have had good renewal because it's still -- the deadline got pushed and they renewed. But it's very few.

Most people are centered now on the current deadline for this year. And, really, that's all they're focused on. So as we -- we just don't know. As we learn more each quarter what we can report now is that we're on the positive side of this curve, and sales continue to be strong. And people are not quite as ready as they would -- they hope to be, and so we feel like we've got a good pipeline through the deadline and maybe a little bit beyond that.

So on the challenges side there's just a lot of unknowns that we try to be very clear about as we learn more and more each year. We've been talking about this now for over a year and the first thing we noted to everyone about a year ago was just the nature of this because of the deadline as a different feel. That said, in dialogue yesterday with some of our executives, and -- there clearly is an ongoing demand for products in this category.

We don't know yet what that level of demand will be. We don't believe it will be the same level of demand. We do believe it will drop off, and we do believe we'll have to reconstitute the products to meet what I'll call the ongoing training needs of a smaller percentage of the workforce. Contrary to that, though, is the fact that for that workforce it's a higher value proposition than the orientation packages that we currently sell to a broader audience.

So, Matt, it's a confusing time where we're trying to be as direct as we can about the opportunity because it's incredible business opportunity, and driving growth through this year at least. And then we're working hard with Precise to build new products and understand the go forward -- the go forward challenges and actually introduce some new products throughout the year and new channels. But we won't know until we know. And I'd say the fourth quarter of this year is when we'll see the first material renewals come up. And we do expect that they won't be for the entire enterprise, they'll be for a smaller number of people.

I guess kind of what I was getting at is have you had a chance, not so much renewing for ICD-10, but have you talked to some of those initial customers and said, okay, you had been buying the ICD-10 platform for 800 of your employees, upon renewal it's going to be less. I think everyone could acknowledge that.

But are they intending to then reduce the spend with HealthStream or just reallocate those dollars with other customers? Or, I'm sorry, with other applications and products?

It is hard to sell and I think there will be a mix of some renewals where they say our enterprise isn't fully [oriented] -- this is such a core issue that we may see some renewals for the enterprise. They may -- I just can't imagine being able to be fully prepared where they just train only at that point their coders but I guess that is a possible scenario. And, no, we just don't have those indications. I think everybody is a bit of a scramble now to just handle the orientation phase. And, again, I think it will be several quarters before we get better answers to what the go forward is on this product [set].

Alright. Shifting gears a little bit. You've had a couple acquisitions over the last couple years. Maybe update us on the cross selling successes that you've had and how quickly you're able to penetrate those new customers that came in either with BLG or SciMed and cross sell into those [install] basis.

Yes, great. We just had our Board meeting recently just before earnings and we give a scorecard to the Board on some of those acquisitions where we track those things. And I was generally very pleased with the scorecard.

So one of our acquisitions was a group decision critical. And the first mission was to transfer those customers on a different platform to be part of our eco system into our own platform and we -- majority of those accounts have moved and then majority of those accounts have bought additional upsell, bought additional products from our portfolio. So if we think back to the decision critical, right now -- like I said, we have a green light on that scorecard of cross selling.

We've moved the economic materiality of the customers they had were able to move to our platform and then cross sell and upsell additional products. We feel really good about that. BLG is a little bit early but we're encouraged with that and the new thought leading, the newsletters, the new national seminars that it's given new life to our patient experience solutions and energizing our dedicated sales team in that area and giving them some new tools to go to market with.

So it's a little early to tell how BLG cross selling is going but, generally, I think it's a very good sign that -- we didn't have four or five national or regional conferences, and we've already had one, with another in a month, attracting customers for us to show our capabilities to. So we do feel very good about that investment. We've made a few minority investments, a little company called NurseCompetency.

Again very small minority investment but they have testing for knowledge tests that are delivered to clinical experts and we're excited about the potential of that product. Our investments in SimVentures are providing steady, I'd call it linear, growth, and we think it's a part of the future but still contributing cash flow and EBITDA . What else? Let's see.

So, in most cases, we feel really good about -- and then at SciMed, [was] just recently seen as some of this whole cross selling of the ICD-10 products through that sales organization. So we feel like that sales organization is beginning to try to test the other parts of the channel and have some early success. So, generally, I think the way our sales organization is structured is very conducive to account management and cross selling.

Okay. Great. Thanks. I'll hop back in the queue.

Thank you.

Thank you. Our next question comes from Scott Berg of Northland Capital. Your line is now opened.

Hi, guys. This is Mark Rosenkranz in for Scott Berg. First off, congratulations on a great quarter and great 2013. I was just wondering if you could give a little color on the adoption of the performance center product lines?

Sure. Sure. So we try to give a few numbers on that. And the way we count now is not subscribers but subscriptions sold. And the way to think of it is in the fourth quarter -- I believe last quarter we announced we had about 250,000 subscriptions sold to those two products. And we added 60,000 subscriptions in the quarter. So that's a person subscribing to one or other -- of the other of those two or to both.

And so it was a really nice growth. I guess that's about 20% growth in the quarter. And so we're very pleased with how that product is going. And also we believe that product, ultimately, will drive additional content sales because as you conduct the performance reviews you identify knowledge deficits and deficiencies, and you want remediation strategies.

So we think that, in the long run, that the continued growth of that product set -- and now you can see it's getting to be a good number, 300,000 of our 3.5 million plus subscribers are now also using that center performance or competency. And we think it has a good opportunity. The competency center, in particular, tends to be bought for clinical reviews and it's interesting because we think clinical reviews are kind of performance reviews on steroids. And a clinical review requires the ongoing assessment of competency in the different way than a performance review.

So we feel that product is well positioned for CNOs to acquire to assess the clinical skills and do critical development programs for their nurses, which is a good differentiator than a typical performance management system sold to HR to do annual reviews. So we have both. And we're excited to have both because we think the Competency Center is a bit of a differentiator. So 60,000 new subscriptions sold in the quarter.

Fantastic. Thank you very much. And just a quick little follow up, did you mention how much seats there were for the post acute sector?

We did not. It's now, of course, blended in with the total subscriber count we have now. So any subscriber we add for the first time to any of our products will increment that new subscriber metric, regardless of the market segment they're in. So the post acute ads are in that number.

Okay. Fair enough. Alright. I'll let you (inaudible). I'll jump back in the queue. Congrats, again, on a good quarter.

Thank you.

Thank you. Our next question comes from Ryan Daniels of William Blair. Your line is now opened.

Yes, guys, thanks for taking the question. Bobby, let me start with one for you. In your prepared comments you talked about one of the larger health systems in the U.S. signing on in the fourth quarter. Can you give us a little bit more color on what drove that and if that was a competitive win or if they were doing it via in-house system and decided to turn that over to you?

They were not using an in-house system they were using an out-house system. I think we better met their future needs as they looked at clinical development, compliance topics. They kind of examined solutions set and felt that we had a better handle on how to develop their workforce in those areas. So we're very excited to see that win.

They replaced a lighter weight solution that was internal to their organization. But, really, I don't think it was about the software as much about the competence of approach and the partnering approach that we have demonstrated with other large health systems that let them understand that we were the best partner for developing their workforce.

Okay. Perfect color. And on the VA contract, you mentioned at the end of the year you signed them for HeartCode. Was that for an existing HLC customer or are they tapping into the system just for HeartCode at this point?

They are tapping into the system. For HeartCode they use part of our technology infrastructure so they're -- it will add subscribers over time as they're implemented. A little slower implementation ramp went through the government but, nonetheless, being implemented. And they were not existing subscribers to the HLC but they'll be using components of the HLC learning center to deliver and measure and target this content to their employees. So it's a very exciting additional [app].

Okay. Perfect. And then with the caveat that I know you're always interested in obtaining more content for your subscribers, can you talk a little bit about the post acute care market, a big development a week ago with three partners and 900 courses. But does that get you, with your existing content in that post acute specific, pretty close to a nice portfolio to go sell in the market? Or is there a lot of the things you need to add to that to cover the full gauntlet of the challenges in post acute?

Yes, I think our experience would say there's still more to add. Generally association brands are very strong and these independent brands, we think, are market leading brands with high quality but there's definitely -- it took us ten years to build out the power of the eco system we have in acute. And it won't take us that long in post acute but it takes time to assemble the right network. And -- but what we're seeing is a faster build of the content. These three exclusive partnerships, we're really excited about them.

What we find is that good content partners attract other good content partners. And so -- and then one of the things I think we'd like to see progress in the next 18 months would be identifying some of the key association brands that have more recognition with the professionals in the market. So there's definitely work to be done, but we have a solid portfolio now, and a go-to-market strategy. We've hired someone to focus on the marketing, product management, a few sales people, content acquisition. So we're beginning to kind of click the flywheel, as I said, on this market opportunity.

Okay. Perfect. And last one for me. Just on ICD-10. Obviously, it was, I think, a record fourth quarter and it sounds like a good start to the yea. So two questions there, quickly. One, I think you said this, but are those still two-year contracts such that this revenue is going to spill into all of 2014, all of 2015 and maybe even the start of 2016 now, so little bit longer tail?

Number two, anything unique with those hundred winds? Are you starting so see more in the ambulatory market? I know you've got some new partnerships like Athena. But any deviation who is purchasing it today versus a quarter or two ago?

Yes. So first that is a correct observation. The contracts are still right now holding at two-year contracts. So from here forward, every two-year contract adds, think of it as, 11 months in 2014 and a full12 months in 2015, which helps with some of the issue. And also some of them are actually pushing into Q1 now at 2016.

So basically every sale from here forward helps with some of the challenges we spoke about. So I think that's a positive dynamic. If we could have a really strong Q2, obviously, that would do a lot, go a long way towards the 2015 challenge. But we're not there yet, so we're glad to see sales (inaudible). And secondarily, what was the second part of that? The -- ?

Just in regards to the mix of who is buying it now.

Oh, mix, yes, yes. I'm sorry. Yes, it's coming through largely -- right now it's still acute care. So we still see -- we still see acute care. But we're also seeing some non existing customers. So we're beginning to see more penetration into non HLC or non existing customers so that will add new subscribers and, hopefully, we'll get to cross sell them over the next 24 months. So we feel good about that.

We've gotten great penetration, 93% of our sales in the current base but we're seeing more of our people that weren't customers and generally that's -- we think they should have been customers because they would have been more prepared. But we're seeing more first time customers. And we think that's good because they'll start to see the value, we think, of our total ecology, our total eco system.

Okay. Perfect. Thanks and I'll add my congrats to the great end of the year.

Thank you, Ryan.

Thank you. Our next question comes from Frank Sparacino of First Analysis. Your line is now opened.

Hi, Frank.

Directionally what you expect from a gross margin standpoint as well as the key operating expense lines?

Yes, thanks, Frank. I think part of that was cut off but I think you're asking about gross margins. I think one of the interesting challenges of our models is that it is an eco system so it includes applications that are sold stand alone as high margin.

It includes solutions that are blended with content and royalties that are lower margin. And so the way the gross margin moves is probably a challenge for people to follow when you have a pure model and just have one type of product or gross margin. And so here what we see is that both categories of higher margin, lower margin products are growing but the relative rate of the -- some of the lower gross margin products are, obviously, like ICD-10, are really doing well.

So right now, obviously, the pressure is downward a point on gross margins but we see things like Competency Center, we saw the sales uptick in Q4 on Competency Center, which is a higher margin product. So, over time, I think our focus is on operating cash flow and what flows down into every content sale. Why it doesn't (inaudible) a high cost of goods. A lot of that can fall downward because it doesn't allow a cost of service, of delivery given that it's an internet model.

So it has a high royalty, potentially, but can flow as cash flow because it's not a high cost of service or tech supported. On the expense and investments, obviously, as we've noted our vision continues to expand and we're seeing an incredible strength in balance sheet and we're trying to balance growth in profits with our desire to execute and build new capabilities and features for our eco system, new applications, board new content partners. And so as we enter the year we usually hire another full development team or two.

We ramp up our sales organization, which I believe is now over 90 strong. And we did that in November, December and January. We did a quick ramp and added over a dozen sales people. So we began -- and we do that typically every year, right in that season we try to determine the budget and start to bring them aboard so they can be here for our national sales meeting in mid January. We kind of invest in what we think is a relatively balanced approach to try to balance a little bit of profit growth with continued opportunity investment.

You know, we're building the SimVentures, we're building long-term care. Those take steady stream of investments and take time to build and we're not asking for a pass on them we're just explaining to investors that good companies are built over longer periods of time with steady investment and real opportunities. And that's what we do each year as we exit our budget and strategic planning.

And so this year you see a little more emphasis in post acute, a little more in SimVentures and, clearly, adding to the sales team to build new channels and adding to the tech teams to build new products. And there is no shortage of vision for the products [sects] to build -- that can generate new, high margin revenues.

So it's really a question of how to deploy that $808 million without disrupting too much earnings and, clearly, some of our competitors choose to just hire hundreds and hundreds of salespeople and tech people and that's -- that could be a good decision for them. We tend to try to balance it and discipline it and deliver a little bit of operating income growth while we're also investing.

Thanks, Bobby. And just maybe a follow up, I guess. I was just trying to get a sense of we're seeing some modest margin compression again next year and I just wanted to know if that was going to be focused in any one particular area? It doesn't sound like that's the case. It sounds like it's getting fairly spread across the board.

Yes, at the gross margin level it's clearly -- it depends on the relative continued success of these different products as we've talked about. But it is -- it is, from an investment standpoint, across the board. We added to R and D, we added to sales. We increased our marketing budget. We tend to work off of common size income statements and determine what our profitability target should be but we can still deliver growth with our investments.

We're beginning to invest in new product development around our Precise products. We think we've got an exciting road map for the second half of the year with some other new ideas we're working on as well in our R and D group. So it's kind of across the board and it's fairly well balanced .

Great. Thank you, guys .

Thank you.

Thank you. Our next question comes from Terry Lally of Spotlight Funds. Your line is now opened.

Hi and good morning. Gerry, for the guidance for 2014, are you seeing 2013 GAAP or non-GAAP as the basis of the revenue and operating income growth?

It's all based on GAAP measurements.

Okay. So if it's based on GAAP and you start with the $14.6 million, grow to 10% to 15%, add in interest income, tax effect and if share delusion's not that bad that suggests you're talking $0.33 to $0.36?

That's the basic math, yes.

Okay. So $0.33 to $0.36. A year ago, at this time, analysts expected you to do $0.50 in 2014. When you cut 2013 numbers on the call, the sell side took numbers down to $0.39. The estimate stripped it up to $0.42 and now you're expecting $0.33 to $0.36. Why let expectations get so far ahead of themselves that they had to be slashed again?

Yes, that's fair enough. I think a little bit is how we provide annual guidance. When we look forward -- and I think our analysts tend to wait for this call to make those adjustments and rebuild their models based on this highly detailed call.

So we don't guide two years out and I guess that's part of the challenge. And I think that part of the reason is because we're a relatively high growth Company that is a small Company with a lot of uncertainties around it. That's just the nature of a high growth small Company and we try to acknowledge that. So we provide what we think is a highly detailed visibility into the next 12 months, and then we re-up that each year in this call.

And so we don't provide, and we never have provided, three and five year targets for any of these because there are so many moving parts, largely driven by what we view as opportunities. And we kind of reserve the right to change these things, the mix of gross margin, the mix of rate of investment. We've tried to have a 15-year discipline of incrementally improving EBITDA and cash flow from operations while investing but we reserve the right to change that. Some of our competitors have decided to, actually, not even target profits and just hire sales organizations to ramp sales.

So it's just the nature of our -- of the way we provide guidance, Terry. We look out -- we give detailed looks at one year and that may leave some of our analysts a bit where they can only adjust once a year and that's just the nature of how we guide. We don't give three and five year targets yet because there's so many moving parts and we're growing. And so I hope that helps you understand the nature of the issue.

Well, it does and there's, obviously, a number of things, particularly the mix of (inaudible) ICD-10 was such a strong growth driver. So it impacts the mix. But I know you don't give two year guidance but if I look out to 2015 and the street has started north of $0.50 again, which was where they started last year, and it looks like the assumptions are for significant margin improvement driven by gross margins.

Can you comment on 2015? There's a 50% expected earnings growth in the forecast next year. And there's significant margin leverage expected. Can you talk a little bit about 2015 and where the leverage points would be? Is it that ICD-10 is rolling off and that that impact in gross margins would be less of a hit?

Yes, so clearly we only provide annual guidance so I can't talk about 2015. The parts of 2015 we've started to talk about is some of our -- what we call the challenges associated with the nature of the ICD-10 products and it just -- it is what it is and there's a lot of uncertainties, which we'll do our best to fight our way through. So the only area where we've kind of gone beyond talking about 2014 is by explaining the nature of these two year contracts in ICD-10.

We thought it was important enough to articulate. But we really can't comment , and don't, and have intentionally just provided the year. The analysts will have to make their own decisions about -- one of our professional challenges, Terry, is we have $108 million in cash and see lots of places we could deploy that. We've never done it but, conceptually, we could hire another 100 sales people and go after new niches and trade profits, long-term opportunity for short-term costs.

And so I think all of our analysts have generally tried to understand that but also looked at our historical patterns, the last five years, where we've done our best to show discipline investment. I'll say one other thing, Terry, is that as we enter this year, too, that we're going to continue to try to deploy the $108 million.

And we are continuously ramping up and trying to find good value propositions in our M and A front that, given the way accounting works with these deferred revenue [rack] write downs and all, if our M and A pipeline gets more active it could change the bottom line earnings trajectory. But all of these would be done in the spirit of adding to our three to five year potential as a Company and trying our best to deploy this $108 million in a responsible way.

And, in fact, I think we've always done these acquisitions that we felt were very manageable and we could fit inside of our flame work in a way that we could scale. I hope that each helps you understand. We do one year guidance only and part of that is just the nature but we try to give a steady hand by looking back at our patterns, and, so far, that's worked for our analysts.

Okay. It sounds like to reach the $0.50 in 2015 it would be more by buying your way to it versus it being the gross margin improvement?

Well, Terry, we're not going to comment on 2015 but there's inherently a lot of -- it depends on what the business objectives are of management. And we're not trying to strive to hit that particular number that you keep putting out there because analysts have written it.

We're trying to make decisions each year at our strategic retreat about where to make investments, and sometimes those investments deleverage earnings and some times those investments leverage earnings. Clearly, with the gross margins on the platform and adding 300,000, almost 289,000 really high margin subscribers, there's clearly a way to move earnings materially in a one to two year horizon in either direction.

And you can see if you look at our last two years the way we chosen to move it. And with our current guidance, we're choosing to target the 10% to 15%, and I say choice because there's such high visibility into our three to five year contracts that it's a choice what kind of profits and margins we deliver in the next 24 months.

Okay. So two years in a row. Hopefully next year we won't have a similar ratcheting down of guidance. Thank you.

Thank you .

Thank you. And our next question comes from Vincent Colicchio of Noble Financial. Your line is now opened.

Yes, Bobby, in recent quarters you mentioned increased competition in the health came vertical. I'm just curious. What does that look like? Are you seeing larger players at a vertical or are these mostly smaller companies getting involved?

It is a little both. Everybody wants to be in the talent management business, including big guys like Oracle and SAP and they're real and they have strong software and big R and D budgets. That said, they tend to sell software and leave the problems to the health systems. And what we're trying to do, clearly, like in this fifth largest health system in the country, in the fourth quarter, we're able to show them that when you're trying to develop your workforce that software isn't the only part of being successful there.

But it is true, and they will be successful and it will get more competitive, and we will have wins and losses as we move forward. It's just the nature of competition and being successful in our vertical to attraction attention. And so we're trying to make sure that, over time, our customers can understand our total value proposition and not just what the new competitors are bringing in.

We also see smaller innovative competitors coming in and offering new models for training and we try to incorporate those into our business through we've made some small minority investments and partnerships that help us continue on the innovation curve. So I would say, as with most businesses that are showing signs of success, competition comes from all directions and, realistically, any growing business will take its lumps.

And a good management team will find its way through and continue to innovate and add new product sets and improve the value proposition. The competitive landscape is definitely hotter than it was three years ago and somewhere along this journey no one has a perfect record. Eventually you take a lump and then you push on through it and innovate a new product and keep going. So it's fair to say competition comes from all sides and scales and angles now.

Thanks for that perspective. One of the questions were asked. Thanks.

Thank you.

Thank you. And our next question is a follow up from Matt Hewitt of Craig-Hallum. Your line is now opened.

Thanks for taking the follow ups. I just wanted to circle back down to gross margin. Without getting to 2015, Bobby and Gerry, I think you both kind of hinted that one of the challenges you've face is ICD-10, in particular, is one of your lower gross margin applications. As that growth decelerates as this year progresses and likely flips over in 2015, is it safe to assume that your gross margin should uptick as this year progresses as some of the higher margin products gain momentum, like the Competency Center and Performance Center? Is that a safe assumption?

Well, obviously, the answer is it depends. So our Heartcode products, which has three partners, is also a low gross margin business. And it is doing very well. It's a very steady performer. We think it's best in the market. We continue to add subscribers and we think it has potential in other verticals. And you see Competency Center doing well.

So that's why we -- gross margin is, obviously, very important but our model is different, and it's a blended eco system where different products deliver differently to the bottom line. [Apple] sells a lot of content through stores that pay royalties, and they also sell high margin software. And at their scale, I guess, it all blends out but at our scale things can move. So we're more of an eco system business than any one product line.

So it is a little hard to say because it's about the relative success of those products over time. What I would say is that our solution approach blends platform and content in a way that would have a little lower margin than a pure software business but we also think it's a better business. It solves a real problem for a customer and delivers more value than just platform alone.

So we think it's more sustainable over time because it gets at the heart of the business or critical issue and not just paperwork automation or the things that software can do alone. So that's a bit of our perspective on how we think about it.

Alright. And then maybe just a couple more house cleaning type things, at least for our models. Have you set a date or do you intend to hold a user summit in 2014?

No, we actually have announced that summit will be in the first or second quarter of 2015. So we're going to take a little 18 month hiatus. We're going to run these four or five symposiums we mentioned earlier and do a few small regional conferences but we need a little more time to plan such a big event and we're going to have about 18 months between summits this year instead of 12.

We've done that in the past, by the way. We find that we get better attendance and people can cycle. People started coming every other year and, although attendance has grown each year, we think it's better to give a little pause here and let our teams regroup and we're going to do it. I think it's scheduled for March or April of 2015.

There won't be any summit in 2014. There will be in our expenses and marketing, though. So we'll redeploy those marketing dollars into other marketing efforts. As I mentioned, the marketing budget has grown, not gone down, even with summit out.

Oh, okay. So maybe instead of that one big event, taking the incremental revenues and expenses that we would have had, for example, in Q4, and spread that over these three to four symposiums instead? Is that a better way to approach that?

I think it is. If you looked at our total marketing spend, including the cost of summit, assuming it's grown a little bit, kind of proportional to our growth, that we'll be spending and investing more marketing in different ways. But we will grow the marketing budget. And it's probably better to think of that more spread than have it a point in time in a quarter.

Okay. Alright. And then, lastly, here the guidance for CapEx for 2014 implies a pretty big step up. Is some of that tied to the earn outs on SciMed or is there something else that's kind of crept into the mix?

No. This is Gerry. Not tied to SciMed (inaudible). That's purely -- mostly [cap ware] software development. Just trying to expand our teams and do additional work in that area.

Okay. Oh. Alright.

Yes. It's $8.5 million for the full year of 2013 so we'll, hopefully, [ramp] that up a little bit.

Okay. Alright. Fair enough. And congratulations, again. You guys are performing extremely well and taking advantage of the opportunities as they present themselves.

Thank you , Matt.

Thank you. And our next question comes from Ryan Daniels of William Blair. Your line is now opened.

Yes, guys. Thanks for the follow up. I'll keep it quick as I know we're running long. I'm curious if you have any data that shows the lifetime value of a customer new product versus the development cost or customer acquisition cost. And, Bobby, the reason I ask, in many regards I would think this is the type of business model with your retention in market share where you should be investing more despite the impact on profits to elongate the revenue growth curve and maximize that lifetime customer value. So kind of the opposite end of the spectrum, in my view. How do you think about that?

Well, we have articulated in the past some examples of the way we think about growing the value to customers and we shown some slides where we show the growth and revenue per subscriber at specific large accounts. And, in fact, at some of our larger strategic accounts where we began with an entry point at $10 per person per year, and, in many cases, it moved them up to $80 or $90 per person per year. I think in our examples, one is $70 and one is $87 and that's by the mix of products.

So we definitely do think of the lifetime value of a subscriber and trying to move its annual value up per year. A lot of our sales organization is thinking that way. Our product managers, in fact, when they design and build a new product have to decide what their contributions can be, if they achieve penetration. So the way I think of it is each product can achieve a certain market share inside of our network.

So if we have 3.7 million subscribers you might have a product appropriate for ten people in each hospital, which would be 5,000 hospitals times ten and that's your market potential. So our product managers are trained to think if they hit full market potential at the full price for their product they're launching, what will that add to revenue per subscriber? And so there's a lot of focus on growing the lifetime value of a customer by the product mix that they're receiving.

We also have an account management model where we have solutions specific sales teams that are brought into accounts through the account management model and they're focused on that as well. So assume every one of our accounts has an account management salesperson and then we have five, six, seven solution teams that come in and meet with the revenue cycle head of the head risk or the CNO and they show the products that are relevant to that buyer.

So a whole lot of our focus is getting deeper within the accounts and growing the revenue per subscriber, the lifetime [of that] subscriber. As far as costs, obviously, we have over total infrastructure costs and look at that but -- and we study our acquisition costs, sales and marketing costs to the cost of adding a subscriber. We feel that we have a very good return on that. But we haven't published those numbers but we feel like they're well in line. Our acquisition cost per dollar of [NOV] or per new subscriber we think is very reasonable compared to our competitors.

Okay. Very helpful color. Thank you, Bobby.

Thank you and our final question comes from Richard Close of Avondale Partners. Your line is now opened.

Yes. Just really two quick ones. In the past you've given us the SimVentures revenue and I was wondering if you could do for the fourth quarter?

I don't have it in front of me but it did -- it improved linearly over the last quarter to a little over $500,000. Is that roughly --?

Yes, roughly $500,000. That's about right.

$500,000?

Yes.

So it's down from $565,000 in the third quarter?

It's about flat. It's flat (inaudible) a little bit.

Okay. And then just final question, on the exclusive arrangements for the post acute content that you announced a couple weeks ago. Should we think about that as a similar type of gross margin as something like Precise or Heartcode?

They're going to be different and a few of those will be higher. And so they will be different. I think, generally, they'll be a little higher gross margin than the Precise, which is more of a venture together.

Okay. Thank you. Thanks.

Thank you. And 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. I'd like to do one thing here at the end because there was some discussion around the earnings, the EPS numbers and I wanted to reiterate our guidance of operating income of 10% to 15%. I think when Terry asked the question he had some ins and outs of the number and we haven't had time to validate those and [he] extrapolated that into an earnings range, which management is not providing a [cents] earnings range. We're providing a percentage growth over prior year and I will need to verify how that translates into EPS.

I think, generally, it's on target but he rounded off a list of items that were ins and outs to EPS that we need to confirm. The range that I'm confirming, therefore, is 10% to 15%, expressed in percentages over prior year EPS, is our actual guidance. We don't guide in terms of cents so -- and everybody may translate that slightly differently than how they calculate it.

So, again, thank you to all the employees. Thank you everyone for listening. We'll try to provide, continue to provide, steady and continuous guidance on all these issues and opportunities facing the Company. We look forward to reporting our Q1 report here in a couple months. Thank you.

Thank you, sir. 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.