HealthStream Inc (HSTM) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HealthStream first-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mollie Condra, Vice President Investor Relations and Communications. You may begin.

Thank you and good morning. Thank you for joining us today to discuss our first-quarter 2014 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 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 the results to differ materially from those forward-looking statements are contained in the Company's filings with the SEC, including forms 10-K and 10-Q.

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

Thank you, Mollie. Good morning, everyone; welcome to our conference call. I want to start with a quick review of our business segments. We operate in two business segments: the workforce development solutions and the Research/Patient Experience Solutions segments. For us, a solution is a combination of products and/or services that we offer to healthcare organizations focused on helping them achieve a specific business or clinical outcome.

Our workforce development segment offers market-leading solutions in compliance, resuscitation, ICD-10 training, performance management, competency management, and learning management, among others. In addition to government-mandated surveys, our research and patient experience segment combine survey results with consulting to create a solution to improve a patient's experience while in a clinical setting.

As we think about those solution sets which reflect on the quarter's performance, the quarterly revenue is up 29%, adjusted EBITDA up 13%, and operating income up 4%. Let's look at some of the underlying contributors to the growth that the Company is demonstrating. Within our ecosystem, each individual end-user utilizes at least one HealthStream subscription-based solution is counted as one subscriber, regardless of the number of subscriptions contracted for -- by or for that end-user.

As of March 31, 2014, HealthStream had approximately 3.58 million total subscribers implemented and 3.85 million total subscribers contracted to use one or more of its subscription-based solutions.

In the first quarter, we contracted approximately 140,000 net new subscribers. Contributing to this strong quarterly growth was the win of a large multifacility health system with over 30,000 employees. This system entered into an enterprise-wide contract for our Performance Center, Competency Center, and Learning Center under a multi-year agreement. So it's nice when we see the solid performance of 140,000 subscribers, but also see a large system when in the quarter.

The workforce solutions development segment continues to benefit from both an increase in the number of total subscribers as well as greater courseware and application consumption across the subscriber base. As a result, our metric, annualized revenue per subscriber, increased by 17% from 28.47% in Q1 2013 to 33.33% this quarter. Which is noteworthy, given that implemented subscriber count, the denominator in that formula, is growing by 18%.

The last eight quarters we've seen a steady upward trajectory, which is indicative of our progress in selling more and more solutions to our growing customer base. Strong contributors to this growth include product sales from our ICD-10 solution set, our HeartCode -- also in the resuscitation category -- our clinical content offerings, and our new or relatively new application extensions, including our Competency and Performance Center software applications.

Let's take a moment, turn the call over to Gerry, and hit the highlights of the financial analysis, and then I'll come back and address product line-specific and marketplace-specific updates. Go ahead, Gerry.

Thank you, Bobby. Good morning, everyone. I'll provide some financial color on our results.

First, the financial highlights. As a reminder, all of the following (inaudible) numbers show our results in the first quarter of 2014 compared to the first quarter of 2013. As Bobby mentioned briefly, our consolidated revenues were up 29% to $38.3 million and operating income was up 4% to $3.3 million. Net income was up one point -- I'm sorry, net income was $1.9 million in both the first quarter of 2014 and 2013. Adjusted EBITDA was up 13% to $6.1 million.

Let's look at four years of our income statement to start off some comments here -- revenue growth, gross margin, operating expenses, and operating income. First, revenue growth. The foundation to our financial performance continues to be organic revenue growth. As you've seen and as Bobby mentioned, our overall growth rates were 29% for the first quarter over 2013.

The ICD-10 product contributed about $6.6 million to first-quarter revenues compared to $2 million on last year's first quarter. This product has been a strong performer for us, but we also want to point out that, overall, first quarter 2014 growth was about 15% if you exclude the ICD-10 results. In addition to the ICD-10 revenue growth, we continue to see positive results in other key product areas such as resuscitation solutions, including HeartCode.

Although revenues from the Research/Patient Experience where we reported 14% overall growth, this performance was below our original guidance. This segment's key recurring revenue metric, Patient Insight surveys, showed growth of 7% during the quarter and we had incremental contribution from our September 2013 acquisition of BLG.

Sales of these new consulting services from Baptist Leadership Group were not at expected levels because -- as our sales team learns to incorporate and fit this in these new consolidations into their core offerings.

Gross margins -- platform products with higher gross margins performed very well during the first quarter of 2014, but lower gross margin courseware products, such as our ICD-10 offering, grew even faster, which resulted in a gross margin decrease from 57.8% last year to 56% this year. Some comments on operating expenses -- as we experienced strong sales results, our investment in sales and marketing has proven to be very beneficial.

Now as a percent of revenue, sales and marketing percentages have increased from 17.5% in the first quarter of 2013 to 18.1% of 2014 first-quarter revenues. As you know from past conversations, sales is an important and critical investment area for us. This relative increase represents both additions to our sales force and higher commissions resulting from production.

Our G&A expenses as part of revenue decreased from last year's first quarter level of 14.4% to 13.6% in Q1 of 2014. It's important to note that the Q1 2014 results do include $350,000 HCCS transaction closing costs and the pro forma ratio of 2014 G&A expenses excluding these transaction costs would have been 12.7%.

Operating income -- before I discuss operating income, I'd like to give some color around the accounting impact of our recent acquisition of HCCS. All of the first-quarter results only include one month of HCCS operating activity. There were two notable finance reporting impacts from HCCS in our results. First, as I just mentioned, we incurred $350,000 of transaction closing costs in the first quarter, which we expensed in the course of Generally Accepted Accounting Principles, or GAAP.

Second, GAAP accounting rules require us to write down acquired deferred revenue balances to their fair value as part of recording the initial transaction. This accounting convention results in a disproportionate revenue and operating income until we've amortized the initial discount. Accordingly, our first-quarter operating results include $369,000 of deferred revenue write-downs, most of which pertained to HCCS.

Included in the HCCS transaction costs and deferred revenue write-down, operating income for the first quarter increased by 4% over 2013. Without the HCCS transaction costs and write-down of deferred revenue, operating income growth on a pro forma basis would have been 15%.

Our balance sheet -- our balance sheet remains strong and we are well positioned to support our development activities, the most recent example of which is the HCCS transaction from March of this year. As of March 31, 2014, our cash balance of $102 million, a $6 million decrease from $108 million at year-end December 31, 2013.

However, during the first quarter, our cash investment for the HCCS transaction was $12.5 million. In essence, our positive cash flow in the first quarter comes to approximately half of our cash investment in this very important transaction for us. And as you already know, we have no long-term debt. We continue to review and evaluate a variety of acquisitions and business development opportunities while maintaining our discipline in terms of the strategic affair and valuation.

One last financial metric to call your attention is cash flow from operations. Cash flow from operations in the first quarter of 2014 has grown by 135% over the last year of 2013, increasing from $3.9 million to $9.2 million. Some notes to us -- some comments on guidance. Yesterday's earnings release contains updated guidance and we anticipate that consolidated revenues will grow between 25% and 29%.

We expect workforce development solutions revenues to increase in the 27% to 31% range and for reasons cited earlier, Research/Patient Experience Solution revenues to grow by approximately 15% to 19%, part of which growth includes revenues from the BLG acquisition, which we closed in September of 2013.

We anticipate operating income will decrease between 2% to 11% over full-year 2013. This operating income range includes between $2.5 million and $3 million related to the combined impact of the deferred revenue write-down, which we just discussed, amortization of acquired intangibles, incremental investments in HCCS-related sales, marketing, and product development to drive future growth and the $350,000 of transaction costs incurred in the first quarter of 2014.

We anticipate that our 2014 capital expenditures will be between $9 million and $12 million and our effective tax rate to be between 42% and 44%. Our revised guidance reflects the anticipated impact of the HCCS acquisition that we announced on March 4, 2013, but does not include the impact from any of the business development activities that we may complete during the rest of the year during 2014.

On April 1, 2014, the Protecting Access to Medicare Act of 2014 was signed by the President, which postponed the deadline for requiring the use of the ICD-10 coding system previously set for October 1, 2014, for at least one year. While we believe that the transition to the ICD-10 coding system will hopefully occur, the deadlines set by the Centers for Medicare and Medicaid Services, CMS, their healthcare organizations has now been extended three times and CMS has not provided any guidance about the revised scheduling for ICD-10 coding implementation.

It is not clear how the postponement will impact our results of operations and the aforementioned guidance is subject to revision based on future developments regarding ICD-10.

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

Thanks, Gerry. I'd like to cover some market and product line updates and then we'll move on to questions.

First of all, look at the post-acute care addition for the Company. As we announced in February, we had signed exclusive partnerships with the Institute for Professional Care Education, QueTech, and Mather LifeWays. Together, these three partnerships added approximately 900 online courses to our library that is specifically designed for post-acute care organizations.

In the first quarter, we launched a national marketing initiative to create brand awareness and thought leadership in the post-acute care space. We're working in collaboration with an organization called LeadingAge. It's a leading industry association for the post-acute care market. Our workforce development solutions will be promoted with preferred access to its 6000 members.

During the quarter, we added thousands of subscribers from this new market. Some of our new post-acute care customers that were added in the first quarter include Seasons Hospice and Palliative Care, Louisiana Home Care, and Advanced Home Care. So overall, we're starting to see some traction by declaring this new vertical extension and we're beginning to bring in the subscribers now and create the overall opportunity for growth from our efforts in the post-acute care space.

Maybe a brief update on our HealthStream Performance Center and HealthStream Competency Center applications. During the first quarter of 2014, we continued to expand our customer base for two of our workforce development offerings, the HealthStream Performance Center and HealthStream Competency Center.

We added over 50,000 subscriptions in the first-quarter 2014 to these two products, and included exciting customers like Yale New Haven Health System and Carson Valley Medical Center's St. Luke's Health System. So we're seeing the traction that we hoped for and continued traction in the two platform extensions that we call the Competency Center and Performance Center.

Let's turn some attention to the ICD-10 situation. As of March -- what I'd first like to do is review all the facts from prior disclosures and then add a few more elements of color to that and then we'll move into questions.

So let's look at the past disclosures and facts. As of March 31, 2014, we have approximately 1.6 million healthcare professionals under contract for the ICD-10 training solution -- so obviously delivered a strong first quarter. I believe our last reported quarter we were at 1.2 million. So you can see, we added quite a large number of subscribers under contract at ICD-10 solution during the first quarter.

Revenues from the ICD-10 training solutions were approximately $6.6 million in the first quarter of 2014. Retail prices for ICD-10 sales generally range from $15 to $125 per person per year and the majority of contracts are for two-year terms. Sales to date indicate enterprise-level focus on training and orientation -- and orienting the wide range of employees impacted by the transition to ICD-10. That has led that the average purchase price to fall at the lowest end of the retail price range that I just mentioned.

As Gerry just referenced, the Protecting Access to Medicare Act of 2014 was signed by the President on April 1 of this year. And ineffectively, it postponed the deadline for at least one year and postponed the requirement, therefore, for the use of the ICD-10 coding system. In the 20 days since the April 1 postponement, customers have deferred contracting for ICD-10 solutions.

Given the postponement, we are in active dialogue with customers to understand the impact of this postponement on their training plans. It is not clear how the postponement will impact our results of operations.

Now let's turn our attention to our long-standing compliance solution. This is an area that's an exciting area of growth and innovation for our Company. Our product roadmap in the area of our compliant solutions includes improvements of our mandatory regulatory courses for the use on mobile devices later this year, and the acquisition of HCCS has expanded our potential buyers to include hospitals' compliance officers.

We're encouraged to see early success and cross-selling HCCS core products into our customer base. So overall, the compliance solutions and the acquisition of HCCS -- it was very exciting to see us redouble efforts in an area that has been the core growth driver for us for over a decade.

At this time, I'd like to turn the call over for questions from the investor community.

(Operator Instructions) Ryan Daniels, William Blair.

I think the obvious place to start is some more color on ICD-10. And I'm curious if you could talk a little bit about the contracts that have already been signed that I think you mentioned a few minutes ago and in the past are typically two years in nature. I'm curious if there's provisions within those contracts that would allow clients to defer consumption and that could potentially push off some of that revenue, maybe into 2015, given that they no longer want to train real-time with the push?

Ryan, thanks for the question. We're not going to comment on the specifics of the contracts, other than we've mentioned the number of people under contract for provisional services. And we won't go into the details of the contracts today, but they're firm contracts and they're two-year averages and at the price points we mentioned, and all we can say this time is that we're in a dialogue with customers, and really the whole marketplace is in a bit of a state of confusion given this postponement.

And the problem with the postponement, of course, is its indefinite date. And so, all of our customers will be evaluating their training plans given this indefinite date and deciding how to use the products for which they have contracted. So that's really all we can say about the specifics of the contracts other than what I would view as a high degree of detail we've provided on the contracts that exist.

No, that's good color. And then regarding future uncertainty, I'm curious if you can discuss in your revenue guidance when you were building your model or thinking about the year, did you have a lot of incremental ICD-10 sales occurring in Q2 and Q3 to help you this year? Because it's pretty clear that people probably won't be acquiring more ICD-10 training given the delay, regardless of what the existing book of business does.

I think, Ryan, again, what I'll speak to is what we've done year to date and what's under contract. Obviously, every quarter, it's grown significantly and as we just reported, in the 20 days since the disclosure of this postponement, we haven't seen -- we've seen deferred contracting decisions on ICD-10 and so really we'll work from the base of what we have, which is the 1.6 million that are under contract.

Okay, fair enough. And then maybe a couple of other different ones and then I'll hop off. Just on the HCCS acquisition, it looks like in regards to that, you got a platform, the COI-Smart or [Co-Smart], as well as some courseware. I know in the past, you haven't really looked at acquiring a lot of courseware to make that proprietary. Was there something unique about this that made you want to bring that in house and integrate it with the rest of your solutions?

Yes, in that area we don't see a strong competition from associations or from other content providers, and it's been a particular area of expertise for our Company for over a decade. And so -- and the major medical publishers haven't had extraordinary focus in these areas of compliance, so we thought it was a nice niche to be wholly vertical integrated.

In fact, some of our vision and plans that include going mobile, as we mentioned, into a more complete suite of products, and products that also will leverage the data that flows through our network about compliance topics in the not-too-distant future.

So we have a very exciting roadmap there that will be kind of one of the first fully integrated product sets, which is platform, platform extensions, content -- and a broad suite of content -- and data, which we think will add value to the journey of maintaining compliance for our hospitals. So it's an exciting area of investment and we think we found exactly the right organization to acquire to help us strengthen what has always been a core growth driver for our Company.

Okay, that makes sense and helpful color. And the last quick one, just on the Research/Patient Experience. I know you pulled that down a lot. Not overly material to the corporate guidance, but can you discuss maybe what you're doing internally on the sales front to help them sell the recently acquired product a little bit more effectively? Thanks.

Yes, you know, selling consulting services is a little different. We think that they're a great component to the overall solution. Ultimately, we think that to differentiate ourselves, we have to be able to help hospitals move the needle on their HCAHPS scores. And to do that, as we think in our Company, you need to identify what tools and services you need to actually have that actual business or clinical impact.

And so, to do that, we believe that these consulting services and the corresponding IP -- a lot of which has to do with the development of the workforce, was critical to moving the needle.

And so, it will be a long journey and there will be two key components. One is the productization of the IP. There's a lot of great IP about how to train and develop the workforce from BLG, and we've begun that journey. That will take time. And second is for our sales organization to learn to incorporate the assessment and consulting services into their core offerings as they sell the normal data collection, data analysis services.

And so I think if you keep those two things in mind, we're kind of early to the game, we're little behind expectations, but I think we have a clear vision and a really good team -- a really great team working on those two items, and I'm confident they're going to pull it off and we'll start to see better results in the second half of the year.

Okay, perfect. Thanks, guys.

Matt Hewitt, Craig-Hallum Capital.

Good morning. Thank you for taking the questions. I don't want to belabor the point too much, but regarding ICD-10, have you had a chance to speak with some of those initial customers to get a sense whether or not they will simply extend the contract beyond the initial two years once we do have a firm date?

From what we've heard, from what we've read, the hospitals are concerned. Those that had actually implemented training programs are concerned that if they were to delay or hit the pause button, that anything learned so far -- a lot of that would be lost and they would have to start from scratch again at some point in the future. So what have you heard from customers that were maybe early adopters?

Well, there are a lot of hypotheticals and so we're going to be very careful to talk about what we know instead of projecting things and behaviors that we don't know, and the first thing is to say I think our customers are also in a state of assessment, and we are, yes, in an active dialogue with them. It's too early to determine, in my opinion, how it will impact their plans.

And I think there are certainly customers that believe, as you have mentioned, that they don't want to lose momentum and there are others that might want to defer the process and costs associated with training and development.

And so we're very early. We're 20 days post a very vague and lack of clear guidance from our federal government and from CMS about how the industry should plan and react, and so we're not in a position as a Company to comment on its impact as we work through the facts with the customers and they adjust their thinking and plans.

Ultimately, what happens will be dependent on essentially the individual systems and how they react to this lack of guidance and leadership and clarity from our government and from CMS. And then in turn, we will work with them to react to their decisions.

Okay, all right, thank you for that. Secondly, as far as BLG is concerned, and you touched on this little bit in the prepared remarks, but you mentioned it was down a little bit below plan. How much of that, if any, could be attributed to the weather? I know that sounds a little bit silly, but given that business model and given that service essentially -- could any of it be contributed to the rough spring we had?

Well, you know, I appreciate that thought. I guess there is a logical train of thought there, because we do offer some seminars and all, but I would say that the day that a SaaS company with highly recurring revenues attributes the challenges to weather it is not a good day. So I'm going to say that today it has absolutely nothing to do with the weather.

All right. Well, I appreciate it. Maybe I was reaching a little bit. All right, and then maybe last question for me and I'll hop back in the queue. The cross-selling -- and you touched on this that you have been successful in cross-selling, but are there any examples with some of these more recent acquisitions where you've taken in maybe an install base that you had not previously had tentacles into with your own products, but are there maybe one or two examples where you could say, within three months, we were able to get them signed up for the core learning platform or one of the other applications?

Oh yes, we're seeing that. I think that's one of the core drivers here. As you know, we have such great market share on the core platform that we have several examples of almost immediate benefit of cross-selling. And I can go back first thinking of the DCI -- the decision critical acquisition back a little bit -- and within a pretty short time frame, we had begun to sell some of our additional products and content libraries into customers as we were in the process of migrating them to our core platform.

So we were seeing that. With our HCCS acquisition, we're already seeing a cross-selling in two accounts. We seem to go both ways, where an account that was very interested in their high-end compliance content -- now ours -- acquired our learning platform quickly for delivery instead of the older connect model. And we've seen customers on our platform make actually large acquisitions of their compliance library post closing the transaction just a month or so ago.

And then, in research, we've seen that as well. We've had some great competitive wins recently, where we've seen customers in our research solutions. In fact, the large health system, when we mentioned earlier on our compliance -- on our performance and competency in learning system, was a major contributor to 140,000 subscribers this quarter, was already an existing and large customer of our research solutions.

And as an organization, we've been able to build a relationship with the entire executive team at that rather large health system, which I think over time, as you deliver in one category, you get an opportunity to deliver in others.

And so while I wouldn't directly attribute to the fact that they've been a long-standing research customer to the switch that they decided to make to our learning and competency platforms, it certainly didn't hurt. So in all three of those examples, our teams in our sales organization is structured to deliver cross-selling and we've run an account management model that allows our sales teams to cross-sell into those accounts.

That's great. And thank you very much for that detail. I'll hop back into queue.

Scott Berg, Northland Capital.

A couple things. Could you talk a little bit more about the traction in the quarter on the -- I won't call it newer post-care business. You obviously signed the three new partners that bring a lot of courses to your platform, which I think is fantastic. Can you talk about traction maybe around subscribers in that segment? And then what pipelines maybe over the next seven quarters look like?

Yes, sure. So the pipelines are growing. We're beginning to start to -- as we get our wheels down and we get our marketing campaigns launched and we have the right content partners, there's much more to come in those areas, which give us a more complete solution. We're beginning to see early traction.

And I think one of the things we're trying to do is shift everyone's attention to these two new core metrics, the revenue per subscriber and the absolute number of subscribers under contract and not the number of subscribers to specific solutions. So we were a little bit vague by saying we had thousands of subscribers in the quarter. We didn't say tens of thousands and that was intentional, but we did add thousands of subscribers in the quarter.

And we're excited to see a start to have traction with new customers beyond some of the anchor tenants that we got last year and before Brookdale and Almost Family and others. And so we're excited that the solution appears to be coming together and we're beginning to add staff and capacity to continue to pursue that market segment.

Great. And then I guess on the sales strategy for those customers, do you have existing sales people that are overlapping with the acute care business that are selling it to those, are have you carved out individual salespeople to attack that portion of the market?

Yes, it's really interesting -- we do both. And so, in the acute care space, as we really tally the totals, we see that a lot of our large health system customers have material operations in the post-acute space and so we've often said this, but of the 3.8 million under contract, there's a good number of them that reflect and they have extended our platform into their post-acute settings, like their surgery centers and home care and long-term care.

And so we do have an existing sales team that now has more -- that has great account relationships with large health systems and we have more specific products to offer them to extend down within their organization.

In addition, we have a carved out or a dedicated team that is focused on the segment exclusively and whose call lists and pipelines are only generated from our marketing campaigns directed as standalone and freestanding and independent post-acute care operations. We also, you may note on our website, have several post-acute sales positions open now. We're beginning to add to the team as we get more comfortable with our product offerings.

So again, overall -- again we've described this over a long time. We first announced it as a focus area and then we began with some anchor customers and some content strategy and then a national marketing campaign, and we're now slowly adding to the sales team. And so we feel it's been a very planful way to enter the market, learn it, stub our toe a little bit here and there, but kind of launch in a deliberate manner over time.

Okay, great. And then I guess my last question is for Gerry. How should we think about gross margins going for the rest of the year? Obviously, with the shift in mix towards the content side driven by CG-CAHPS has come down a little bit over the last, we'll call it, four or five quarters. But as we execute one, is that kind of the margin level, gross margin level we should think about for the rest of the year or do you see anything meaningfully moving out or moving down from the 58% range?

Well, we subsume the gross margin guidance is the overall guidance for operating income. If you go back in time, over the last probably three to four years, we've seen that margin shift as there's been more and more courseware sales. At some point, it does stabilize by virtue of just the mathematics of where the growth year rates are, but our thinking on the gross margin is part of that overall operating income guidance we offered earlier.

Great, thanks. I'll just jump back into the queue.

Brent Hogan, Avondale Partners.

Most of my questions have already been asked, actually, so I was just wondering could you perhaps clarify whether or not your updated guidance includes any effect from the ICD-10 deferred customers?

The guidance includes all the known facts that we have disclosed and we went down a list of about eight of them in this call, including average price point, term, number of subscribers under existing contract. A known fact is that sales have halted in the last 20 days. So -- but we've also been clear of what it doesn't include, which is a whole lot of unknowns about the nature of the market's reaction and the lack of clarity around the date and its potential impact on customers' behaviors and decision-making, and so unfortunately, this is an area where clarity is not possible, given the situation that the entire industry finds itself in.

All right. Well, I appreciate it. Thank you very much.

(Operator Instructions) Frank Sparacino, First Analysis.

Just two questions. First, on the research side, if you look at the organic growth this quarter, it was fairly low and just curious if there is anything specific there from overall hospital operating environment perspective or other factors going on and any potential changes? I assume CG-CAHPS continues to roll out at a healthy pace, but any comments there would be helpful.

Sure. No macrolevel changes with the product sets or product lines or the environment or the need to do the work and collect the data. A little bit of internal changes as we incorporate the new product sets and figure out their impact and kind of realign the selling strategies and so maybe a little bit of attribution to -- there's some internal work we have to do to get where we want to be.

And then, as you can tell from our overall projections for growth for the segment, we're expecting obviously a stronger second half and we maintain that here with the guidance we just provided. Maybe not quite as strong as we had originally thought earlier in the year, but certainly a stronger second half than first half.

And lastly, Bobby, just -- when I look at your backlog, the number of subscribers to be implemented, that number continues to grow at very healthy rates and it's a fairly large number. I'm just wondering if there's any sort of constraints from your ability to implement or -- how you look at that figure as it becomes larger and larger.

Sure, sure. Well, I think we feel pretty good about our capacity to turn those on in reasonable windows. Not much greater than we have in our many, many year history. Some of them are larger health systems and, actually, in some cases, we feel those are going on very, very aggressively and rapidly and so the backlog -- if you remember in the last couple of quarters, we had some big system wins.

It can move meaningfully when one large health system gets activated. And we feel on schedule for those activations and don't expect to see any major changes in our long-standing historical patterns of implementing and activating.

So our teams are outstanding. They're doing a great job and have really mature processes for implementing those customers and bringing them online rapidly. And I think it's one of the highlights of our service provision is our depth of knowledge about the protocol or process and structure that we use to bring customers online.

In fact, I think it's a meaningful way of how we win business. We just understand the language and the operating environment and the needs of our customers in a way that allows us to configure and rapidly bring them online. So I expect us to move through those backlogs the way we always have.

Great, thank you guys.

Terry Lally, Spotlight Funds.

In that guidance is subject to revisions based on learning more about ICD-10; can you be more explicit about what you're expecting for ICD-10 in the guidance, whether it's the workforce solution plus 27% to 31% or the overall revenues of the plus 25% to 29%?

Well, all the known facts for ICD-10 will be factored into both. ICD-10 revenues roll up under the workforce development solutions segment and so the numbers provided in there incorporate all the known facts, both about the business and what we know about ICD-10 currently.

But your base case -- you have the 1.6 million customers and then the growth -- expect to grow beyond that. How much of the revenues that you're expecting for ICD-8 to 10 this year is related to the base 1.6 million customers and how much is related to the growth in ICD-10?

Not quite sure what you're asking there. Again, what we know is the contract is valued at [1.6 million]. We know the average price point per user, as you do; we know the term of the contracts. What we don't know is what customers are thinking about how they deploy their programs and its future impact, which is why we reserve the right as we learn more to revise guidance based on the future impact.

And so it is a complicated situation where we've laid out everything we know and tried to incorporate it obviously into our guidance, but there are many, many unknowns that we can't factor into guidance currently.

You mentioned that sales have halted in the last 20 days since this decision. Are there any expenses that you can adjust? It seems like there's downside to revenue as customers push out decisions. Can you adjust anything in the expense structure? Are there any variable expenses that can offset any revenue shortfalls in ICD-10?

Well, sadly, the one expense that will be adjusted would be commissions, which, as you know, we've really outperformed and had incredibly strong quarters even through the first quarter of -- exceeding internal expectations for sales in really many, many product categories.

So one variable cost which will come down would be commissions related to sales. Which in our model are little bit frontloaded. They're not completely frontloaded. They're recognized over time, but they have a little more weight to closing a contract than a year, year and a half out. So that is one.

Otherwise though, the way we implement that solution is highly automated. It's delivered online. And so there's not a lot of cost, which is one of the advantages of these content relationships. There is a high cost of goods in the royalties we pay, but there is an overall low cost of delivery once we sign the contract other than things like commissions. So no, there are not a lot of other variable costs that we can pull out of the model associated specifically with ICD-10.

On the commissions, do salespeople get the average corporate commission on ICD-10 or is it lower due to the lower gross margin?

That's -- we have slightly adjusted commissions on a lot of products. The ICD-10 products with the lower gross margins have a lower overall commission than some of the higher-margin products, like when someone purely buys and subscribes to our platform. And so, overall, I would say that the content products with the lower gross margins, when they're sold as a standalone product, not a [comparative] solution, have lower commission costs.

Okay. And then the HCCS acquisition, how much does that add to revenues this year? Looks like it's included in the 27% to 31% workforce development growth.

It is and it is factored in, and we don't break it out by line, but you can see if you look at -- at close, we announced the total historical revenues and if you deduct all this deferred revenue accounting and you deduct on both operating, it hits the topline revenue recognition and operating income. There's not a lot left, particularly in this first quarter, to be contributed from the HCCS acquisition.

Now one positive effect of these strange GAAP accounting rules is that in 2015, a lot of this comes back as we work off that deferred revenue write-down. And so we'll expect to return more to seeing growth out of that asset after we finish the deferred revenue write-down model that's the GAAP model.

During the quarter, you disclosed that you'd had a series of letters or correspondence with the SEC. It looked like it was heavily related to acquisitions and acquisition accounting. How does that change acquisition accounting going forward?

I don't know what you're referring to. That doesn't seem accurate. I don't know of any (technical difficulty) that you're mentioning so maybe be a little clearer in your question.

I saw that you had posted that you had different letters back and forth with the SEC.

Terry, this is Gerry. The comments are more about the footnotes. There's no change in the accounting and no restatement of any kind. The comments from the Commission were more to try to add a little more color to some of the background to the reason why we did the acquisitions in the narrative and qualitative session footnotes.

Okay, so it won't impact how you do acquisition accounting, the deferred -- what revenues you can recognize?

It will not.

That's correct, it will not.

Okay, thank you.

Thank you, and there are no further questions in the queue at this time. I'll turn the call back over for closing remarks.

Thank you, all. We look forward to reporting in the next quarter earnings conference call and appreciate the questions and most importantly the contributions of our employees that have gotten us to deliver this success we've enjoyed so far. Thank you much and see you next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.