HealthStream Inc (HSTM) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HealthStream, Inc. third-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference call, Ms. Mollie Condra, Vice President, Investor Relations and Communications. You may begin, ma'am.

Thank you. Good morning and thank you for joining us today to discuss our third-quarter 2014 results. Also in the room with me today 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 now turn the call over to our CEO, Robert Frist.

Thank you, good morning. Good morning, Mollie, Gerry. HealthStream offers several market-leading workforce development solutions. The solutions span compliance, resuscitation, ICD-10 units, competency and learning management and many others. Our research/patient experience solutions combine survey results with consulting to help healthcare organizations improve a patient's experience while in a clinical setting.

Our core solution sets continue to grow. And this report will talk about some of the focused areas of growth, challenge and opportunity for the Company.

Our performance was strong in the third quarter with quarterly revenues up 32%, operating income up 22%, net income up 50% and adjusted EBITDA up 26%. Subscriber growth to our solutions was a strong contender to our performance. Each individual end-user utilizes at least one HealthStream subscription-based solution is counted as one subscriber regardless of the number of subscriptions contracted by or for that end-user.

As of September 30, 2014, HealthStream had approximately 3.83 million total subscribers implemented and approximately 4.13 million total subscribers contracted to use one or more of its subscription-based solutions. In the third quarter we contracted approximately 150,000 net new subscribers.

Progress with our workforce development solutions continues to benefit from both an increase in the number of total subscribers as well as a greater courseware consumption across the subscriber base. As a result our metric annualized revenue per subscriber increased 16% from $30.95 in the third quarter of 2013 to $35.91 this quarter. Strong contributions to this growth included product and solution sales from ICD-10 readiness, resuscitation, compliance and clinical offerings and from our Competency and Performance Center applications.

I now turn the call over to Gerry who will provide financial highlights. And then I will take it back and we will dive into some product line updates.

Thank you, Bobby, and good morning, everyone. I will provide some financial color to our results. As a reminder, all of the following quarterly numbers show our results in the third-quarter 2014 compared to the third-quarter 2013.

Consolidated revenues were up 32% to $44.5 million and operating income was up 22% to $4.7 million in this year's third quarter versus $3.9 million last year. Net income was up 50% to $3.4 million in the third quarter of 2014 compared with net income of $2.3 in last year's third quarter. Adjusted EBITDA, as Bobby mentioned, was up 26% to $7.9 million versus $6.3 million in last year's third quarter.

Let's now look at five areas of the income statement: revenue, gross margin, operating expenses, operating income and income taxes. Revenue, you have seen that our overall revenue growth rate is 32% for the third quarter which is a combination of continued organic growth complemented by recent acquisitions.

The ICD-10 readiness solution, an important contributor to our organic growth, contributed about $7.4 million to third-quarter revenues this year compared to $3.9 million in last year's third quarter. Excluding the IC-10 readiness solution, our overall revenue growth rate in the quarter was about 25%, which includes contributions from recent acquisitions. In addition, other product lines continued to perform well including our clinical development courseware, where for example our Lippincott Nursing Practice Series revenues grew by 75% over last year's third quarter while our Competency and Performance Center revenues grew by 87% this quarter.

Research/patient experience revenues grew by 16% in this year's third quarter. The BLG acquisition, which closed in September of 2013, contributed an incremental $618,000 to patient experience revenues and Patient Insights surveys grew by $378,000, or 7% over the third quarter of last year.

By now you've most likely seen our announcement of our expanding our survey operations with a Nashville-based interview center. Over time the Patient Interview Center in Nashville will grow to support contract expansions from our existing customers such as Community Health Systems, that requires investments in personal and capacity beginning in the fourth quarter of 2014.

Now let's look at gross margins. The gross margin at 57% for this quarter was less than the 58% gross margin in the third quarter of 2013. And similar pattern to the past several quarters, platform products with higher gross margins performed well during this quarter -- the third quarter of 2014 -- but lower gross margin solutions such as ICD-10 readiness, resuscitation and clinical solutions grew even faster, which resulted in a gross margin decrease.

In our research/patient experience segment, product mix changes and the addition of BLG resulted in a reduction to gross margins quarter over quarter.

Let's turn our attention to operating expenses. We continue to make investments in product development. For the third quarter of 2014 product development expenses were 9.5% of revenue and represented a 31% growth rate over the third quarter of 2013.

On a year-to-date basis product development expenses as a percent of revenue have increased to 9.6% equating to a 40% year-over-year increase in product development expenses. Similarly, year-to-date investments in our sales teams have increased by 32% over 2013 and we remain committed to adding talent and resources that will allow us to expand our product base and our sales force.

G&A expenses at 13.6% of revenue were similar to last year's third-quarter level of 13.5%. Our year-to-date 2014 G&A expenses were 13.3% versus 14.3% of revenue at the same time last year.

Operating income. As you know from our previous investor calls, GAAP accounting rules require us to write down acquired deferred revenue balances to fair value as part of recording the initial transaction. This accounting convention results in reduced reported revenue and operating income until we have amortized the initial discount.

The third-quarter results reflect the amortizing impact of the deferred revenue write-downs as the write-downs was $150,000 in this quarter and $167,000 in last year's third-quarter. Included in the impact of deferred revenue write-downs, which reduced operating income by $555,000 over 2013, year-to-date operating income has grown by 8.9%.

Income taxes, as you read in our earnings announcement, we were able to recognize research and development tax credits to reduce our cash income tax requirements. Our book income tax provision also reflects the eventual realization of these credits by virtue of lower effective tax rate.

The $670,000 tax benefit represents approximately $0.02 in earnings per share this quarter. Accordingly, we would have reported $0.10 earnings per share without the research and development credits, meaning this tax benefit accounts for 17% of this quarter's earnings per share. Although we continue to utilize our net operating loss carryforwards, we are planning for that time when we have fully utilized that tax benefit, which we anticipate will be sometime in the next 12 to 24 months.

Now let's look at our balance sheet. Our cash position and overall balance sheet are strong further enabling our ability to support organic development activities and inorganic growth opportunities as they may arise. 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.

As of September 30, 2014, our cash balances are $116 million, a $4 million increase from $112 million at June 30, 2014. Also as you already know, we have no long-term debt.

Guidance. Yesterday's earnings release contains updated guidance. We anticipate that consolidated revenues will grow between 28% and 30% as compared to 2013, which revenue growth reflects the impact of the deferred revenue write-down related to the HCCS acquisition, which we did earlier this year. We expect the revenue growth in workforce development segment, which includes HCCS, to increase in the 33% to 35% range also reflecting the impact of the deferred revenue write-down related to the HCCS acquisition.

We expect our research/patient experience solutions revenues to grow by approximately 10% to 12%. By the fourth quarter of 2014, revenues from our BLG acquisition, which we closed in September 2013, will be fully comparable between the two years.

We now anticipate that operating income will increase between 5% to 10% over full-year 2013. This range includes approximately $2 million related to the impact of the HCCS acquisition and incorporates startup costs we expect to incur as we ready the Patient Interview Center to begin survey work in the near future. The improvement in this operating income guidance range results in the slower-than-anticipated rates of hiring and better-than-expected performance from the HCCS acquisition.

This guidance does not include the impact from any other business development activities that we may complete during 2014. We anticipate that our 2014 capital expenditures will be between $9 million and $10 million and expect our effective income tax rate to be between 37% and 39%. This effective tax rate incorporates the research and development tax credits which we recognized in this quarter.

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

Thank you, Gerry. So let's look at some market and product line updates briefly and then we will go to questions.

Over this month we announced plans to open a new Patient Interview Center here in Nashville, Tennessee. We expect to relocate members of the research/patient experience team that are currently located at our corporate headquarters along with an initial group of interviewers to the new office space.

This move will free up approximately 10,000 square feet in our current headquarters while also giving us the opportunity to expand our interviewing capacity in a measured, iterative fashion according to market demand over time. We are pleased to be in a position to grow alongside our clients to meet their increasing needs with this newly leased and as we bring it online, this new interview center.

Having celebrated the one-year anniversary of our acquisition of BLG on September 9 of this year we are also working to incorporate BLG's services as part of her overarching solution to improve the patient experience. Our updated financial outlook for 2014 revenue growth for the research/patient experience segment decreased due to sales declines which related in part to our decision to restructure how BLG products are sold.

Ultimately we believe the restructuring will be of increased benefit to our Company and to our clients. But in the short term we have experienced revenue declines in BLG, which will blend the growth rate overall of the patient experience solution.

We are excited about the expansion of momentum in our family of products comprising our clinical development solutions. This evolving solution set now includes our Checklist Management tool that was launched last quarter, our Competency and Performance Centers and our Competency Dictionary.

Checklist Management tool is a powerful product that replaces paper-based processes and, therefore, either serves our customers as an entry-level competency management tool or complements the competency center as a method of validation. We are observing that the Checklist Management is becoming a first step for many customers to adopt automated competency management. Our customers are expressing much enthusiasm and demand for this new product, which is relatively easy and quick to implement in healthcare organizations.

At the end of the third quarter we had tens of thousands of subscribers to this new product that are either implemented or in the process of being implemented. So we are excited to see the uptake of this new Checklist Management product, which is part of the continuum of products in healthcare worker competency management. Again, just released last quarter.

During the third quarter of 2014 we also continued to expand our customer base for more advanced components for our clinical development solution, the Healthcare Competency Center namely. As Gerry reported earlier, revenues for our competency centers grew by 87% this quarter.

Let's turn our attention a bit to ICD-10. It is both been a great opportunity and presents a year-over-year challenge as we look forward into 2015 and 2016. But I'd like to characterize and refresh some of the details around ICD-10 products that we call the ICD-10 preparedness or readiness solution.

So let's look at a few of the details. Retail prices for our ICD-10 readiness solution generally range from $15 to $125 per user per year with the majority of contracts being for two-year terms. So the term on these contracts is generally shorter than the terms on most other solutions from HealthStream.

Sales to date indicate an enterprise-level focus on orienting the wide range of employees impacted by the transition to ICD-10. That has led to an average price per user to fall at the lowest end of the retail price range near to the $15. In addition, another characteristic of this revenue stream is we have a 50-50 revenue-sharing arrangement with Precyse, giving us 50% gross margins for any sales of ICD-10 readiness solution.

In light of the most recent postponement of the ICD-10 transition deadlines by CMS, last quarter we offered our customers of this solution the option to purchase a one-year extension of the current solution at a 50% annualized discount. Customers who accept the offer are eligible to blend unbilled payments remaining on their existing term with a discount of payments of their extension term, then spread the payments over the existing term plus the extension term.

Customers receive a discounted extension and lower periodic payments while we receive greater total revenue recognized over an extended period of time. So that characterizes the offer that we made recently to customers.

For the third consecutive quarter our cumulative number of subscribers for the ICD-10 readiness solution remains at approximately 1.6 million. Two years ago we described the revenue opportunity from our ICD-10 readiness solution as a bolus. Last quarter we stated our expectation that the peak revenue contribution from this solution would occur in the second, third and fourth quarters of this year and we projected that it would begin to decline thereafter.

Based on preliminary responses to our extension offer and our sales forecasts for the fourth quarter, we now expect the peak revenue contribution to span the second, third, fourth quarters of 2014 and the first quarter of 2015 and to begin declining thereafter. Therefore, for our ICD-10 readiness solution we expect a similar revenue contribution in the fourth quarter of this year as we just delivered in the third quarter of this year.

I hope that helps with characterizing the opportunity that has been presented by the ICD-10 readiness solution. We are working diligently with our partner, Precyse, to introduce next-generation products as we enter into the next year. But we still have to deal with the year-over-year comparability particularly in the second half of 2015 as it relates to the sale of this product.

In closing, I do want to comment a bit on the Ebola outbreak as it seems to have had a global impact and also a specific impact on the US acute care health system. I want to express my heartfelt appreciation to the healthcare professionals that are on the front lines facing the current Ebola outbreak and dealing with the planning and the readiness preparation that they are undertaking for and on behalf of our country.

As our hospital customers are turning to us to support them in their preparation, we have assembled an active interdepartmental Ebola task force that is working hard on this issue for our customers. Yesterday for example, we launched a webinar-based course on Ebola from one of our partners that is being made available to hospitals free of charge. We've notified our customers about this resource and expect to begin to see uptake of that education and training actually beginning today.

In addition, we are creating an Ebola Reference and Support Center on our website that will house resources for use by hospitals including several components: links to the CDC, World Health Organization and other public health organizations responsible to establish protocols, additional industry partners' content as it becomes available. We expect many of our partners are in a publishing mode and producing new courseware that should become available in the next several weeks and months.

Specific guidance for using HealthStream products in preparing their staff. For example, our customers can use the learning Center to now deploy and track training on Ebola protocols as set forth by the CDC. Because we have bundled those protocols into an assignable object that now will let them assigned it -- if they are on our platform -- assign it to their workforce and track their participation in it as opposed to just viewing it on a website.

They can also use the checklist -- the new Checklist Manager, to activate CDC-provided checklists. And so we are beginning to incorporate CDC checklists into the Checklist Management Tool -- this hot new tool that we launched last quarter -- and allow them to manage the checklists provided by the CDC in the Checklist Manager, in the management of Ebola protocols.

We expect these protocols to be rapidly evolving and hope to keep passing information along from the CDC forward to all of our nearly 4 million subscribers and make them available to our customer base. And as content and partnerships come online and provide services, whether free, sponsored or charged for, we plan to organize those resources for easy access throughout our network to all of our customers so we can be a part of the solution to the challenge our country faces.

At this time I would like to turn it over for questions to the investor community and back to the moderator, who will organize the questions.

(Operator Instructions) Ryan Daniels, William Blair.

Yes, Bobby good morning. Thanks for all the color. Had a quick follow-up question on ICD-10.

You referenced the extension offer you made with the discounted payment terms. Can you give us a little bit more color on how that was received by your client base and how many people as a part of that 1.6 million subs have actually moved forward with the extension?

Yes, so a couple of things on that. First, not many contracts have come up for renewal yet. So there is not a lot of people that are faced with the decision yet of needing the one-year extension.

But of the limited number of those that do face and have come up to that and faced that, a meaningful number, about 40% -- again, this is of a very small subset -- of them had already accepted the offer and another meaningful portion have indicated that they are going to accept. Again, I remind you that this is a positive indicator but I will call them very, very early returns, meaning that not many customers at all have faced the decision that they need the extension.

In the coming quarters we will see more customers come up into that decision and we will see their reaction. So I am not sure it is a full indicator but of course I would rather it be in a positive direction than otherwise. So I would say early indications are favorable.

Okay. That's helpful additional color. A quick question on the BLG Group, you mentioned you're structuring there a little bit, how the products are sold. Is that a restructuring of the revenue model in how you price that or recognize sales, or is that more of a sales team infrastructure change?

So there's a couple of things going on there. We have a couple of objectives with the BLG Group and their excellence and expertise.

The first is, and it's going to be a longer term journey, investment journey, is to capture their intellectual property, some of their software planning tools and their IP books and others and create them into publishable subscription products. And so that process is underway and requires investment.

The second was to incorporate their consulting services and IP into the salesforce -- the existing salesforce we already had prior to BLG. And I would say that integration is not going as well as we had hoped, meaning we still haven't quite learned to position and sell their services the way we would've expected.

So we are not getting the growth results we expected out of it. But we still believe it's the right thing to do. We have a very strong patient experience solutions sales team.

It is just a new product set for them and they've got to learn the language of selling these value-added services. And as we bring more of the IP online they will have more productized solution to sell from the BLG Group.

But right now it's the consulting that they sell and just frankly we haven't been very good at it yet. But I think we're still very optimistic about it and confident that it's the right capability to add to that group to add to the overall capability of patient experience.

Okay. That's very helpful. Then last question and I will hop back in the queue. Just on the Lippincott solutions, I think Gerry mentioned they were up over 70% year-over-year, which is pretty strong growth for a product you have had for some time. Number one, any color on what is driving that? And two, I think you may have started offering some unlimited bundles, so maybe that is driving growth. But just any thoughts on the strength in that segment.

Just in general the clinical area continues to be a relative strength for us. In the talent development spectrum, new tools like Checklist Management are seeing great receptivity. And they are used to manage kind of a rudimentary level of checklist, of competency check-off, not like Competency Center but they are used commonly in the competency management and evaluation process.

We are seeing good uptake there. The content from Lippincott, also, is very targeted clinical content. And we are just seeing a good enterprise-level subscriptions to that library.

And one of the great moves I think we made a few years back was of course that we integrated it in a thoughtful way with our platform. So there is benefit. It becomes assignable and trackable and reportable in unique ways because of how it is delivered through our platform, so we are seeing very good uptake.

And finally, in the clinical content areas in general and in the talent platform in general we've also been adding and plan to continue adding to the sales organization so that we have more people carrying the message in the market. We are just finding that it's a particular unique strength.

You mentioned the bundling. We do have a new product that is yet to be officially rolled out, but it is a -- I will call it a Netflix-like subscription product that we are seeing some early orders on and we are very excited about. That is not yet contributing to revenues in a material way but we are very optimistic for it for next year.

And so we have assembled a certain set of content, which includes Lippincott content as kind of an anchor or top brand, but other brands -- as I mentioned, it's a Netflix-like model. And the early returns are very positive.

Again, we have taken the time to integrate the technology to deliver this bundle, the marketing and messaging. We have very carefully assembled the content partners that will be a part of this solution. And we expect a strong launch of it in January. But we do have some preorders and initial contracts coming in that are very exciting for this new product, this new as-of-yet unnamed product.

I will go ahead and name it, CE Center. And you will see it move forward and you will see some launch announcements early next year as we orient our sales team around this new subscription product that we are very excited about.

Okay. Thanks for all the color and congrats on a strong quarter.

Matt Hewitt, Craig-Hallum Capital.

Good morning. Congratulations on a great Q3. A couple questions. First, on the research segment, it sounds like the BLG is the reason that you reigned in the guidance for that segment, but you also rolling out a new facility in Nashville. It sounds like that's more on the survey side of the business. Are you seeing incremental growth there or are there some contracts coming onboard early in 2015 that you're trying to prepare for?

There's a little of both. There's a little bit of capacity management across our entire workforce of space. As we mentioned, we have some of the operations for those service lines in our downtown Nashville office and we need to have expansion space here.

There's definitely a need to expand capacity as our managed call centers and our owned call centers are reaching capacity. And we definitely have brought on new customers, we noted the 7% growth rate. Again not the strongest growth rate in our portfolio but it is growing.

And we do have some large contract expansions that we are going to need the capacity. And we would rather service them out of this Nashville call center than some of our managed or even our other owned call center. So there's a bit of capacity management there and a readiness.

But you did hear us talk about bringing capacity online over time. It's not an immediate doubling of capacity just because the square footage is larger. There's a bit of shifting between corporate, other product and service lines that have growth in personnel and the ability to expand the call capacity of that product line.

Okay, great. Another question, SimVentures, you haven't talked about -- specifically about that the last couple quarters. I'm curious, could you provide an update on how that partnership is progressing, maybe if you can quantify the revenue contribution from that segment?

We haven't broken out the revenue in this earnings announcement. I think some of it might be in our other filings, I'm not sure of that. But it definitely is a smaller component of our overall growth story today.

The products of SimVentures we consider successful, meaning SimVentures is EBITDA positive and contributing to growth overall. So we are excited that it is serving that function.

The products of SimVentures typically get bundled with other products sold, generating a royalty back to the venture and then therefore to the two partners that co-own it. And so for example, one of the venture products is called SimManager and SimManager is bundled with sales of HeartCode and therefore generates a small royalty back to the venture partners because SimManager is bundled with HeartCode.

And so overall, again, a small overall contributor to revenue but a critical function of innovation. And the model is the venture builds capabilities that are bundled with solutions sold by Laerdal and by HealthStream and generates revenue streams back to the venture, which the partners share in.

So that is the model description. It hasn't grown as fast as maybe we had hoped, but it is providing vital and highly differentiated software to both Laerdal and HealthStream to take to market and positioning the companies well in an area of expected future growth which is the adoption of physical simulation and training and developing the workforces really globally but in particular in the United States.

Okay. Maybe one more for me and then I will hop back in the queue. Juice Analytics, you have started to be a little bit more open about the partnership there, or the investment there. I know it is still in the R&D phase but when are you expecting you will have some products ready for primetime out of that group?

I think we will begin to see some non-revenue generating but customer-beneficial facing products early next year. Meaning we will begin to provide some of the benchmarking tools that we think add value to specific products as part of the product offering as a new enhancement to the product offerings next year.

Over time, over the next several years, we expect that those will result in tools and additions that can be revenue-generating in and of themselves. But I would start to say that we will see some of the commercial availability of the Juice-created toolsets early next year. And you will see them as kind of bundled capabilities with existing products that I think will give our customers unprecedented data and analytics capabilities particularly beginning to leverage the overall strength and knowledge base across the entirety of the population of the 4 million subscribers.

And this will be kind of unprecedented capability and, given our size and market presence, not replicable by competitors. So we are very excited that, for example, Precyse in our ICD-10 products is beginning to incorporate Juice Analytics capabilities into next-generation ICD-10 products, which will allow for unprecedented benchmarking across the 1.6 million subscribers and, again, capabilities that other competitors just simply won't be able to replicate.

So again, we'll see early releases and impacts of probably what I will call non-revenue generating capabilities that we think will be unique and differentiated early next year. And then I will say over the next several years we hope to turn some of those into revenue-generating and highly differentiated data-driven product offerings.

But again, this is very preliminary. But we are about a year into the R&D and seeing exciting developments both with partners and internally that we think hold promise for the future.

Okay, great. Thank you.

Scott Berg, Northland Capital.

Hi, Bobby and Gerry. Congratulations on a strong third quarter. A couple quick ones for me. Gerry had mentioned additional investments from a general perspective. How do you view the opportunity over the next generically 12 months? And I know you are not guiding to 2015, but do the additional growth investments going forward, is it more marketing and awareness, or is it more headcount-related, or something in between?

Yes, it's a great question. I would say it's almost I'm going to say across the board. Meaning we are at an exciting place in our trajectory. When we release new products like Checklist Management, those had development initiatives behind them.

Each year about this time we wrap up our strategic planning process and begin to release hires, which you can watch on our website as we release hiring around new development teams in software and new sales hirings. In fact, just in the last three weeks we have started to post new sales positions around our post-acute offerings, I think four new ones there.

Our clinical area we expect to start hiring almost immediately in the sales organization and the clinical solutions, as I mentioned earlier. Sometime between now and yearend we will probably post up new development positions that we are expecting to hire as we enter next year.

Marketing and others we look at more common sizing approaches trying to grow the marketing budgets alongside with revenue growth. Another expense that will be in next year that is not in this year is Summit. And so you need to be cognizant of that as again we won't provide any detailed guidance until our February call, as we have done the last eight years, but these are some things that you need to be thinking about.

And then finally, while again we are not providing Company guidance, we have tried to provide as much color as we are able to around product line guidance, specifically ICD-10. And we are trying to very carefully articulate the challenges that ICD-10 presents as we move into 2015 and 2016, making sure people understand the bolus description, the nature of this revenue stream, our efforts to backfill, grow with other exciting products, like I mentioned CE Center and data products, are all important.

But we can't ignore the fact that the ICD-10 products will begin their decline in 2015 creating year-over-year comparability issues kind of overall because it has been such a strong revenue and growth contributor to the Company.

And so, every quarter as we get new data, price point, number of contracts, length of contracts, our expectations around when the beginning of what I will call the backside of the revenue curve for ICD-10 will begin. Fortunately this quarter we were able to push it out yet another quarter because of these extensions and stronger-than-expected sales of organizations for the fourth quarter that we are expecting.

So we are glad to be able to push it back. But it doesn't change the inevitability of the challenges it will present, especially as we enter the second half of next year the way it looks now.

But overall -- so we plan to make investments in all these areas. So products to backfill ICD-10 like the CE Center we mentioned, products with Precyse, the next-generation ICD products, sales team investments that you are already seeing posted on our website and technological and development team investments.

So in general we just feel like a small, young and growing company that sees opportunity in front of itself and needs to invest in all areas across the organization. And also you shouldn't ignore the fact that our growth in the future will be driven by a mixture of organic and inorganic growth. So we are increasing our investment.

We think we have such a strong ecosystem that we need to be on a constant lookout for acquisitions that can strengthen our overall ecosystem. And we are investing more meaningfully in the teams of people that scout, negotiate for, find and close transactions. We have done a few in our last couple years after a period of not doing many and we have announced that we continue to search and negotiate for and try to close on acquisition opportunities.

But it is important to note that as you think of next year we will be investing continuously in that pipeline whether or not it yields results. So I don't know if that answered your question, but that means investments in all areas.

And even specifically we have disclosed investments in areas like the need to expand capacity in our call center with this new 22,000 square feet lease, which accommodates growth across all business units. And so, continuous investing in all areas to manage against our growth.

Thanks. I like to hear the comprehensive answers, certainly. You have a lot of things going on right now, which is always good.

Moving on to the research segment generically, you talked about how BLG is underperforming a little bit relative to your expectations to be able to sell that. The space addition obviously talks to some other synergies and general growth in the other areas. But how would you quantify your expectations for general growth of that product segment for you guys within research?

Because I think historically we talked about likely a mid-double-digits, mid-teens growth opportunity. Obviously you are bringing it in this year. But from a general perspective not guiding to 2017, should our expectations be that that continues to be a mid-teens grower? Or is this more of an opportunity to reset those expectations as maybe more of a lower teens growth opportunity moving forward?

Yes, I think a couple things. The patient experience solution combines the numbers from BLG, which is underperforming expectations and a bit of a drag to the expected overall growth rate. We hope that our corrective actions and that we've made the right moves will start to pay off in the coming months, quarters and years.

But that is definitely something that will -- and ironically it had a strong positive impact but anomalous on growth because it wasn't year over year comparable in the analysis period to period. In the period we are just releasing it looked like it contributed in a strong way to growth because it was only a partial quarter in last year.

So again, be thoughtful of your analysis there. Because overall BLG helped pull up the growth rate this quarter of that product solution because it had a full quarter this year and a partial quarter last year. So you have to be careful. You look at the 7% number we disclosed, the growth rate in the patient experienced surveys, that is the current growth rate of that product line, which is clearly not in mid-teens.

We do expect -- we've announced some contract extensions that are compelling. Existing customers are acquiring business and the business is coming our way and, in fact, already signed under contract. So we do have the need to expand capacity, but we did say it will be more of an iterative and incremental growth in capacity to meet the contract expansions over time.

So I hope that provided some color and some thoughtfulness as you think about that product line. Generally, it has been a lower performer against -- we just announced nearly 70% growth rates on a couple of other products, the competency contributions, for example, from Competency Center and the clinical solutions I think near -- were they nearly 80% or ?

75% -- 87% on the (multiple speakers).

75% and 87%. So there are areas of extremely high growth and then this particular solution is still growing but much more midland growth.

Great. That's all I have. I will jump in the queue.

Richard Close, Avondale Partners.

Great. Thank you. Congratulations on a very solid third quarter. Was curious if we could just dive down on the next-generation products for ICD-10. Just to be clear, the guidance that you gave or the target peak quarters extending into first quarter, that doesn't include any second-generation products, correct?

No, it does not.

No, it does not. We will reflect any thoughts about second-generation products as we provide guidance next year in February.

Is there any window into what the second-generation products are? You talk about the 1.6 million and that is more on an enterprise-level. It's at the lower end of your $15 to $125 price range. Is it plausible to say, hey, the second-generation products may be more for the clinically focused as we get closer to the October 2015 day and it might be a higher price point, or any thoughts on that?

Yes, I think a couple of quick characterizations. One, the next-generation products, which are over a year in development, are incredibly exciting. They do things that the first-generation products don't do. We mentioned some of them. They will incorporate some Juice Analytics capabilities.

They are just -- overall they are just truly next-generation products not just an iteration, but very exciting. They use elements like gamification, benchmarking leaderboarding. But it is safe to say that they will target -- as people renew and extend their need for enterprise licensing will go away and the products will target much smaller subsets of the original subscriber base on an ongoing basis.

It is also true that we expect those subscribers to be at a higher price point. And so it will be -- we will use this as a beachhead with our partner Precyse to make a material move into the ongoing development and training needs of coders nationally.

And the broader potentially revenue cycle related opportunities, we plan to expand the product offerings again along with Precyse and hopefully some association partnerships to include broader areas of business that essentially we found a new buyer for this ICD-10 product and our opportunities to expand the toolsets and offerings we have for that buyer.

And so in the next year not only will -- it will focus on fewer people, it will be a higher price point and be truly next-generation capabilities. We will expand to that buyer into the revenue cycle areas by the middle of next year and so we will have a broader product set to sell to that buyer. And so in that way we hope to work to backfill these revenues the best we can.

Great. I appreciate the details there. With respect to BLG, I just want to make sure that I am understanding this correctly. You are disappointed I guess on the consulting and advisory portion in terms of integrating that with your existing business. And I am just -- is there any thoughts in terms of the weakness there, or not living up to expectations that we would anticipate any type of write-down with respect to that acquisition?

Yes, we would -- that would be talking about next year, I think, and so we are going to defer all that to our February call. But right now we are still optimistic for the product line. We are seeing an uptake in the pipeline for the product line.

And it is just taking us a little longer to get the strong sales organization to carry the product and represent it and show it in an integrated fashion with the current product. So I would say it is not a current expectation as I sit here today of any type of write-down on that product set.

Okay. And then Gerry, I was curious if you could just talk to us about the deferred revenue guidance? I think you were at $2.5 million to $3 million previously and going to $2 million I guess now for the year. If you could just walk us to that change?

Yes, the number you are referring to is in the previous quarter's guidance. And the $2.5 million to $3 million was a combination of deferred revenue write-down estimate, transaction costs, any potential hiring and so on and operating expense redundancies at ACCS.

So if you've gotten into the -- owning it now for the last six months, it is performing at a little better than we first expected. And so that $2.5 million to $3 million range is now above $2 million. So that number comprehends all the different pieces that might have been part of the ACCS transaction in first year of ownership.

Okay. All right. Getting back -- I just have two final questions. Getting back on Ryan's question on the bundle. Can you tell us, is that additive or does that cannibalize existing content subscriptions, or consumption?

No, I think actually you're referring to the bundled solution that we kind of newly announced that, the [CE] Center? No, we really think it represents a unique opportunity to help organizations provide the necessary content for their staff to meet licensure requirements in a better and more organized way.

And so, a lot of the clinical solutions we are selling today are incorporated into on boarding programs or they are very specific risk areas. Whereas this product is a more open, broader library offering that allows people to do elective learning, meaning they can kind of choose the components they want to take. But it is in fulfillment of say state licensure requirements.

So there's a nice mixture of -- it's a product to meet a professional need but not an institutionally directed need, if that makes sense? In other words, the hospital is unlikely to say, you need to take these 10 courses from this new bundle. They are more likely to say, here is a solution, a bunch of courses that you can choose from to meet your personal state licensure requirements and it's going to be provided to you by your institution.

Whereas the current Lippincott products and clinical products we mentioned are more directed, meaning the chief nursing officer determines that the employees need access to this reference or clinical library in their work and they license those products in a more directed fashion to target to those clinicians. So there's kind of two things going on so we don't think that they cannibalize each other. We think they support each other.

Okay, great. And my final question, we haven't really talked that much about post-acute. I think it was mentioned briefly. But if you can give us an update there? Obviously you have had a ton of success I guess when you launched that last year. And then just any updates and your thought process or thought on that subsegment?

I think as we enter the next few quarters, again finishing our strategic retreat and planning process, you're already beginning to see like on our website we posted I think four new sales positions and we will probably continue to add to those.

So specifically for the post-acute areas we are finding that the hospitals in the new ACO model are drivers of extending services out to the post-acute settings. And so, both our existing sales team and our new sales team has opportunity. Now we have actual product sets to offer to be bought through hospitals and extended to their new relationships and vice versa.

So we're excited about the opportunity. It is becoming a part of our adds each quarter. We are not breaking out adds by product lines anymore because it is just confusing, or by segment but our overall growth and ability to maintain adding subscribers to our network is now beginning to be added to by the opportunities in the post-acute setting.

And so we think it's an important -- it was important 18 months ago to extend our market definition beyond acute into the additional 3 million people that work in post-acute. And what I would say is it is now kind of part of the ongoing quarterly delivery of new subscribers will be coming from this new segment. And while we are not breaking out or quantifying it, it is adding in the thousands to the new subscriber counts each quarter.

And a follow-up, are we still targeting the 20,000 to 50,000 on a quarterly basis? Is that still our goal?

Well, that's a tough one because in an effort to try to manage expectations of what I thought was a more normalized or acceptable rate, we have used that as a range for five years. In the last several years we have continuously beat the range fairly regularly. And so, I probably need to reevaluate that range and think about it.

We know that it will be increasingly more difficult to add brand-new subscribers in the acute setting and we are learning the rate that we can offset that, which will get a little more difficult because of our absolute penetration there. But in the post-acute settings we are seeing uptake.

And so, I'm going to need to maybe think about that question and in the first-quarter earnings call next year when we provide guidance I will give you a better answer.

I would say it is a bit -- been obsoleted, the 20,000 to 50,000 by our actual performance the last say eight quarters. But I have been trying to be cautious about it because of the challenge and the opportunity I just presented. So let me think about it and maybe when we do our comprehensive of guidance for 2015 in February we will try to come up with a new range.

Okay, great. Thank you. Congratulations.

Frank Sparacino, First Analysis.

Hi, guys. Just two quick questions. Bobby, first maybe on HCCS, which look to have a very good quarter. Is there anything you would point out as it relates to the market there and just how that asset is performing?

The HCCS assets? Yes. So the HCCS assets, we are obviously very pleased. The management team there, Ben Diamond and his entire team, have really done a great job trying to understand the HealthStream culture, bring all the strengths of their already strong culture.

When we conducted due diligence on that acquisition, they had some of the highest customer satisfaction scores that we had seen. And we hire an independent third-party to call customers and ask them about their satisfaction. So they began from a really strong place but more impressively, they have really worked to adopt and not resist but learn from and add to from their existing culture but add to the HealthStream culture.

And so their sales teams are operating very effectively. We have taken them from their old model of having maybe six or seven to cover all 10 of our territories, so we have expanded their sales team. Their sales leadership, Bill McGinn, is just doing a great job organizing that team into kind of what I will call our matrix sales organization.

They are beginning to assume broader responsibility across our compliance product sets and so they have compliance thought leaders in their organization. And they are stepping up and some of our regulatory compliance products that are historical products in HealthStream, they are beginning to take responsibility for.

The net effect of all that too, in addition to the fact that they had a broader product set than we had in compliance, is resulting in more awareness across compliance officers and more strength to what used to be just a mandatory training that we offer to be more of a compliance suite.

And also you should know they have a software solution which we are working to integrate technologically called COI-SMART that is a SaaS based application, a little niche application, but it is performing very well.

So if it is not evident, while we've had challenges in some areas that we have mentioned, BLG and learning to sell consulting as an organization, and we've got a lot of work to do there, but we will get it and have great teams there as well.

But just kind of the opposite end of the spectrum, HCCS seems to be firing on all cylinders, assuming broader responsibility and delivering great financial results to the Company. So we are both proud of and excited about their work.

And maybe lastly, just following up on that Bobby. Do you have a sense, or are you willing to share what you think the potential market is there in terms of how big the compliance side could be?

And related to that is just when you look at the sales that are happening today, are those largely just new sales, or are in fact -- are they looking to replace some existing compliance solution that perhaps wasn't adequate enough?

Well, they have a great mix of products -- we have now. For example, we didn't really have a great product -- when hospitals faced a corporate integrity agreement we didn't have a great content offering to help them through the then mandatory training and orientation programs that are required under a corporate integrity agreement.

Well, HCCS has a great program for that and now HealthStream does. And so at customers that faced that unfortunate challenge, we have been able to cross-sell. So our existing base is very broad, as you know, and we have been able to reach out some of our health systems that face that challenge and support them in that journey with new product offerings, so you call that a cross-sell.

Other products like the COI-SMART application that I mentioned are almost completely greenfield, meaning we don't see a lot of competition for it. It's kind of healthcare tailored and it's a niche product, so not as big and broad as maybe our learning platform. But still we see greenfield in that product.

So it's a nice mix of cross-selling existing products into HealthStream's existing customer base and greenfield opportunity like the COI-SMART application that has been built that is a unique niche software application.

Thank you.

Steve Rubis, Stifel.

Can you help me understand the impact of Checklist Management in terms of the aspirational price of a subscriber? In your Company presentation you show some slide that reflect what a customer might be worth on a per sub basis based on a solution walk-up? And how does Checklist Management change those numbers?

What's happening now is a lot of the modules are steady incremental adds but not exponential or doubling adds. And so a lot of these products from our Authoring Center to Checklist Management are uniquely positioned to add incremental revenues but not leaps and bounds. They are high-margin, high gross margin products and this one is very exciting because it is rate of uptake.

But I would characterize it at the lower end of contributing. It is a new contract, it is kind of an entry level product, it is simple to use and implement. So I can't give you the price point of the number because we don't do that by product. But it would be a small increment to those models that we have shown in our previous Investor Relations slides.

Okay, that's fair. Can you walk us through the value proposition of the research patient engagement segment. Specifically what is the growth opportunity here especially around surveys? And do you think there's an opportunity to take share from competitors?

Yes, so that market on the whole -- there is things I like about it and things that I don't like about it. So the thing I like about it is that it is a defined competitive landscape. There are four or five core and quality competitors, but the talent management arena where we compete is wild, wild west. And everyone from Oracle and SAP too much smaller innovative incubated companies are competing. And hundreds of competitors including some of the giants.

Whereas the patient and experience in research solution, A, is very healthcare specific; B, it is rooted in federal requirements. And so CMS requires the certain collection of the data and submission of the data and we are a qualified vendor to do that. And so, there are very few -- there is a list of maybe 30 or 50 qualified vendors, some hospital self certified taking that number higher, maybe 70 or 80. But overall there is a process you have to go through to become a certified vendor.

So it is a defined competitive landscape, that is what I like about it. So the things I don't like about it is in the pure data collection component it is more of a take away business. And so I like that it is not thousands of competitors, but you do have to move that work from another existing vendor. So it is less greenfield, making it more challenging to grow at high rates.

The innovation therefore is the important component. It is helping an organization move the needle on their score, not just collecting the data and showing them their score that will be ultimately the differentiator for any of us and our competitors.

In our view of the world training and developing and selecting the talent that ultimately shaped the perceptions of these scores is the way to move the needle. And so over time we plan to, as you see, consult the organizations about how to build a more patient centered culture, talent selection tool so you hire the right people and have the right attitude because attitude is reflected in those scores later by how patients remember their experience.

Training people to be aware of how the scores are created and what is measured in these CMS required surveys, so training is a key component. So we think we have a lot of the right assets to actually add value to helping a hospital improve their patient experience. Ultimately the vendor of these say five competitors that actually improves the patient experience as reflected in an improving score I think will gain market share against its competitors.

And so, at its core the data collection component of the business is a bit commoditized and it is a bit of a takeaway market. But it is a race to see who can innovate enough tools and capabilities to actually help an organization improve the patient experience as reflected in those scores. And whoever does that will start growing beyond the 7% range.

And so, we are working hard to invest through BLG, product innovations and new tools and analytics capabilities to try to be the first to move the needle.

Got it. One quick follow-up and then I will yield my time to everyone else. Have your clients talked to you at all about emotional intelligence or working in ways to quantify and understand emotional intelligence of their employee base, especially in your talent management offerings?

So, it is interesting, we are beginning to build in collaboration with other partnerships. So we have a partnership with a professor out of Pepperdine that uses behavioral screening tools to screen employment candidates and ultimately rank potential -- high potential leaders based on behavioral screening criterion.

And so, while not exactly getting at emotional intelligence we are beginning to see, and in this case foster and actually invest in the development of behavioral-based screening tools that we think will add value to our customers both in the selection of new employees and the promotion of internal candidates.

And so, we built -- you may know this, we built a capability in our platform called 9 Box, and 9 Box is the tool that helps you visually sort out your workforce based on capital X and Y criterion. And in order to make that effective though we engage a professor out of Pepperdine who is an expert in workforce behavior and predictive analytics to build and we're in the process of validating an instrument that will help sort out high potential future leaders based on behavioral science.

And so maybe not exact question about emotional intelligence -- answer to it, but directionally I expect to see more and more tools introduced through HealthStream and HealthStream Partners that select, sort and assign and use behavioral science to achieve selection and sorting and promotions of employees.

Why, thanks.

And I'm not showing any further questions at this time. I would like to turn the conference back over to our host for closing remarks.

Sure. So I hope we are brought the proper balance to both opportunities and challenges. Of course we celebrate a very strong third-quarter and with our increased guidance we look forward to a strong year end wrap. We miss our resident questions from our resident short to bring the appropriate emphasis to both the challenges that we face and the opportunities.

Hopefully you get a sense from this call of all the investments we are making and exciting new products that will drive future growth. But also the challenges of backfilling the ICD-10 revenue, which are real challenges that we'll put a lot of thinking into how we guide for 2015 in our February call.

And so, we look forward to that next call, we'll provide year-end results and a forward look into 2015 for the first time in great detail. Thank you for participating. And we look forward to the next call with investors and shareholders. And congratulations to our employees for a strong third quarter.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect a wonderful day.