HealthStream Inc (HSTM) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the HealthStream Inc. fourth quarter and full year 2014 earnings conference call. (Operator Instructions). As a reminder, this conference call me be recorded. I would now like to introduce your host for today's conference, Ms. Mollie Condra, Vice President, Investor Relations and Communications.

Thank you and good morning. Thank you for joining us today to discuss our fourth-quarter and full year 2014 results. Also in the conference call 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 statements regarding future events and the future performance of HealthStream that involve risk and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risk and other factors that could cause results to differ materially from those forward-looking statements are contained in the Company's filings with the SEC, including Forms 10-K and 10-Q.

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

Thank you, good morning everyone. Welcome to our 2014 year-end earnings conference call. As many of you know, who are familiar with our Company, this conference call is particularly important, as it's the one time each year we provide our forward-looking guidance for the upcoming year, which we are now 1.5 months into here. We have many business developments to discuss today, so I'm going to jump right in.

HealthStream's full-year 2014 metrics reflect a strong year of growth as revenues were up 29%, net income up 25% and adjusted EBITDA up 21%. Ending the year with revenues exceeding $170 million was an exciting accomplishment for the HealthStream team.

In a minute, Gerry Hayden is going to provide more detail on the 2014 financial performance and our 2015 guidance in just a few minutes here.

I think some of our biggest news I need to kind of cover early, so I'll jump right in on the HealthLine Systems pending acquisition. I'm really excited about the announcement we made last Friday, where we entered into a definitive agreement to acquire HealthLine Systems.

HealthLine Systems is a market leader in credentialing and privileging for healthcare providers and hospitals and health systems across the US. We expect this transaction to close later in the quarter pending required approvals. So we're excited to bring that to signature, but we have a little bit of a waiting period here as we seek final approvals.

We believe acquiring HealthLine Systems represents the next step in the execution of our planned strategy for credentialing, privileging and provider enrollment business. If you think back to our acquisition of SciMed Development -- I think that occurred in September 2012, you'll recall our entry into the healthcare credentialing business kind of began with that acquisition. And it was a smaller organization focused on really the provider enrollment process.

Now, through the combination with SciMed and HealthLine coming together, we'll meaningfully strengthen and expand our presence in this business. Importantly, we are going to do that under the strong and established leadership of Michael Souza. All of you may remember Michael from his role as Senior Vice President of Sales. He led us to strong organic growth in the last several years and recently took on the Senior Vice President of Business Development role for us as we sought out how to strengthen our position with SciMed. In this role, he gained a deep understanding of the credentialing and privileging business and helped hand-select the HealthLine Systems company as a target for growth for us and an acquisition.

HealthLine's products offer an innovative expansion to our growing suite of healthcare-specific talent management solutions. If you think about it, the process of validating the professionals that are potential employees of hospitals places HealthLine's systems and software in an enviable position of being the gatekeeper for workforce quality at over 1000 US hospitals. There's simply a process for determining the credential sets of the workforce as it enters into deployment and hospitals. And HealthLine software is used to orchestrate the process of validating their credentials.

And so, the front-end of talent management is kind of managed in over 1000 US hospitals via the systems and software of HealthLine Systems, so really excited about this kind of -- this early component of talent management.

2000 (sic -- 2014, see press release) revenues of $18.8 million show a strong and robust company at HealthLine Systems, generating operating income of $7.7 million. And EBITDA I believe was around $8.4 million or $8.5 million, meaning that we paid a very reasonable multiple to acquire a strong and profitable business in the healthcare solutions business.

With our growth-oriented leader Michael at the helm, and our commitment to add growth investments because we have to combine the SciMed operation with the HealthLine Systems operation, we are confident that the new business segment with this combination of good growth-oriented leadership and our commitment for growth investments will be an important contributor to the HealthStream story on a go forward basis.

You know, this announcement was very exciting. It sets us up really well for the next 24 months. And now, I'm going to turn it over to Gerry to hit some of the financial highlights, and then I'm going to come back and do some deep dives into many of our product lines and product sets. Gerry?

Thank you, Bobby and good morning everyone. I'll provide some financial color to our results. Here are some financial highlights. Consolidated revenues were up 22% to $45.3 million in the fourth quarter of 2014, while they were up 29% to $171 million for the full year. Operating income was up 20% to $4.2 million in the fourth quarter of 2014, while it increased 12% to $16.4 million for the year.

Net income was [up 50%] to $2.6 million in the fourth quarter 2014, while it increased by 23% to $10.4 million for the full year of 2014. Adjusted EBITDA was up 28% to $7.6 million in the fourth quarter of this year, while it increased by 21% to $28.9 million for the full year of 2014.

Let's now look at five areas of the income statement: revenue, gross margin, operating expenses, operating income and income taxes.

Revenue. You've all seen from the release that our overall revenue growth rate is 22% for the fourth quarter compared to last year. The ICD-10 readiness solution, an important contributor to organic growth, contributed about $7.2 million to the fourth-quarter revenues this year compared to $5 million in last year's fourth quarter. Excluding the ICD-10 readiness solution, our overall revenue growth rate in the quarter was about 19%, 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 52% over last year's fourth quarter, while our competency and Performance Center and related products grew by 80% over the prior year's fourth quarter.

Research patient experience revenues grew by 1% in this year's fourth quarter. Revenues from our patient insight surveys grew by 8%. But that growth was offset by lower growth or decreases in other products, such as our annual and biannual surveys and BLG Consulting and Coaching. Nevertheless, it is important to note that the research patient experience grew, is still a contributor to operating income and EBITDA for the Company.

The growth rate in subscription-based revenues was influenced in part by slight decrease in ICD-10 revenues from the third quarter. For the fourth quarter, customers began exercising their contractual right to extend their contract term, resulting in some revenue being shifted from the fourth quarter to future periods. We estimate that approximately $500,000 in revenues moved from this year's fourth quarter to future periods. Had the $500,000 in revenue remained in the fourth quarter, we estimate that our revenue per subscriber metric would be $0.50 higher than reported levels.

Now let's look at the gross margins. The gross margin at 57.3% in the fourth quarter of 2014 versus 56.5% in the fourth quarter of 2013 reverses the pattern from previous quarters whereby we experienced decreases in our gross margins on a comparative basis. One factor influencing the gross margin improvement is the flattening of the ICD-10 revenue curves.

Specifically, as ICD-10 revenues growth slowed, so too did the increase in the variable cost of royalties. The revenue mix excluding ICD-10 will carry a higher gross margin contribution. On a full-year basis, the gross margins do show a decline between 2013 and 2014. The 2013 gross margin was 57.9% versus 56.6% for this year, 2014.

Let's turn to operating expenses. For the fourth quarter of 2014, product development expenses were 9.7% of revenues and versus a 40% growth rate over the fourth quarter of 2013. The full year of 2014 product development expenses as a percent of revenue have increased to 9.6%, equating to a 40% year-over-year increase in that category product development expenses. Similarly, for the full year, investments in our sales and marketing initiatives have increased by 24% over 2013 as we continue to add talent and resources that will allow us to expand our product base and our salesforce.

G&A expenses at 13.8% of revenue were higher than 2013's fourth-quarter level of 12.7%. A significant reason for this increase was the partial deal cost we incurred 2014 for the HealthLine Systems acquisition that we announced back on February 13, actually last week, February 13.

On a full-year basis, it's important to note the trends. As a percent of revenues, G&A expenses have declined from 13.9% in 2013 to 13.4% this year 2014. This has happened even though 2014 includes deal costs for both HCCS, which we closed in the first quarter of this year, and the HealthLine Systems transaction we just discussed a second ago.

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 fourth-quarter results reflect the amortizing impact of the deferred revenue write-downs totaling $244,000 in the fourth quarter of 2014 and $172,000 in the fourth quarter of 2013. The impact of deferred revenue write-downs was $1.5 million in 2014 compared to $839,000 in 2013. The full-year operating income growth rate was 11.6%.

Income taxes. As you may have noticed in our financial statements, the effective tax rate in the fourth quarter of 2014 was approximately 38% versus our historical trends of 42% to 43%. In the fourth quarter, our booked income tax provision reflects an estimate of the research and development tax credit we anticipate to realize for the 2014 year. Accordingly this tax benefit reduces our provision and results in a lower effective rate quarter.

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 such as HealthLine Systems. As of December 31, 2014, our cash balances were $121 million, a $5 million increase from $116 million at September 30, 2014.

Also, as you already know, we have no long-term debt, but we did increase our revolving credit availability to up to $50 million from this previous $20 million level. In our earnings release yesterday, we stated that we anticipate funding the HealthLine Systems purchase price with approximately $60 million of cash on hand and $28 million of borrowings under the revolving credit agreement.

We continue to review and evaluate a variety of acquisition business development opportunities while maintaining our discipline in terms of strategic fit and valuation. We believe that this blend of cash and debt provides us with financial flexibility to pursue development opportunities, while introducing a modest leverage into the capital structure.

Yesterday, this earnings release contained our guidance for 2015 full year. But before diving into the details, I'd like to highlight a few points about the HealthLine Systems acquisition. The press release includes full year 2014 HealthLine financial information. Our guidance is based on nine months of ownership in 2015, once again assuming a transaction closing in the first quarter of this year.

The revenue and operating income guidance range is [contemplated in the] HealthLine Systems deferred revenue write-down for GAAP accounting purposes. Our guidance indicated increased rates of investment over 2014. These are largely associated with product development. For 2014, as I just mentioned a few minutes ago, product development increased by 40% over 2013. In 2015, we anticipate this category will increase by approximately 48% over 2014.

The depreciation and amortization expense line should increase to account for the amortization of intangible assets that are related to the HealthLine acquisition.

We anticipate accelerated revenues will grow between 18% and 21% as compared to 2014 and will be derived from the following three areas. First, we expect revenue growth in the workforce development segment to increase in the 15% to 18% range. Second, we expect our research patient experience solution revenues to grow by approximately 2% to 4%. Third, assuming once again a closing some time by March 31, 2015 which implies nine months' contribution to 2015 results, we anticipate HealthLine Systems revenue to be between $7 million and $9 million, which once again reflects the write-down of the acquired deferred revenue balance as required under GAAP.

The Company anticipates that revenues from its ICD-10 product category will be between $26 million and $28 million in 2015, similar to last year's levels. We anticipate that 2015 operating income will decrease between 25% and 35% over full-year 2014.

This operating income range includes the following. Between $5 million to $7 million of write-down and deferred revenue balances of the recently acquired or to-be-acquired HealthLine Systems. Approximately $1 million in transaction and closing costs also related to the HealthLine Systems acquisition, and an increase rate of investment over full-year 2014 HealthStream's product development related to new products, enhancements to existing products, and integration of acquired products, including an increase in investment in the HealthLine product -- HealthLine Systems products. And finally an increase in sales and marketing investments, including the Company's customer Summit which will be held in Nashville during second quarter of 2015.

As I mentioned just a few seconds ago, we anticipate funding the HealthLine purchase price of approximately $60 million of cash on hand and $20 million in borrowings under the revolving credit agreement. Accordingly, we expect to incur between $650,000 and $700,000 in interest expense beginning in second quarter of this year 2015, which will be reported in other income expense, which is below operating income on the income statement.

We expect effective interest rate on these borrowings to be approximately 3% per annum. We anticipate that our 2015 capital expenditures will be between $11 million and $14 million, and our effective tax rate will be between 42% and 44%. And this guidance does not include the impact of any other acquisitions that we may complete during 2015. Thank you for your time and I'll now turn the call back to Bobby.

Thank you, Gerry. Now it's time to take a little deeper dive into some of the product lines and solution areas of the Company. First, let's cover the patient experience solution area.

Since the passage of the Patient Protection and Affordable Care Act of 2010, CMS is increasingly using its CAHPS patient experience surveys as part of their quality reporting programs. For hospital, their HCAHPS scores are directly tied to the CMS value-based purchasing program, where their Medicare reimbursement rates will be impacted by these scores.

The patient experience business has a challenging forecast with a growth rate of only 2% to 4% for a few key reasons. At the end of 2014, the solution area lost a meaningful patient survey account when the account consolidated services to another vendor. That means that some of our growth is necessary to just backfill this loss.

That's a key contributor to lower forecasted growth rate of 2% to 4%. And that just occurred really in the end of 2014, and so we had to pull back some of that revenue expectation into 2015. And therefore a lot of our energy will go into backfilling that, and so the lower growth rate of 2% to 4%.

Second, we are seeing the growth in the CG-CAHPS survey. These are the physician office experience surveys. While a majority of the surveys are still done by phone, we're encouraging a shift to an e-survey methodology. The e-survey methodology has a lower price point and, however, a higher-margin. As the shift occurs, we expect margins to improve on lower growth. And so that's the second contributor explained in the revenue growth rates in the patient experience solution area.

Third, we've modeled a flat growth rate for the acquired consulting services BLG while we work to restructure and improve this service offering. That acquisition has proven little more challenging for us, and we continue to work the bundle those services with the sold services, the patient experience measurement capabilities that we have. So for those three reasons, we have a lower growth forecast on the patient experience solution as we enter into 2015.

And so, in an effort to begin to improve that business, in the third quarter of 2014 HealthStream announced that it had leased office space to build an open a new patient interview center in Nashville. The new facility officially opened earlier this week, and over time, we expect the lower operating cost at this facility to improve margins overall in the patient experience solution area.

For the full year 2014 we completed a record 1.9 million total surveys, which was 11.3% higher than the prior year, and our operating teams are making steady improvements to manage the volume of this growth.

Let's turn our attention to ICD-10, which has been a topic of great importance over the last eight to really ten, almost twelve quarters now. And we are finally here kind of reconciling the past and the concerns with the fact that we now believe that we're going to be able to deliver similar revenues to the prior -- to last year. And so, effectively, we've kind of been able to we believe kick the can down the road to 2016 on the ICD-10 issue.

However, if you have a really high growth driver, which is true in our workforce development solutions, and it starts to go flat as we've just projected, which we perceive as a strong accomplishment given its early rapid growth, it's very dilutive to the overall growth rate of the workforce development section. And so it is, in itself, going kind of horizontal on us is a contributor to the lower growth rate on the workforce development segment.

So let's look at a few of the details around the ICD-10 to remind everybody of the facts. Retail prices for the ICD-10 readiness solution are generally between $15 and $125 per user per year. The majority of contracts are still two years and we have a 50-50 revenue sharing agreement with our partner, giving us the 50% gross margin on ICD-10 solution sales.

After several postponements, the current date set by CMS for the transition to ICD-10 coding systems is -- remains set at October 1 of 2015, so this year. And, as of late last week, a hearing was held by the US House of Representatives Energy and Commerce Committee, Subcommittee on Health and there seemed to be apparent support for maintaining the coming deadline and little resistance to and desire to change it. So we believe that this time it's going to stick.

In light of the last postponement, however, of ICD-10 readiness that confused many of our customers, and that occurred in the second quarter of 2014, we offered our ICD-10 readiness solution customers the option to purchase a one-year extension of their current solution at a 50% annualized discount. Customers who accept this offer are eligible to blend unbilled payments remaining on their existing term with the discounted payments of their extension term, then spread the number of payments over the existing term plus the extension term. Customers receive a discounted extension at a lower periodic payment, while we receive greater total revenue from the account over an extended period of time.

And so, earlier -- in the prior quarters we were unable to identify the uptake of that offer. But I'm pleased to report that now after a quarter, at year end 2014, 80 of our ICD-10 readiness customers have chosen to purchase the one-year extension offer, thus amending their contracts over a longer period time and for a greater total dollar amount. This is higher rate of adoption than originally expected and we consider it to be a positive development.

After three consecutive quarters of nominal subscriber additions that rounded to 1.6 million, we were excited to see increased levels of contracting bringing our total to 1.78 million subscribers. And so finally, some movement on the total subscribers for ICD-10.

The net effect of these developments is that we now anticipate our full-year 2015 revenues from our ICD-10 readiness solution to be between $26 million and $28 million, roughly comparable to our 2014 revenues. While this flattening of revenues for ICD-10 readiness is better than we originally had anticipated, and we will probably still see some decline towards the end of the year, it will of course have the effect of reducing the overall growth rate of our workforce development segment.

On Monday of this week, our ICD-10 solutions partner Precyse announced the launch of an exciting new product called Precyse University DNA, which we are a primary carrier for. And our technologies play a primary role in the development of the new capabilities of Precyse University DNA.

Precyse University DNA is a solution that enables healthcare organizations to pinpoint performance gaps for coding, documentation and other revenue cycle functions. While the current ICD-10 readiness products were designed to prepare the workforce for the looming ICD-10 deadline, the new Precyse University DNA is designed to maintain critical coding and revenue cycle competencies over time. So it's much more of a sustainment product than the product we've been addressing the last few years, so really excited just in the last few weeks to have a new product that we believe has an extended shelf life and compelling reasons to upgrade from the readiness solution to the DNA solution.

In fact, already, which was preannouncement, three contracts have been signed for Precyse University DNA prior to its official launch and utilizing some of our new data and analysis toolsets.

So I'm going to shift gears and talk a bit about the Heartcode suite of products, another category of products that has been a strong and steady contributor to our growth over the years. This product is focused on teaching resuscitation skills to healthcare professionals and it's offered through our partnerships with Laerdal Medical and American Heart Association.

In the fourth quarter, we saw a 32% increase in completion over the prior year quarter. And so we continue to see all the gauges of consumption and utilization of this project moving in a positive direction, indicating strong market acceptance and continued growth of this product set. So we are very excited to see a 32% increase in completions over the prior year.

Another new product, Checklist Management, which was launched just in the second quarter of 2014 finished the year with over 120,000 implemented subscribers. As you recall, Checklist Management is a powerful product that replaces widely utilized paper-based processes. So we are really excited to see a new product go from zero to 120,000 subscribers in just two short quarters.

For our competency center and performance center products, the fourth quarter represented a period of steady progress. Both contracted and implemented subscribers showed sequential growth. For example, we implemented over 58,000 new subscribers to competency and performance center in the fourth quarter.

Another new product that we are excited to see and is having positive early results is our CE Center. And I previewed the CE Center for you during last quarter's call and kind of let the cat out of the bag little bit early. But we described it as a Netflix-like subscription product designed to meet the state licensure requirements for nursing and allied health professionals.

For this product, we partner with Lippincott, a top brand in nursing, and Academy Medical, top brand in allied professional education. Hospitals purchase CE Center and make it available to staff for their professional development. We've seen considerable momentum with this product adding, 63 new contracts since its launch in August.

We should begin seeing contribution to our ARIS from this exciting product throughout 2015. So the uptake of that product has surprised even us in some of our preliminary budgeting, in just the fourth quarter alone, with 63 new accounts sign for its utilization.

I think it's the integration of that product with the core platform that's going to give it a considerable competitive advantage in the market, and of course its completeness and quality of content. It finally has all the right elements to be a growth driver for our Company. So we surprised ourselves a bit with 63 new accounts signed in the last 90 days of the year.

Finally on February 3, 2015 we announced the launch of HealthStream Recruiting Center, a new module and capability of our core talent management platform. I don't have a lot to report on that, except that we are excited about it. And in the 2.5 weeks since its announcement we are ready have a qualified pipeline and contracts pending. So we really -- we kind of launched it at our national sales meeting a few weeks back and then took it market. We see some early acceptance of it as a rounding out of our talent management suite.

Across HealthStream, our employees are celebrating the news that several of our products received outstanding industry recognition in the fourth quarter. Our resuscitation solutions won two Brandon Hall Group gold awards for excellence in the best advance in gaming or simulation technology, and the best advance in a unique learning technology. Our COI smart product line which was acquired through our HCCS acquisition also earned a Brandon Hall Gold Award for its excellence in best defense in time and labor technology category.

I'd like to congratulate our employees, our partners and customers for the innovative use of these products and the outstanding outcomes they are achieving with these products. So it feels like we're getting a little bit of our project mojo back in our product sets, and that's encouraged us to continue to invest in an exciting and bright future horizon. And so you see a little bit more of an investment theme again as we enter into 2015.

Finally, everyone at HealthStream is gearing up to host our annual customer summit. We point that out on this call for two reasons. One, we expect this attendance to set new records again and to be an exciting event in April 29 through May 1 here in Nashville.

And secondly, since we didn't have it last year, for those of you modeling our Company, you want to add extra expenses into our marketing for this exciting annual customer summit. Or actually it's around every 18 months is our cycle. We are really gearing up now, just a few months to go until that large customer summit.

With all that in hand and laying out all of our exciting growth plans and also our challenges as we enter 2015, I'd like to turn it over for questions for the investor community.

(Operator Instructions) Matt Hewitt, Craig Hallum.

Thank you very much for the update and the opportunity to ask some questions.

Glad to do it.

First, on the ICD-10, and thank you for going into detail on that. Could you help quantify with the impact to the growth rate will be in 2015? Maybe kind of walk through the math that -- the contracts that have been extended, taking advantage of the contract option, how much of a magnitude? Was that a 2% to 3% hit to the top line growth rate in 2015, or is it just too difficult to calculate at this point?

I think the easiest way to think about it is that it was our single largest growth rate contributor and last, say, 24 months. And now for the next 12 months, it will show slight declines, which means if you think of it in the context of the overall segment of workforce development, you've got an important product line. We are really excited now that it's actually going to hold its own.

It's going to kind of go -- as I said, go horizontal in that $26 million to $28 million. If you add up the sum of all the prior quarters it was around $28.4 million, and now we are telling everyone that we expect to do between $26 million and $28 million in this year. So you have what was, in the prior 24 months, a grower showing now effectively zero or slight decline in growth.

So it has a meaningful effect, a dilutive effect to the growth rate of that business segment. And that's why we wanted to highlight some of the other high-growth products that we are growing in the 50% range and the 80% range, like competency center, that show that there are still a lot of high-growth smaller products. But again, one of our biggest drivers for growth is now going horizontal.

In fact, we predicted a steeper decline in it beginning in the second quarter. And now looking at it with these extensions, we are basically taking the revenue contributions and it would have looked more like a bell curve tapering off. And now it's kind of plateauing for almost a full year across the top of its revenue contribution.

So if you think about it, it climbed to peak revenue contribution in about the third quarter of last year. And we are going to be able to maintain essentially that peak level of contribution around the $7 million level. It might bounce around, $6.8 million, $7.5 million for the remainder of the year but -- and so we are effectively going to have a six-quarter plateau of contributions from that product.

When you look at it in the context of a growth rate, it is very damaging. When you look at it in the context of the expected decline, we are actually pretty excited. These extensions are just -- every time we sign one now, it gives us revenue out 24 months from today and takes the peak down. As you saw, we had expected a higher contribution even in the fourth quarter.

But when we signed 80 extensions, it pulled $0.5 million of revenue out of the fourth quarter pushed it into the future. So that hurt the ARIS calculation. But again in some ways I think it is taking the top of the bell curve and smushing it down and stretching it horizontally. So I view it as a financial victory that we're able to do that.

And the other exciting thing is it's buying us more time to introduce the new product, which is called DNA. And DNA has a higher, we think, value proposition and a more sustainable value contribution, meaning the existing ICD-10 products were geared for really getting ready for the deadline. We kind of classified it as a readiness or change management product.

DNA is designed for perpetual maintenance of competence of the coding and revenue cycle staff. And so now, we have a product to sell into that department to a VP of finance that we think we can continue selling for years. And so, we don't know, but it's our ambition to make this more sustainable product try to continuously backfill what will be a declining revenue stream eventually, now looking like into 2016, on the ICD-10 products.

I hope that all helps. There's just a lot going on there. But essentially bought more time, spread out the revenue and we've had a great uptake in the last quarter suddenly of our extension offers.

That does help. And I guess kind of sticking with the growth topic, HealthLine obviously looks to be a very nice acquisition. And thank you for providing the metrics, financial metrics with last year. But could you comment -- what was the growth rate that they'd been experiencing either in 2014 or the last couple of years?

Yes, so the growth rate was fairly low in the single digits. And you could tell from its extreme profitability -- and we paid a very reasonable multiple around 10 times EBITDA. You can see its operating income there is very strong, and its size relative to our size is going to be a meaningful contributor.

So overall, a profitable business. Some of that is because it wasn't in a high-growth mode. And I think I saw some of the preannounced -- pre-analysis from other analysts that talked a little bit -- they kind of assumed that. In fact they were right. So it's kind of a low growth, high profit.

But what's encouraging about that is that with over 1000 hospitals using the products and our more extensive customer base, and most importantly, the growth-oriented leadership that we are putting into place with Michael Sousa who, as you know, was a key contributor to our growth rates in the past five years. He was really excited to step into this new role, and of course this is still pending acquisition. So hopefully, it will close this quarter. We'll put our highest growth-oriented officer to help drive growth.

You can also see now while we are increasing our investment into SciMed not only to increase -- to integrate it with SciMed -- increasing our investments with HealthLine and SciMed -- not only to integrate it with SciMed to make it a cohesive unit, and SciMed has a really great operating team as well. But also to give Michael Sousa some flexibility to invest in growth investments in both technology integration and the sales team, to continue to strengthen it.

In general we found in the space that both the competitors and the company we acquired has underinvested in growth-oriented investments. So I expect a pretty rapid growth in the sales organizations for this new business unit we're speaking of. Of course, I must caveat that is pending HSR approval and a few more hoops we have to jump through in the next, say, hopefully 30 days.

All right, one more for me and then I'll hop back in the queue. In the press release you had commented that you had a large health system that contributed to the 324,000 new implemented subscribers. Can you provide some details on who that customer is? Was that competitive conversion or were they -- was it more of a greenfield situation? Anything on that front would help.

They were on a different platform. It wouldn't have been one of the platinum platforms in the industry, but it was a takeaway. It was driven by the robustness and completeness of our solution and they were existing customer of other products. And so we were able to use our cross-selling ability to bring them in.

And I'll note that we implemented 324,000 subscribers. And so the first thing is, if you think about a prior seven quarters, we are implementing about 130,000 each quarter for seven quarters if you took an average. Our teams here activated more than 2X -- 324,000 in 90 days. And so, we are looking forward to seeing that revenue contribution.

Another interesting fact is that customer was a customer of another product for a very small subset of their employee population. So if you think of a large health system in excess of 100,000 subscribers, they were already buying another product and their revenue per subscriber was above 50.

But suddenly we brought on the balance of their employee population of the core platform at a much lower entry-level purchase price. So it immediately depressed the revenue per subscriber both at that health system, and it was large enough to contribute to the ARIS drop across our network. But if you really think of it, it's really -- you can see it as a positive, because now we have another 100,000 people to sell incremental product to that we didn't have before that.

So it was a -- I'll call it a moderate competitive win, meaning they're on a lighter industry platform. It was a cross-selling strength. So they did use of the products from both research and patient experience and learning.

It did have a dilutive effect to the ARIS calculation, both at the account level and our bigger, our broader number calculation. But if you really concentrate on it, I look at it as we now have 100,000 more people to sell more products to on a go forward basis.

Great, thank you very much for answering the questions.

Ryan Daniels, William Blair.

Thanks for all the details and for taking the question. Let me start with one on HealthLine. It seems like from a strategic perspective the transaction gets you closer to a more robust upfront platform for recruiting and credentialing and pre-hire questionnaires, skills assessment. So how far along the recruiting spectrum does this get you versus where you envisioned the product needing to be for future growth?

Yes, so it's interesting. Credentialing and privileging are very unique dimensions of managing a workforce, unique to healthcare. And they kind of sit between recruiting. And so in our new applicant tracking system is part of the front end of recruiting. As people key in and enter data, it gets shifted over into these credentialing and privileging systems.

And there's kind of two more steps that happen as part of on-boarding and managing the clinical and provider workforce, and that's credentialing and privileging. And so it kind of fills a niche. It's not on the very front end of recruiting.

It's kind of post-recruiting, post-hiring. But it's the immediate process of kind of on-boarding. You have to credential the workforce and verify their resume, essentially, to accept them as employees. And then you have to grant them practice rights and that's the privileging process.

And then, to get money for their services, you have to send a lot of their data that you've just verified off to the different insurance companies so you can get reimbursed for their work. And it's that little window that's both -- all three of those functions that are very unique managing a workforce, the healthcare workforce. And they kind of sits between what I'll call the ATS recruiting, behavioral screening, selection tools and kind of the learning systems and performance review systems.

And so it's kind of, in my mind, like a unique little window, part of the spectrum of talent management. In fact, in most industries it doesn't exist. So it wouldn't be thought of as part of talent management. And in hospitals it's management out of the medical office, so it's not even managed out of HR. But it does in fact -- it is part of a continuous spectrum of managing the healthcare workforce.

And so, those processes of credentialing and privileging occur continuously. So the privileging process has to be revisited for all of those providers based on different policies at different intervals, one to two years. And the credentialing process is ongoing, as you have to monitor things like sanctioning and other elements. So they're kind of continuous and ongoing.

They're a core part of getting validated data collected on your workforce. They are critical to reimbursement, meaning you just simply can't get revenue unless you have done things like enroll it. And you have to have accurate data to get providers enrolled. And they fill out a really unique dimension of talent management, in my mind, in healthcare.

Okay, that's very helpful color. And then maybe one more on the transaction, just from the financial standpoint. So if we look at the operating income impact, you've got the write-down of the acquired deferred, you've got some transaction costs and then also the amortization of acquired intangibles all hitting the operating income line. So I'm curious if you could give us a little bit more detail on what the impact of this transition is on your operating income outlook for 2015?

I think right now there will be more detail financials filed in the not-too-distant future. But right now, I think it's safe to say that if you think of the deferred revenue discount, if you had taken a business that generates $18.5 million in revenue and we are only going to get $7 million to $9 million of revenue. And so -- and it hits at the revenue line and the operating income line.

And so it is a majority contributor to the forecasted decline in operating income is this deferred revenue write-down. It is the majority contributor to why we are guiding operating income down. And it's really based on accounting convention more than the financials and the cash flow.

The economics.

Or the economics.

Okay, that's helpful. We'll look for more detail there. And then the last one, on Precyse University DNA, can you just talk a little bit more about the financial relationship there? I guess twofold; number one, is it a similar revenue share agreement to what we've seen with ICD-10? And then number two, any view yet -- and I realize it's early -- but any view on what the average revenue per user might look like for that versus the kind of lower end that you've guided us towards on the ICU readiness product? Thanks.

Yes, and we use that readiness as a characterization because it's just known as Precyse University. But you can think of it as Precyse University, as kind of a readiness and orientation product and DNA is next-generation. So the price points will be higher. They will target smaller audiences and they'll be more recurring.

As you noted, the price points on the readiness -- we gave a broad range of selling. But it ended up for most of the now 1.78 million subscribers that we ended up at the very bottom of the range, around the 15 -- right around the bottom of that range as an average. The price points on DNA will be higher. It will target smaller populations. But we hope that it proves to be a little bit more of a perpetuity.

One other important note is that it is a 50-50. So DNA is 50-50 on a go forward basis, just like the prior agreement. And we have released some exciting capabilities that are central -- technological capabilities that are central to making this product what it is. In the coming months you are going to hear more announcements about those capabilities. But they do center on the use of data, benchmarking, analytics and certain capabilities that didn't exist in Precyse University until we release these technical capabilities.

So I'm going to leave that as a little bit of a teaser, but Precyse University is real. We have contracts on it. We believe it's more of a perpetuity product. It will be a higher price point. It is 50-50 and it's based on some exciting new technology we've been developing for about 18 months.

Thanks again for all the color.

Scott Berg, Northland.

Congrats on a solid fourth quarter.

Thank you.

A couple of quick ones for me. Gerry, was there anything else in the calculation of ARPU this quarter outside of the large customer that was converted and came online, and the slightly lower ICD-10 revenues that would have contributed to the lower ARPU number quarter over quarter? Or does that really comprise the vast majority of that difference?

I think those two factors comprise the vast majority of the differences.

Great, that's fine. Bobby, on the HealthLine products, obviously a profitable company and in an area that should fit very well from a software perspective into your product suite. But what's needed from an integration perspective to make the use of it more seamless with customers of other applications?

Well, it right now can be installed and it can be delivered software-as-a-service kind of in a hosted or cloud-based model, and there is a mixture of both of those deployments. Of course over time we would like to see it more cloud-based than installed.

The data flow between that -- so once you verify the a credential set and you grant privileges and maybe even before that, you're going to want data to flow over to the learning and performance review system. So we'll have our work cut out for us to make that all seamless.

And so, over 1000 hospitals use this software. And interestingly, when we did our review of this, we heard customers quote that the data coming out of that piece of software was sometimes considered the source of truth on their workforce, meaning they actually used that data to populate their HRIS system and talent systems.

And so we were really excited to be moving into a line of business where the data is so well vetted and qualified and quantified, that is often considered a source of truth data set inside of these health systems.

So -- but to get your question, we will have our work cut out for us, which is a bit of why you're seeing the increase investments. We're going to need to hire some additional development teams to begin to get that data flowing more seamlessly between and among our systems and it's going to take time.

Okay, great. And then as you look at the survey business, and growth, obviously, is not guided very high in 2015 based on the larger customer that you lost at the end of the fourth quarter, but what is the right way to think about the growth of that business on a go forward basis? Is it a mid to high single digit type grower in terms of profile? Or should we expect it to accelerate back into the maybe low teens, double-digit area?

I think first of all, there's no way to say it other than we are disappointed we haven't been able to deliver better than single digit growth out of that unit. Every time we seem to get our wheels moving, we have a little bit of a setback like this one, this loss of customer. And so that's clearly disappointing.

That said, we have great operators in this group and they continuously find ways to improve margin and contribution from the business. I think the burden is on us now that we are kind of getting our hands around ICD-10, we're rounding out our talent platform, completed a significant acquisition for us, or at least have a pending significant acquisition.

We need to get our heads a little more around the product innovation in that area, the way we've done in our talent suites in other areas. And so it's probably a matter of a little more attention to innovation and adding new product sets.

As you know, we acquired the BLG Group which is a service-oriented group. We haven't proven particularly adept at selling services and consulting. I still believe it was a critical move, because those services are needed if you're going to improve an HCAHPS outcome. And there is a lot of great IT bottled up inside of that company we bought.

And it's kind of incumbent on us now to get this growth rate up above single digits back to double digits, to put an emphasis this year in preparing for 2016. Get our operations straight, deliver the 2% to 4% growth and start to make investments again, a little bit of that theme in product innovation in that area, because we think there's plenty of room around this pace and experience opportunity.

Because no one has really figured out how to move the needle on these HCAHPS scores, which changes reimbursement. And so I think innovation is the key, and so therefore, you hear a bit of an increased investment in R&D in this area as well.

Okay, great, and then last question for me, probably for Gerry, is you used some debt for the acquisition, yet you have enough cash. And considering that that's going to cost you this year -- we'll call it roughly $700,000 in interest, why use the debt instead of just using the cash that you have on hand?

Yes, well, certainly we have to close the transaction, but it's really a judgment call in terms of trying to retain some flexibility to move quickly on some smaller transactions. And at the same time we begin to, I say, gracefully bring some leverage to the capital structure. So it's more I could say judgment and flexibility. We have enough cash plus remaining debt capacity to do some smaller transactions, and so we are just trying to balance out that -- the capital position.

Great, that's all I have. Thanks for taking my questions.

Richard Close, Avondale Partners.

Thank you, congratulations on a solid year. I was wondering if I could piggyback off of Ryan's questions with respect to the operating income guidance. Just as we think about, I guess, the deferred revenue and transaction costs, excluding those, how should we think about the $7 million to $9 million in revenue attributed to HealthLine? Should we be applying that 41% type of margin? And if so, if you back that out, doesn't that imply that the core operating income is essentially declining year over year? Or am I doing my math wrong?

I think -- this is Gerry, Richard. I think I'd offer a more conceptual answer, which is that the operating income guidance is consolidated taking into account all of the factors. So I don't know that I would be using the historical standalone margins.

As Bobby mentioned, they seem high; maybe some investments were not made in prior years. But I think -- or my suggestion is that you use the premise that the guidance subsumes all the different factors.

I can follow up with you after. A couple of other just housekeeping; excited about the CE Center and those products, and the uptake here near-term or since you've launched it in August. Can you talk a little bit about what the price points are on that product?

On the CE Center product?

Yes.

Well, for competitive reasons, we don't want to put it out there. But we are doing our best to be -- have a better product at a lower price than competitors. I'll have to think about that one. Just for competitive reasons we are maintaining flexibility on pricing there.

Okay, that's fine. I completely understand. And then I guess my next question is I think a lot of other -- there seems to be a lot of competitors, or maybe I'm wrong, on the credentialing side. And just your thought process on the competitive environment and what the market opportunity is on that. And is it more like a best-of-breed opportunity where you guys can take market share from being best-of-breed? Or is it just a bolt -- people view it as a bolt-on and just use their existing vendors?

Well, let's see, it is the competitive landscape. There are at least three or four meaningful competitors in the space. It's my understanding they are kind of all around similar size.

We think HealthLine was the leader in both size and profitability, and we think, just our observation about it is it was a very profitable space that needed a competitive shakeup, needed some investment and a growth-oriented attitude. And so that's what we're going to bring to it. And I think by bringing it, we expect start to win a higher percentage of the deals that come and move.

In addition, as we get it a little more integrated with our platform, there should be more inherent advantages to being part of a broader suite than a standalone application. Those theses will take time to prove out.

Minimally, it's a very profitable component now of our business and it also has an interesting effect of the deferred revenue write down. Right as we enter in probably what may be a more challenging period around ICD-10 in 2016, we'll get the deferred revenue write-down treatment back and the revenues will essentially start to surge in the contribution from this acquisition, which has kind of been -- we've kind of -- all the contributions in the first year these acquisitions now with the accounting convention get kind of eliminated. So it will surge back in 2016, creating a nice counterweight to any challenges we may face in 2016 with ICD-10.

So, from a financial planning standpoint, it seems like a very good deal. It is very profitable. We are putting growth-oriented leadership into it. And I think, to get to the heart of your question, the ultimate integration with our broader platform should give us a competitive advantage we need start to switch organizations to our HealthLine Systems platform.

Are these -- with HealthLine is it a one- to two-year contract? Or how is it -- how are the typical contracts? How should we -- (multiple speakers)

When initially signed, they're multiyear contracts and they roll into kind of one-year auto renews. And so they are not quite as long-term as our current agreements, and I think that's industry norm. Probably over time, we'll see that shift as people sign up for them as part of the way we sell.

And my final question, Bobby, is we didn't hear much about post acute. Is there anything to add or update us on the post acute offering?

Well, we made some moves in December and January to add to that sales team. So we now have, on a territory basis, a full team that we are fielding. And we didn't. So we've kind of gone from two or three up to ten or more in the sales organization since -- as I've said, we're kind of dabbling in it.

We built out are partnerships last year from zero to 7. We appointed executive leadership over it in December, actually effective January 1, a vice president level market leader for us. Real excited about that. That person came out of our salesforce as well, so now we have a market manager.

We let the team go from just a few to over 10 now. And we are really ready to go to market this year. So, we're pretty excited about where we are. I didn't talk about it because there's just so much to talk about.

But we have made -- I think, again, we're kind of a slow and steady group here. We acquired a couple of big customers; we enhanced our own libraries; we added six additional content partners. We figured out our pricing model. And then the last 90 days we appointed executive-level added 7 more sales people.

Excellent, thank you very much. Congratulations.

Sure.

Steve Rubis, Stifel.

I've got two. The easy one is, earlier in your prepared remarks you sort of signaled an appetite or an interest in possibly doing some more acquisitions this year. Can you give any color on general areas that you're focused on as opportunities?

Yes, we definitely -- it was probably two years ago started to add executive leadership. So we have a vice president of integration. We -- our general counsel serves as our head of business development now with Michael Sousa moving into this new presidential role, assuming we close. And so we've got real executive leadership and support for an active M&A program.

And so, it's fair to say that our future vision includes a little bit more of an inorganic -- includes more than, say, five years ago of an inorganic contribution to growth and deploying our capital and capital structure, and flexing our debt a little bit. So the areas we are interested, of course, our talent suite continuously needs adding to. Occasionally, our ecosystem, we invest in partnerships to build new product offerings. Just in the last couple of years, we've done some minority investing like in Juice Analytics to get very specific technologies built.

We round out our solution area. So if you think about last year, we thought about our compliance solution and we acquired HCCS. This year, two years ago, we put our toe in to credentialing and privileging. And this year, we made it a real segment. If you look at the combined financials assigned to that, which we'll publish soon with HealthLine, it's now a real meaningful contributor.

And so if you think across compliance, revenue cycle and ICD-10, patient experience, we kind of go across those segments and strengthen them. So BLG strengthened patient experience, HCCS strengthened compliance, HealthLine strengthened and built a unit out of credentialing and privileging. And so we kind of think in these core solution areas how to either add a new solution area or strengthen an existing one.

So I think I've covered it all. But adding technologies like the Juice investment, which is a minority stake in a small company to acquire the rights to technologies, or strengthening core solution sets or value propositions we offer, or entering a new one. And so credentialing and privileging went from a very small piece, we signed that two years ago, to now meaningful part of our business. So that's way we think about the way we add to the M&A program.

Great, thanks. And then my other question is more around -- it's more of a long-term strategic question, given you're making a pretty big bet on credentialing as you are sort of building it into a new business. And I'm wondering if like your strategic outlook there is based on sort of the EHR realm, maintaining the status quo where it's sort of Epic and Cerner dominate everything. Or what happens if a cloud-based player comes in who offers some credentialing solutions as well? Is that a concern? Have you thought about those scenarios?

Well, sure. I think over time our advantage will be integration and cross-selling. And again, we view this as a unique dimension to talent management instead of a unique dimension of electronic health records system. And so either view could play out. We like our position pretty good.

All right, thank you very much.

Frank Sparacino, First Analysis.

I just had one question, Bobby, as it relates to, I guess, compliance and maybe even touching credentialing. In light of the Anthem breach, I don't know if you've seen more sensitivity on the provider side to security. Any thoughts there, Bobby, just in terms of maybe short-term or longer-term impact for you guys?

Well, security is top of mind for everyone. And it seems like no one, no matter what they invest, is able to provide an absolute assurance to it.

The move into credentialing and privileging, it provides us some outreach into new types of data sets. They're not as sensitive as the data sets we already manage through our patient experience solution, which is really electronic patient information, which is covered under HIPPA laws. So we already have robust protocols around in management of HIPPA-oriented data.

And I don't think that -- once you do that, you're not really incrementing your risk any by moving into data about the providers themselves. We already have higher security in and around the patient data that they already exist at our firm.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back to management for any further remarks.

Well, thank you. If there are no further questions, we've been waiting for this time for some period of time to share our experience of 2014 and summarize it. We look forward to tackling the challenges and opportunities in 2015. And hopefully everybody has a good clear view into the future with us, the best that we can tell today.

We look forward to updating you in a few short months as we wrap up Q1 and report on how we're doing against these expectations. So thank you all very much and look forward to seeing you on the next call.

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