HealthStream Inc (HSTM) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HealthStream first-quarter 2015 earnings call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you and good morning. Thank you for joining us today to discuss our first-quarter 2015 results. Also in the room, on the conference call with me are Robert A. Frist, Jr., CEO and Chairman of HealthStream, and Gerry Hayden, Senior Vice President and CFO.

I would also like to remind you that this conference call may contain forward-looking statements regarding future events and future performance of HealthStream that involve risk and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the Company's filings with the SEC, including Forms 10-K and 10-Q.

So with that, I'll turn the call over to our CEO, Robert Frist.

Thank you, Mollie. Good morning, Gerry; good morning, everyone. Welcome to our first-quarter 2015 earnings conference call.

Our first-quarter 2015 metrics reflect strong financial growth, with revenues up 23%, operating income up 45%, net income up 40%, and adjusted EBITDA up 39%. As usual, I'll let Gerry dive into more details on the financials, so I'll cover a few business updates.

The first thing you may have noticed in our first-quarter earnings releases that the nomenclature we've used for our business segments has been slightly updated. We are now reporting on three segments. The first segment is Workforce Solutions; Patient Experience Solutions; and our newly established Provider Solutions, which are -- the last one is comprised of the HealthLine Systems and Sy.Med acquisitions that are now combined into our Provider Solutions segment.

The Workforce Solutions segment performed well again in the first quarter of 2015. This business segment is comprised of applications and content solutions for customers, which are primarily subscription-based. In the first quarter we contracted over 150,000 net new subscribers to the platform for Workforce Solutions, which increased the total number of contracted subscribers to approximately 4.43 million subscribers.

Our Patient Experience Solutions segment increased revenues by 8% in the first quarter over the first quarter of 2014. Revenues from Patient Insights surveys, a survey research product that generates recurring revenues, increased 14% over the first quarter of 2014.

Also in the first quarter -- and I think this is good news -- two large health systems contracted for over $1 million of our BLG consulting services, which is now part of the Patient Experience Solutions segment. That new order value, that contracted value represents an uptick in the sales momentum for that part of our Patient Experience Solutions segment.

We are reporting on our Provider Solutions segment for the first time in this quarter. If you think back to our acquisition of Sy.Med, which occurred in September of 2012, you can recall our entry into the credentialing and provider enrollment business. I'm pleased to report that on March 16 of this year, we completed the acquisition of HealthLine Systems, a leading healthcare credentialing and privileging company based in San Diego.

Now, through the combination of Sy.Med and HealthLine, we'll meaningfully strengthen and expand our business presence in this area and launch today the Provider Solutions business segment. By providing software that is used to validate the professional credentials of potential employees, HealthLine Systems' Echo products serve as the gatekeeper for workforce quality for over 1,000 US hospitals.

We believe that credentialing, privileging, and provider enrollment are unique dimensions to managing talent in healthcare. Our Provider Solutions segment helps ensure that hospitals surround their patients with the best workforce possible.

Senior Vice President Michael Sousa has been appointed President of our Provider Solutions business segment. We're excited to see the plans for that segment evolve and the growth trajectory begin to take off here in the remainder of the year.

Gerry Hayden will now dive in and take a look at some detailed financials. Then I'm going to come back and talk about a few product lines so we can quickly get to questions.

Thank you, Bobby, and good morning, everyone. I'll try to provide some color to our financial results.

Some highlights; these are all, of course, first quarter of 2015 versus last year's first quarter. Consolidated revenues were up 23% to $47.2 million, and operating income was up 45% to $4.8 million. Net income was up 40% to $2.7 million, and fully diluted earnings per share were $0.10 in the first quarter this year compared to $0.07 last year. Adjusted EBITDA was up 39% to $8.4 million.

Now let's look at four areas of the income statement: revenue, gross margin, operating expenses, and operating income.

Revenue. Revenue within the Workforce Solutions continued to perform well. Strong implementations of Learning Center, Competency Center, Performance Center, and Checklist were meaningful contributors to our revenue growth. Also in Workforce Solutions our clinical development offerings, including Lippincott Nursing Practice series, grew by 51%.

Our ICD-10-readiness solution contributed $7.1 million to first-quarter revenues this year, compared to $6.6 million in last year's first quarter. Full-year guidance for this product remains at $26 million to $28 million of revenue for 2015.

The HCCS acquisition, which closed in early March of last year, continues to perform well for us and contributed an additional $2 million to revenue in the first quarter of 2015. The comparisons over the prior-year first quarter include two additional months of ownership versus last year and the complete amortization of the beginning deferred revenue write-down.

The Patient Experience Solutions revenues grew by 8% in this year's first quarter. Revenues from our Patient Insights surveys grew by 14%; but that growth is offset by lower growth or decreases in other products such as our annual or biannual surveys and patient experience coaching.

As we mentioned in last quarter's call, this solution area lost a meaningful patient survey account when it consolidated its services to another vendor. This account completed its final survey cycle with us at the end of the first quarter, and we will experience the lost business impact the remainder of this year, and is therefore reflected in our lower guidance.

In the first quarter, Workforce annualized revenue per subscriber, or ARIS, increased to $34.63, representing a 4% growth over last year's first quarter and a sequential increase of $0.20 over the fourth quarter of 2014. Subscription-based revenues grew by 25%, while implemented subscribers grew 19% over the same period last year.

Now to the gross margins. The gross margin in this year's first quarter was 57.2% versus 55.9% in the first-quarter 2014. Slowing growth in lower-margin ICD-10-readiness solution revenues leads to higher blended gross margin.

Operating expenses. For the first quarter of 2015, product development expenses were 9.9% of revenue and represented a 31% increase over the first quarter of 2014. In addition, we incurred $2 million in capitalized software development costs in this year's first quarter.

On a combined basis, income statement expense and capitalized software development, we invested 14% of revenues in product development in this year's first quarter. Product development is an area where we expect accelerated investments over the rate we've seen in this year's first quarter.

G&A expenses at 14.7% of revenue were higher than 2014's first-quarter level of 13.6%. A significant reason for this increase was the approximate $1 million in transaction costs we incurred in the first quarter of this year to complete the HealthLine Systems acquisition. On a pro forma basis, excluding the HealthLine deal costs, G&A expenses would have been 12.6% of revenues for the quarter.

Operating income. As you know from previous 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've amortized the initial write-down.

The first-quarter 2015 results reflect the amortizing impact of the deferred revenue write-downs totaling $578,000 compared to $369,000 in the first quarter of 2014. Including the impact of deferred revenue write-downs, operating income grew by 45% in this year's first quarter. For the remainder of the year we expect to see significantly higher deferred revenue write-downs related to the HealthLine Systems acquisition.

Now a look at our balance sheet. Our cash position and overall balance sheet remain strong and support organic development activities and potential inorganic growth opportunities. As you may already know, we funded the $88 million HealthLine Systems purchase price with a combination of $60 million in cash and $28 million from our revolving line of credit.

Our cash balance at March 31 was $64 million, and $22 million remains available under our line of credit. We continue to review and evaluate a variety of potential acquisition and business development opportunities in terms of strategic fit and valuation.

Yesterday's earnings release contains updated guidance for the 2015 full year. We anticipate the consolidated revenues to grow between 18% and 21% as compared to 2014 and will be derived from the following three areas. First, we expect the revenue growth in Workforce Solutions to increase in the 15% to 18% range. This Workforce Solutions growth range excludes Sy.Med, which had revenues of approximately $4.5 million in the 2014 full-year results. Sy.Med is now included in the Provider Solutions segment as Bobby mentioned a few minutes ago.

Second, we expect our Patient Experience Solutions revenues to grow by approximately 1% to 3%.

Third, we expect our new segment, Provider Solutions, which consists of our recent HealthLine acquisition and Sy.Med, to contribute between $11 million and $14 million in revenues. We expect HealthLine Systems to contribute between $7 million and $9 million of this total, which is the estimated amount after the write-down of the acquired deferred revenue balances as required under GAAP. The accounting anticipates that revenues from its ICD-10 product category will be between $26 million and $28 million, similar to last year's levels.

We reported strong results in the first quarter of 2014. Going forward, we anticipate our full-year 2015 operating income will decrease 25% to 35% over 2014 as our guidance takes into account, among other things, the impact of the recently completed acquisition of HealthLine Systems. Associated with the acquisition of HealthLine Systems, beginning in the second quarter of this year we will start incurring $6.5 million to $7.5 million of deferred revenue write-downs and amortization of intangible assets associated with the transaction, interest expense, and planned investments in sales and product development.

As I just mentioned we funded the HealthLine purchase price with approximately $60 million in cash on hand and $28 million in borrowings under our revolving line of credit. Accordingly, we expect to incur between $400,000 and $500,000 in interest expense beginning in the second quarter of 2015, which will be reported in other income expense on the income statement. We expect the effective interest rate on these borrowings to be approximately 2% per annum based on current rates.

We expect that our 2015 capital expenditures will be between $11 million and $14 million, and our effective income tax rate to be between 42% and 44%. 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 turn the call back to Bobby.

Thank you, Gerry. Just packed full of information and details on the finance. Appreciate the update.

I'll run through a few product updates and we'll get to questions here in just a few moments. First, in February of this year we announced the launch of HealthStream Recruiting Center, and already we have a qualified and building pipeline for that product set and have signed our first customer under contract. So very excited to see progress in 30 days on a brand-new product, the HealthStream Recruiting Center.

Our new product Checklist Management, which was launched in the second quarter of 2014, added thousands of newly contracted subscribers in the first quarter of this year; and importantly we implemented over 80,000 subscribers in the first quarter. So cumulatively, there are now approximately 200,000 subscribers using the product.

As you recall, the Checklist Management is a powerful product that replaces widely utilized paper-based processes throughout the hospital. We see them associated with competency management, for example, as a use for the Checklist Management tool.

Another new product which we've begun seeing positive early results is CECenter. I previously described to you CECenter as a Netflix-like subscription. What that means is that it's a combination of content partners' content into a flat-rate unlimited-use subscription.

The product is designed to meet state licensure requirements for nursing and allied health professionals. For this product we have partners like Lippincott and Academy Medical and plan to add additional partners over time.

We've seen great momentum on this new product. On average we're signing about one new account per week during the first quarter, so really good to see CECenter taking off as we had hoped it would.

Turn our attention a little bit to ICD-10. Consistent with what we announced last quarter we do anticipate the full-year contribution from ICD-10-readiness solution to be between $26 million and $28 million. Also as we mentioned, that's roughly comparable to the prior year's revenue contribution for that product set.

Revenues from the ICD-10-readiness solution were $7.1 million in the first quarter, which is relatively flat sequential growth, as we had previously guided. In fact, we've seen several quarters now in that range between $7 million and $7.5 million; I think it's about four quarters, in that range.

So we're seeing a plateauing of the contribution from the ICD-10 product set. The thing about that, though, is that it was such a high-growth product earlier on that as it flattens it has the effect of reducing the overall growth rate of the Workforce Development segment.

We continue to see strong performance of our HeartCode suite of products. This product is focused on teaching resuscitation skills to healthcare professionals. It's offered through partnerships with Laerdal Medical and American Heart Association.

As of March 31, 2015, we had approximately 1.7 million cumulative training certificates that have been completed through HealthStream. Importantly, approximately 113 new HeartCode contracts were signed in the first quarter of this year.

About half of those are renewals and half of those represent new HeartCode business. So really strong sales organization around this use of simulation technologies for training and development of the healthcare workforce.

Associated with our Patient Experience Solutions, we opened and began operations and started conducting surveys from our new Patient Interview Center here in March. So we're excited to see capacity ramp up in our Patient Experience Solutions business.

It's also important to note that financially the cost of delivering these surveys is lower out of this facility in Nashville than some of our other facilities. So over time we hope it helps improve margins for our Patient Experience Solution business.

Finally, I'll just mention that we are up -- just in front of us is an exciting week. We expect approximately 700 customers and partners to be in attendance and hundreds of HealthStream employees to participate in our HealthStream Summit. It will be held here in Nashville at the Omni just a few blocks away from our headquarters, and it's an exciting time.

It's about 3, 3.5 days dedicated to our customers, our new product introductions, and our partners, importantly. Our ecosystem of partners is there to show.

We have an exhibit hall of about 20 or more vendors will be present, so it's really an entire system and products of services and partners that are presenting there to our approximately 600 to 700 customers that will be present. So I am really excited to announce that and appreciate all the work that's gone in by our staff to get that event ready.

I'd now like to turn it over to the operator to hear questions from the investor community.

(Operator Instructions) Richard Close, Avondale Partners.

Great. Thank you. Congratulations on a good start to the year. Gerry, I had one clarification or just comment on the Sy.Med revenue. I appreciate you telling us the $4.5 million for 2014.

Is there any way to just gauge what the quarterly breakout was for 2014 on Sy.Med? Just so we can try to tidy up our models on a go-forward basis.

Well, you will see over the course of the year, as we report quarter-to-quarter, you will get a better look at that. But we've always leaned toward annual guidance in that case.

So -- but is it running rough -- if it was $4.5 million for the entire year last year, so use approximately about a $4 million -- or I mean a $1 million number for each quarter? Is that essentially ballpark-ish?

I think that would be appropriate.

Okay. Bobby, I was wondering if you could go in a little bit more on -- I think it was -- you call it clinical development, the 51% growth. Just talk a little bit more about those products and the opportunity on those products.

And then just refresh me on the recruiting, I guess, data point that you gave. You sold one new hospital. And what exactly is that product?

Sure. Well, first I want to comment on a go-forward basis the Provider Solutions segment: we won't be breaking out Sy.Med from HealthLine. We are integrating the product lines, the product sets, and we'll provide segment-level details.

We wanted to give this initial breakdown so you could see the independent contribution of HealthLine. But on a go-forward basis, it will be just one unit, and we will be talking about its growth rates and products sets. In fact, we are working on a way to combine the branding and simplify the messaging around Provider Solutions.

Secondly, on clinical product sets, generally the clinical product sets are products like CECenter. We have a product from Lippincott, which is a large and well-known brand in nursing education and development that does very well. It's a clinical practice series to enhance skills for nurses. It's a very targeted set of content and assessment tools to determine clinical competency and knowledge, and those products continue to perform very well for us.

We have added to both the sales team there and the product sets. So as we've added new products that are clinically focused like CECenter, we see the whole area developing very well.

In fact, products like Checklist often accompany the sale of these clinical products, because they are used to watch and manage the ongoing development of staff and check off their competencies over time. So that whole product set is doing very well.

We highlighted one in the script that is growing at about 51%. But really all of them -- CECenter, Checklist, which is associated, and the Lippincott practice series are all doing very well.

There was a third part of the question.

Recruiting.

It was the Recruiting Center, yes. That's a new dimension to our platform offering. It's focused on the prehire process and selection process, managing the applicant pool.

We are of course new to that line of business. We're excited to have a robust offering that includes some unique analytics approaches.

So the pipeline is building on that. Of course, it's new to our sales team and they are building a nice pipeline, and we've already closed our first contract. So we are glad to see that that part of managing talent, the preemployment period, we now have some focus on.

We expect to see some continued growth over time in that area as we add assessment tools and other tools that are used in that preemployment period. Because selecting and credentialing and engaging the workforce prehire we think is very important to getting a quality and qualified workforce into healthcare. So we view it as part of the continuum of selecting, managing, and engaging talent to get the performance needed to improve patient care.

I had one final question. If you looked at your current product set, I guess I'm curious, your thoughts on how penetrated you are within your customer base or what you think the total addressable market is within that base.

Well, new products like the one we just talked about, the Recruiting Center, obviously it's brand-new. It's a fairly established market segment. Most providers have some of these recruiting tools in place.

We think we have some unique capabilities that give us opportunity. But it's an important product to be on the continuum of talent management.

We could go through 10 different segments. The Learning segment we have a really strong presence; over half or over 60% of hospitals utilize our Learning platform for development.

The Competency and Performance Centers continue to do well, adding thousands of subscribers each quarter. In particular when sold through the clinical lens, we think that is a more open opportunity than maybe performance reviews, which are either done on paper or less adopted in general, the concept of the annual review in our segment. But a growing area.

So we feel that across our clinical products, our content solutions like resuscitation, there is plenty of TAM to go. We don't guide to some kind of absolute opportunity. There are publications out there that talk about the education spend, training and development spend in the marketplace, that place it in the -- well, in excess of billions of revenues if you think of $400 to $500 per employee per year times 5 million employees in acute-care alone.

So the TAM can be very high. We're operating from a ground-up growth strategy, layering in new products, and we think each of them has strong growth potential.

Thank you. Congratulations.

Jeff Garro, William Blair & Company.

Good morning. Thanks for taking the questions. I want to ask a few questions on the new Provider Solutions segment. First, if we look at the HealthLine financials historically and the expected impact for 2015, before the deferred revenue write-down, we don't see a lot of there; but we know you guys are very bullish on this new segment.

So I was hoping for a little further commentary on why the combination of HealthLine and Sy.Med together will produce some type of competitive advantage and allow you to capture more of this credentialing market.

I think we've conducted some recent surveys that hospitals have a desire to have more integrated suite of services in that area. The Sy.Med applications of provider enrollment seem to be a missing element.

As you know, Sy.Med predominantly initially focused on the physician office market, selling directly into that and not as much to the hospital market. They had some hospital presence when we bought them.

What we are hopeful for and we see opportunity in is to see some cross-selling of those products, the Sy.Med products, directly to the hospitals when bundled as part of a suite, the credentialing and privileging capabilities of the HealthLine products. So we are seeing that.

We would also have a visionary leader in Michael Sousa that's building roadmaps for extending each of these three areas into new areas, and we are excited for those opportunities as they come online in the next 24 months. But we think it is a good combination of Sy.Med and HealthLine together because it provides a more complete service set and solution set to the buyers for that type of product and hospitals.

Great. That's very helpful. You mentioned the progress over the next two years; so maybe you can help set our expectations in the investor community. Should we be looking for particular milestones over the next few quarters in terms of new bookings, capturing that cross-sell opportunity, unifying the go-to-market strategy that you also reference? Or should we be thinking about a longer-term time horizon to really develop those joint solutions?

Yes, I think we're going to see some early progress, although I would say in the first year, though, the accounting treatment essentially negates the financial contributions of that acquisition in the first 12 months of the acquisition. It's just -- they had a high deferred revenue balance, and we have to write it down, and it hits both the revenue and the expense structure, the profitability of the unit.

It's the main and significant contributor to why our guidance overall for the year is -- that deferred revenue write-down is probably contributing over 70% or 80% of the reason why we are forecasting our operating income to drop overall as a Company. And remember, that's just an accounting convention, accounting treatment.

Overall, if you look at the filings we've just done on HealthLine, you can see the business was a very profitable business with a very stable customer base. It was low growth, but extremely profitable.

We plan to trade a little bit of the profitability for growth under this new leadership with Michael Sousa. I would think of it, therefore, as a 36- to 48-month horizon, but contributing meaningfully profits beginning in the second year. Because of the accounting treatment, all of those profits and the ability to show the revenues of the business will come back after the first 12 months for that acquisition.

So it's really interesting, though. The accounting treatment really does take away all the financial contributions of this unit for the first year, and then in the second year it comes back. It will come back just on paper; it will come back incredibly strong, even though the revenues and cost structures will be similar to the first year during the accounting treatment period.

So I would view it as a 36-, 48-month story, but contributing profitably all the way along the way. We are going to try to shift it from a -- to a higher growth mode here during that time frame.

That's very helpful. I have a follow-up there. After we get past this first-year period, how should we think about the business model, the recurring nature of the revenue?

And just more specifically on operating metrics, will revenue from the Provider Solutions segment be included in your ARIS metric?

Well, we're going to have to work on that to figure out how it folds in. Certainly it derives revenue from the hospital. We may have to evaluate the metrics so that we can unify these units a little more to show revenue per hospital.

We've got some work to do on that. The ARIS metric was designed to show the power of the subscription solutions in Workforce area. This is certainly a contributor on a per-facility basis and we need to think of a way to -- and it is highly recurring, and a really nice contracted base with very, very low turnover, and very solid and high margins because it is a software business as well. So we are very excited about how it will contribute after the first 12 month -- the stub period here, the first 12 months.

Great. Thanks for taking the questions.

Matt Hewitt, Craig-Hallum.

Good morning and congratulations on the great quarter. A couple questions. When you're talking about the ICD-10, you are primarily talking about the readiness solutions. Obviously you've recently launched a Precyse University DNA.

At HIMSS it sounded like there was a lot of interest and potentially going to be a lot of demand for that product. How will that start to factor in? Will you be breaking that out, so that we can differentiate between readiness and essentially the continuing-ed portion of the DNA platform? or how should we be thinking about the ramp in that product?

A couple of things. The product area will comprise of two or three products now, not just one. And we're trying to do everything we can to offset the potential or known decline that will occur in the readiness product; we also call it preparedness product.

So the first answer to try to offset that as we move forward, as we approach the deadline -- and we've talked about this for almost 2 years now -- is the new D&A product. You're right, it was recently launched and very well received.

It is the first product, by the way, to launch that takes advantage of our nearly 18 months of investment in Juice Analytics. We've built an infrastructure now that allows both HealthStream and our partners to corral and organize data from across our network to build comparative benchmarking analysis and really take control of managing a workforce to a certain competence level, but through the lens of comparing them to a national performance standard.

So the Precyse DNA product is the first product to launch. It includes what we call control centers. It's incorporated into the product.

The control center allows for the data and performance data across the country to flow into a unified warehouse and be utilized by those customers to check performance of their individual staff and their hospital performance against national standards.

It's really, really exciting, and it's getting a great reception, and there's really nothing else like it in the market. It's a new way to manage talent to a specific business outcome; in this case maintaining competence over time in coding.

So Precyse and HealthStream are very excited about this new product. It's based on new technologies.

That's the first offset. We're already getting contracts on that product, and we see -- and they are term contracts, two- and three-year contracts. They are not about the ICD-10 deadline; they are about maintaining competence in the workforce over time.

So we are cautiously optimistic. The initial reception is good.

The second thing we're going to do is build out through partnerships and some organic build offerings for broader revenue cycle content and development tools. We've made some good progress there and have some announcements pending that we'll strengthen.

So the second offset category is going to be broadening into -- again we found this buyer in the financial area for the readiness solution; and now we have the DNA products for ongoing maintenance and competence; and soon to come the revenue cycle products. So we'll have a whole category here.

And the effort is to simply for the next couple years just try to find ways to push off the decline from the preparedness or readiness solution which again we've talked about now for over two years. It was deadline driven, very much tied to the mandates to shift to this ICD-10 system.

So DNA and revenue cycle products we hope will be offsets as we move through 2015 and into 2016. We will not report them separately because we view them, the three products, together as a product category.

So a bit in the forecast of $26 million to $28 million is just a little bit of DNA revenue, and hopefully DNA revenue will grow throughout the year as we get towards thinking about 2016 with the other new products. So that's the way we think about the category. We are going to fight to just try to maintain its contributions.

Certainly this year we've achieved that, and already management team is focused on trying to do the same thing for 2016, although that will be more challenging. But we are already on it, and that's -- our focus is already on 2016 for that product set.

Thank you. That was a lot of detail. Much appreciated. I guess a follow-up question, based upon some of the details there, how should we think about pricing on the DNA? Is it similar to the preparedness product?

Is there an incremental fee or cost for the Juice component, the control centers? Obviously just helping us understand that would be great.

Well, the price point is a little higher for the product. It targets a much smaller population of people than the readiness or preparedness product. This product is really for training and developing the coding workforce.

And then a subset of the overall, what we will call the preparedness product -- because the preparedness product was kind of information for everyone and training for everyone. This is really -- it gets a little more into the nuts and bolts for a subset of that audience. So it does have a higher price point, but it has a smaller potential audience.

The framework with Precyse because we're 50-50 partners, 2e provide all the technology to make the new products work. Now the DNA products are now not just based on the learning platform, but on our analytics and what we call our control center platform; and you'll see more announcements as this evolves over time.

Just as an FYI to investors, it's based on the efforts and investments we've made in the Juice development efforts, but it's folded into the 50-50 share in the DNA products as well. So we view it as providing more architecture to provide more unique capabilities to our partners, to provide more unique talent management capabilities to our customers; and it's folded into the 50-50 split.

We may design products that are just information products designed on the control center that would be only ours and not folded into a partner's products. Remember the architecture can be used by HealthStream or by our partners to build these new talent management toolsets; again, we call them control centers.

So that's the way we think about it, and we are very excited. It creates a real -- for the first time, it leverages the network effect to the benefit of our customers when they buy these new products. And we don't think any competitor has anything like it.

Great. Maybe one more for me and then I'll hop back into queue. Could you provide an update on the long-term care opportunity? You announced a couple obviously large partners and customers I guess about a year ago.

Just any update on how the market opportunity looks today? Any penetration that you've been able to achieve? Color there would be great. Thanks.

Sure, sure. It's small but steady. It's certainly part of those 150,000 new subscribers come in, through subscribers that are acquiring part of our platform for the post-acute. We continue to round out the content and product offerings in that area, and so we've added some additional content partners.

It's a slow and steady build, and it's going to be an ongoing and continuing part of our story. We probably won't break it out; it will just be kind of rolled into the way -- as you know, we think about our market now as not just the 5 million people in the acute settings, but another 3 million in the post-acute settings.

So we've now just expanded the runway to continue selling all products, and we are learning a little more about which products are more relevant for the post-acute settings. So it's an evolving story and now it's just an integrated part of our story. We expect to add thousands of subscribers each quarter from the post-acute markets.

Great. thank you.

Frank Sparacino, First Analysis.

Hi, guys. Bobby, maybe first, just last couple of days there has been some news as it relates to Hospital Compare the Star Ratings being reported publicly. I know that that is not a surprise to many, but I don't know if you are seeing anything new as it relates to the HCAHPS market; or I assume most of the growth is still coming from the ambulatory, CG side of things. But any thoughts there?

You're right in that assumption. The CG is the piece that's helping us grow, the CG-CAHPS. It's higher volume and lower margin for us.

This whole area of our business has struggled in the last several quarters, and the projected growth rate is way below our standards. So we've begun to add some new officers to the group to bring new innovation and concepts for growth.

We saw a little bit of a turnaround in the consulting services. We hope to sustain that, but over $1 million in new orders for the consulting service is associated.

The Star ratings is an attempt to create more understanding and visibility of the prior metrics, which were more just statistical in nature about what, where, quartiles and quintiles and where you sit. So that's an effort to bring more visibility to the whole program.

But we are not seeing any immediate impact of that on our market potential. So you're right to identify the growth area, the CG-CAHPS. Unfortunately it's a higher volume, lower margin.

We noted that our call center is coming online, which should help try to offset that and improve margins because it has a lower cost to service out of Nashville than out of Maryland. And we don't see any immediate impact of the Star ratings discussion that's happening right now.

Okay. Thank you, guys.

Matthew Gillmor, Robert Baird.

Hey, thanks. Good morning and thanks for taking the question. Just one quick one on guidance. I wanted to understand the thinking around maintaining the EBIT outlook in light of the first quarter upside. I guess EBIT came in about $2 million above Street estimates; but you are also absorbing some higher write-down of deferred revenues compared to your previous expectations.

Should we think about these as offsetting items? Or are there other items we should consider as you think about the updated guidance?

Yes, I would say this, and I appreciate you bringing this up. We do have and set aside in our planning some additional growth investments in everything -- first just basic integration investments to get Sy.Med and HealthLine integrated. And so if you think of the cost categories here that are going to drive this 25% to 35%, many of them are associated directly with HealthLine Systems in deferred revenue, the amortization of intangibles, the interest expense, and some integration set-aside money.

But I would also say that we've taken the opportunity to set aside some additional expected growth investments for the rest of HealthStream. So we expect to do a little more hiring in sales and in -- of course we have things like our Summit, which we didn't have last year in marketing, so that adds to this guidance.

We are going to add more people in development. So we mentioned that, and that's not just for HealthLine; it's for HealthStream proper.

We have a lot of ambition and a lot of designs for new products across the Company. So we are going to be adding development teams throughout this year.

Now, one of our challenges has been -- and even in the first quarter -- we have about 50 open positions on our website. We're over 930 employees now; and we still have not been able to hire at the speed which we had hoped. So it's put us in a perpetual deficit from our expectations.

In fact, in many ways we had hoped to hire more in January and February and have a little lower performance in Q1, because we had hoped to spend a little more earlier in the year on product development and sales and marketing. So we are going to do everything we can to catch up on those investments throughout this year.

Again most -- and I would say 70% to 80% of this revised -- of this 25% to 35% decline is tied directly to three or four elements associated with HealthLine. However, say 20% or 25% is associated with organic growth investments and new product development and new sales efforts, across the board.

So I hope that helps categorically. We will do what we can to get these people onboarded and hired to get these investments flowing in these growth areas.

And as a quick follow-up, as you think about those investments you are making this year, do you expect to get some leverage off of those investments next year as a percentage of revenue? Or will there be additional investments next year to grow the business?

Well, I view us as a small Company with continuous growth opportunities. We vet those opportunities each year and determine how to staff them. If we think they've got good three- and four- and five-year IRRs, we will invest in them.

So we are coming out of an exciting retreat with new products like our control centers, and we see lots of things to invest in. So I can't really comment on next year, but I would say we are a growth-oriented Company and we want to continue with those investments, certainly in this year and as part of our current guidance.

I really can't comment on 2016 yet; it's just a little too far out. We have a retreat and a lot of thought to do before we determine the rate.

You would note, though, that things like G&A, you can see really good leverage on G&A in the numbers of this quarter. So when we weren't able to hire everybody we expected, you could see the leverage in the G&A. So G&A as a percent of revenues is one of -- it's the lowest it's been, which is one of the reasons we saw those margins accelerate in Q1.

Okay. Thanks very much for taking the questions.

Richard Close, Avondale Partners.

Yes, just a follow-up for Gerry. You mentioned capitalized software in the quarter. I think the number you threw out was $2 million, if I am not mistaken. Is that something we should expect, that level on a quarterly basis as we progress through 2015?

Yes, that's been our run rate. I think that's probably a good assumption.

Okay, thank you.

Thank you. I'm showing no further questions. I'd like to turn the call back over to Robert Frist for closing remarks.

Thank you, everyone. We look forward to reporting the next quarter and, of course, invite all customers and excited to celebrate with all employees our customer summit next week. Thanks for attending; we look forward to our next report.

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