HealthStream Inc (HSTM) 2015 Q4 法說會逐字稿

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

I would now like to introduce your host for today's conference, Ms. Mollie Condra, Vice President, Investor Relations and Communications. Ma'am, you may begin.

Thank you and good morning. Thank you for joining us today to discuss our fourth-quarter and full-year 2015 results.

Also in 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 actual results to differ materially from those projected in the forward-looking statements.

Information concerning these risks and other factors that could cause results to differ materially from those forward-looking statements are contained in the Company's filings with the SEC including Forms 10-K and 10-Q.

So with that I'll turn the call over to Bobby Frist.

Good morning. Welcome to our fourth-quarter full-year 2015 earnings conference call. We've got a lot of ground to cover this morning and I'm excited to dive in.

Compared to the prior year 2015 topline revenues increased 22% to $209 million while adjusted EBITDA for the year was up 17% to $33.8 million. It's also fun to reflect that, importantly, we passed another financial milestone in the fourth quarter of 2015. We produced positive retained earnings for our shareholders of approximately $1.6 million.

We ended the year with a strong balance sheet of $149 million in cash and marketable securities, along with a $50 million untapped line of credit and no long-term debt. And we reflected a bit on this strong capital position, entering into 2016 and thinking of the ways to deploy it. It allows us to utilize multiple strategies for creating shareholder value into 2016 and 2017.

A primary area, of course, is developing and launching new products; second to that, pursuing an active M&A pipeline; and third, you may have seen in our announcement in the headline that we established the share repurchase program. All three of these we expect to be able to pursue simultaneously as we enter into 2016. We continue to invest in new product development to drive organic growth with releases -- new software and product releases.

In fact, this is a period of great innovation and product introductions for HealthStream, really proud of all that has been built and launched in the last 12 months but also looking forward to a series of new products in the next 12 months.

With product releases like our new User Experience, which now has over 3.3 million subscribers on the new User Experience, the Precise DNA product earlier in the year of 2015 and the more recent knowledge Q, which is the data-driven, outcomes-focused product, one of the first of its kind, all released in 2015.

We also have exciting pending releases in the next few months areas of organic investment and development. We expect to release a program called the Nurse Residency Pathways program. We have been in development in this program for over a year, working with organizations like Stanford to develop a new nurse residency pathway program.

Correspondingly, we are launching with Duke University a Frail and Elderly Certificate program. This program is targeted to the broader market space including ACOs, hospitals and home care organizations because it focuses on transitional care moments. So it's appropriate in the new healthcare environment to launch programs that facilitate the reduction of readmission risk and a program that is specifically targeted to the pay-for-performance models that are emerging.

I'm excited to also enter 2016 with an active merger and acquisition pipeline. And we are continually evaluating opportunities.

In the first quarter of this year we are seeing an influx of sellers across all three of our business segments. And we stated previously that we are open to a range of different types of opportunities as we think about M&A, those that help us gain market share in any of our three segments, those that leverage our customer base and our platform ,and even new technologies that may accelerate launching of new product concepts into our network, so new technology platform or component pieces that could accelerate the adoption and an ever-widening use of our platform.

Finally, the Board approved -- as far as capital allocation, the Board approved the share repurchase program. And that gives us another means of utilizing our capital position to help create shareholder value. You may have seen that it's about a $25 million program. It's a management discretion program throughout 2016, so we hope to be able to acquire some shares throughout the year.

The last three years we have described another important area that I think I need to cover is the business opportunity associated with ICD-10. This is a deadline-driven industrywide initiative. And as early as three years ago we mentioned that it would create a [bolus] type of revenue stream for the Company.

Now, with the deadline past us, we are on the back side of this financial opportunity. The great thing about this opportunity was that HealthStream was able to play a major role in preparing the US healthcare workforce for this federally required one-time transition to the ICD-10 coding system.

We were a part and played a role in preparing over 1.8 million healthcare professionals and generated total sales to the Company of approximately $78 million associated with this opportunity.

Having passed the transition deadline, and after many delays of the deadline by the federal government, we passed the transition deadline in the fourth quarter. We can now better quantify the decline in revenues from this product category we call the ICD-10 Readiness Training product category. So we now expect that this will define approximately $20 million in 2016.

And what's really great about this was, one, it showed the power of our network. When an opportunity presented to us, we were able to seize it and be the number 1 provider of this form of training to the nation's healthcare systems.

And the other thing that's about this that I think is exciting about our business model is that even with this $20 million decline, this $20 million decline, we are still anticipating annual growth next year, 2016, of 8% to 12% with all these great product introductions and the existing portfolio of products.

So, 8% to 12% expected growth rate inclusive of a $20 million decline of this ICD-10 readiness product.

One part of the successful transition into 2016, given such a decline, was our longer term strategy around ICD-10. Now that we've established a new buyer in the financial department of hospitals, the Director of Finance or the VP of Finance, we now have introduced a series of products also in conjunction with Precise that target the more ongoing needs of revenue cycle management and the continuous preparation of the coding workforce in healthcare.

So we're pleased to report that our new ICD-10 product, which is not oriented to the one-time event of preparing the nation for the switch but is called the Precise University DNA product and it's targeted more to the ongoing training needs of this financial department, specifically the coders and revenue cycle-associated people. It's performing very well.

The DNA is the follow-on product of the ICD-10 readiness solution. The DNA product, as we call it, the Precise DNA product, is a data-driven product. It leverages our partner Precise's coding expertise but also HealthStream's proprietary control center technology. If you reflect back a few years ago, we made capital investments in an organization called Juice Analytics and went about developing new analytical frameworks that could connect to our backbone of 4.5 million subscribers. And the Precise DNA product is one of the first to take advantage of that backbone technology we call control center technology. So it's exciting to see that Tronic do well in the marketplace.

And it also provides a backfilling effect, a little bit, to the loss of the $20 million of readiness revenue, as we call it. This control center technology that's built into the DNA product is also now part of our new KnowledgeQ product. And while that product is new and has only generated a few sales, it's building a great and strong pipeline of interest across larger health systems.

So we will be excited to report on that throughout the year.

We have offered -- with this new technology infrastructure, we've offered our partners in HealthStream the ability to launch new products that are data-driven, allow comparison against national benchmarks. And DNA is a product that does just this. It allows the hospitals and healthcare organizations to benchmark the quality and competence and knowledge of their coding workforce against the entire nation's workforce, giving them an inside and outside look at the quality of their workforce.

In the fourth quarter, we signed an additional 16 new contracts for DNA. And cumulatively, since its launch in Q1, over 82 contracts have been signed for DNA, representing over $12.4 million in order value.

So we are excited to get these new organic investments in the market. Some of these new backbone technologies are starting to manifest into new products, and we look forward to 2016 because we think these new products have the potential to save money and save lives and really change the way the industry thinks about managing key initiatives.

With those elements as background -- the share repurchase program, the active M&A program, the investment in organics, the strong balance sheet, a good year in financial performance, we are not -- we are up against some good headwinds with such a drop off in the $20 million from that specific product line. But we feel like we are fairly well prepared for it and we are excited about it as we enter 2016 with such a great arsenal of new products and a strong war chest of capital.

I'd like to turn it over to Gerry to address the detailed financials.

Thank you, Bobby. And good morning, everyone. I'll provide some color to our financial results, including some items that affected the impact of the quarter.

So for the quarter, consolidated revenues were up 23% to $55.9 million. Operating income was down 56% to $1.9 million. Net income was down 32% to $1.8 million. And earnings per share was $0.06 compared to $0.09 in the fourth quarter of 2014. Adjusted EBITDA was down 4% to $7.3 million from $7.6 million in last year's fourth quarter.

Let's look at [four years of our] income statement including revenue, gross margin, operating expenses and operating income. I'll also take a few minutes to explain our lower effective income tax rate that we experienced in the fourth quarter.

Revenues -- consolidated revenues were up 23% in the fourth quarter with contributions from each of our three business segments: Workforce Solutions, Patient Experience and Provider Solutions. The Workforce Solutions segment performed well again in the fourth quarter of 2015. This business segment is comprised of applications and content solutions which are primarily SaaS subscription-based and are targeted at improving the health care workforce. Revenues from our Workforce Solutions segment increased by $6.9 million or 19% when compared to the fourth quarter of 2014. For example, HeartCode, which is part of the Resuscitation Solutions, grew by 31% year over year.

HealthStream's Patient Experience Solutions provide valuable insight to healthcare providers to meet capture requirements, improve the patient experience, engage the workforce and enhance physician alignments. Our Patient Experience Solutions segment increased revenues by 6% for the fourth quarter of 2014. Revenues from Patient Insight Surveys, a survey research product that generates recurring revenues, increased 9% over the fourth quarter of 2014 with that growth partially offset by lower growth in our patient experience coaching business and other products, including surveys conducted on either annual or biannual cycles.

We were pleased to see our Patient Experience segment performed a little better than our earlier guidance. A faster uptake of CG [caps] and attrition rates lower than our projections contributed to the slightly stronger performance.

The Provider Solutions segment, operating as Echo, a HealthStream company, continues to perform to our expectations. By providing the software that is used to validate the professional credentials of potential employees, Echo products serve as the gatekeeper for workforce quality and healthcare. In the fourth quarter of 2015, revenues from our Provider Solutions segment increased by $3.2 million, net of approximately $1.5 million of deferred revenue write-down, which is the accounting convention requiring us to write down beginning balances to fair value, as that term is defined in GAAP.

Our gross margins -- gross margins have been stable in the 57% range for the past year but increased slightly to 57.7% in the fourth quarter of 2015. A combination of factors that included lower ICD-10 revenues and revenues from proprietary solutions with higher gross margins were key contributors to this trend.

Operating expenses -- as we've mentioned in previous calls this year, our 2015 plans call for increased rate of investment to support the Company's growth. Fourth-quarter operating expenses reflect increased investments in several key growth categories including product development and marketing. G&A expenses also reflect the fourth-quarter investment trend, as this category was 14.9% of revenues versus 13.8% in the fourth quarter of last year.

For example, implementation costs associated with our new financial management system are recruited in the fourth-quarter G&A. On a year-to-date basis, G&A expenses have stabilized to 2014 levels of above 13.5% of revenue when adjusted for $1 million in closing costs we incurred in the first quarter of this year, related to the HealthLine Systems acquisition.

Operating income -- as I mentioned earlier, operating income was $1.9 million in the fourth quarter and was adversely impacted by the $1.5 million reduction from the deferred revenue write-down related to the HealthLine acquisition, as well as the increased rates of investment in product development, marketing and G&A costs which we just discussed a few seconds ago.

The fourth-quarter effective income tax rate of 11.5% reflects the benefit of $435,000 of federal research and development tax credits. Because Congress renewed the R&D credits in December 2015, we recorded the entire benefit in the fourth quarter of 2015.

The full-year rate for 2015 of 37% is the same as 2014, which year also included R&D tax credits. Our guidance for 2016 effective income tax rates reflects the fact that Congress permanently adopted the R&D credit revisions in this year's legislation.

Our balance sheet -- as Bobby mentioned, our cash position and overall balance sheet remains strong and is reinforced by positive cash flow from operations, as evidenced by our $7.3 million of adjusted EBITDA in this past quarter. Our cash balance at December 31 was $149 million, up from $145 million at December 30 of this year.

Once again, as Bobby mentioned, we have no outstanding debt and our full $50 million line of credit capacity is available to us. We believe our overall capital position is likely to support our organic and inorganic growth opportunities and support our share repurchase program, which, as you know, we announced with our earnings yesterday.

We continue to review and evaluate a variety of potential acquisition and business development opportunities in terms of a strategic fit and valuation, while the share repurchase program provides us additional avenues for creating shareholder value.

Yesterday contained our initial guidance for 2016 full year. And as you may have seen, we anticipate that consolidated revenues will grow between 8% and 12% as compared to 2015. And the growth in our three segments will be as follows: Workforce Solutions, between 2% to 6%; Patient Experience, 8% to 12%; and Provider Solutions, 80% to 84%. Revenues from ICD-10 readiness training, which were approximately $26.8 million in 2015, are expected to decline by approximately $20 million in 2016 and are reflected in the guidance range for Workforce Solutions.

It is worth noting that without the revenue impact of the ICD-10 readiness product in either 2015 or 2016, the year-over-year growth rate for Workforce Solutions segment will be projected at between 17% and 22%. For the full year 2016, we anticipate revenues from ICD-10 readiness training to be approximately $7.3 million, which will be essentially comprised of approximately $3.2 million in the first quarter of 2016, $1.9 million in the second quarter, $1 million in the third quarter and $1.1 million in the fourth quarter.

We expect our full-year 2016 operating income will increase 10% to 14% over 2015.

We anticipate that capital expenditures will be between $14 million and $16 million and our effective income tax rate will be between 39% to 41% for this year as well. These effective income tax rates reflect the promoted impact of the federal R&D credit that we just discussed a few minutes ago.

This guidance does not include the impact of any other acquisitions that we may complete during 2016. So thank you for your time and I will turn the call back to Bobby.

Thank you, Gerry. I thought I'd do a few more reflections before I turn it over to Q&A.

And so, thinking back about 2015, our mergers and acquisitions program produced the largest acquisition in the Company's history. It was HealthLine Systems in San Diego, California. So we're almost at year end, and I feel good about that acquisition. We are pleased with results generated under the leadership of Michael Sousa and the leadership team he is assembling and the team that was acquired. There's a lot of great energy out of HealthLine Systems, which, as you know, was merged with SciMed, a prior acquisition. Both of them found really good purpose and fit together. And they have been rebranded as Echo, a HealthStream company.

So we are a year in to that investment. It's the largest in our history. And we are feeling really good about its potential and its actual performance.

For the fourth-quarter 2015, our metric that we call ARIS, the average revenue per implemented subscriber, was $36.96. And that metric is reflective of HealthStream's Workforce Solutions segment. And so, compared to last year's fourth quarter, which was $34.43, there was an increase of $1.14 per implemented subscriber over the third quarter of 2015. So, the ARIS metric showed a little bit of positive movement.

And if you think about some of the things that drive that, one example of a product driving growth in ARIS, which is, again, revenue per implemented subscriber, is CECenter. And CECenter is another product that we are very excited about.

It was a strong contributor to the 20% increase in subscription-based revenues when compared to last year's fourth quarter. You may remember that I described the CECenter as a Netflix-like subscription product. It's designed to meet state license requirements for nursing and allied healthcare professionals with a library of approximately 1,500, maybe 2,000 courses by now.

And we've seen continued momentum in this product. For example, we added 31 new accounts in the fourth quarter, representing approximately 30,000 subscribers.

So, we continue to see really good uptake of this product. It seems to be meeting a real need and help fulfill state license requirements. And in fact, now we have over 290,000 subscribers on CECenter and a very strong pipeline entering into 2016. The activity in the CECenter is also very high, so our partners are excited to see that. They have content in CECenter.

We have completed over 1.3 million courses during the short span of time in this growing product update.

Our resuscitation solutions, which are also subscription-based products, continue to perform strong, and the HeartCode suite of products, in particular. This product is focused on teaching resuscitation skills to healthcare professionals -- advanced cardiac life support, basic life support and pediatric advanced life support, known as PALS.

And we have created that and launched that product with partnerships with Laerdal Medical and American Heart Association, and so some of the most powerful brands in healthcare have assembled to really change the nature of how people are trained in resuscitation, changed the nature of the approach. And, most importantly, the scientific evidence is now pointing to the fact that these HeartCode suite of products are changing the outcomes in CPR.

We have over 2.3 million cumulative CPR training certifications that have been completed through HealthStream now. So you can see that the product is having a broad impact with over 2.3 million certification processes that have been undertaken through the HealthStream offering.

It's really exciting to see because, in our heart of hearts here at HealthStream, we know that this product is having an impact. So in conjunction with American Heart Association, Laerdal and our nearly 1,000 employees, we take great tried in being part of really changing a specific clinical outcome for patients and healthcare.

I'd like to close by updating you on a few other exciting items. The first has really been the pivotal milestone for us. It's the transition to our new, smarter user experience. We announced that in just August. And it took us almost 2 years of development in R&D to build that, essentially a new front end, a new front door to HealthStream. And this new user experience we have been rolling out at a very, very rapid clip.

In fact, recently some of the larger health systems remaining in our network went live. And we've crossed the 3.3 million subscriber mark on the new mobile enabled user interface.

Customer feedback, most importantly, about the new user experience has been very positive. The workflows have been simplified and the application is centered on the individual. And so it's really a workflow tool for the individual. It helps them get through their required training and education. It also, over time, become a gateway to our other products, where items that may require action like to-dos or a calendar of scheduled events could appear in this new front end, this new HealthStream user experience.

So you will see our other applications starting to flow data and information into this new front end that's now, in our belief, one of the most widely adopted SaaS applications in the marketplace at 3.3 million subscribers.

I do expect before the middle of this year we will have an entire 4.5 million subscribers on the new user experience, the new front end HealthStream. It's also important because it's built with responsive design. And what that means is it works on iPads and iPhones and Androids and laptops and desktops, and it adjusts how it behaves based on the device being used.

It also works across multiple browsers including Safari, Chrome and Explorer. So if there's a hospital out there that has adopted one standard or another or has taken their workforce mobile, HealthStream is now the right home for the development, training and assessment and competency journey for that employee.

It's an exciting development as we move our customers to the new mobile UI. It creates a new experience for them and a new front door for many or hopefully someday all of our HealthStream applications.

I look forward to reporting on the finished adoption curve for this product in coming quarters and I look forward to your questions. I'd now like to turn it over for Q&A.

(Operator Instructions) Matt Hewitt, Craig-Hallum.

Congratulations on the strong finish to the year and thank you for taking the questions. A couple: first, could you help us understand the cadence of the $20 million of [ICD] revenues that you anticipate falling off this year? Is that more backend-loaded?

Yes. No. Actually, we just gave and we will find and repeat the quarterization of that. We actually gave it with pretty good precision here. Let's reread that; I think it's important for everyone to hear. So Gerry, would you reread the quarterly -- so the quarterly revenue, we are going to drop from about $26.5 million down to $7.3 million. And what we did, Matt, was we broke the $7.3 million across the four quarters so you could very specifically model it, and you will know the exact actual revenue from the preparedness product on each quarter. So the numbers are --

Yes; the $7.3 million will be comprised of approximately $3.2 million in the first quarter, $1.9 million in the second quarter of 2016, $1 million in the third quarter of 2016, then $1.1 million in the fourth quarter.

So you can see, Matt, that, even in the first quarter -- if you think of the fourth-quarter revenue from that comment, I think it was $6.6 million. So it's going to drop from $6.6 million to $3.2 million during this quarter, the first quarter. And then we gave you the rest of the quarters. So hopefully that really helps in your modeling.

No, it does, very much. As we look at -- I know you are not guiding this, but Q4, will that just be the precise DNA contribution at that point or will they be a little bit of a tail that drags into 2017? (multiple speakers)

Okay. No. Yes, let me just add some more color. So the numbers we just gave you are only the revenue from the preparedness product, the ICD-10, what we call the readiness or preparedness product.

So DNA revenues are incremental to those numbers. And so we are expecting millions of dollars of revenue from the DNA product, which increments the numbers we just gave you.

So we gave you the specific revenue curve of the preparedness product, the legacy product. And as you can see, it's winding all the way down to $1 million in revenue contribution in the quarter. But DNA is going in the opposite direction and we expect millions of dollars in contribution as part of our overall growth rate we are able to project is because DNA is growing. In fact, what we did give you -- we didn't give you the quarterization of that, but we did tell you that we have sold about $12.4 million of orders on DNA. Now, those are slightly longer term contracts in the revenue will be spread over multiple years.

But you can see, with $12.4 million already sold of DNA, we are beginning the revenue recognition process. And that product is on the growth path.

Okay, that piece is important. So thank you for clarifying. Shifting a little bit to the Patient Experience, there was a nice uptick there. Your guidance is obviously pretty strong for that segment. Have you picked up some new customers or is this broader adoption of the additional cap surveys?

It's a little bit of both. It's a highly competitive landscape. There are four or five major competitors.

But we are holding our own and able to grow a little bit in that environment. We are growing at a similar rate to some of the market leader -- the market leader in the space. So we are glad to be holding our own in terms of market share as well as expanding relationships with additional customers. And in addition, we put some new leadership in a few quarters ago, and we are really excited about Greg Lockman and the team that he is organizing to pursue this opportunity in addition to better organizing some of our intellectual property assets from the BLG acquisition you may recall so we can generate additional subscription revenues.

So in general, it's our lower growing segment. But we've got a little bit of growing confidence in that segment and some new product introductions coming as well.

That's great. All right, thank you very much. I'll hop back in the queue.

Jeff Garro, William Blair.

Congrats on the quarterly and full-year results as well. I wanted to dig a little bit deeper into the net subscriber count. I know it's not your favorite metric at this stage of the Company's growth. But still was hoping that maybe you could help us quantify how much of a headwind the ICD-10 falloff is going to be. What percent of ICD-10 readiness customers are converting to DNA versus many were ICD-10 only? And if we should think about a bigger seasonality around net subscriber growth in 2016, really more specifically whether we are likely to see more pressure on that number in Q1 as some of those readiness contracts fall off?

Yes, we did see -- so, a couple of things. The preparedness only, the ICD-10-related customers that were tied to what we will call the legacy or the preparedness products -- we had estimated or -- and this is a little bit of a range, but between 5% and 10% of subscribers. So I think at one point a few quarters ago we quantified it around 390,000 or 360,000 subscribers for ICD-10 only.

And we are beginning to see some of those peel out of the subscriptions. So if we are unable to get those subscribers to subscribe to anything else -- and there's a half a dozen things they could subscribe to, not just DNA -- and keep them as a subscriber, they will, in fact, peel out of our ARIS number.

So we did see that starting to happen even in the fourth quarter; we had a pretty good number of them peel out, probably close to 30,000. And some of them were converted but some of them peeled out. And so we will see pressure on ARIS, at least that dimension of ARIS, which are those ICD-10-only subscribers.

That said, you can see from last quarter, I believe we contracted 165,000 to other products and so we had a strong offset including DNA in that number. So yes, I think it's fair to say that the metric had a lot of pieces moving in the numerator and the denominator with products like CECenter adding subscribers, DNA adding subscribers. But that rather large body of people, about 360,000, that we estimate to be on the preparedness product only -- they are definitely at risk.

And in fact, you can tell from the decline in revenue we are expecting most of them to peel out of the number. The question is whether we will recover them in a year or two years or when, on other products. So, right now, I would say it's a correct assumption that, A, the metric is under pressure; and, B, there's still a very large number of people that could potentially come out of the metric in the course of 2016.

And in fact, from our forecast of a drop of $20 million in revenue you can see we have a lot of expectation, in fact, that they will come out. The question is, when will we get them back in?

Absolutely, very helpful color. My next question is more around the key areas of investment driving your operating expense spend in your 2016 guidance. Should we think about it as more product development, additional sales and marketing resources or incremental investment into the new Provider Solutions segment or, really, a broad mix of the above?

You know, it's interesting; it's a fairly even spread. When we went through our strategic retreat process this year we allocated some increased investment into our [P exit] business. With Greg Lockman's leadership, we presented a plan to the Board that was approved that required some additional investment.

Similarly, our Echo line of business -- it was a very profitable business that we acquired but relatively low growth, especially relative to our expectations and history as a company.

So, Michael Sousa and his team put together a growth-oriented plan that required hiring of dozens of people, a few dozen people, maybe around 20 or so people, around there. It was a mix across sales and product development throughout late 2015 and throughout 2016.

So that's a growth-oriented plan. We are going to try to take what's a very profitable business, and there's a robust product introduction schedule for the Echo suite as well.

In addition, as you know, our talent products and our what we call outcomes apps that are based on control centers -- we've got a rich roadmap there. So really, it was a very fairly even spread across the three business segments and an all growth-oriented mixture of sales personnel, so our sales team in aggregate grew.

We usually do most of our hiring on the sales team between really November, December, January and February. So, a lot of that hiring is done. We've grown the sales organization and those costs are now in place. And it will take some time to get some productivity out of those hires.

So I hope that touches on it. But really, it's across all three segments and divided fairly evenly into sales additions and product development.

That's very helpful color as well. Last question from me before I hop back in the queue: I was hoping maybe you could elaborate on the thought process behind the share repurchase program and how this use of cash compares with M&A opportunities in the current market.

Yes, I think it's a great question. We wanted to point out our overall strength on the balance sheet relative to the size of the program. The first thing is, we've implemented two of these programs in the past. One of them was incredibly effective. It was a management discretion program. It allowed us to come in and out of the market with certain parameters that are Board supported, when we saw that the stock was undervalued and we executed the full program that was authorized and ended up with incredible returns for shareholders.

The second program was authorized in a similar fashion, and it was only partially executed using management discretion at the time as well. And the part that was executed was, again, financially very, very successful for shareholders.

We went through the process in our retreat. And always at our retreat, which is several months back now, we look at all forms of investment -- the active M&A pipeline, our access to capital. We do IRR projections. And in this case we had prepared even as far back as four or five months ago hypothetical IRR calculations based on stock price and stock movement.

And so, the IRRs would compare favorably based on, again, using management discretion over the course of the year and the purchasing. But we projected IRRs for that program similar to the IRRs of our M&A program. So, that allowed us to put the instrument in place here, as we announced yesterday.

That said, the pipeline is very strong. And we are hopeful that we can advance the M&A pipeline and that they will similarly contribute to IRR. And so it was a balanced approach, a relatively small use of our available capital. And we felt like it was good.

And also in light of the particular environment of the last month, we've seen incredible volatility in SaaS-based is this valuations. And we thought it would be wise to have this instrument in place, knowing how we think about our value and our SaaS model.

And in the context of some of the challenges that we've been talking about for three years now manifesting in 2016, like the $20 million drop off, we thought that given all of those things it would be really wise to have this program in place and a great way to create shareholder value as we enter 2016.

Great, thanks again for taking the questions.

Peter Heckmann, Avondale Partners.

Gerry, could you comment on what amount is remaining for deferred revenue that will need to be written down from HealthLine and whether that will all be written down in the first quarter?

Yes, it's about $1 million to $2 million or so over the course -- a declining rate over the course of 2016. It was roughly $7 million in 2015 and about $2 million remains, so it will be amortized in 2016.

Okay, that's helpful. And then are there any particular one-time items that you would call out in your GAAP operating income growth guidance?

No; we tend to just do it global, universal, comprehensive growth rates in operating income and revenue. But a couple things that we would say about 2015 -- of course, we had Summit this year, which we did not have in 2014. Bobby's stock grant back, I think it was late June, was also in 2015. The transaction costs for HealthLine closing, which I mentioned a short while ago, about $1 million or so -- those are in 2015 as a point of context. But our guidance for 2016 is just pretty much operating on an as-is basis.

Sure, sure. But you are guiding off of the GAAP number?

Yes, we are. That's correct.

Okay, that's helpful. And then just lastly, in terms of Echo and how we would think about that business longer term and a little bit of a competitive market in trying to do a transition. But is that the type of business that, based upon industry metrics, can be a mid-single digit grower over time? Or would we expect maybe something even greater than that?

Well, I think we are hopeful to maintain higher growth rates than that. And through new product introductions -- so putting us in the position where over 1,000 institutions use us for managing the credentials of their workforce, we think, presents an opportunity for a lot of derivative product concepts. And so, by hiring additional development capacity and preparing new product launches we think we can drive additional growth.

But that will take some time, you know. We are a year in and we are assembling a really good team to lead us into the future there. But I would say in general we are hopeful of higher growth rates than single digits, certainly. And part of that is our investment in our sales organization, which we are excited, we have a good history with that, and also a good product roadmap for the Echo product sets.

Great, that's helpful. I'll get back in the queue.

Nicholas Janssen, Raymond James.

Nice job on the strong finish to 2015. I guess my question would be surrounding operating margin leverage -- obviously, a lot of moving parts with 2016 as you are cycling through the investments that you did in the back half of 2015. You do lose a lot of profitability associated with ICD-10. But should we think about, as exiting 2016 and going into 2017, where we can probably think about margins starting to expand, relative to contract?

Well, we put a little bit of -- in our guidance range they do overlap. But we have a little bit of, hopefully, operating leverage built into the 2016 forecast. And then, consistent with our history, we usually make those decisions about the rate of investment at our retreat. And so I really can't get too far into 2017.

It really depends on the investment opportunities and the IRR calculations, the project prioritization that we come up with throughout the year and present to our Board near the end of the year and then get approved. And so it's really -- it's such a consistent revenue model of subscriptions that we can meet and determine the rate of investment that we would like to achieve. And we have preserved the ability to leverage or deleverage the Company in any given year. This year we have obviously tipped our hand that we think we can achieve a little bit of leverage, not a lot.

But if we end up at the higher end of our ranges we will show some operating leverage. If we end up at the lower ends, we would be kind of flat. But not now, in 2016. So that's a long-winded way of saying we reserve the right to leverage or deleverage earnings in 2017, frankly.

That's fine, thanks for the color there. And then secondly, I think last quarter you did give some revenue parameters surrounding the DNA, Precise, ICD-10 product. And I wasn't sure if you are going to think about disclosing that going forward into 2016 and 2017.

Just wanted to get a better sense -- I think you said many millions. But if you are trying to quantify that, how big of a net ICD-10 headwind is built into the 2016 objectives relative to the gross?

That's a great question. We have sold over $12 million. And if you think of these in terms of two- and three-year contracts or maybe a little longer, you can start to see the annual contribution from the DNA product. A lot of that signing was done in the last year, really.

So at $12 million of contract value spread over two- and three-year contracts you can start to get a sense for the annual contribution of that product. We probably won't update that as a line item going forward. We will consider the category of revenue cycle, which would take that plus add the run out on the prepared this product plus the new revenue cycle products, maybe case management. And we have other products that are either pending or just launched. And we will consider doing that full category.

But we've given, I think, a pretty good color on those two variables. You can roughly see how the decline is -- the most immediate offsetting variable is the DNA product. And we gave you the order value of that. And so you've got a sense for the offset. It's not a very large offset but it is something you can put in your model.

Okay. And then lastly, just back on the readiness product dropping to $7.3 million in 2016 -- should that virtually go away in 2017? There might be a little bit of contribution, but just to make sure we are all thinking about growth properly, should that 2017 number be closer to zero?

I think at this point that is a fair statement. We are not selling that product anymore. There are limited to no extensions on that product. The new product that is being purchased is DNA, if there's an interest in that category from customers. So I think it's fair to say that that product will continue to run its way all the way down.

Nice job, guys. Thanks.

Richard Close, Canaccord Genuity.

Congratulations on a good year. I just want to hit on, I guess, continue on Pete's line of questioning with respect to the operating income and how we should think about the deferred revenue. You had about $6.8 million in deferred. And that essentially -- doesn't that all come back to operating income, essentially, in 2016? Or shouldn't it, most of it?

Yes, theoretically it does. That's right.

So you -- are you essentially saying with your guidance, your implied operating margin guidance off of GAAP, that you are taking about $2 million to $3 million of that and reinvesting that into the business? Is that essentially what you are doing?

Well, I think there's a couple of factors, a couple or three factors. For Echo HealthLine, we had another quarter of ownership to get a full year into our numbers. The $2 million of deferred revenue write-down that remains to be recognized in 2016 plus growth on Echo as well. So those factors are all within the guidance.

And then, as we think about the M&A activity, is there any particular segment in your three buckets or divisions of revenue that you are seeing more activity or maybe you think is a likely candidate to see an acquisition in?

Well, we really have seen a little bit of a change even in the last, say -- well, across January and February of the number of sellers in the market. And we are trying to understand the valuations and how they may or may not have been changed, given the market conditions for public companies. But we are seeing available, really, acquisition targets across all three segments. So we'll be working to prioritize and make sure we put our energy into the right areas.

But I would say we're seeing available candidates that could strengthen any of our three segments and ordinarily within workforce there are two or three key solution areas where we see opportunities to strengthen those as well. So we can't promise anything there, we have an active pipeline, we're always evaluating. I would just say that in January and February we see more things to evaluate which is encouraging to us.

Okay, want to hit on subscribers a little bit, I guess on contracted subscribers, saw a nice bump there. Was there any area in particular that contributed to that like long-term care or any -- is that acute hospitals?

It's a little bit of everything. It's a nice mix of -- I highlighted one, which was CECenter. I mean, clearly, when we add subscribers to CECenter, that's a good add, at least to the revenue per subscriber. Now, there's really over a dozen ways people can become a member of our network. You can buy any one of our products, and you essentially license our core technology and have access to our new front-end interface. And we count you as a subscriber. And so it's no longer just the talent platforms but these new outcomes apps like DNA, they can bring in net new subscribers. KnowledgeKube, Which we have our first contract on, can bring in new subscribers. Any one of the components of our talent platform, which would be the learning system, the competency system, performance system, the checklist system -- all of those can bring in subscribers. We can bring in any of those products into the vertical of long-term care, which we are seeing some growth there. We have added to the sales team a bit more. And so that can bring in subscribers.

So there's a lot of ways to become a member of our network for at least one product. And we did highlight CECenter as one driver of ARIS, maybe not of net new subscribers, because a lot of those are already on platform. And we have really good reach with the 4.5 million already. But it is a nice, balanced mix across the way we are acquiring new subscribers.

Okay. And I was wondering if you could go into the nursing product that you mentioned at the beginning. And you mentioned Stanford. Is that cobranded with Stanford, similar to the Duke? You brought Duke up as well. So just trying to get a feel whether those are, I guess, cobranded products that you are hit in the market with.

So the Duke one is absolutely cobranded; it was with the medical and nursing schools. And we are nearing and getting closer to launch that product.

The nurse residency program is a HealthStream branded product, but there is a component of that product that was actually built with Stanford. And it's the confidence measuring instrument. But there are about a half-dozen tools that are involved in the residency program that takes advantage of our full platform, including things like our Checklist Management, our community capability, our learning system. The residency program is one we are very excited about. We have our first paid pilots on our HealthStream nurse residency program.

And the program has -- it leverages our control center technology we built with Juice. So it really brings everything that we have together and helps bring new nurses into the workforce. It blends curriculum from across our catalog, from over a half-dozen different content partners.

And so it's really a subscription -- it's kind of like CECenter except it's a much higher value proposition. And it's for the focused purpose of bringing a new nurse into the workforce. So we call it the nurse residency program. And again, we have our first paid pilot on it. So maybe the second half of this year we will see some contribution out of the nurse residency program.

My final question is just maybe longer term in nature. I know you don't provide guidance beyond the current year, but as you sit here today and evaluate your market position, how do you view the current market conditions, the purchasing environment with hospitals, just overall the opportunity that maybe lies ahead for HealthStream over the next two to three years?

Yes. I think that's probably some -- that's a great question; I probably should have addressed it in my general comments because I've seen a shift even in the last, say, 60 days. You may have noticed many of our customers have come under extreme -- the publicly traded ones have come under extreme pressure lately. And we definitely want to be a part of helping them remain strong and remain a growing organizations. But our customers have come under pressure, and if there is one thing that could put pressure on the rate of sales across the board it's that environment.

We are hopeful and expectant that our products are part of the solution, meaning that the more they can consolidate from five vendors down to one, the more that instruments like ours provide insight into how to manage costs like our KnowledgeQ product, or meet a federal requirement with a lower cost and maybe they could do without our product.

We still think we are part of the solution. It is fair to say that overall there's more pressure on our historical customers, the acute care organizations, even though we are seeing growth in the home care and other areas, they are all under, I would say, more financial pressure than in prior years. So I think that's a good overall thing to be aware of. That is a form of a headwind that could result in the pipeline slowing down a bit.

But across the board, obviously we projected strong pipelines, good demand. And the reason for that is because we believe that our products actually make a difference in a specific -- a clinical outcome or a business outcome or it lowers the cost of doing something that's already required of hospitals. So we are still optimistic that we will play a role in helping them be stronger and more financially fit. Even though it requires buying our products, we think our products save money and save lives. But again, their balance sheet -- they are under pressure. And I think that's a fair and a good observation and one that we should all be cognizant of.

I guess that's what I was getting at, that you guys -- obviously, your products potentially solve problems with respect to labor costs and attrition, retention, issues like that, and that maybe you would see your pipeline potentially grow as a result of maybe some of the issues facing the hospitals currently.

So fundamentally that is what it should be. But when you are under pressure and you have to sign a contract and spend any money, even if you think it has an IRR, sometimes the environment makes it more difficult. So I would say the net effect is probably a little bit more of a headwind than a tailwind.

But relative to other types of organizations selling into this environment I think our solutions are more targeted to helping save money and consolidate vendors and reduce costs. And so I think we've got as good or better shot as anybody at gaining in this environment but overall you still have to sit in front of the CFO, the CFO is under pressure and they have to sign a contract and the contract requires a payment. Even if you believe the payment has an IRR, some of them are under such pressure that that's still a hard decision so I'd say the net effect of the environment is a bit of a headwind.

Thanks. Congratulations.

(Operator Instructions) Claire Mencke, Sidoti.

Great quarter. Just in regard to that last remark, some of your publicly traded customers seem like they're doing pretty well and have increased their capital plan. So I didn't want to let that one get away particularly.

That is true, and hopefully they tend to be consolidators as well, which would bring more business to us if they end up being acquirers or consolidators in this environment.

So it's just kind of a net negative that the industry is under pressure. But you're right, there are definitely those that are also strong in this environment. We want to be part of helping all of them be strong and both stabilize and save money.

So we are pulling for all of them and think we play a role in that outcome.

Okay. Also when were your previous buybacks, just what years, if you recall?

Oh, goodness. They were a while ago. (multiple speakers) We have been conservative in the use of the instrument, but probably back 2009. So it's been a while. But it's one more tool in the toolkit and I just want to point out that we have used it effectively in the past. We're optimistic we will be able to do that again.

Okay. And then you said earlier that there were about six other products that had attracted some of the previous ICD-10 subscribers. I wondered if you could just talk a little bit about what they were and if any of them were surprises to you, if there might be more that the ICD-10 customers were interested in.

You are asking what other products attracted overall subscribers or attracted -- ?

The ICD-10 customers. You said there were probably about six of them that they had been subscribing to When your contracts were (multiple speakers) --

I may have miscommunicated that. Let me see. I think ICD-10 product were really the preparedness product that we have been talking about. That was really -- the demand for that product was driven by a federal requirement, a specific deadline. The DNA products, which are the replacement products, which included a little bit on revenue cycle, a little bit on coding -- those are being driven by the need, the ongoing need to certify and train the coding workforce.

And so the good news about the new product is it has a bit more of a perpetual type of need built into it than a point-in-time need. And when I opened up, I did mention four or five other products. So if you are referencing those, they each have their own specific drivers. And I'm glad to run through those if that's what you are asking about.

No. I thought that there were a group of products that were more useful for the ICD-10 (multiple speakers) Preparedness.

Oh, oh, oh, yes. So as a category, we have now the DNA products, and alongside of that is a new case management product that's targeted towards the revenue component, case management. We have new products from HFMA, the Financial Management Association, which are in this category. So we have two or three products in that category.

And then there's the clinician case manager. Yes, and so there's another clinician case manager as well, which might be sold to the CNO or the revenue cycle.

So we have a small family of products, not just a single product. When we started we had a single product, the Preparedness product.

Right. Okay, thank you very much.

I am showing no further questions at this time. I'd like to hand the call back to Mr. Frist for closing remarks.

Thank you for listening. We look forward to reporting the next quarter, which comes up faster this time around. Thank you to all of our employees again. We have crossed the 1,000-employee milestone and we are excited about that. Our employees are a big part of who we are and where we are going. And together we all feel like we are making a difference.

So thank you to all of our employees listening in, shareholders as well. Just know that I'm right alongside you as a common shareholder and doing everything we can to grow, even facing the headwinds that we face. Thank you and look forward to reporting next quarter.

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