HealthStream Inc (HSTM) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the HealthStream first-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would like to introduce your host for today's conference, Ms. Mollie Condra, Vice President of Investor Relations and Communications. Ma'am, please go ahead.

Thank you and good morning. Thank you all today for joining us for our first-quarter 2016 results. Also on the conference call with me are Robert Frist, Jr., CEO and Chairman of HealthStream, and Gerry Hayden, Senior Vice President and CFO.

I would also like to remind you this morning 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.

With that in mind, I will now turn the call over to Bobby Frist.

Thank you. Good morning, everyone. Welcome to our first-quarter 2016 earnings conference call. I've got a few financial highlights, some exciting product announcements, Gerry will cover some financials, and we will head right into questions. Let's get started.

Compared to the first -- to the prior-year first quarter, our top-line revenues increased approximately 15% to $54.1 million. And we ended the quarter with a strong balance sheet of about $150.5 million of cash and marketable securities, along with a $50 million untapped line of credit. And we don't carry any long-term debt.

So the strong capital position allows us to use multiple strategies for growth, and we are going to outline some of those here in this call. Some of those strategies include developing and launching new products and pursuing an active M&A pipeline.

In the first quarter of last year, our M&A program, for example, produced the largest acquisition in the Company's history in HealthLine Systems. We are pleased with the first year of results generated under the leadership of Michael Sousa and his growing management team.

Yesterday, Michael presented a summary, kind of a one-year anniversary summary. And in that, he presented an exciting product development roadmap for Echo, which is Echo, a HealthStream Company. He announced also several key customer wins. So it's great to see some strong traction on the one-year kind of anniversary presentation from the management team at Echo, a HealthStream Company.

We feel really good about this acquisition, and how it has merged in with the prior acquisition SyMed at HealthStream. And maybe more importantly, it has been reorganized as Echo with a strong leadership team. We are really encouraged by the opportunities we see in this space represented by the Echo organization.

We continue to have an active M&A pipeline. We are seeing opportunities across all three segments of our business. As we've stated previously, we are open to a range of different types of opportunities, including those that help us gain market share, leverage our customer base and platform, and provide technologies that plug into our new mobile-enabled user interface.

That is a good segue to discuss the mobile-enabled user experience that we have rolled out recently. It is really exciting, because in the last 60 days since we last spoke, we have added another 1 million users to that platform. So we are close to completing one of the more exciting rollouts in the Company's history. And we have now crossed the 4.3 million subscriber mark on this new mobile user interface.

The interface, excitingly, we have also added multilanguage support. And we have started to see health systems across the country, where their employees are selecting other than English as their primary way to interact with our platform. In fact, Spanish appears to be the second-most popular language, and that makes sense to us, as we have major customers in markets where that is an important language.

But we've also activated French, German, Japanese, Portuguese, Mandarin, and Dutch options as well. And interestingly, through our relationship with Laerdal and see some international uptake, we have seen utilization on all of those language on our platform. So it's really exciting to see that for the first time.

Our customers are delighted with the new HealthStream Experience and that is evidenced by their positive tweets. We have celebrated along with some of the largest health systems in the country as they have activated this new mobile user experience. And we are calling this the HealthStream experience because it serves as a front door to a myriad of our applications, not just our learnings platform.

So we are celebrating these key milestones: passing through the one-year anniversary of the HealthLine acquisition and the deployment of an additional million subscribers to our mobile user interface, the new front door to HealthStream. We call it the HealthStream Experience in this exciting time inside of HealthStream.

Let's take a look at some of the financial highlights. I would like to turn it over to Gerry Hayden.

Thank you, Bobby, and good morning, everyone. I will provide some color to our financial results, including certain items that impacted the quarter.

A few highlights first for the quarter: consolidated revenues were up 15% to $54.1 million, as Bobby just mentioned. Operating income was down 48% to $2.5 million. Net income was down 45% to $1.5 million, and earnings per share was $0.05 compared to $0.10 in the first quarter of 2015. Adjusted EBITDA was down 4% to $8.1 million from $8.4 million in last year's first quarter.

Let's now look at four areas of the income statement: revenue, gross margin, operating expenses, and operating income. And as we review these results, we will place financial context on the impact of the ICD-10 revenue declines.

First, revenues. As we just mentioned, consolidated revenues were up 15% in the first quarter, with strong contributions from our workforce solutions and provider solutions business segments. We achieved this 15% revenue growth while overcoming the $3.2 million decline in ICD-10 readiness revenues from last year's first quarter. When we exclude ICD-10 revenues from the first quarters of both 2015 and 2016, our consolidated pro forma revenue growth rate is 25%.

The workforce solutions segment performed well again in the first quarter of 2016. This business segment is comprised of applications and content solutions, which are primarily SaaS, subscription-based, and are targeted at improving the healthcare workforce. This is also the segment in which ICD-10 revenues are reported. Revenues from our workforce solutions segment increased $3.7 million or 10% when compared to the first quarter of 2015.

The ARIS grew in the first quarter of 2016 to $36.67 from $34.63 in the first quarter 2015, reflecting expansion in both subscriber counts and revenues from our customer base. On a sequential basis, this metric declined about 2% from the fourth quarter's $36.96.

As of the end of the first quarter of 2016, approximately 578,000 subscribers completed their ICD-10 readiness commitments. Of these 578,000 subscribers, 200,000 were ICD-10-only subscribers, while the remaining 378,000 remain in the subscriber count with no corresponding ICD-10 readiness revenues.

At approximately $18 per subscriber per year, or $4.50 per quarter, the result is the $2.6 million sequential decline in the ICD-10 readiness revenues category. Growth in other revenue categories -- other than ICD-10 readiness -- was strong enough to maintain the ARIS.

HealthStream's patient experience solutions provide valuable insight to healthcare providers to meet cash requirements, improve the patient experience, engage their workforce, and enhance physician alignment. Our patient experience solutions segment revenues were even between the first quarter of 2016 and the first quarter of 2015.

Revenues from Patient Insights surveys, a survey research product that generates recurring revenues, increased 4% over the first quarter of 2015, with that growth partially offset by lower growth in our employee survey business, which is conducted on either an annual or biannual cycles.

The provider solutions segment, operating as Echo, a HealthStream Company, continues to perform to our expectations. By providing us software that is used to validate the professional credentials of potential employees, Echo products serve as the gatekeeper for workforce quality in healthcare.

In the first quarter of 2016, revenues from our provider solutions segment increased by approximately $3.2 million, with the HealthLine Systems acquisition accounting for the majority of that increase. The $3.2 million HealthLine increase was net of approximately $955,000 in deferred revenue write-down, which is the accounting convention requiring us to write down the beginning balances to fair value as defined in GAAP. And as you will recall, we closed the HealthLine Systems transaction in mid-March of 2015.

Now our gross margins. The gross margins have been stable in the 57% range for the past year and increased slightly to 57.7% in the first quarter of 2016 versus 57.2% in the first quarter of 2015. A combination of factors that include lower ICD-10 revenues and growth in revenues for proprietary solutions with higher gross margins were key contributors to this trend.

Now, some words on operating expenses. This quarter's results reflect our ongoing plans to invest in product development to foster long-term growth and strengthen our competitive position. Product development costs as a percentage of revenue in the first quarter of 2016 were 13% of revenues versus 10% in last year's first quarter. This increase represents investments in all of our segments: workforce solutions, patient experience, and also Echo.

G&A expenses in the first quarter of 2016 were 14% of revenues, which is the same level as last year's first quarter. Several factors influenced the G&A expenses, such as the rollout of our new financial platform, NetSuite, and a full quarter of HealthLine Systems results compared to a partial quarter of results in the first quarter of 2015.

Operating income. Our operating income was down $2.5 million, as I mentioned a few minutes ago, in the first quarter. It was adversely impacted by the $955,000 of deferred revenue write-down related to the HealthLine acquisition as well as lower contribution from ICD-10 revenue streams.

Now a quick look at our balance sheet. As Bobby mentioned a few minutes ago, our cash position and overall balance sheet remains strong and were reinforced by positive cash flow from operations, as evidenced by our $8.1 million in adjusted EBITDA for this quarter. Once again, it is important to know that adjusted EBITDA also reflects the impact of lower contributions for the ICD-10 readiness revenues.

Our cash balances at March 31 was [a plus] $150 million. We have no outstanding debt and our full $50 million line of credit is available to us. We believe our overall capital position is likely to support organic and inorganic growth opportunities and support other capital structure optimization and general value maximization strategies as may be appropriate.

And we continue to review and evaluate a variety of potential acquisition and business development opportunities in terms of strategic fit and valuation while also evaluating additional avenues for creating shareholder value, as I just mentioned.

Yesterday's earnings release contains guidance for the 2016 full year, which guidance remains unchanged from our announcements in February, which were awhile ago. We anticipate that consolidated revenues will grow between 8% and 12% as compared to 2015. And the growth in our three operating segments will be as follows: workforce solutions between 2% and 6%; patient experience, 8% to 12%; 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 $19 million in 2016, and are reflected in the guidance ranges for workforce solutions. For the full year 2016 then, we anticipate revenues from ICD-10 readiness training to be approximately $8 million, which we expect will be comprised of approximately the $3.9 million of actual results from the first quarter, $1.9 million in the second quarter this year, $1 million in the third quarter, and $1.1 million in the fourth quarter.

We anticipate that our full-year operating income will increase between 10% to 14% over 2015. We anticipate that our capital expenditures will be between $14 million and $16 million, and our effective tax rate will be between 39% and 41% for the full year 2016.

We also look forward to our annual client summit in October of this year, meaning that the estimated net expenses of approximately $0.75 million for summit will be recorded largely in the fourth quarter of 2016. And finally, 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. A few more business segment updates and then we will go to questions. First, our patient experience segment, we have some exciting announcements. We recently launched Express Surveys. These are our census-based surveys, which allow customers to better guide performance improvement efforts.

Express Surveys are brief, 10-question surveys, which are, according to our research, they are aligned and provide the most important measures of a patient's experience and are delivered via email, text, and interactive voice response technology. CG Express and ED Express are our first express surveys, and they are enhanced through links to improvement resources in the HealthStream ecosystem, including courseware, evidence-based practices, and our ATI coaching engagements. Express Surveys represent a very cost-effective offering for customers to collect more of their robust data sets that are relevant to fuel their patient experience improvement initiatives.

Another area of great -- that's an exciting announcement. An area of great sales momentum is with the sales of our resuscitation solutions. In fact, sales of our resuscitation solutions led the way in the first quarter. We particularly believe that approximately 20% of these sales of the resuscitation solutions suite were into the post-acute care settings, which as you know is an area where we are trying all of our products and services to see how they will be adopted. So we saw some really great uptake of the resuscitation products into the post-acute settings.

The product is focused on teaching resuscitation skills to healthcare professionals and it is offered through our partnerships with Laerdal Medical and American Heart Association. A few details about that. As of March 31, 2016, approximately 2.3 million cumulative CPR training certifications have been completed through HealthStream.

New HeartCode sales were strong in the first quarter. We actually added over 100 new customers to our resuscitation solutions suite in the 90 days of the first quarter.

While the sales of the resuscitation products are strong, the clinical course for our products actually were driving a lot of revenue growth in the first quarter because of strong sales in the prior preceding quarters. Clinical products include content from our medical association partners, the clinical procedures and skills product sets, and our CE center all put together under this clinical products umbrella.

As our association content continues to expand, so do the innovative ways in which we plan to make them available to our customers. And so in the second half of the year, we expect some additional product introductions in the clinical products area -- clinical product and clinical training area.

And we have mentioned some of those in prior calls, like the Duke frail elderly care program -- certificate program as an example of some of the innovations coming in our clinical products area. So we are excited about the new introductions ahead of us. In fact, revenue growth from clinical courseware products was up 58% over the prior-year same quarter.

As we head to questions, I guess I will remind everybody that our annual shareholder meeting is coming up right around the corner. It will be held Thursday, May 20 at 2 PM Central here at our national headquarters office. And I hope many of you and all shareholders are welcome to visit and participate in that meeting.

At this time, I would like to turn it over for questions for our team.

(Operator Instructions) Scott Berg, Needham.

Congrats on a very good quarter here. A couple quick ones for me. First of all, Bobby, on the new user interface, you obviously have the majority of your customers -- excuse me, of your implemented subscribers on the new platform. But can you talk about maybe how you are seeing any impact of the new platform with win rates or deal activity or maybe opportunities in the pipeline?

I think it was a modernization that was much required, and sets a high bar. Our sales team is excited to be able to demonstrate our platform, of course, across all forms of devices and browser types. So it has really enhanced our ability to show the flexibility of our platform.

I don't know if I would attribute it directly to win rates, but it certainly is a core asset of the organization, and it also provides, as I mentioned, this capability for multiple languages. So it comes with a lot of exciting advantages beyond just mobility and scalability to platforms and multi-browser support.

It also has allowed -- and if you take big health systems down in the Southern United States and certain areas where there may be more of a concentration of Spanish-speaking employees, we can now accommodate those type of capabilities. And interestingly, some of those health systems have expanded internationally down into Mexico and areas where our platform is now able to support that expansion for our US-based customers.

And then finally, as you noted -- or as I noted in the call, we actually do support through our platform some products that are sold internationally. We are not international. We don't conduct business or have employees internationally. But the platform is resold as SIM Manager in conjunction with Laerdal Medical.

And so we are actually seeing uptake in other language, as I mentioned already and some of the more far-reaching, like Mandarin. So we are excited to provide all those capabilities all at one time, and to the 4.3 million existing implemented subscribers.

Great. I guess as -- Gerry, as I am looking at the balance sheet, just a housekeeping item really quick. As your DSOs in the fourth quarter were their lowest of any first quarter in several years, anything attributable to driving them lower or was it just standard better cash collections in the quarter?

I'd said -- first of all, it's kind of somewhat cyclical and things can change quarter to quarter. A little more attention we placed on those the last couple quarters, but it is a constant point of financial attention. [But there's nothing] --

Great. Last question. Nothing other than the normal stuff, it sounds like.

That's correct.

Great. Bobby, last question for me. Your ICD-10 revenues were just marginally ahead of your prior guidance for Q1. Anything driving that in particular? Maybe it was timing of customers falling off?

Just trying to understand if there is going to be upside to any of those numbers the rest of the year as we go through or the guidance that you gave was consistent with 60 days ago. Just trying to ballpark or handicap what the rest of the year might look like there.

I think that the runout numbers that we gave, which I think drop from -- well, now this quarter of about $3.9 million to $2 million, and then roughly two quarters of $1 million. So $1 million in the third quarter, $1 million in the fourth quarter.

I think we expect the runout to play out as we have outlined it. We were a little higher in Q1. There's adjustments made at the end of each quarter that are made based on utilization patterns and close out of contracts from the ending of the year that boost it a little higher.

But we still do hold to the trajectory we have given, which should see a decline from about $3.9 million in this quarter to roughly $2 million next quarter, and then $1 million and then $1.1 million. And so we believe that is an accurate trajectory for that product.

Great. That is all I have. I will jump back in the queue. Thank you.

Ryan Daniels, William Blair.

Thanks for taking the questions. Let me start with a follow-up on ICD-10. Gerry, you gave some numbers on the subscriber count. I am curious you can just give us at this point in time how many subs are currently there that are ICD-10 only that are either at risk or that you need to convert to other programs.

The remaining, you mean?

Exactly.

I think most of them are pretty much gone by now. This was a big quarter for the reduction in the ICD-10 only, many of whom are wrapping up by the calendar year end, December 31. I think what remains mostly are those folks who are on the platform.

Okay, that is helpful color. And then Bobby, I guess one for you on the user experience. A lot of discussion on that in your comments and then some Q&A already.

But I am curious if you are seeing any different use among the customer base, given that platform. Meaning, are they consuming more content? Is it leading to more of the other platform sales? Or anything you are noticing on the maybe more tenured users on that platform?

Well, first, I wanted to offer a quick correction to I think Gerry's comment. I think in looking at the ICD-10 users, I believe there are probably -- I think we announced 370,000 or so for ICD-10 only in the prior quarter, and about 200,000 of them have come off since then.

So I believe probably about 170,000 ICD-10 only remain, and maybe Gerry can fact check that. Unfortunately, I am remote today, so Gerry, if you could fact check that by the end of the call, that would be great.

And then can you repeat? Which platform are you talking about to see the cross-selling?

The new user experience. Just with the mobile platform, with the new experience, are you actually seeing more coursework consumption or different use?

Yes, sure. Well, what was exciting about it is that it was originally conceived as new application front end to our core application, our learning platform. And what it has evolved into over the last year is really a front door for all of our applications.

So we are in the process now -- for example, one of the primary features of it is a to do list, kind of like a way to govern activities upcoming for someone. Historically, if you look back a few years, the only thing that would appear on the to do list were activities associated with the required learning.

But through the new APIs we are developing, we can now feed other to do items out of other systems into HealthStream right into that front door, which is, as you know, widely accessed. In fact, I think recently, we had about 600,000 logins for that application, that new UX, in a single day.

And so what we are doing is all of our application suites are now writing to this new interface. So if there is an event triggered out of the use of our conflict of interest smart platform -- we call it COI-SMART -- it will be the first one to debut where activity that trigger action requirements will also trigger to your to do list, this centralized repository for 4.3 million people. And so we are opening it up; it kind of represents an opening of our platform. And the first place it's open to is our own -- our other applications.

And so it will a road over the course of this year as more and more applications relate to, link to, and technologically integrate with that front end. And then our ambition of course over time is to open up those APIs and allow others to link into that central access point. We are not there yet, but that is a bit of our journey, and we are starting to see exciting opportunities evolve because of this open architecture approach.

Okay, great. That is helpful. And then final question just on Echo; you talked about some new customer wins that were internally announced. And I won't ask who that is.

But is that something, one, that is reflected in the Q1 numbers or still on the come? And then number two, you talked a little bit about product development. Are there any very specific target areas for Echo that we should think about going forward?

Well, there is a whole host of derivative products. As I looked at the new product roadmaps being built by Echo -- and it's really exciting because it integrates assets from across the Company. And so for example, the concept of provider scorecards that would take data from the core credentialing system, but also potentially from the patient experience business we have is an interesting concept on the roadmap and underway from an execution standpoint.

The customer wins, we have a bit of an implementation backlog in the provider solutions area. In fact, the wins were coming at a really good pace, but they are not fully implemented. And so similar to the phenomena of our core business, there's kind of a contracted number and then an implemented number.

And so some of that is still in front of us as we catch up to those implementations on the provider solutions side. And it now holds a very similar model of signing contract and moving into the implementation phase. So we are still optimistic.

Now, we've got large growth expectations on provider solutions. Some of those come from just the year-over-year comparisons and the timing of the acquisition. But some of them come from organic growth and new products in that very category.

So there's a lot of optimism and energy in that area of our business right now, and we are seeing customer wins result. In fact, some of the touch points of integration with other applications of HealthStream I think are meaningful competitive differentiators.

I will give you one more example. We are currently in the process of making available to the credentialing system the credentials that originate out of the learning platform, which will reduce the work burden on the customers of that credentialing platform.

For example, the credentials associated with the completion of resuscitation training, which is largely delivered through our learning platform, is a data point that would prove very useful because it is often required in the credentialing process for providers. And so facilitating the movement of that data from our learning platforms into our credentialing platform we think will provide additional leverage down the road with customers as a real work reduction opportunity for them.

So I've given a few examples of points of technological integration, but your core question was are we seeing the customer wins in the numbers yet. I would say they have gone to the implementation backlog, but they are part of the growth forecast, which we have already put forward. So we are excited to see those new wins.

Okay, perfect. Very helpful. Thanks for the color.

Nicholas Jansen, Raymond James.

Just wanted to dig a little bit deeper into the product development expenses. We have seen those grow as a percent of revenue 500 basis points over the last four years. Certainly you have outlined another -- a number of key initiatives over the last 12 months as we think about revenue drivers.

But if I had a better sense of kind of where you are in the revenue recognition process associated with that product development expense increase, just want to kind of get a better sense of what inning we are in from a -- are we still very early from capitalizing on this increased investment? Are we starting to see the benefits in the numbers thus far?

That's a great question, a fair question. As you know, each year, we go through a three-year planning cycle that we refresh each year in a retreat process at the end of the year. And then we announce our new investments, and we have accelerated product development investments each of the last two years.

I would say we are still mid-innings; four, five. We've got a lot of exciting things right in front of us. In fact, a couple of them announced here in the call today: the patient experience solutions area; these new Express surveys is still in front of us. It's relatively new. We are rolling it out. It adjusts our model to compete with a more census-based approach of some of our competitors, and we are excited about those innovations.

In this last retreat process in November/December, we essentially approved two new investment plans on the business of provider solutions being one, and Echo being the other. And they are early in their product investment cycles, as I've mentioned on this call, in both of those segments.

And then we see a steady increase because of HR, talent management, in the core business R&D investments as well. So you can think of it as three areas of investment and two of them are a little earlier stage: provider solutions and patient experience. And one is just the ongoing innovation curve of the core business.

I hope that helps. I would put a couple of them in the fourth inning and a couple of them in the fifth and sixth inning.

That's actually very helpful. And then we think about the Echo business year-over-year growth, obviously the growth included the HealthLine transaction, which fueled the overall number and certainly some optics associated with the deferred revenue write-down.

But how is that this is performing on an apples-to-apples basis? And I guess I know that business before was not really growth targeted, and you guys are making investments to kind of accelerate the growth there. But just wanted to kind of get a better sense of apples to apples in Echo.

Yes. Well, we are pretty excited about the things we are seeing in the last couple of reports. We are seeing solid organic growth. And the businesses that are now part of Echo historically had -- well, at least the HealthLine business had a lower growth rate. It is very profitable business, but as you noted, a very low emphasis from a number of headcount on sales, and marketing investments.

And we are changing that. We are building a sales organization and adding to the one that existed and integrating them better with the SyMed sales organization, and we are beginning to see the fruits of that. So on an apples-to-apples basis, we are seeing increased win rates and sales rates.

What's also exciting is some of the products of those two combined business, and now one is Echo, were installed products. And while that accelerates revenue recognition, we are selling more of the SaaS and the subscription-based products and remotely hosted managed products. And while that spreads out revenue more, it is consistent more with the business model of HealthStream.

So it will take longer time to matriculate in the revenues, with both the shift in the model. But the win rates are increasing in the last -- really the last 100 days for that business line.

That's very helpful. Lastly for me from an M&A perspective, have we seen private multiples start to adjust to public multiple realities? Or are multiples out there still elevated in areas that you are looking to deploy capital to? Thank you.

Well, it's interesting. We have an active M&A program. In fact, some of our G&A expenses are up, we will do to a couple of things that Gerry identified, like our -- the complete overhaul of our accounting finance system, which is the first time we have done that in a decade. But also because we have an active M&A pipeline.

And we actually had one deal that was moving along that we halted during the first quarter, so some of those expenses are in our numbers, and unfortunately won't materialize into a deal. That deal stopped on valuation concerns, and kind of growth trajectory concerns in the due diligence process.

I would say that I think everyone feels a little pressure on multiples, including the private sellers. I don't know they have all woken to the full reality I think that will exist the next couple years as a potential for compressed multiples for private companies. And as you know, there is always holdouts that -- and maybe some for good reason -- that cling to the higher multiples because of their exceptional growth rates. But I would say we are seeing some sensitivity, but not quite enough from a buyer's standpoint.

Appreciate all the color, Bobby. Thanks. I will hop in the queue.

Richard Close, Canaccord Genuity.

I was wondering if we could just scrub the ICD-10 subscriber numbers a little bit more. Just wanted to make sure I understand that. And Gerry, I'm not sure if you have the information there.

But if I go over the fourth-quarter call, you guys mentioned there were about 360,000 or 390,000 subscribers, ICD-10 only. So I'm not sure which number is correct there. You referenced 370,000 here this morning.

In the fourth quarter, you talked about 30,000 rolling off, and then you guys threw out 165,000 effectively were kept as subscribers by buying one of your additional products. And then we have the 200,000 number that you listed here today or mentioned today.

So that pretty much takes me down to -- call it zero. So I just want to make sure that differs from the 170,000 number, Bobby, that you just said. So I just want to make sure we all understand that --

Yes, let me try to walk through it a little bit. Let's try to walk through it together a little bit. And again, I don't have the table in front of me, but I've got a pretty good sense for it.

Hey, Bobby, can I --

Remember a few quarters ago, we peaked at about 1.8 million subscribers on ICD-10. So start with that number. We peaked at about 1.8 million subscribers on ICD-10 about three quarters ago. And since then, the number's been declining and the revenues have been declining. So if you look at the sequential declines in revenue, you can see them dropping.

Remember there are two categories of ICD-10 readiness customers. The first category are those that have other HealthStream products. And so when their ICD-10 readiness contract runs out, they will remain a customer of HealthStream and they will remain in the ARIS. But that revenue associated with ICD-10 will obviously be gone.

And then there is the ICD-10-only subscribers, that that was literally the only product they had purchased from us. And so when they reach the end of their contracts, and assuming they haven't bought anything else, which is our current modeling assumption for that number, they will go to zero in our model. They will drop out of the numerator and the denominator of ARIS.

That number we believe at the end of the year was about 370,000 and -- of ICD-10-only subscribers remaining on the platform. And then in this quarter, about 200,000 of them have dropped off. And so leaving about 170,000 of ICD-10-only subscribers to eventually over the course the next three quarters come off of the numbers.

The balance number we gave, the 570,000 that we gave, represents the total number of ICD-10 subscribers that reached the end of their commitments in the first quarter. So that number is comprised of roughly 200,000 that were ICD-10 only. And then the balance number, which would be 378,000 -- 378,000, that's the balance number that are also -- that reached the end of their term and therefore dropped the revenue, but remained on our platform.

So the easiest way to think of it is about 578,000 were using ICD-10 and through the course of the first quarter dropped off. On average, we are generating about $4.50 per revenue per person, which represents the $2.6 million decline sequentially in ICD-10 revenues. I hope that helped, and then maybe Gerry can add some color because there's an averaging convention as well.

If you are referring to its impact on ARIS, it gets a little more complicated because of the way we average the numbers over the quarter. But I believe those are accurate numbers.

And so if you look at the runout of ICD-10, we have enough subscribers at $4.50 per subscriber to generate about $2 million in revenue in the next quarter. And so it's -- say just round roughly to $5 -- it would generate about $2 million at $5 a head.

And then in the third quarter, it will be down to subscription number in total that will generate about $1 million in revenue. And then in the fourth quarter, there will be some carry-throughs and adjustments, we expect. It will generate about $1.1 million in revenue from ICD-10.

So we expect by the first quarter of next year, the entire 1.8 million would be out of the network and not generating revenues from that limited ICD-10 readiness product. I hope that helps if you can follow that along.

So one thing -- I misspoke earlier when Ryan asked his question. You are right: it's about 370,000 subscribers for ICD-10 only at the end of Q4 of 2015. So your math is right.

Could you guys give us an update in terms of how many ICD-10 only that you have been able to cross-sell an additional HealthStream product? I think that was 165,000 that you mentioned last quarter.

That number would've occurred last year and as we were trying to market to them. We are now at this runout point where -- we will still try to cross-sell the remaining 170,000 onto something new, like D&A would be great. But the expected conversion of the remaining balance of 170,000 ICD-10 only is zero based on the late model that -- doesn't mean we're not trying to convert them. We are.

But remember, there's a larger number left on the core platform that are existing customers. There's only 170,000 left to convert in the remaining three quarters, and we are of course working with them. But we -- in the model, we put it at zero.

Okay. And I guess thoughts on gross margin, Gerry. Maybe how we should think about that going through the year. Clearly it ICD-10 rolling off, that takes lower margin business out of the equation.

You've been selling a lot of platform revenue here over the last year with Competency Center, Performance Center, and I thought that maybe gross margins would have increased a little bit sequentially. And maybe your thoughts on how we should look at that going throughout the year.

I think one thing to remember that's important -- and I will let Gerry chime in as well. But we are in different locations, so a little harder to coordinate. But the clinical courseware products are really, really doing well. And some of them also have high cost of goods and high royalties. They come from very powerful association brands and nursing organizations and medical publishers.

And so in those scenarios, they have similar gross margins as, say, the ICD-10 and some of those key products. And so you have to remember that that is the area that delivered 58% of revenue growth over the prior-year quarter and it has similar gross margins to the ICD-10. Slight improvements in some of them, but similar for many.

So you have to remember that a really high growth area in addition to the platform pieces is in that clinical curriculum area. And it has a high cost of goods as well.

So I'd echo that that. But also don't forget, this is the -- with HealthLine Systems transaction closing in March of last year, this is the last quarter where it's I call it incremental to HealthStream's overall results. So Q2 of 2016 will be comparable to Q2 of 2015. So your product mix becomes more and more comparable. So that will also be a fact you should consider as well.

Okay. My final question Bobby -- can you give us an update on the DNA product and the CECenter? You'd thrown some stats out there in the past in terms of number of contracts and subscribers, those type of things. If you can give us any update, that would be great.

Well, this quarter, the highlight -- and so we prepared numbers around the HeartCode resuscitation products and we didn't prepare updates on CECenter and DNA. Both are plugging along. They had relatively stronger quarters in the fourth quarter of last year than the first quarter of this year. So we hope to see them continue to pick up their pace throughout the year.

They have very strong pipelines and so we feel good about them. More so CECenter. Secondarily, the DNA product. But we saw such tremendous progress with the resuscitation suite at this time; we did the detailed look, the 2.3 million completions and the 100 new contracts. Those were the analytics we put forth this quarter.

A little bit stronger fourth quarter, though, from recollection for those products. We had a great selling season as we wrapped the year and brought a lot of business into the fourth quarter, setting us up well financially for this year. A little weaker first quarter on those two in terms of new order value, but steady progress on all three fronts. The strongest of the three was the HeartCode and resuscitation products.

Okay, thank you.

Peter Heckmann, Avondale.

Just a few more questions. Has there been any measurable change in the competitive dynamics, given some of the M&A activity we've seen in e-learning and credentialing? Are you seen competitors that are gaining sufficient scale or being able to bundle services that's having an effect on you competitively?

I think that on the -- some of our offerings are really fundamental and well positioned in the market, and we don't feel that there's anything particularly new about the competitive landscape.

In other areas in the core platform, I would say that that continues to intensify when we talk about learning and the talent suite. And so that environment continues to intensify and be more challenging. That's the sale through the HR department.

So it's good that we are showing strength through the provider solutions sold into the medical office and credentialing areas of the hospital and into the clinical side, which is the CNO and CMO. It's good to have those relative strengths happening now as the competitive landscape on some of the pure software sales is escalating.

It's not really any different than the prior mix of competitors because of M&A. You may be referring to a merger that occurred in the credentialing space. We do not see that as materially changing the competitive landscape for us. We feel like we have that in hand and it won't change our win rates and trajectories in the provider solutions business.

And so in general, we are seeing relative competitive strength in the clinical solutions areas. The provider solutions areas. We have some enhancements to help us competitively.

In the patient experience line, that's a tough competition there. We compete against a really strong, dominant provider in that space, but that hasn't changed, and it's been that way for years. And then in the pure talent sales, I would say that that continues to intensify and we are working to continue to enhance our offerings in that area.

Got it. Okay, that's helpful. And then just a little bit more clarity, if you would, on the year-over-year increase in ARIS. Did the recent enhancements, including the mobile ready, did that provide any uplift on pricing? Or if not, can you talk about some of the areas that are contributing to the year-over-year increase that was stronger than what we had modeled?

Yes, there's a lot of moving parts and ins and outs. Probably the largest contributor to its movement is the strange movement of the ICD-10 coming in and out. And so it's interesting, because the ICD-10 product set is below the average ARIS. And so the ICD-10-only subscribers that are coming out, they tend to boost the average.

However, you have to remember that more than a majority were existing customers. And those subscribers stay in the ARIS in the denominator, but the revenue from it comes out. And so the net effect of that we believe is kind of a downward pressure. So it's the relative movement of those two things that is moving this metric -- probably the most heavily weighted variable in moving the metric.

In addition, though, you remember our sales in the clinical course areas are performing very, very well. And that has -- those are usually same-store sales growths, which pushes ARIS upward. And remember, that was a 58% growth over the prior-year first quarter. And so again, that's another upward pressure on ARIS. The net effect of all of that was upward year over year and slightly down sequentially.

That's helpful. All right, thank you.

Matt Hewitt, Craig-Hallum Capital Group.

Thanks for taking the questions. I'm going to go a couple high-level ones here, Bobby, if you don't mind. First, as we look at this post-ICD-10 landscape, obviously you had put HealthStream in a position to benefit and to help hospitals and clinicians deal with this new regulatory change.

As you look out over the next couple years, do you envision or do you see any other similar type situations? And given your experience of ICD-10, do you think that HealthStream has now put themselves in a position to be that go-to educator in those circumstances?

There are a couple of macro trends that we are trying to position ourselves really well for that are not quite the level of a mandate. But we see dire need in these areas.

One area is the onboarding of the new workforce. So the new Millennial nursing workforce coming into practice for the first time, given the shortage of the experienced nursing workforce, toolsets to help orient -- strengthen their confidence and skills as they come into the workforce. It's almost mandatory now that we are going to have to employ that younger workforce.

It's interesting because five years ago, some health system strategy with the looming shortage was to simply pay a little more and recruit the seasoned nurses that were experienced from other health systems back and forth and fight over the existing talent pool. That battle is no longer going to work, as each year, we get closer to seeing faster retirement rates.

And so the new nurses have to be hired and brought in and has to be put patient bedside. And so we are working on a series of products that will help onboard, build the skills, and build the confidence.

Remember, they are coming from nursing school without a residency requirement. And although many hospitals build residency type programs to try to build confidence and skill in the first year, there's a lot of turnover in the first year and there is a lack of confidence and -- justifiably, because they haven't been taking care of patients. They've been in school.

And we have a lot of tools that we were building and working on that focus on incorporating this new Millennial nursing workforce into the care provider environment. And so note there's some work in the simulation area. We are actually doing pilot programs of some large health systems of what we are calling a residency program, which is a more robust curriculum for these new nurses.

And we've built confidence -- study tools, for example, with professors at Stanford that will become standard measurement instruments to see how these new nurses are performing in their first year. So that's a macro trend, a big one, and one that we are focused on as an organization.

One other macro trend is just this movement towards paper performance and in general, but more specifically, the accountable care organization with the shared risk pools. It creates a lot of need for post-acute and acute settings to coordinate care. And a lot of incentives for those workforces to be coordinated and how they provide care delivery.

And so the Duke frail elderly certificate program is an example of a program that addresses the needs of both these new shared risk organizations that targets the post-acute settings and the acute settings with its educational effort.

And so that's the first of a series of products that we call pathways that are geared -- in this case, focused on shared risk and targeted to both subsectors, the acute and post-acute settings. Those are two example macro trends that we are trying to prepare for that I think pressure the healthcare system in the US that we are aware of that we think can drive business growth in the coming years.

Okay, great, thanks. Maybe two more. From a penetration standpoint, I think you've broken it out historically roughly $5 million in the acute space, $3 million in the post-acute. Any update on where you think you are from a penetration standpoint in the post-acute? I realize it is probably still very early days, but given your comments about the basic life-support adoption there, are you seeing a faster uptake in that post-acute space?

Yes, we are encouraged by the recent trends. We continue to strengthen the sales organization that focuses on post-acute settings, providing yet more specialization in their approach. We continue to add content partners, strengthening the ecology or the ecosystem to offer specific products to that segment.

And then we are getting better at figuring out how to cross-sell existing products, like you mentioned the BLS product, into that segment. And finding in some cases we have to tweak our platform a bit or add a new content partner or adjust a price point to get the growth we want in that area.

But we are seeing some encouraging signs early in the year here. And we mentioned one of them, which was about 20% of the outstanding performance on the resuscitation suite came from post-acute settings in this last 90 days.

Great. One last one. And I think you've commented on this in prior quarters, but if you could refresh my memory. The ICD-10 readiness platform -- you've talked about it here on the call. Roughly $4.50 was the average sale price on the continuing -- the follow-on offering. If I recall, that was a higher price point. Is that accurate expectations for their product as we move forward?

Yes, that product I think you are referring to is the DNA product, and there's actually a series of products that use that format that we are pretty excited about. One is focused on the coders, so it's a small subset of what the preparedness product was focused on, but definitely a higher price point. We haven't disclosed a price point, but it is a higher price point focused on a narrower audience.

We've launched a new case manager program, which we are really excited about. It is also under the precise joint efforts of development. And it has a price point, again, focused on a smaller population than the operations side, but -- in the revenue cycle side of the case managers that are often associated with managing the patient flow. And so those are two examples of higher price point, more focused curriculum sets that are in the market now that we are excited about.

Great, thank you.

Matthew Gilmore, Robert Baird.

Thanks for taking the question. I wanted to ask about the patient experience segment. It seems like gross for the patient insights was a little slower than the recent trends. So first, can you help us understand what drove that modest deceleration? Was there any client attrition or was that just normal fluctuations in the business?

And then second, your guidance for the patient experience segment obviously implies a ramp for growth for the rest of the year. So can you help us understand what drives that acceleration throughout the rest of the year?

Yes, sure. I think we are pretty optimistic that I've got a good leadership team in place, and they are building a pipeline and they have some new products like I mentioned. We are pretty excited about this shift to add products that are more census-based approach, which has been a move of some of our competitors that's resulted in the success.

And we're seeing interest in that from our base. So these Express Surveys we're launching we think help round out our offering and hopefully provide some uptake in the second half of the year.

We've seen a normal amount of churn in the customer base. There's three or four big providers in the space. The dominant one is Press Ganey. And we see -- lost -- we have a continuous process of trading accounts. And sometimes they net a little better; sometimes we net a little better. This last quarter, not particularly atypical, but there is that constant churn as customers decide to switch vendors between four or five core providers of the service.

So that -- those are the reasons for optimism: some new product concepts that are hitting the market now and a stronger management team. The churn is always there and I don't know if it's particularly atypical this quarter, but it is definitely a factor in the growth rate.

Got it; that's helpful. And then Gerry had mentioned in his prepared remarks, looking at some value maximization strategies -- and I know you obviously announced the buyback last quarter. Was that comment mentioned on Compass something beyond a buyback or more specific to that? Thanks.

Yes, I think -- clearly, it puts a buyback mechanism in place and it's at management's discretion. We did not exercise anything under the buyback program in the first quarter of its existence. So we'll watch that carefully over time.

We also refer when we talk about maximization strategies to our M&A program. So we talk about organic and inorganic growth. And I think those three are our core strategies for enhancing shareholder value and generally what we are referring to right now when we talk about growth and potential for growth in earnings and growth in therefore shareholder value. Or growth in cash flow. A core metric we watch is EBITDA and operating income.

And so we generally -- when we talk about that, we're talking about those three things: organic, in organic through acquisitions, which is [active]. I even noted that we have a constant investment now in the M&A pipeline. And so when we talk about investments in that, we concluded a cycle of due diligence that had costs for us in the quarter, and that is kind of an ongoing cost of doing business.

So we have a focused team on the M&A pipeline area. So that's what we mean when we talk about shareholder value creation.

Okay. Thanks a lot.

Frank Sparacino, First Analysis.

Given the time, I'll just take my questions off-line. Thanks.

Thank you. I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. Robert Frist for any closing remarks.

Thanks, everyone, for participating in this call. Hopefully, we were able to answer everyone's questions. And our employees are doing a fantastic job delivering new products innovations to the market. So we will celebrate those launches together as we move through the year. Look forward to updating on our next earnings conference call. Thank you, all.

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