HealthStream Inc (HSTM) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the HealthStream, Inc. First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

Now I would like to welcome and turn the call to Ms. Mollie Condra, Vice President of Investor Relations and Communications. Ma'am, please begin.

Thank you, and good morning. Thank you for joining us today to discuss our first quarter 2017 results. Also in the conference call with me today are Robert A. Frist, Jr., CEO and Chairman of HealthStream; and Gerry Hayden, Senior Vice President and CFO.

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

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

Thank you, Mollie. Good morning, everyone. Welcome to our first quarter 2017 earnings conference call. We're going, as always, hit a few highlights and go into details on some of the numbers.

Our first quarter performance, we felt good about our first quarter performance. It sets us on track to deliver full year revenue growth of 10% to 14% and a return to leverage operating income growth in 2017. We were excited to see several operational developments and financial metrics that showed strength in the quarter and throughout the quarter. And if you think about it, the sequential improvement was a positive movement. Compared to the prior quarter, for example, revenues were up to a record high. Operating income and adjusted EBITDA improved sequentially. DSO was down, which helped contributed to the cash balance being up. Subscriber count improved. And finally, our ARIS, our annualized revenue per implemented subscriber, was up.

During the quarter, we made significant progress on 2 items that we brought up in the last quarter. The first was restructuring our Provider Solutions teams to improve workflows, thereby reducing the implementation backlogs. We also made important progress on the consolidation of our Patient Interview Center operations in a move from Nashville to Laurel -- or to Nashville from Laurel. Both of these developments, we feel and have kind of modeled out, will contribute to improved financial results in the second half of the year as we're still midstream but making good progress throughout the first quarter.

In our last call, several new products were introduced as well. And I'm pleased to update on the report that all 6 of these new products, they are TalentTracks, OB Risk curriculum, DevelopRX, Nurse Residency Pathway, EngageRx and our PCCB library, they all had new sales and revenue recognized in the first quarter. Now as I mentioned, these products will be immaterial contributors to growth in 2017. But we are excited to have them in the market, continue selling them and see them be adopted by our customers.

I'd like to turn it over to Gerry Hayden for a more detailed look at the financial metrics. And then we'll circle back around with the business segment updates from me.

Thank you, Bobby, and good morning, everyone. I'll provide some additional information about our financial results, including certain items that impacted the quarter.

For the first quarter, consolidated revenues were up 11% to $59.9 million, operating income of $1.8 million versus operating income of $2.5 million in last year's first quarter, net income of $1.3 million and earnings per share of $0.04 versus net income of $1.5 million and $0.05 per share in the first quarter of 2016. Adjusted EBITDA was up 7% to $8.7 million from $8.1 million in last year's first quarter. During the quarter, the Morrisey Associates acquisition, which closed in August of 2016, contributed approximately $2.3 million of revenue and incurred an operating loss of $700,000, primarily due to the deferred revenue write-down accounting convention.

Now let's look at 4 areas of the income statement, segment revenues, gross margin, operating expenses and operating income. Revenues. Revenues from our Workforce Solutions segment increased by $2.4 million while overcoming a $3.4 million year-over-year decline in ICD-10 readiness revenues in the first quarter.

Now let's take a quick look at the Workforce ARIS. For the first quarter of 2017, HealthStream's Workforce ARIS was $37.68, which is up when compared to last year's first quarter of $36.27 and last year's fourth quarter of $37.28. So we grew ARIS both quarter-to-quarter -- quarter-over-quarter and sequentially.

ARIS, as we discussed in previous quarters, is also subject to movements that may seem counterintuitive. For example, adding a highly desirable number of subscribers can actually drive the ARIS down if the amount sold to each subscriber does not initially equal or exceed the previous quarter's ARIS. Similarly, recent subscribers who paid less within the previous quarter's ARIS can drive the ARIS up. It's also important to keep in mind that the ARIS does not include a complete look at our business as 2 out of our 3 segments, Patient Experience and Provider Solutions, are not included in ARIS at all.

Revenues from our Patient Experience segment for the first quarter of 2017 is comparable to first quarter of 2016. During the quarter, we saw the continued trend towards greater adoption of online patient surveys, which carry lower price points than phone surveys but produce higher margins for us. In the first quarter of 2017, the volume of phone-based patient surveys declined 25% while online patient surveys increased by 39% in the same period. We believe that our action plans to better align our operations with this trend are yielding results. For example, the Patient Experience gross margin increased by 500 basis points over last year's first quarter.

In the first quarter of 2017, revenue from our Provider Solutions segment increased by $3.5 million. As I mentioned, the Morrisey Associates acquisition represents $2.3 million of that increase. During the quarter, management of business unit took steps to improve customers' limitations, which are expected to reduce the backlog in the second half of the year. However, we have lower effective revenue growth rate for Provider Solutions segment. We ended the year with assumption is higher installed software sales with more immediate revenue recognition. During the first quarter, we were exclusively focused on SaaS-based sales, which are recognized ratably over time.

Now our gross margins. The gross margin was 56% this quarter versus 57% in last year's first quarter. The $700,000 impact of Morrisey deferred revenue write-down that I just mentioned a short while ago in the first quarter was the primary reason for the lower gross margin. Our operating expenses, our operating expenses for the first quarter were up 10.7% over the first quarter of 2016. The combination of capitalized software investments and product development expenses grew by 6% year-over-year, even though the product development category had a year-over-year decline of $420,000.

Sales and marketing expenses increased primarily due to the addition to our sales force and related commissions costs. Depreciation and amortization increased 24% over the last year's first quarter, reflecting increased levels of capitalized software amortization and the amortization of acquired intangible assets from the Morrisey acquisition. G&A expenses in the first quarter of 2017, relatively flat but improved as a percentage of revenue to 13.3%, which compares to 14.7% in the first quarter of 2016.

Our operating income was $1.8 million in the first quarter of 2017 compared to $2.5 million of operating income in the first quarter of last year. This quarter's results were primarily impacted by the $1.7 million margin loss from the decline in ICD-10 revenues and approximately $700,000 of deferred revenue write-downs, which are partly Morrisey Associates acquisition. But those declines were partially offset by the margins on revenue growth from other products over the first quarter of 2016.

Our balance sheet. And Bobby mentioned a few indicators of the balance sheet. But our cash position on our overall balance sheet remained strong. Our cash balance at March 31 was approximately $115 million, a $12 million increase since December 31. If one considers this cash balance as improved collections, DSO dropped from 71 days to 63 days, which is obviously an improvement of $5 million in collections. Our 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 other capital structure optimizations and shareholder value maximization strategies as may be appropriate.

Yesterday's earnings release contains updated guidance for the 2017 full year. And we continue to anticipate that consolidated revenues will grow between 10% and 14% as compared to 2016 and the growth in our 3 operating segments will be as follows: Workforce Solutions, 5% to 8%; Patient Experience Solutions, 3% to 5%; Provider Solutions, 47% to 51%. In our workforce segment, we continue to anticipate the variance will be approximately $1 million in 2017 versus $9 million in 2016, which is a $8 million decline over the course of this year.

We continue to anticipate our full year 2017 operating income will increase between 50% and 65% over 2016. We also continue to anticipate our capital expenditures will be between $15 million and $17 million and our effective tax rate will be between 39% and 41% for 2017. This guidance does not include the impact of any other acquisitions that we may complete during the course of this year.

Thanks for your time. I'll turn the call back to Bobby.

Thank you, Gerry. That was precise and concise. And you must have been channeling a famous historical figure who once said, "Broadly speaking, short words are best and old words when short are best of all." Let's see who could pick up the quote. Gerry, thanks for the comments.

Let's head into my follow-up on the segments. I'd like to talk first about Workforce Solutions segment. Our Workforce Solutions segment showed continued growth in the first quarter. In this segment, we offer a complete suite of talent management applications, one of them, the HealthStream Performance Center or the HPC as we call it, saw strong revenue and sales growth when compared to the same quarter last year. But that's not the only reason we're excited about that product.

We're on our way to completing a successful enterprise rollout of an enhanced mobile-ready, responsive design version of this product. In fact, over 70,000 subscribers to the HPC are already enjoying this enhanced version. And we're getting into the move where we're going to move the bulk of the customers over. In the next month, 0.25 million more subscribers we move to the new mobile-responsive HPC. And in the following month from that, hundreds of thousands and more will follow in migrating to the new enhanced, mobile-responsive design HealthStream Performance Center.

And our sales team is expressing renewed confidence in the competitive advantage this product now offers. In fact, a medium-sized health system in Ohio, for example, recently chose to add the Performance Center to their renewal contract, which is exciting because it, of course, drives ARIS up at that facility. But also with the new capabilities, they commented on the improved features, the fewer clicks, the enhanced workflows. And they talked about its overall ease of use, particularly with regards to documentation necessary for the Joint Commission. So it's exciting to have a new product come aboard and watch it roll out across our customer base, energizing our sales organization as well.

Let's talk about our Patient Experience segment for just a moment. As announced, we are transitioning our survey operations to Nashville, where we can meet customers' increasing demand for online surveys. We anticipate improved operating income later in 2017 as we move forward with our plans to close our phone survey center operations in Maryland. Online surveys carry the challenge, as Gerry pointed out, of having lower price points than phone surveys. However, they are more profitable on a per survey basis.

During the quarter, we continued to see the uptake in adoption of e-surveying as a method of data collection. During Q1, the total volume of completed patient e-surveys was up 39% over 2016. This increase comes from both new customers contracting for e-surveys as well as the conversion of existing customers from phone survey to e-survey. Revenue from Patient Insights surveys that we're currently targeting for e-survey adoption represents 60% of all Patient Insights revenue. About 27% of the targeted survey category is using e-surveys, leaving 73% yet to be converted. And that's a direct follow-up from questions last quarter. We're able to get a little more data and color about the rate of adoption and the migration towards this e-survey methodology with lower revenue but higher margin. And Gerry mentioned the margin improvement that we're already starting to see in that business segment.

Moving to our newest business segment, Provider Solutions, which has been in place for approximately 2 years. Generating growth in this segment is a long-term initiative that we're very bullish on, switching to the software-as-a-service model from an installed model. Shortening the implementation cycles for customers, moving to a new single credentialing platform and pulling 3 distinct companies together are important initiatives that are well underway. They will each make us stronger in this segment. But they will take some time. And we're really confident that a great leadership team is making all that happen.

We had a few bumps in the backlog that we talked about. But as of this quarter, we can report that the teams and processes, we've made meaningful process improvements in our Provider Solutions segment. And these are results, again moving customers forward in their implementation process. And of course, as they're implemented, we can begin the revenue recognition process. So we now expect several key accounts that are larger to be implemented and activated in the second quarter, which will meaningfully reduce the backlog of unimplemented customers and begin the revenue recognition process, as I mentioned. So we're excited to see those improvements in Provider Solutions.

In closing, before we go to Q&A, I'd like to remind you that our Annual Shareholder Meeting, which will be held on Thursday, May 25 at 2:00 p.m. Central, is here at our national corporate office in Cummins Station, downtown Nashville. I hope many of you will be able to attend and visit us for that meeting.

At this time, I'd like to turn it over for questions from the investor and analyst community.

(Operator Instructions) And our first question is from the line of Matt Hewitt with Craig-Hallum Capital.

This is Charlie on for Matt. First, related to ICD-10, what was the number of the subscribers in terms of headwind that you faced in Q1?

What was the what? Could you say that again?

The number of subs that you -- in terms of related headwind for ICD-10 that you faced in Q1?

Well, we haven't disclosed the exact number. I don't have it in front of me, but it was in the tens of thousands for ICD-10-only subscribers, if that's what you're asking, that rolled off the platform.

Yes. No, that's what I'm asking. Second, we saw that you're moving your headquarters. Is there going to be any incremental CapEx associated with that move or maybe some lease termination expenses?

Not in this year and not in next year. Maybe some in next year as we prepare for the move, there will be some capital outlays, but nothing for your model this year at all. We don't assume the property for almost another full 2 years.

Okay, that's helpful. And then lastly, related to the implementation time and the switch to SaaS revenues, can you kind of talk a little bit more about what you were saying related to the SaaS contracts maybe lowering your revenue outlook in '17? I think I missed that part.

Yes, we had -- when we entered the year and created our budget process, we had modeled that we would have a certain amount of installed softwares and, of course, a certain amount of SaaS software being sold out of our Provider Solutions segment. And after we finished the first quarter, we realized that we really sold very little and in some cases, for example, out of the Morrisey acquisition, sold no installed software, which in the short run, you recognize revenue much faster on installed software. So in the short run, it's a bit of a hit to our revenue growth plan. But in the long run, it's a stronger move to our subscription model. And so I guess the good part of the report, although we did lower guidance for the segment a bit on our top line revenue growth, is that it results in more long-term stability and fewer accounts to ultimately migrate to the SaaS platforms.

And our next question comes from the line of Ryan Daniels with William Blair.

I wanted to ask a few follow-ups on the Patient Experience surveys. The first one, I know you've talked about the margin profile on a percentage basis being stronger. But I'm curious if the dollar gross margins in that business will actually improve as you do the e-survey conversion or if it's just that percentage margin.

Well, I guess it will ultimately depend on the volume commitment from each customer whether we are able to offset the dollar value of the margin. But the margin percent would go up. And right now, it's also up on the dollar value.

Okay. And have you looked into -- I know one of your larger competitors had some success not just converting to e-surveys but driving more volume, kind of doing census-based surveying, where you go above and beyond mandated standards to get a bigger picture of the patient base and the experience. Are your customers also willing to accept that type of initiative? Or have you just focused on more converting to the regulatory standard levels?

I think that's an ambition for us. But right now, we're focused on the conversion to get the margin shift. So we haven't moved in the Patient Insights business to full census-based model. It would be a great opportunity for us as a secondary process of improving the performance of that business unit. Right now, we're focused on the conversion to e-survey, so the part that will convert.

And then if we think of the guidance, I guess I appreciate the conversion to SaaS and the e-survey conversion are negatively impacting those lines a little bit. But what is the key in driving the uptick in the core workforce guidance for growth? Is that really just the HPC that you talked about? Or is it better traction in the 6 novel programs that you've highlighted last quarter and said we're selling this quarter?

Right. So a couple of things there, the 6 new programs that we announced are very, very small, immaterial to the year. And we just noted them because we're excited we have some initial sales. So they have -- we launched the new products and customers purchased them. But for modeling purposes, you almost don't want to include those in your model. The HPC is performing well. It's certainly up. It's in the clinical solutions group, which is a subset of the workforce. So in the workforce, there are kind of 2 or 3 primary driver areas. Of course, the resuscitation business we talk about continues to perform well. The clinical business which contains the HPC -- or talent business, which contains the HPC, is doing well. Clinical is up overall. There are some good products in there, for example, CECenter. And then of course, compliance, our core business, is one of our top performers this quarter. Our new product called KnowledgeQ, which is a high-margin product, which is, I don't know, I guess I'd call it a third-generation compliance tool set for OSHA mandatory training, it is kind of leading the pack right now as the top performer, a high-margin contributor. So there's at least 1 or 2 products performing in each of resuscitation, clinical compliance and talent that are all -- they're all bundled into workforce. Now of course, they're climbing through and offsetting, but there's a strong offset still on ICD-10 revenues. And so we're having to climb through that this quarter. I have a little more color on that because if you recall last year, if you look at ICD-10 on a quarter basis, we got approximately $4 million in Q1, $2 million in Q2, $1 million in Q3 and $1 million in Q4, so $8 million, $8.5 million of ICD-10 revenue, which this year in totality will be $1 million across 4 quarters. And so first quarter showed the biggest change down. Second quarter will be the second largest. And by third and fourth quarters, it will be almost completely out of the system. So 1 or 2 key products in each of the 4 areas that make up our workforce are performing well and driving growth, variable growth rates on them. Clinical systems that we call our clinical systems development platform was up about 24%. And we talked about the HealthStream Performance Center, it was also up, I believe, at almost -- do you have that number? It was on here. The clinical staff development area overall was up about 13.2%, compliance, up about 26% overall. So there's some really nice drivers that were offsetting the ICD-10 drop.

And our next question is from the line of Richard Close with Canaccord Genuity.

I want to hit on Provider Solutions. You talked about software-as-a-service versus software license, I guess, for the revenue adjustment. Can you talk a little bit with respect to you were able to maintain your operating income guidance for the year? I would have thought that, albeit the numbers are not huge, but I would have thought if your software license would be a higher margin than the software-as-a-service and maybe there would be an adjustment to operating income.

Well, not -- there will be less margin overall because there's a little less revenue and it is a high-margin revenue. But the comparable margin, gross margin on the 2 is not that different. It's just that revenue comes in slower and over a longer period of time for the SaaS business. We were able to manage the entire workflows across all 3 business segments, even with this change of expected performance in installed software, which again I view as a positive overall. We were able to manage the expenses and other areas across the business to deliver and have confidence in, in the operating income leverage that we have guided to.

Okay. And then also the strength in some of the workforce services, that's higher-margin business and that partially probably offset that as well?

Yes, I would say that HealthStream Performance Center, which we wanted to highlight because there's a new version out. And while the new version isn't necessarily -- there's no upgrade cost for existing customers, so it's not immediate growth in revenue. It is reenergizing our competitiveness in that area. And so we feel good about the product. It is a high-margin SaaS platform application. So we did want to call it out because we're in the middle literally of a 90-day window here of migrating customers. And as I mentioned, we've already migrated over 70,000 users to the new one and we're getting very positive feedback. But by the way, that update we used to also update the HealthStream Competency Center. And it is also part of this rollout as we're migrating customers. Those 2 together will probably move hundreds and hundreds of thousand users on them in the next 90 days. And the sales team is excited because we've specifically redesigned those applications, have fewer clicks, better workflows, to be responsive design on mobile devices, so they can work on iPhones and it makes all the whole workforce more mobile. So just overall, we see an improvement. And then don't forget that in Patient Experience, Gerry did call out a very specific movement in the gross margin enhancement on Patient Experience. And so that also has given us some confidence for full year about 500 basis points movement already. And then remember that's even while we're carrying the cost of the Laurel operation, which will wind down throughout this quarter. So those moves altogether are what has given us the confidence to reiterate our operating income guidance range.

Okay. On the Provider Solutions, just staying on that for a second maybe, with respect to the improvement in the backlog and I guess the process of restructuring of the teams there and focusing on the process to improve backlog conversion, can you comment at all on whether there was any negative impact over the last several quarters to the pipeline of new business? Because you had the backlog logjam and whether now that you're seeing improvements, whether the pipeline of new potential in business is improving?

Yes, it's probably worth a little historical review there. As you know, we acquired these 2 companies in the last 2 years or so. We've ramped up investments in product development and particularly in sales. The sales of the SaaS platform, obviously even per our discussion a few moments ago, we're doing very, very well. The backlog problem kind of as we imbalance sales with the implementation, operation and execution did cause some consternation to the pipeline. And we had brought in a lot of new sales. We, in fact, had won business from competitors and we felt good about it. Along that journey and several months ago and maybe even 1.5 quarters ago, we did lose a couple of accounts out of the pipeline that were frustrated with the backlog situation. In the last full quarter, which is this quarter, we feel strength again in the pipeline. The sales team has new energy and kick. And so we think that the cost in terms of pipeline is behind us of those challenges. But there were a few direct costs in maybe 1 or 2 accounts of a very robust pipeline that did -- we kind of brought them in and lost their attention. We'll fight to get them back, of course, in the next renewal cycle. But there were some direct costs to the lag. (inaudible) they were just lost opportunity to be clear, not lost revenue out of our model. And we'll fight to get them back as the new products are coming out of that segment are really compelling and will be introduced throughout the year and early next year. But it is fair to say that the backlog did cost a little bit of opportunity cost. I will also repeat that throughout the entirety of the first quarter, we feel back on our game and customers back in good graces. And as I mentioned, there's probably about half a dozen material go-lives that are all committed to firm dates over the next 2 months to go live on the applications that we sold them. So we feel again good about the progress.

Okay. And my last question would be any commentary around renewals or how those are trending and the outlook there in terms of renewals? And just then just how uncertainty in health care-related around repeal and replace, did you see any impact in terms of new business or renewals associated with that uncertainty?

So I'll kind of go backwards there. Macro level, our sales throughout the end of the year last year performed well. And in Q1, as we assessed it with our board just in a meeting a few days ago, we felt really good about what we call of our newer value pipeline. And so we felt that we were kind of -- we were ahead of schedule as of the end of Q1 on our new order value, which is a reflection of our sales progress. So the mix of products is maybe a little different than was expected as we did talk about installed versus SaaS selling. But at the macro level, we continue to perform to expectations and haven't directly seen or imputed any change from the macro on policy uncertainties. That said, I do think they exist and don't know when they'll manifest. In general, there's increased pressure on our customers, continues to be increased concern for their margins. We've probably seen -- we have definitely seen a very small uptake and a very immaterial, small number of bankruptcies. So we have seen 1 or 2 of those that maybe a little higher -- a slightly higher rate than we saw in the prior year. So that has had again an immaterial, a very small default rate, but we did see a small uptake in that. So that's probably maybe factoring the macro conditions. Again, so not affecting the sales pipeline but maybe some existing customers falling under pressure. Let's see, what was outside of the macro conditions? The renewal rates. Yes, so the renewal rates through Q1 broadly across all platforms were pro forma and good. And so no material changes to renewal rates to report. We have some -- a little bit of churn as we've gotten bigger in the core workforce base. I can recount one medium account that non-renewed and went and consolidate to another platform, which happens often in M&A scenarios. Sometimes it consolidates our way, sometimes it consolidates the other way. And in one case, we had a medium-size account that consolidated the other way. But overall, given the scale of the subscriber base, renewal rates remained strong on the subscription products.

And our next question comes from the line of Matthew Gillmor with Robert Baird.

I wanted to ask about the consolidation of the phone operations on the PX side. Can you help us understand the financial implications from that? I know you've just given some directional indicators. But will there be some severance and lease termination charges over the next couple of quarters to think about that aren't included in guidance? And if so, can you quantify it? And then second, how much do you expect you'll save from a cost perspective after this has been completed?

So Matt, this is Gerry. So first of all, the severance and separation costs were in the original guidance. This quarter, we incurred about $155,000 of separation costs. There would be somewhat of a piece in Q2 as for the final wave of people go off payroll and case in point move to Nashville. In terms of the overall impact is basis for overall guidance going forward into the year. So it's all baked in together (inaudible) less rent, for example, because the lease expires June 30, the people headcount obviously in the Laurel operation as well. But that's the -- it's in guidance, $155,000 or so in the first quarter.

Okay, great. And then as a follow-up, I wanted to ask about the resuscitation product. And I had kind of 2 questions around this. First, on the last call, Bobby mentioned that sales for the product could slow a little from the really strong trend you've seen in part because you're expecting a pull-forward of sales, ahead of some planned price increases in '17. Can you maybe just update us on the activity there and if the price increases have been pushed through? And then secondarily, can you update us on how hospitals are responding to the more frequent CPR training under the new RQI guidelines, if the product is priced any differently under the new more frequent training?

Sure. So it is true that on a relative basis on our portfolio, the performance in Q1 was strong but not as strong as some of the other areas so -- and relative to prior performance, has slowed down. And in some ways, that's favorable from a gross margin mix standpoint obviously to see something like HealthStream Performance Center, which is a higher -- much higher gross margin product, probably 90% plus, to be doing on a relative basis performing well is a good thing for gross margins. It will show up in later quarters. The product price increases have been pushed through broadly across the platform. And so I think we've been able to convince customers of the return on investment for those price increases. And I don't think there's a direct correlation to the slowdown, although again -- so it's relatively performing well, but relative to prior quarters, where it was our #1 lead product, it has slowed down a little bit, but it continues to perform well. The customers, we're finding, the vanguard customers that want to move to more frequent training are very receptive to the model and getting good results. And of course, this science shows that even though the cost of the hospital has effectively doubled because it moves to essentially an annual subscription from biannual, that it's shown to be clinically effective and have an ROI. And therefore, the value proposition is high on an ROI basis. But on an absolute dollar basis, it is a more expensive program to operate across the health care organization. Those customers that are early adopters are in for the quality and find value in the outcome and are willing to invest, even though the price is a higher price point. We'll see as we get into the bulk of the adoption, the acceptance, it requires a significant change management process at the hospital. And we'll see the customer rate of adoption as it gets into the middle of the adoption curve whether the longer implementation cycles and the more change management required to implement such a program is a hinderance to sales. But we would say right now, we're finding a lot of excitement for the program. And all the organizations that's focused on quality are willing to invest in such program.

And then I had one quick follow-up on the Provider Solutions commentary around moving to the SaaS model. And I know that's part of the longer-term segment plan. But would you characterize that decision as a decision made by HealthStream to more aggressively move to the SaaS-based pricing because you're having a good performance in some of your other segments in sales? Or is that just a demand factor in terms of how clients wanted to consume that process?

Well, a couple of things there. One, I think our sales team has really shown the features of discussing and selling subscription software over installed software as a preference. And so we essentially missed the relative velocity of both in our planning. And so we've accommodated for that in our revised guidance for that segment. But it has been the preference for many, many quarters now to demonstrate SaaS products. We think it's also customer preference. So we think it's combination of both. And so we prefer to sell on the subscription-based models.

And our next question is from the line of Scott Berg with Needham & Company.

This is Peter Levine in for Scott. Most of my questions have been answered. So just one quick one here, if can you talk about your sales investments for the year. I know it's 4 months into the year. But are there any changes being made to the sales teams based on current demand trends, product adoption or anything with the macro environment?

I think if you look on our website, you can see there's quite a number of sales positions that are open. We've had some challenges in filling them. They're a little complicated to find, people who have sales experience with clinical backgrounds to get the right mix. We've been a little slower to fill some of the open sales positions. But we do plan to make those investments throughout the year and continue to grow the absolute size of the sales organization at the rate we can successfully hire and onboard them. And so there are probably about a dozen or so posted and open position that we're seeking to fill this year. Those are, of course, factoring our budget, and we'll bring in as we can throughout the year. So really, there are planned investments that will show throughout the year. Sometimes in past, we would surge the hiring and use a lot of recruiting to try to fill them earlier in the year. This year, they're probably going to fill out a little slower throughout the first half and maybe even into the third quarter.

Scott, does that answer your question?

Yes.

(Operator Instructions) And our next question is from the line of Vincent Colicchio with Barrington Research.

Most of mine were asked as well. I'm just curious, the subscriber growth sequentially, how did that break between hospitals and its ancillary facilities?

I don't have the exact breakdown of this. But as we looked in the last few quarters, we've been winning a good number of subs from the post-acute settings and the secondary settings. So it's become an important part of the growth of the new subs model. And then we have, of course, the normal churn of hospitals, divesting of hospitals, hospitals acquiring hospitals. And we've seen some interesting and new announcements. Some of our larger customers -- interestingly, one of our larger customer is divesting hospitals. Another one announced a potential target of a health system down in Georgia, I believe, that would be a nice growth for us. So there's kind of that going on, along with the sales dynamic that is positive. But a meaningful number, maybe not quite the majority, is coming from those post-acute settings though in the new subscriber accounts.

And our next question is from the line of Frank Sparacino with First Analysis.

Just following up on the last question, of the kind of 4.6 million subscribers you have to date, can you tell us roughly what percentage of that is outside of the hospital setting?

No, I don't have that number directly in front of me. And sometimes, we have a little difficulty counting and here is why. If we land a large health system and historically they put all their employees on the platform, we didn't go in and parse out how many of them were in their home health division necessarily, their surgery center division. And so when we land a pure-play post-acute setting customer, and we have dozens of those, in fact, we think we have the market-leading brand in there, this is very clear and easy to calculate. When we go backwards in time, customers that we've had for a decade that put their entire census on our platform, they've been acquiring home health, physician practices, surgery centers. And we don't always have the exact breakdown or even go back and catalog them all. So it's a little bit difficult, but we do occasionally list our customer base that's growing in post-acute. And it is a blue-chip customer base, a couple of dozen really of blue-chip names that we mentioned in the past.

And then just one more, maybe for Gerry. The capitalized software this quarter was up $3 million, which is higher than it has been historically. What should we sort of expect and model going forward, Gerry?

The run rate for the first quarter is kind of what we do as the teams in their output on an ongoing basis.

And I'm not showing any further questions in the queue. I would like to turn the call back to Robert A. Frist for final remarks.

So thank you all. I'd like to remind you of the shareholder meeting again. What's the date of that, Mollie?

May 25.

May 25 here in Nashville, 2:00 p.m. at Cummins Station for all shareholders. We welcome any and all shareholders to attend the meeting. And then finally, to circle back around and make sure I do a proper attribution, the quote, "Broadly speaking, short words are best and the old words when short are best of all," is, of course, Winston Churchill. So Gerry channeling Winston Churchill today in our conference call. Thank you for everyone visiting and listening in on this call. We look forward to reporting the next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. And you may all disconnect, have a wonderful day.