HealthStream Inc (HSTM) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to HealthStream's Fourth Quarter and Full Year 2017 Earnings Results Conference Call and Webcast. (Operator Instructions) And as a reminder, this conference is being recorded.

I'd now like to turn the conference over to Vice President of Investor Relations and Communications, Mollie Condra. Please go ahead.

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

I would also like to remind you that this conference call may contain forward-looking statements regarding future events and future performance of HealthStream that involve 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 start, I'll now turn the call over to Bobby Frist.

Thank you, Mollie. Good morning, everyone. Welcome to our fourth quarter and 2017 year-end earnings call.

Reflecting back, those of you with good memories may recall last year's fourth quarter and year-end earnings call. At the time, I characterized that quarter as challenging from an operating income and EBITDA standpoint. Later, really in that same call, I told that our management team and really our entire company was committed to return to operating leverage in 2017 financial results, and a year later, we've done just that. We were able to go from 2016 operating income of $5.6 million to 2017 operating income of $9.8 million, a 76% increase.

I want to discuss the actions we took during the course of the year in each of our segments to achieve that result. After Gerry's detailed financial discussion, I'll address some of the ways we plan to continue delivering operating leverage into 2018 and really beyond that as well.

First, let's look at our workforce development segment, where we focused on higher margin products and creating a more open marketplace for our customers. We co-invested in solutions throughout the year with some of our new partners, and we purchased some content outright to improve margins and established interoperability between our platform and our partner's offerings. We also implemented innovative connectivity models, in allowing our new partners to reach our customers through our platform in ways not previously possible. All of these shifts resulted in better margins and more potential for steady growth in operating income and EBITDA.

Next, let's take a look at and discuss the Provider Solutions. Here, we worked through a tough backlog, some of which we inherited from the 2015- 2016 acquisitions. We also made strong progress towards integrating the 3 companies that we acquired -- they were Sy. Med, HealthLine and Morrisey Associates -- into a single entity under one leadership team. In doing so, we achieved some synergy and operating efficiency throughout the integration process. Furthermore, we did begin cross-selling some of the high-margin Morrissey products into HealthLine and Sy. Med customers and vice versa.

I also want to discuss quickly our Patient Experience business. Even though we divested the segment 9 days ago, 2017 saw us improve margins by closing our energy center in Laurel, Maryland, and converting many clients to lower cost, but higher margin survey modalities. Generally, for our customer, this meant shifting from a telephone based to an email or SMS text-based survey methodology. These actions that we took for our Patient Experience business improved operating income and EBITDA during the second half of the year.

After Gerry goes through a detailed review of financials, and he'll end with the guidance in his section, I look forward to diving into guidance and some of these longer term actions we're taking to improve operating income and EBITDA.

Thank you, Bobby. Good morning, everyone. I'll apologize for the cough in advance.

Here's a summary of our fourth quarter results, which include Patient Experience. Consolidated revenues were up 7% to $62.8 million. Operating income of $1.1 million was up 317% versus an operating loss of $500,000 in last year's fourth quarter. Net income was $3.9 million and earnings per share were $0.12 versus a net loss of $300,000 and a $0.01 loss per share in the fourth quarter of 2016. Adjusted EBITDA was up 37% to $8.4 million to $6.1 million in last year's fourth quarter.

Our usual investor call begins with a review of certain areas of our income statement, where we touch on highlights for each business segment. As most of you know, we announced the sale of our Patient Experience segment on February 12. So our fourth quarter results still include the Patient Experience segment, but we will focus on the Workforce and Provider Solutions, since these will be our continuing operations in the future.

Beginning the first quarter of 2018, we will report what was the Patient Experience segment as discontinued operations, and that will also include the gain related to that transaction. And originally, we also discontinued the ARIS metric. As we've mentioned in previous phone calls, ARIS did not include a complete look at our business as 2 of our 3 business segments -- Patient Experience and Provider Solutions -- were not included in ARIS at all. At the same time, the Patient Experience divestiture also creates an opportunity to develop a unifying metric between our Workforce and Provider segments.

Now our revenues. Revenues from the Workforce Solutions segment increased by $1.9 million in the fourth quarter of 2017, overcoming a $1.1 million decline in ICD-10 readiness revenues from the fourth quarter of 2016. In the fourth quarter of 2017, revenues from our Provider Solutions segment increased by approximately $2.6 million or 36%. The Morrisey Associates acquisition represents approximately $1.1 million of that increase. Revenues from other Provider Solutions products increased $1.5 million or 27% compared to the fourth quarter of 2016.

Now let's look at the gross margin. Our gross margin was 57.6% this quarter versus 55.4% in last year's fourth quarter. Several factors contribute to this margin expansion over last year's fourth quarter, and Provider Solutions' gross margin improved in 2 ways. As the deferred revenue write-downs have decreased, the gross margin has improved. Also, as we gained scale in the Provider segment, we are seeing margin expansion. The Provider Solutions gross margin improved to 67% in the fourth quarter of 2017 from 58% in last year's fourth quarter.

Let's turn to our operating expenses. Operating expenses for the quarter were up 6% over the fourth quarter of 2016. The combination of capitalized software investments and product development expenses were flat between this year's -- between this quarter and last year's fourth quarter. Software development remains a priority, and the capitalized software development investments have grown by 22% on a full year basis in 2017 over 2016.

Sales and marketing expenses were up about 6% over the fourth quarter of 2016, driven primarily by higher commissions. Depreciation and amortization increased 9% over last year's fourth quarter. This increase was lower than recent quarters, and reflects the full inclusion of amortization of acquired intangible assets from the Morrisey acquisition in both the fourth quarters of 2016 and 2017. It is important to note that depreciation and amortization still reflects increased levels of capitalized software development amortization as we continue to invest in product development.

G&A expenses in the fourth quarter 2017 increased over the fourth quarter of 2016. Compared to the fourth quarter 2016, G&A expenses grew by approximately 10.5% [to] about 14.6% of revenues.

During the fourth quarter of 2017, we continue to incur implementation and compliance costs related to the new GAAP revenue recognition standard, also known as ASC 606. These expenses were approximately $200,000 in the fourth quarter. On a full year basis, year-over-year basis, G&A expense has declined from 14.9% of revenues, down to 14%.

We also reported [bad] debt expense in G&A. And as we've mentioned in previous calls, we've seen an increasing level of payment volatility and credit risk in our customer base this year, and that is by a greater number of hospital bankruptcies amongst our customers in 2017 than in prior years. Our bad debt expense has increased from $640,000 in the full year of '16 to $1.8 million for the full year of 2017.

Operating income. Our operating income was $1.1 million in the fourth quarter of 2017 compared to what we've mentioned before, a $500,000 operating loss in the fourth quarter of 2016. The increase in operating income reflects revenue growth, leveraged on our product development and G&A expenses, while we overcame a $550,000 margin loss from the decline of ICD-10 revenues, the Morrissey deferred revenue write-downs and higher depreciation and amortization expenses.

Now let's look at our balance sheet. Our cash position and overall balance sheet remains strong. Our cash balance at December 31 was approximately $131 million, a $28 million increase since December 31 of last year. A contributor to this cash balance growth has been improved collections and accounts receivable management. The sequential drop in DSO from 71 days at December 31, 2016 to 58 days at December 31, 2017 was a result of a $3.9 million reduction in accounts receivable balances.

We have no outstanding debt, and our full $50 million line of credit capacity is available to us. We believe our overall capital position is likely to support our organic and inorganic growth opportunities and support other capital structure optimization and shareholder maximization strategies, as may be appropriate.

The proceed received for the divestiture provided ample opportunity for HealthStream to return value directly to our shareholders. Accordingly, the Board of Directors has declared a $1 per common share special cash dividend, payable by April 3, 2018 to shareholders of record on March 6, 2018. Net cash provided by operating activities and our cash flow statement has improved to $47 million for the full year of 2017 versus $24 million for the same period of 2016.

As you know, the President signed the tax law change into effect in December of 2017. That rule has required us to revalue deferred tax liabilities in the quarter when a tax law changes, not the period in which the tax law changes take effect. Accordingly, we recorded a $2.7 million reduction in our provision for income taxes directly related to the revaluation from our deferred tax liabilities. In turn, this dollar-for-dollar reduction resulted in a tax benefit and decreased our effective income tax rate.

Without the tax law change, and using our previously effective tax rate of 40%, earnings per share on a pro forma basis would have been $0.03 for the fourth quarter of this year. Our full year 2018 guidance includes our estimate of the full year impact of the new tax rates. For 2018, we believe the lower federal corporate income tax rate will result in improved returns to shareholders.

Before we conclude this part of the call with guidance, I will discuss ASC 606. We expect the primary impact of ASC 606 to manifest itself in 2 areas: professional services revenue and commissions expense.

As previously disclosed, the company adopted the new revenue recognition standard known as ASC 606, utilizing a modified retrospective approach, effective January 1, 2018, such that we will recognize revenue under this new standard for periods beginning on or after January 1, 2018, but we'll continue to report results in the periods prior to January 1, 2018 on the old revenue [recog] standard, known as ASC 605. Throughout the comparability against 2017 results, our financial outlook with respect to the anticipated 2018 results does not include the impact of ASC 606, but instead has been determined utilizing the ASC 605 revenue recognition standard.

Beginning with our financial statements for the quarter ending this quarter, March 31, 2018, the historical business results in the Patient Experience business for periods prior to the sale transaction will be reflected in the company's consolidated financial statements as discontinued operations. Accordingly, our financial outlook does not include, A, the gain on the sale of our Patient Experience business, which we completed February 12, or B, the results of our Patient Experience business during the period of 2018 prior to the sale of that business with the results of our Patient Experience in 2017 for financial outlook comparison purposes.

Yesterday -- yesterday's earnings release guidance -- pardon me. Yesterday's earnings release contains guidance for 2018 full year. For 2018, we anticipate that consolidated revenues will increase 6% to 8%, as compared to 2017. We anticipate that revenue growth in our Workforce Solutions segment will be in the 4% to 6% range, and our Provider Solutions segment to grow 10% to 20% when compared to 2017. Workforce full year 2017 revenues were approximately $178 million, and Provider Solutions 2017 full year revenues were approximately $37 million.

We anticipate operating income from continuing operations, which would be Workforce and Provider for 2018, to increase between 20% and 30% as compared to 2017. Operating income from continuing operations in 2017, excluding Patient Experience on a pro forma basis, was approximately $9 million. So once again, pro forma 2017, excluding the Patient business, operating income of approximately $9 million.

We anticipate that capital expenditures will be approximately $20 million through 2018, and we expect our annual effective income tax rate to range between 26% and 28% for 2018, and this range reflects the change in the federal corporate income tax rate, effective January 1st of this year. And finally, this guidance does not include the impact of any acquisitions that we may complete in the remainder of 2018.

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

Thank you, Gerry. Glad you got through with that cough. You made it all the way through.

So I'd like to highlight 3 strategic initiatives that have an impact on the 2018 guidance that Gerry just provided. These initiatives will also have a long run -- they enhance our long run objective of enhancing operating income and EBITDA.

The first initiative we are undertaking is the transformation of our resuscitation product suite. As a reminder, at the end of June 2017, we announced that our current agreements with Laerdal Medical for the HeartCode and RQI products will expire on December 31, 2018. HealthStream retains the right to and expects to continue selling HeartCode and RQI for the next 10 months, and we will provide uninterrupted service to our customers for the duration of their contracts, which can be extended through December 31, 2020.

HeartCode and RQI generated approximately $44.6 million of revenue during 2017. At the end of this year, we will stop selling those products and expect the revenue from them to decline in 2019 and run out over the course of 2020. In an effort to build a marketplace for our customer that presents more choices and lower prices for resuscitation training, we're committed to delivering a new suite of products to the market on January 1, 2019.

On the last earnings call, we announced 2 long-term partnership agreements to develop a new, higher-quality, low-priced suite of products. We are pleased to report that HealthStream and our new partners are tracking to launch this exciting new suite of products beginning in January of 2019. This new product suite will carry significantly higher margin than our existing resuscitation products.

In prior years, our HeartCode and RQI products were some of our highest growth and lowest margin products in our company's portfolio, growing over 20% each year. We have factored into our guidance lower expected sales on these products, which results in single-digit revenue growth in 2018 for this product category.

Of course, as we prepare these new product to go to market, our capital investments will increase throughout 2018, which is reflected in our $20 million capital expenditure guidance provided by Gerry. Therefore, the actions we are taking to create more choice for customers will result in higher margin in HealthStream in the coming years.

The second major initiative to improve our operating income and EBITDA has been the creation of a new business segment, Provider Solutions. Three companies that make up Provider Solutions have now been combined to form Verity, which was launched last month. In Verity's business, we're beginning to see higher gross margins emerge now that we are beyond the impact of deferred revenue accounting related to the acquisitions. In fact, in the fourth quarter, you can see the margins improving from 58% to 67%.

It's also exciting to note that we are expecting Verity in its new form to grow revenue between 10% and 20%. As a market leader in credentialing, privileging and enrollment, our new Verity platform gives us the opportunity to migrate thousands of customers to our higher margin, more serviceable SaaS platform in the coming years.

The third strategic initiative designed to improve our long-run operating income and EBITDA was a decision to divest our Patient Experience business. Despite the margin improvements in the second half of last year, the Patient Experience business was historically challenged to deliver the growth and profitability of our other 2 business segments. The divestiture allows us to focus our capital and our development resources on our higher margin business segments and products.

On February 12, therefore, we divested of our Patient Experience business to Press Ganey Associates for $65.5 million in cash. We anticipate recording a book gain on the sale of our Patient Experience business of between $20 million and $23 million. The proceeds received from this transaction provide an ideal opportunity for HealthStream to return value to our shareholders. So our Board of Directors declared a $1 per common share special cash dividend payable on April 3, 2018 to shareholders of record on March 6, 2018.

At the same time, in a separate business segment, HealthStream -- in a separate business agreement, HealthStream and Press Ganey entered into a 7-year agreement for Press Ganey to provide content to health care organizations on HealthStream's platform. Their curriculum, courses and certificate programs will be exclusively available on HealthStream's platform, with both companies marketing and selling this content.

We're excited to add another market leader to our growing ecosystem of health care industry partners. In fact, I believe we added over a dozen health care industry partners last year, and very excited to add Press Ganey to kick off the new year.

The outstanding solutions and service of our PX employees and provided customers over the years, it was noticed by many in the industry, including the leaders of Press Ganey. Those employees' commitments to our vision to improve the quality of health care ensured that the voice of the patient was always heard. We are grateful for their contribution to HealthStream and to the industry and hope they enjoy their new home with Press Ganey where they can continue contributing to the industry.

Before we go to question and answer, I'd like to acknowledge the announcement that was made, yesterday's press release, that Jeff Doster, HealthStream's Chief Information Officer, has tendered his resignation, effective as of March 30, 2018. After March 30, 2018, we expect to work together on a consulting basis to help ensure a smooth transition.

During this period, Jeff's responsibilities will be shared by the company's Chief Technology Officer, Jeff Cunningham, and our Chief Operating Officer, Eddie Pearson. We would like to express our heartfelt gratitude and thanks to Jeff for his leadership and service over the past 10 years.

Jeff, you truly made a difference in the trajectory and the culture of HealthStream.

At this time, I'd like to turn it over to questions from our investor community.

(Operator Instructions) Our first question comes from Matthew Hewitt with Craig-Hallum Capital.

Questions on the sale of the Patient Experience Solutions. Question on that segment, in particular, with the Press Ganey relationship that you announced, 7-year agreement; how quickly will some of those products start ramping within your platform, and maybe what have you kind of factored in from a contribution standpoint into your '18 guidance?

Sure, sure. So the agreement does call from some licensing of our infrastructure, and so we've factored in those numbers into our guidance and our thinking, so that's already in there.

Press Ganey has a limited amount of content initially. In fact, some of their content is the acquired content that we had just released. It will be rebuilt and rebranded and repositioned under the Press Ganey moniker. And so we'll be able to get some content to market quickly under the Press Ganey brand and take that to customers. Of course, they'll continue to enhance that content and build new content.

And so I would say that we'll begin to see some impact, which is factored into our guidance already, immediately because of the agreement, and then it'll take time to figure out what it's -- the real upside potential is. But as you know, the Patient Experience topic is a very important topic. It affects reimbursement. We've always believed in the link between improving those CAHPS scores, and in general, the Patient Experience being an important driver of quality outcomes in health care. And to have 2 industry leaders to be able to partner to focus on getting an outcome for our customers, HealthStream through employee development and Press Ganey through data analysis, education, training, development and all that they do, is a wonderful opportunity for both the companies and the industry.

So I believe it will have some impact, again, already factored in the guidance. That's in the base agreement, and we'll be exploring together the total opportunity over time.

That's great. And then maybe a separate question. You had a significant jump in subscribers, both fully implemented and contracted here in the fourth quarter, highest in almost 3 years. Was that a single customer coming onboard? Was there something different in the sales process? Maybe what drove that increase?

Sure. It was an exceptional period, so we do want to note that, as you think about on a go-forward basis. We've historically guided to think about 20,000 to 50,000 net new subscribers per quarter. Also, given our scale at 4.7 million, it is getting a little more difficult to add at the rates, particularly in the fourth quarter, that we added. That said, the fourth quarter was broad-based and strong and not a single customer. In fact, that was dozens of renewals where those customers expanded their base, including some big system early renewals where they added new users.

It was new systems. We added a big health system that had over 30,000 subscribers, that was brand new to the platform, and then a lot of base hits in the post-acute setting markets as well. So it really was a nice broad-based spread, including renewals, early renewals, new market penetration and new share.

That said, as we think about guidance, we've kind of lowered our internal expectations giving -- given the size of our customer base and just general market conditions. We've lowered our expectations, and we've kind of have everyone thinking in the idea of 20,000 to 50,000 net new subscribers a quarter as we move forward.

In addition, as you know, the competitive landscape has amped up in some of our product categories. And so we've anticipated a little bit more in our guidance, competitive landscape wins and losses, and so we factored all that in when we considered our growth for the next year.

Our next question comes from Ryan Daniels with William Blair.

Let me start with a quick one, just to make sure I have the housekeeping on the guidance correct. If we think about the pro forma revenues, that also includes some survey and workforce engagement business. So do you have the actual '17 revenue number that you were using to grow the 6% to 8% off of? We're thinking it's around $248 million, but I want to be clear with that.

Ryan, this is Gerry. So do you mean the cross-sell course written PX?

No, I'm just saying I know there's another piece of the survey business that's workforce engagement, et cetera, which I don't believe also -- so you gave us the 178 workforce, the 37 Provider Solutions, which is 215, but I know there's another element of revenue, not just the 215 we need to grow 6% to 8%.

But I mean, the employee engagement surveys?

Yes, yes. So what's the 2017 pro forma revenue?

That was the -- Ryan, the entire segment was sold.

Yes.

All these assets and revenues from all of our historical quarterly reporting. The entire segment was sold.

Exactly.

Okay. Including the Workforce segment?

All the assets and contracts, employee, physician and CAHPS survey instruments and content that was in that segment was sold. So it was a complete divestiture of the segment.

Got it. Okay, So we should be growing 215 million by 6% to 8%. That's your aggregate revenue guidance?

That's correct.

Okay, okay. No, that's helpful clarity. And then as my follow-up, you talked a lot about HeartCode and preparing for that end of the relationship. I'm curious if you've had the opportunity or you've spoken with your sales force about what the market reaction has been, i.e., do they feel that the value of HeartCode is so strong, they want to stick with it? Or are they excited about having broader, perhaps, less expensive opportunities to develop novel resuscitation?

Yes. So our sales organization is completely focused on selling the current product set, and in fact, is uneducated and unaware of the new products, other than to know that they are being built. So we're in full mode to continue selling the current products, position them well with customers, and do our best to sign contracts that extend through 2020. And so the entire client-facing organization is 100% devoted to getting those products in the market successfully.

Those products have been market leaders for years. They continue to have great brand recognition, and they're effective and high-quality products, so our customers are pleased with them.

That said, we know from history and other partnerships that customers value the level of innovation and integration that HealthStream can deliver when partners are fully integrated and signed up to our ecosystem as full-on ecosystem partners. And so we have seen plenty of market feedback from other product sets when we switched our focus to new, more integrated and more codeveloped products that there was tremendous benefit to that to our large customer base. So I still expect, and after seeing our progress on the development of our new products, they'll be received very well.

With that said, you can't underestimate the history here. We've just spent nearly a decade taking these products to market, the existing products to market as the best on the planet, and have the most clinical outcomes and impact, and we can't even begin that shift until January 1 of '19. And so there's no understating the size of the challenge. But also, commensurate with the large challenge is usually a large opportunity. So we're up for it and excited about it.

(Operator Instructions) Our next question comes from Matthew Gillmor with Robert W. Baird.

I wanted to ask first on the workforce growth in 2018. You talked about the slower growth rate that you're expecting. It sounds like that's driven by expectations that resuscitation will create a drag. Can you provide some detail in terms of how large you think that drag would be for resuscitation, and maybe what the underlying growth rate would be, excluding resuscitation?

Sure, sure. Well, I'll give some detail on that. The historically, that product set, I think, as I mentioned, grew in excess of 20%, and some as high as 27%, 25%. For the purposes of -- and as you know, it's one of our larger product suites within Workforce. So there are 2 dynamics there, and as I also mentioned, it's one of our lowest margin products. But nonetheless, from a growth-rate perspective, it was one of our highest year-over-year growers and in the mid to high -- mid-20s.

And for purposes of modeling on a forward basis, we're looking at the actual sales decline in the contract order value this year, and the result of that should have the revenue growing from that product in the 6% range, so a materially lower growth rate year-over-year, in one of the largest products in the category. If there is such a thing as a silver lining, all that growth wasn't necessarily translating into profitability. And so the margins on that growth were some of the lowest in our entire portfolio of products.

Got it. That's helpful. And then maybe one more on this topic. I was just curious about the Laerdal relationship. And is there any chance in your mind that you all come to terms and you have a dialogue around renewing it? Or are we still sort of in the same place as last year where there's not any ongoing discussions?

Yes. So unfortunately, at this time, the discussions are really on concluding and wrapping up in a professional way that supports all of our customers, all of the current products. And I think as we get close to finalizing terms of the wind-down of our entire relationship, we'll see what opportunities present for reopening dialogue, maybe not necessarily with Laerdal, but maybe some of the direct content providers in the segment, and so -- but right now, all of our focus and until such time as we achieve, I guess, what we're calling our wind-down agreements and kind of absolute clarity on how everything will be handled from customers -- customer relationships through 2020, we haven't put any attention towards any form of recovering those relationships.

Someday, obviously, in an optimistic sense, it would be a wonderful thing if our marketplace contained the products of all of these partners to bring in the ultimate in choice and selection. But right now, from an energy standpoint, it's all going into assuring the current agreements have a proper wind down. And of course, all of my energy is going into the new product development cycles and the new partnerships we're forming to build the competing product suite.

Our next question comes from Nicholas Jansen with Raymond James.

I just wanted to dig a little bit deeper into the ex Laerdal revenue growth that you saw in '17. Excluding ICD-10, we're calculating something like high single digit type core HealthStream revenue growth. And just want to kind of get your thoughts on, does that accelerate at all with these new products in the near term? Or is that more of a still a 2019 and 2020 event where some of the product development efforts that you've secured over the last 3 years really translate into meaningful revenue growth?

I think we've -- given the guidance by segment and even carved out the highest -- the declining growth rate of the largest product, noted a little bit of the challenges on adding subscribers organically although, again, except for fourth quarter we've tried to tamper expectations a bit there. So I don't know what to do other than to repeat the guidance range that we've just given as our best reflection of our thinking -- that the new product categories, they're all fundamentally part of what's going to drive growth at higher rates in the future, but they're not of the scale or magnitude of, say, the declines that we'll expect and have modeled in for the resuscitation suite.

Okay. That's helpful. And then thinking about the corporate infrastructure of the organization as you carve out Patient Experience, is there any sort of kind of trapped cost that we may be thinking about? Or how do we think about the underlying -- you're delivering good profit growth year-over-year in '18 over '17, but just wanted to kind of get your thoughts on kind of the underlying infrastructure pro forma.

Yes. I think if you back out all the costs and look at operating income, ex Patient Experience business, it's been around -- is it $9 million?

Yes.

About $9 million, and if you look at 20% to 30% growth on that, and you can pick your modeling point on that, some of that operating leverage growth is reflected in some of the synergies we're going to get from the divestiture, as well as all of the focus that I've told you about in each of the remaining segments to generate higher margins.

So it is a blended impact that's going to help us grow that operating income 20%, 30% over the prior year. And we noted in some of the preconference calls that -- pre-conference call calls that we hadn't provided clarity about the operating income sans Patient Experience. And so that segment at about $9 million shows that the operating income growth, 20% to 30%, is over the $9 million number.

(Operator Instructions) We have a follow-up from Matt Hewitt with Craig-Hallum.

Just a couple additional questions. Just for clarification, the ASC 606 change, it doesn't sound like that's going to have a material impact on the revenue. So when you're talking about these growth rates, that's -- those are true growth rates versus some software companies where we've seen there's a pretty dramatic hit at least in the first year. Am I thinking about that correctly?

Well, we might have a hit, so to speak, but on a comparable -- we gave all our growth rates on a comparable basis without 606, and so we're effectively comparing 605 '17 to 605 '18. And so I think everyone is going to have some kind of hit. But the most consistent way to do comparisons for, it looks like, the coming several quarters, is to do it the way we've done it, and apply the 606 -- I mean, sorry, the 605 on a comparable basis.

So when you report -- go ahead.

It'll have an impact. It will have an impact if you did a 605 to a 606 comparison. (inaudible) Yes, we're still working our way through all that.

Okay. So are we talking several million dollars? Because how are we supposed to model our income statement based out the 605, but then I would think your Qs are going to based off of 606, so there's -- there could be a material delta between the 2, correct?

Yes. We'll be reporting both. But on a comparable basis, the best way to have you help calculate the actual numbers that you could use was the 605 or 6 over 5.

Okay. And then one more question on the shift from Laerdal. I know -- and I think you've been asked this a couple of times, so I apologize, the last couple of quarters anyway. The American Heart Association card, how -- have you gotten any more information from your customers on how critical that piece of it is? Or whether or not as long as they're getting the right offering, that's providing the right training and education, that's what they're concerned about?

Yes. I would say, historically, that card has been important. It's essentially the only credential that existed, at least, in the minds of hospitals as it relates to that credential, that type of training.

That said, both across the globe and even within these assets in other segments, that's not the only or accepted way of achieving skill certification and competency in resuscitation. So it's kind of in my mind a market and policy level issue that doesn't need to underestimate its costs in the market. And so again, our -- the partners we've signed and we expect to sign additional partners beyond the 2 we've already announced but not named, will bring, other, we think, viable credentials to the market. (Inaudible) are not proven, and that is kind of the best that we all have, that HealthStream is going to find a way to power through that, and it will not be without its challenges.

Our next question comes from Frank Sparacino with First Analysis.

So just one for me on the Provider side of things. The growth outlook there is strong, Bobby and Gerry, and I'm just curious, that's a market that's highly competitive with some different players bundling in those capabilities in different solution sets. So curious, Bobby, from a competitive standpoint, how you think you're faring? Why do you think you're winning? Just any color around that business would be great.

Sure, sure. As we rolled the Verity platform, it's very exciting because the value proposition and what distinguishes it is increasingly clear. By combining credentialing, privileging and enrollment as 3 areas of strength, and having a full area suite to manage those workflow prophecies, we've also done things like overlay the Juice Analytics platform, so that we can see more benchmarking on cycle times. We've had this focus on not just platform but also content, and by that, I mean things like a privileging library that goes with our privileging system.

We've also focused on interoperability, and so things like credentials earned in the HealthStream Learning Center are being auto populated into our credentialing platform, reducing the work of the health systems to actually do the validation and vice versa actually. We're beginning to use the data validation services of Verity in our running platform customers as well.

So I would say the completeness of the suite, our focus on thinking of it as platform and content and data and analytics, and not just platform, is a nice differentiator; and then integration with existing platforms where credentials are stored and earned, like our HealthStream Learning Center, are all beginning to help with the differentiation.

Our focus has been on the medical practices where we have over 1,000 medical practice on the platform and the acute care health care settings where we're a market leader. There's some areas for expansion of growth that -- in the product suite itself, and we're beginning to see that emerge out of our product development suite. But we're most excited, the fast Verity platform is now announced and it's beginning to be made available to customers that integrates all the connectivity, integration, data, pre-populated data fields, pre-populated content such as privileges, all in the platform. So we think as far as the needs of an acute care system to manage people through the -- almost the revenue cycle process of on-boarding a new physician, all the way 'til revenue generation, getting them enrolled with their insurance providers, we have, we believe, the most complete suite of products that meets the workflow needs of the acute care health systems, and we think that's beginning to show in our win rates.

Our next question comes from Vincent Colicchio with Barrington.

Bobby, I'm curious on the Workforce side, the growth in the ancillary market, has that been less than you had expected? And if so, is there something you could do better?

Well, maybe you're referring to the post-acute segments compared to the acute care segments. I'm not sure if...

Yes, yes, the post-acute segment, yes.

Yes. Actually, that's helping growth. If you look at the fourth quarter, we always kind of said to expect 20,000 to 50,000. When we beat that, it's usually because we have a nice mix of new customers coming in from all the settings, the new settings, which is kind of the newer market opportunity for us. So the acute care setting is being a regular contributor, but now the post-acute settings are helping us keep the subscriber growth rate up.

As you know, we've described in our filings that our target audience for kind of the maximum subscriber audience, so the currently defined marketing opportunity is around 8 million. And you can see from this release, we're at 4.7 million. A lot of that expansion opportunity, it's a nice balance from those other post-acute, pre-acute settings. And so I would say they're kind of a steady, integrated opportunity in the way we think of our market opportunity.

And then on acquisitions, are you getting close to anything? And what will be your top of list in terms of priorities?

Well, I know you know that I can't comment on that, but I will say this, that now that this divestiture is complete, which obviously took many, many cycles, lots of planning and along with the alliance and the dividend, it was actually a fairly complex transaction, took a lot of cycles out of management. With that behind us, we can turn our attention back to supplemental deployments of capital and juice up the pipeline and start to work on exciting opportunities.

For example, the minority investments concept, the investments in content partnerships has started to pay dividends and margin expansion in just the last reported year, but we see even more opportunity with that, almost a.k.a. Netflix like, if you will. We're seeing opportunities for targeted investments that can boost margins in certain areas.

In addition to the M&A pipeline outright, which we've always been a part of our growth story, we do expect and plan on and work towards achieving, deploying our capital into full-blown acquisitions. So without commenting on specific opportunities, I'll say they do exist, and we'll have more time to actively work on them now with the divestiture complete.

We do have a follow-up from Brian Hoffman with Canaccord.

First one on Laerdal, with respect to the existing book of business, do you have any visibility -- and maybe it's too early to tell, but any visibility into what percentage of that business would be coming up for renewal in 2019?

Yes. Those contacts are typically 2 to 3 years, and right now, we can't sign any contract that extends beyond the last day of 2020. And so the easiest way to think of it is that maybe the historical average length of those contracts was a little more than 2.5 years, and that will be shortening as we get closer to the -- where we're limited by agreement. We can't sell beyond those dates.

Great. And then last one or one more on bookings. Looking back over the past couple of quarters, you talked about bookings being below expectations in 2Q, and then it bounced back in 3Q. Can you talk a bit about how bookings trended in 4Q? I would assume that it might be safe to assume that, generally, considering you talked about paying higher commissions in sales and marketing and all such things can (inaudible) subscriber adds in the quarter that bookings would have been strong, but if you can talk about that a bit, that would be appreciated.

Yes, sure. sure, sure. The first half, we definitely were a little nervous. I think the Q2 call, you're talking about, we were a little nervous because we were a little off-track for our year-end objectives. We also reported, as you just recalled, a kind of recovery to get us back on track in Q3, and then Q4 was strong. And you've noted the exact reason, so I'll repeat them, but you picked up that commissions were higher. That is somewhat related to beginning the implementation of the growing backlog and the new sales that came in the quarter were strong, some early renewals that boosted subscriber counts along with new sales. So overall, the sales team set some really nice records in the fourth quarter for the company and really got us back to goal and back on track.

That said, we've been more cautious as we think about this coming year, given that we're now down to this 10 months of selling on existing products. It's going to get a little harder to sell those products, given our market share and the competitive landscape for some of the segments we offer. We've kind of lowered expectations for some of the organic growth and sales rate as we enter this year.

That said, all of the moves we've been making should improve our cash flow and cash from operations and EBITDA. And we think we're making the right moves to make it a fundamentally financially stronger business in the coming months and years.

I'm showing no further questions in the queue. So I'd like to turn the call back over to Mr. Frist for closing remarks.

Thank you. Thank you to our employees for wrapping up another strong year. Thank you to Jeff Doster for his ongoing contributions and historical contribution to our growth. Thank you to our investors for following our story. I look forward to reporting our next earnings call, as it's made available.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.