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HealthStream, Inc. (NASDAQ:HSTM)

Q2 2013 Results - Earnings Call Transcript

July 23, 2013 09:00 AM ET

Executives

Mollie Condra - Associate VP, IR and Communications

Robert A. Frist, Jr. - CEO and Chairman

Gerry Hayden - Senior Vice President and CFO

Analysts

Jeff Garro - William Blair & Company

Matt Hewitt - Craig-Hallum Capital Group

Richard Close - Avondale Partners

Frank Sparacino - First Analysis

Matt Hewitt from Craig-Hallum

Operator

Good day, ladies and gentlemen. And welcome to HealthStream second quarter 2013 earnings conference call. At this time all participants are in listen-only mode. Later we'll conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to hand the conference over to Ms. Mollie Condra, Associate Vice President, Investor Relations and Communications. Ma'am, you may begin.

Mollie Condra

Thank you and good morning. And thank you for joining us today to discuss our second quarter 2013 results. Also in the room with me are Robert A. Frist, Jr., CEO and Chairman of HealthStream; and Gerry Hayden, Senior Vice President and CFO.

I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the 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.

And with that, I will turn the call over to our CEO, Robert Frist.

Robert A. Frist, Jr.

Thank you, Mollie. Good morning and welcome to our conference call. We'll of course do some financial metrics and highlights. We'll cover operational performance and some product updates as well. I've got to start first with financial highlights, it was a strong quarter, with consolidated revenues up 24% to $31.9 million and operating income up 2% to $4.1 million. Net income came in at $2.4 million in both the second quarter of 2013 and it was the same in second quarter of 2012. Adjusted EBITDA was up 8% to $6.4 million and all these numbers are reflective of strong and well planned quarter for HealthStream on the financial performance metrics.

As you may recall, in the last quarter, we introduced a new metric, an additional measure of progress, as we try to capture the growing nature of our solutions sets that we offer to our customer base. The new metric, we refer to as the annualized revenue per implemented subscriber and it represents the quarter's revenue from our internet based subscription products divided by the average implemented subscribers for the quarter and then annualized.

In the second quarter of 2013, our revenue per implemented subscriber was $29.40 which is about 13% higher than the second quarter of 2012 and from the third quarter of 2011 to the second quarter of 2013, we've enjoyed a steady upward trajectory on this metric and in our earnings release last night, we put a table in that reflects several of the quarters, so you can review the trajectory. And the metric itself, we think, helps better capture the fact that so many new products and solutions are being sold in to the customer base.

Given the expansion of our suite of solutions over the last several quarters and really the last couple of years, we're working to introduce additional new metrics in addition to the annualize revenue per implemented subscriber, historically our HealthStream Learning Center was the single core application on our platform and represented the core product set that we sold to customers and so we made it a routines report on the number of subscribers on HLC, the HealthStream Learning Center along with renewal rates that reflect renewals on the HLC in our quarterly earnings releases. At this time, however the range of solutions have significantly broadened and there are now several applications on our platform. Like the Competency Center and the Sim manager products and the SimView products, there are essentially many new ways to join our ecosystem and come on to our platforms and we continue to look for new metrics to capture this phenomena as most of our historical metrics are really centered around measuring the progress of the HealthStream Learning Center only.

So until that time and of course recognizing that we already have one strong new metric in front of everyone, we'll review the traditional, the more traditional historical metrics. Overall for the quarter for example, we implemented 84,000 new subscribers in the second quarter, bringing our total implemented subscriber based to 3.116 million subscribers. We contracted 93,000 new subscribers in the second quarter bringing the total to 3.260 million contracted subscribers. And that exceeds our longstanding quarterly goal of contracting an additional 20,000 to 50,000 new subscribers per quarter.

So we're excited to have two strong measures of implementation which is tied to revenue recognition and contracting new subscribers which is tied to new sales as measures of progress on again the core HealthStream Learning Center component of our expanding platform. As a backlog we currently have 144,000 subscribers that are in the process of implementation and we continue to make steady quarter-over-quarter progress implementing the backlog of contracted subscribers.

Renewal rates for the second quarter of 2013 was strong, we delivered 102% based on full time equivalents or FTEs and 104% based on contract value. Our renewal rates reflect the addition of subscribers compared to previously contracted amounts combined with any pricing adjustment that may occur at renewal. We are particularly pleased to see the high renewal rate this quarter since the number of subscribers up for renewal in the second quarter was one of the highest in the last couple of years, so as a more heavily weighted quarter in terms of the importance of these metrics.

We've had over a quarter of a million up for renewal in the second quarter. Since some of our renewing customers chose to add subscribers to their contracts, the renewal metric exceeded 100% in the quarter. For the trailing four quarter period ending June 30, 2013 customers representing 96% of subscribers that were up for renewal renewed, while our renewal rate based on contract value again for the trailing four quarter period was 97%.

On the operational front, growth comes with some growing pains. For example in the Middle Tennessee market remains challenging to hire the technology personnel needed for our growth. We continue to develop innovative recruiting strategies and continue to grow and add to our base of Talent in and across HealthStream just not quite at the rate that we expected. And so we continue to work in creative ways to move up the rate of hiring. That said, we are adding and welcome dozens of new employees in the last quarter and we want to welcome them and also let them know that our office expansion process is underway in Nashville. So we expect some new office space to come online later in the year, which also requires capital outlay beginning in the second half of this year.

In other updates, of course a very important progress as we launch our strategy this year for the post-acute market. Again, we officially declared a company focus on penetrating the market opportunities in the post-acute market space. We announced that in the last quarter earnings release and we began to set the stage for entering that market really over the last year. We've have announced some new hires and adding the staff that brings particular expertise and I'm excited to report the second quarter of this year just in the last 100 days really, we've contacted for two large organizations that are leaders within the respective spaces in the post-acute market.

Brookdale Senior Living and Almost Family are the two new anchor tenants for post-acute care market strategy. Brookdale is a public company traded on the New York stock exchange under the symbol BKD it's the nation's largest provider of senior care services and they have about 50,000 associates across 650 communities in 36 states, and they have a capacity to serve over 67,000 residents.

So we're excited to welcome Brookdale as a customer and really an anchor tenant to our strategy of launching the post-acute care market. Also important, Almost Family a public company traded on the NASDAQ Exchange under the symbol AFAM is the leading provider of home healthcare services, employing approximately 5000 employees in 170 branches across 11 states. We welcome the Almost Family organization and their thought leaders as we work together to develop, train and develop their talented workforce across these 170 locations in 11 states. The length of the contracts for Brookdale and Almost Family importantly are long-term five years and three years respectively.

Importantly, Brookdale and HealthStream also plan to co-develop new courseware for the expanding senior care market by joining the largest provider of senior care living services with the largest provider of learning and talent management solutions in healthcare. We believe there is a unique opportunity to create innovative new products, services and courseware for the senior care workforce. Newly developed courseware resulting from the partnership will be offered exclusively through the HealthStream system and through our growing ecosystem in that marketplace and more generally to the post-acute care markets as the content that we build together expands.

We look forward to reporting further progress on the post-acute care space as we continue to build out the full strategy. Again, we believe the post-acute care space is gaining exciting traction and we look forward to more financial progress in this segment next year. This is really our strategy here, our launch here and getting all the components in place.

Also, importantly our SimVentures' collaborative arrangement with Laerdal made significant progress. Revenues from this product suite, from the SimVentures' product suite grew a 105% over the same period last year delivering $802,000 in revenue, so materially higher quarter over the prior year and strong growth rate.

Several pilots for the new SimManager products are now live and we have three multi-system health, multi-facility health systems contracted for SimManager during the second quarter. The SimView product which was a major and important contributor to the revenue growth in the quarter, was the result of fulfilling back orders on a new version of their products.

So some of the growth in SimVentures can be attributed to ultimate shipping of the new SimView products and fulfillment of back orders have been taken over the last several quarters. So we don't expect that exact pattern to repeat but the SimView products were strong contributor and that product has a strong forward pipeline as well.

The number of content scenarios in other products sold to our SimStore [site] continues to increase, showing a 33% increase in the second quarter of 2013 compared to the second quarter of 2012.

Also importantly to talk a bit about our acquisitions, in the second quarter, our Sy.Med product OneApp to grow. We added over 32 new clients for the Sy.Med OneApp credential product set during the second quarter of 2013.

The Sy.Med credentialing solution, we believe provide the unique dimension to our talent management strategy. We believe managing the credentialing and privileging processes and the paperwork associated with onboarding physicians is an important part of managing the personnel and healthcare and it's a unique dimension to the talent management in healthcare. So we're excited to see Sy.Med make steady and continued progress on their product lines.

Within our research product segment, some of the product in-line in research were challenges like the employee and physician survey. They didn't perform to expectations but importantly, the majority of the business for the research product lines comes from the patient insights product lines which we saw continue to progress on.

And those are the product lines in research that generates the recurring and consistent revenues. The patient survey revenues increased 13% over the second quarter in 2012. And we invested in our online survey infrastructure during the second quarter expanding our capabilities to support CG-CAHPS, our clinicians and groups' consumer assessment of health providers and surveys with a new modality of delivery the online modality in addition to the phone modality.

So overall, the more important part of the research business grew a solid 13% in the second quarter with strong attribution to the CG-CAHPS growth, while also making improvements in the infrastructure to deliver the CG-CAHPS work introducing the online capabilities with continued enhancements in our area in the not too distance future.

With that coverage, there is still a lot more to go and exciting product coverage in the second half, we will take a little break here. Turn it over to Gerry Hayden, our CFO to do a more detailed look at our financials and maybe a bit of our guidance for the remainder of the year.

Gerry Hayden

Thank you, Bobby and good morning everyone. Bobby has touched on many these quarter's metrics. I'll provide some additional contest of our financial performance. Consolidated revenues are up 24% over last year's second quarter owing to several key considerations. Learning & Talent Management revenue increases continue to be driven largely by core growth, both in terms of subscribers and revenue per subscriber.

Subscribers have grown by 12% since June 30, 2012. As Bobby mentioned, annualized revenue per subscriber has expanded by 13%. This combination of expanding customer base consuming more courseware with the foundations for the overall 30% revenue growth for Learning & Talent in the second quarter.

Our 2012 acquisitions Decision Critical and Sy.Med development continued to perform well as the revenue released Sy.Med contributed $1.1 million to this quarter's revenue. Continued growth of CG-CAHPS Survey volumes contributed to double-digit 13% patient survey growth and research as Bobby just mentioned.

The pricing for CG-CAHPS is a bit less than our other patient categories, is creating some pressure in the Research segment. CG-CAHPS Surveys come reliant in phone and e-mail methodologies, with phone having a higher cost of fulfillment.

However, we are moving for an e-mail modality that had a potential to improve margins. As Bobby just mentioned as you already know, the patient category is our largest Research product line is a source of recurring revenue for us.

Year-to-date operating income grew by 14% in the first six months of 2013 versus the first six months of 2012. As our 213 guidance indicates and as we discussed in prior conference calls, an important thing for 2013 is investment.

The investment theme shows itself in a variety of ways, where the more obvious is in form of higher labor cost, both in terms of employee account and also contract labor. One of the examples is product development expenses as a percent of revenue.

As we have said [pharmaceutical] revenue it (inaudible) in the category has increased to 8.8% versus 8.2% the same period last year, resulting a 33% increase in absolute dollars over the prior year.

Compared to prior year and last year second quarter, we've incurred higher operating expenses in royalties, personnel additions in contract labor, sales commissions, depreciation and amortization, non-income business taxes, merger acquisition program and other channel of expenses. In addition, this quarter we accrued $230,000 to Sy.Med contingent earn payments for the strong closing performance.

We continue to review and evaluate factors in business development opportunities and our balance sheet remains well positioned to meet those opportunities.

Our cash balances as of June 30, 2013 were $1.4 million, up from $95.6 million since March of this year March 31, 2013. And while we seek these opportunities, we carried our discipline over through the strategic fit and valuation. Finally, 2013 revenue guidance is growth between 23% and 25% for the full year of 2012.

To afore this growth range, our segment growth raise are as follows, Learning & Talent 26% to 28% over last year and research between 8% and 10% over 2012. We anticipate the 2013 full year operating income will be approximately 6% to 10% over full year 2012; capital expenditures will be between $11 million and $12 million. Our effective tax rate will be approximately 41% to 44%.

Thank for your time, and now I will turn the call back to Robert.

Robert A. Frist, Jr.

Thank you, Gerry. So I would like to dive in some solutions update and product line updates. During the second quarter of 2013, we continue to see progress for two of our account management product offerings, the HealthStream Performance Center and the HealthStream Competency Center.

In the second quarter, we strengthened these product offerings with partnership with business and legal resources. We are adding 1,000 job descriptions to this product set to be part of the content offerings that support these platforms. So we have a more complete solution set now for the customers.

The job descriptions that will be included cover the full workforce and hospitals, including clinical and patient care categories. The descriptions are pre-written, they are legally reviewed, they are ADA complaint and they will be fully integrated with the platform. And so just add the resource and another unique component to the talent management platform components of the HealthStream Competency Center and HealthStream Performance Center kind of strengthening the overall talent management strategy for healthcare organizations.

The talent management space, in general, is an exciting and dynamic environment, and our success with these products is definitely attracting an increased attention and increased competition in healthcare vertical. We are focused on building core solution sets for the key challenges facing healthcare organizations, like improving resuscitation rates, improving the onboarding process for new employees, meeting the federal OSHA safety training requirements and, in doing so, building out a robust talent management platform underneath it.

Our competitors tend to be more focused on pure HR functionality and our solutions with combined platform, content and data are important because they saw specific healthcare problems. That said, there are other vendors emerging that are focused on the HR software component and they are building capabilities that we don't currently offer, some of which we have an eye to building and some of which we will never build.

So in some of the doorways where we enter to sell our services, like human resources, we continue to see more and more competing organizations and businesses, in other doorways like the CNOs, the compliance and risk management officers. The competitive landscape remains more focused, where our products remain highly differentiated and where there are fewer competitors.

So this exciting and dynamic environment and growth comes with the increased attention of both increased awareness of HealthStream in general and increased competition in the marketplace. We're expanding our platform and our products in unique and interesting ways to help health organizations achieve specific business and clinical outcomes with their talent.

Two of the areas where we're doing as exceptionally well are with our ICD-10 product suite and our hardcore product solutions. In the first quarter of 2013, CMS reaffirmed deadline of October 2014 for the required transition to the ICD-10 coding system. We believe this regulatory deadline will continue to be a steady driver for our training solutions for the new coding system.

We have partnered with Precyse who offers outstanding courseware for ICD-10, and we bring up this joint offering to our collective and growing customer base as a means of training their respective workforces. Through our partnership with Precyse, we have ICD content for the full range of hospital employees that need training including coders, clinical staff, physicians, non-clinical staff and our price points for those different staff and their adoption range very broad from $30 to $250 per users for the subscription, depending on the audience and the timeframe commitment.

The gross margins for the Precyse products are 50% as we have a 50-50 partnership with Precyse on our ICD-10 product offerings. We continue to see steady sales patterns for our ICD end solution. In the second quarter of 2013, over 80 new contractors signed for ICD-10 solution with approximately one-third of them including -- that included -- that were at new order value greater than $100,000, so again a strong new contract signing period in the second quarter on top of the strong first quarter.

The majority of new contracts are approximately a 24-month period, where we could expect revenue recognition and implementation of those contracts over a 24-month period, which is a little shorter than our typical three and four and five-year systems agreements.

We are excited to be leading industry in providing the best ICD-10 training solution on the market. Given the intending deadline, we believe it is reasonable to expect our sales velocity will taper as we approach the deadline of October of 2014. It is also reasonable to expect revenue for the ICD-10 products to begin to taper after the October 2014 deadline and more likely in 2015.

The strong deadline driven growth are challenged in 2015 is to backfill such a successful product offering by developing a maintenance revenue stream and a renewal strategy with regard to this product line. To be clear, we believe our ICD-10 products will continue to drive growth for the remainder of 2013 and throughout 2014.

We continue to see strong demand for our HeartCode suite of products. This product suite is focused on teaching multiple levels of resuscitation skills to healthcare professionals and there is offer through our partnerships at Laerdal Medical and the American Heart Association.

In the second quarter of 2013, the total number of HeartCode BLS certifications was 30% higher than in the second quarter of 2012. Among those certifications we saw a 39% increase in the use of the voice-assisted mannequins for the certification process, which is the unique aspect of HealthStream to join offerings with American Heart Association in Laerdal to have this combined online and mannequin-based certification process is the proprietary combination of services that HealthStream offers. It's great to see such high rate, 30% year-over-year on the certifications and 39% increase in the use of voice-assisted mannequins in the certification process.

So we've seen similar growth rates in the complementary ACLS and PALS programs for HeartCode as well as the BLS HeartCode products. So the entire suite of HeartCode products continues to perform well.

Looking forward and as we think about the remainder of the year, we are very excited to be holding our Annual Customer Summit here at Nashville, Tennessee in October 15 to 17 here in Nashville and right in the heart of Downtown Nashville and we'll be holding this summit in Nashville's new Music City Center which is a state-of-the-art 2.1 million square foot convention center which just happens to be located only two blocks from our corporate office. So it'd just be very exciting to welcome hundreds of new customers to Downtown Nashville, just an earshot and a short walkway from our headquarters. We expect an exciting agenda for the attendees, over 20 exhibitors that are partners of HealthStream will be at the conference, and we have over a 100 professionally run and managed and exciting topical sessions for the attendees this coming October.

We look forward to welcome the customers this exciting event and providing you further updates in the third quarter earnings conference call, which will be held the following week post the summit in October. So at this time, with all those exciting announcements behind us and congratulations to our HealthStream employees and over 600 strong that are helping drive all this growth, service all these customers and manage and [rather tied] office space I will add in the last several months.

I will turn over to the operator for questions from our analysts and financial community.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Jeff Garro from William Blair & Company.

Jeff Garro - William Blair & Company

I want to ask a few questions on the Brookdale agreement. So I'll just start off with, what can we think about a start date or implementation roadmap?

Robert A. Frist, Jr.

It will be throughout the second half of this year. The new partnership, it's a little different than a normal since the new market. We will be ironing out the deployment model that they seek and their workforce is little different [than] the acute care market across more geographic region and smaller more remote facilities. We are also working out the details of the partnership around content development.

So I would say it's really throughout the second half of the year, we bring it online at the pace that they are suited with, but I would expect full implementation by early next year. A lot of this is dependent on how we work to facilitate the entire partnership solution throughout the course of the year and dependent on their desire for speed of deployment.

Jeff Garro - William Blair & Company

Great. And given that you are full-time working on developing the full content platform and brining them on as a development partner, should we think about a lower HLC fee for this agreement?

Robert A. Frist, Jr.

There are many elements to this agreement, of penetrating a new market and I think that's a fair assumption. They also bought a more complete bundle of our solutions and we often offer bundle pricing. In addition as you noted they are very unique dimensions to our partnership which include content development, potentially co-investment in new solutions and so the nature of this agreement is different and therefore it's probably safer to assume a more bundled pricing strategy kind of across the board for that account.

Jeff Garro - William Blair & Company

That's fair so I guess the follow-up is given the unique nature of that agreement it's fair that this does not change your view going forward on your ability to price products similarly in the post acute and acute settings?

Robert A. Frist, Jr.

Well, again I think what I would say just about the whole market is that we have been very deliberate in our strategy for entering the market, announcing it and beginning the initial hiring in Q1 and then deliberately bringing on two of new anchor customers that are really more development partners as we iron out all of the specifics of what's unique about this market, what do we need to do well and I would say the kind of all material financial progress for this marketplace would begin more towards next year than in this year and so really think of all of these steps as laying the foundation and part of the strategic steps to build hopefully more meaningless opportunity in the post acute space which we've defined as employing about 3 million workers.

Jeff Garro - William Blair & Company

That's fair and so you can provide a timeline sort of when the [currently] developed products will be generally available to the larger post acute market?

Robert A. Frist, Jr.

No I think again it's a long term agreement, five years and I imagine we use the second half of this year just to define the strategies and hopefully begin building some of the new content products but it's more of an open ended partnership over a five year term and we will be relying heavily on their guidance about the rate of development and what we're enthusiastic about is the term commitment and the strength of the partnership that is get go but the planning for everything is still largely in front of us.

Jeff Garro - William Blair & Company

Got it. Then one final question and I'll hop off. You mentioned that this was a full-year agreement and just specifically the compliance solution. You mentioned, I was hoping we could get a little more color on whether that's something that's unique to the post acute market or initially the Brookdale and that's something we haven't heard a lot about previously I believe?

Robert A. Frist, Jr.

Well, we were excited to see their interest in the Compliance Solution is focused on the regulatory requirements that they face in our and their market. HealthStream has an adapted library for the post acute space including the home health and long-term care for the regulatory compliance, content libraries. And they are a little bit smaller libraries than the ones for the acute care space but they meet many of the regulatory needs and that library needs to expand and get even more tailored to the market. So the Compliance Solution is essentially some of the bundled content libraries that come with the platform subscription.

And then we're really excited to see their interest in their clinical competency development for their work force so they also are subscribers to HealthStream Competency Center and there are a lot of implications there about building out the competency dictionary libraries for that market which we plan to do together. So again you see very developmental stage concepts here but it is exciting to see them go on the compliance journey with us and the clinical competency development journey with us and we're excited to be a part of developing the skills, knowledge of their 50,000 person workforce over the next five years.

Jeff Garro - William Blair & Company

Great, thanks for taking the questions, guys.

Robert A. Frist, Jr.

Sure.

Operator

Thank you. And our next question comes from Matt Hewitt from Craig Hallum.

Matt Hewitt - Craig-Hallum Capital Group

Good morning and congratulations on the good quarter. Maybe just taking with the following or prior theme Brookdale and Almost Family, congratulations on the anchored tenants. How has that sales process been different so far and what insights have you gleaned from that process that will help you, as you get into 2014 that really start to make a bigger push into that market?

Robert A. Frist, Jr.

Yeah it's just exciting because there was a sales process. But I would say given our approach to this market again that the deliberate nature of it and you could call it not a rush to sales but a rush to strategy development. The negotiations with both organizations was more about partnership of as much about partnership as sales and getting the right components in place for a better content development understanding the needs of the market. I had expected some of next moves in the market be to assemble a strong advisory board. And so hopefully get the sense for this whole this year around this market.

So the sales process was long, but it includes partner negotiations, they're atypical of the sale, very atypical, partnering agreements for example on developing competency statements for the workforce and in the post-acute space for the unique dimension of the relationship. Efforts to build and identify content library that are needed either built or they help us identify where to acquire content libraries again. So the nature of relationship wasn't just a vendor selling software, it's about a journey together to build new and improved solutions for this vertical.

Matt Hewitt - Craig-Hallum Capital Group

Okay, thank you. And then shifting gears, a couple of follow ups, Sy.Med it sounds like had a very strong quarter in the second quarter. What was the dollar contribution or some of additional color there that helps us understand, what it contributed in the quarter and what's your expectations are for the back half of the year?

Robert A. Frist, Jr.

Right. So Sy.Med had strong performance and had several periods in the last several quarters, where they either set new record sales volume or new revenue records or new larger account acquisitions. So the Sy.Med team has been delivering, it seems like in every quarterly report to me some form of new record, which is exciting. We still and so we're excited about that and we hope and expect they'll continue to show progress, I think they delivered about $1.1 million of the quarter's revenue in total, which is strong.

That said, our vision for where the product set needs to go is very exciting, we're still very early to leveraging it in other channels. For example, they tend to be stronger in the physician office channel, in fact much stronger than in the hospital channel. And it's going to be a bit of a journey to continue to add to and develop the products to meet the broader needs of credentialing and privileging in the acute-care hospital space.

And so we're very excited, because they are performing very, very well in their traditional channels and setting new records. But we also want to recognize that there's a lot of additional, over the next year or so, R&D work to be done and investment to be made to more set with the talent management strategy in the acute-care space for us.

Matt Hewitt - Craig-Hallum Capital Group

Okay. Well, now that is exciting. Last one on from me and then I'll hop back in the queue, the learning guidance for the year, you increased that but it implies a deceleration here in the back half of the year is that, I am just trying to get sense for is that some conservatism or was there something else that comes in the play here in the back half for the year, was that obviously it's tough comps but is there something else at work?

Robert A. Frist, Jr.

No, I think it's just the (inaudible) as well the different product lines and is our best estimate of the range that we can provide, we noted the blended overall growth rate and revenue range was moved up to a whole new range. We moved the segment range up as well for the full year and we are really trying to balance, full year guidance concerns within quarter concerns and we still have same optimism for the segment.

Matt Hewitt - Craig-Hallum Capital Group

Okay, thank you.

Operator

Thank you. And our next question comes from Richard Close from Avondale Partners.

Richard Close - Avondale Partners

Yes, thank you for taking the questions and congratulations as well. Hey, Gerry, I was wondering if you can go over the CapEx you maintained your guidance, I think it was $11 million to $12 million for the year, but you've only spent a little bit. Obviously your operating income guidance is maintained, so if you can just go through a little bit maybe some of that the buckets for CapEx in the back half for the year to help us to understand?

Gerry Hayden

Yeah, sure. Well, one thing Bobby mentioned it is remarks about space additions here in Nashville, that's one thing. We do intend expect to pick up our investing rate in the second half of the year, it is a year for investment. The trade-off is of course that your operating income, look at expense versus capitalized will influence those various pieces of the guidance and we consider lot of our investment in people to be investments that's also expense.

So those are the dynamics we expect to catch up on our capital spending and we still continue to want to hire and invest in other projects that will make our operating income remain in that range of roughly 6% to 10% year-over-year.

Richard Close - Avondale Partners

All right and the 8.8% versus 8.2% when you were talking about I think it was contract labor, can you just go over that metric that what exactly that was again, was it just contract labor?

Gerry Hayden

No, that's the whole category of product development expenses which is primarily labor. You know, there are two forms of labor in product development. There's our employee count, and you know, actual you know fully employed individuals.

We also rely on some contract labor in that category as well and my point was about investment is if you look at the dollars of expense in product development year-to-year for the six months, it was 8.2% of revenue in the first six months of 2012, its 8.8% in the first six months of 2013, the point being that's one place for showing some of our investment activities on year-over-year.

Richard Close - Avondale Partners

And I was wondering if you guys could talk a little bit about the pipeline on the post-acute care segment, maybe a little bit more detail than what you've provided here. Obviously, you probably spend a lot of time in securing the anchored tenants Brookdale and Almost Family, but if you could characterize, I guess, the state of the pipeline, setting us up for maybe the second half of this year?

Gerry Hayden

We tried to be really be careful to talk about this next year and show just hopefully what you view as strategic and steady progress towards that. And so, we hired just a few dedicated sales people, not very many. I believe about three. And so, we've begun to hire in this space and they are beginning to take some of our products. We have a broad product sets to take to the market. That I think, this we week we are looking at some of our research products to take into that market as well.

So I would, and their pipeline is building. We're making calls every day. We're beginning to have a greater presence at tradeshows in this space but I would call preliminary kind of finding our way, which tradeshows that we need to be at.

And so just in general, I would kind of caution in over modeling of this area but hopefully we maintained, we share with everyone the steady progress we're making in each area. I don't want to ramp up too much more in the sales organization until we organize the content libraries and the tools that we need and a little bit of marketing and positioning, which is a little bit more we'll be doing in the second half.

So we remain very optimistic for the segment. We're seeking new partnerships for content and we do, we're making sales calls every single day but and the pipeline is growing but I've also again tried to organize people thinking around this year as strategic and organizationally more than a market share year.

Richard Close - Avondale Partners

And how should we think about the revenue per subscriber metric? Obviously, Brookdale and Almost Family, that's only 55,000 subscribers, just to be clear, are these subscribers factored into the year the subscriber metrics that you will provide. Going forward and then how should we think about the actual revenue per subscribers in the post-acute factor?

Gerry Hayden

I think you are getting this some of our challenges with some of our historical metrics and the reason we introduced the new metric in Q1 around revenue per subscriber, you know, we have new subscribers coming in through different doors now, they come on to one piece of the platform not the other. They buy up new component pieces. They are in new verticals like the post-acute.

So what I would say is the Brookdale arrangement for example is not yet in any of the numbers, because it closed after the quarter and we have this quarter to decide how to begin counting of these subscribers.

I would expect they would show up in the Q3 subscriber accounts as members of our ecosystem and on our platform, but there to be clear they are not in the second quarter yet; as soon as they could show up just by definition when we execute the agreement would be in Q3. And so, hopefully that gets a little bit to the question you asked.

Richard Close - Avondale Partners

Yeah. But I guess trying to engage if all of the sudden you ramped up the post-acute care factor pretty strong or are successful in doing that would, does that pull down the revenue or put downward pressure on your revenue per subscriber, any thoughts there?

Gerry Hayden

Well, anytime we add to the denominator, the number of subscribers it's diluted to the revenue per subscribers by definition and it depends on the product mix and the growth and things like add-on sales to existing accounts, whether the revenue, the numerator goes up. And so, that's true of every subscriber we add in any market, hospital, when we added the numerator right. So by definition, adding 50,000 new subscribers are dilutive to that calculation depending on the product mix that bought.

We are pleased to see a broad product mix initial purchase, but also we have caveated that these initial anchor tenants are development partners at slightly lower subscriber or dollar rate than maybe other non-development partner customers. So I hope that gives you enough color, again I keep wanting to emphasize the deliberate and thoughtful steps of entering this market and share that progress, but without over emphasizing financial impact of that in this year.

Richard Close - Avondale Partners

Okay. No, that's helpful. A couple of more questions from me here. SimVentures talking about that you mentioned three health systems, if you can provide any additional clarity there that would be great. And then final question would be on HeartCode, where do you think the penetration of that market is for you guys?

Robert A. Frist, Jr.

Sure, we have an updated penetration in HeartCode in a little while, but and so we're probably due for an update, this quarter we gave a really much more detail on the ICG-10 marketplace. So I consider HeartCode update maybe for next quarter. But I will say on the HeartCode products as we reported, they continue to gain steady market share and market acceptance and we're very pleased with this continued adoption. We believe to revolutionary product that has better clinical outcomes. And so on HeartCode, we're excited to see progress.

On SimVentures, the overall adoption of SimVentures' products in the quarter was up and we are beginning to see again SimVentures if long-term care is little bit more of what I call medium-term opportunity years two and three with this year being a planning year, SimVentures is more of the long-term opportunity kind of years, three, four and five, and is more a bet on the ultimate adoption of high end simulators across acute care space.

And so it's encouraging to see continued and steady uptake of the products of SimVentures. And in this case, three multi facility health systems have begun to incorporate high end simulation training as part of their workflow in their organizations.

They are most likely to integrate these new methods of training into their onboarding process and that's a particular area of focus for HealthStream in the future in the process of orienting new nurses or changing them between departments called changes in the practice. So again, SimVentures products are little bit more of a bet on a longer term horizon and a new model of training being accepted and becoming the norm over the next five year period, three or five years in particular.

So it's great to see what I call early adopters for this high-fidelity simulation training and, my bet is for them is that they will see the benefits of this form of training and it will become more and more necessity of how they train, develop and onboard new nurses. So I think the new customers are getting now, I would call them early adopters and thought leaders and they are looking for real clinical benefit that I think they are going to get. You see industry like airline industry that incorporated the requirements of recertification of their simulation training processes and we know the safety records of airline industry are just amazing. I think and I believe and we know that this health industry needs to move to these new models of training and so these three health systems I call it merely adopters and thought leaders and they are going to see the earliest benefits of this form of training in their quality outcomes.

Richard Close - Avondale Partners

And just finally sorry for this, what were the ICD-10 enterprise contracts, the number, did you provide that?

Robert A. Frist, Jr.

We did, I think we said about a third of our 80 new contracts in the quarter, so it's almost one a day. A third of them are over $100,000 contracts, which generally indicates a largest subscription to the broader library. I will also note that I want to get the market in front of this. You know when you have such a successful product and is driven by such a large federal mandate, you know as I think about 2015 and I don't know how many of you analysts are thinking about 2015 or the market, you know we are going to have with this great success over the short horizon considerable opportunity and challenge to build new products to since we backfill this great success we've had with this product, because the maintenance use of this product will not be at the same levels as the current volume of adoption sales.

But again, I want to re-emphasize we are talking about after the deadline October of '14, so into 2015 an issue that management is already thinking about and that we want everybody to be cognizant of just a great and successful product. We continue to expect that the growth throughout next year and then it's the year after that in 2015 where our year-over-year [couples] will obviously be tough with such tremendous success.

Operator

Our next question comes from Frank Sparacino from First Analysis.

Frank Sparacino - First Analysis

Bob, I just wanted to go back to ICD-10. Just curious if you can give some sense maybe from a competitive standpoint, what you run into as it relates to Precyse content. And then also curious, I don't know if you've talked about this or [Willno] talked about, but when you look at the entire base of subscribers that you have, do you have any sense as to what would be sort of a reasonable fair market share penetration with ICD-10 in to the base?

Robert A. Frist, Jr.

Well, so it's a great area of importance, it's a great and successful product launch for us and we have a greater partner in Precyse. And we believe that on a competitive front that the combination of immediate and tractable and quick deployment on hospitals existing infrastructure which is as you know largely HealthStream gave us and our partner Precyse a material competitive advantage in deploying these solutions. If you think about the way we're able to roll out new solutions like this to over 40 user groups nationwide, our annual summit, where Precyse and HealthStream were key partners, are very large and growing and focused sales organization.

When something like this happen to the market, we feel we're very well positioned if we have a good partner to take the message to the market and shift market share to our partner and away from their competitors. And in fact I think that's what's happened here. I think we believe we take the best partner and we believe they have the best solutions and we believe that's reflected in their scores as an organization at very high KLAS scores.

And so in that combination with our market share, our sales organization, our user groups has been really astounding rate of wins against the competition. Without naming the competition specifically, there are two or three core competitors in the ICD-10 space and we think we've really been able to born storm the market and deliver a better solution in a more timely way, again a core advantage of how we're going to deploy architecture. And also customers of our ecosystem and our product get meaningful discounts to the product over non-customers as that have to be brought up or on competing platforms that we connect to. And so again just a lot of reasons we think we've done really well with these products at relative to competition and relative to the opportunity.

Operator

Our next question comes from [Terry Ralifus from Balley Funds].

Unidentified Analyst

Kind of go deeper into Brookdale which I think just trying to quantify the impact of the contract. You talked about course development. Content development has been running at $2.7 million a quarter. As you roll out the course development, how much would you expect content development to increase for the Brookdale courses?

Robert A. Frist, Jr.

No, I'm not quite sure understood the two points said, maybe repeat your question, give me a little more color on the two points said in the question. But I think in general, you must understand that with Brookdale we intend to develop content together, which requires some investment and then we will -- some of that content will be consumed by Brookdale at no cost to Brookdale, because they are investors in it. And some of that will result in products that we then take to the broader market and sell. And all of that will occur over the period of this five-year engagement, none of that will occur in the next say 90 days for example, as it relates to content revenue or content potential from the Brookdale relationship. So hope that help some and if didn't get your question, maybe you can rephrase the question and explain the $2.7 million metric a little better.

Unidentified Analyst

I was referring to your product development expenses for the quarter were 2.77 million. So it seems like your current run rate with some of the investments you're making in content is 2.77, but it sounds like the Brookdale course development is going to be on top of that. So just trying to see the product development going over 3 million a quarter or what magnitude will that increase as you start to develop courses for this relationship?

Robert A. Frist, Jr.

I see. Well, the product development expectations are going to go up in almost every quarter of the company. So one know we made in our conference call here was that, we're struggling a bit to hire at the rate that we desired to hire into the technical teams. Some of which as we increase the rate of hiring and hire more teams will be capitalized in the product development in the second half. So we expect more technical development on our core platform. New modules and capabilities are being developed as we speak and we're adding to those teams. So in the core platform development area, we expect the CapEx to go up.

In content development, we also expected to go up, but it's a bit undefined. We expect CapEx to go up in office build-out which there was really none in the first half of the year and there is more in the second half of the year. So sincerely what we're saying is we're reiterating our CapEx budget of 11 million to 12 million for the year, noting that only 3.3 million in the first half has been spent.

So we fully intend and in addition to some hardware upgrades on our systems, what I call the stands, which are high capacity hard drives, will be capital investments in the second half of the year. So in those four categories we expect an acceleration in the second half of the year over the first half of the year and I hope that gives you some sense. So we are reiterating our CapEx plan for the year of $11 to $12 million, even though only $3.3 million has been deployed in the first half.

Unidentified Analyst

You mentioned Brookdale as a launch customer would be at slightly lower revenue per subscriber, is that primarily due to the bundle that they bought and the launch pricing discount or is that a sign of the post-acute bundle and what we should be expecting in the post-acute the average customer?

Robert A. Frist, Jr.

That's a great question and we won't know until we get deeper into the market. Some of the pricing that is a little lower than our expected pricing is attributable directly to all the variables of the partnership of co-investment and the many commitments that both parties made in the partnership that replace value on. And so I would say the specific answer to that question is going to have to play out over next year. We still I would say expect to be able to have slightly higher price points for certain components of our platform in the market than in the acute care space.

So that is our expectation again in the strategic partnerships early on and giving all the variables, the deployment models that didn't turn out to be case, but we still I would say characterize and expect on certain core components strictly the differentiators like our Competency Center. In our company dictionary we expect that we will be able to do better than in some of the post-acute space.

Unidentified Analyst

With the co-development, is there royalty rate back to Brookdale and is this similar to the 50-50 split with the Precyse?

Robert A. Frist, Jr.

Yeah won't share the specifics of the arrangement but it does involve offsetting and revenue sharing and revenue potential for both partners. And so we will characterize it as a strong partnership that has the potential to generate revenues for both parties or offset costs for the parties in either direction. So again it is a more comprehensive development partnership kind of a market development partnership and has many ins and outs.

Unidentified Analyst

If we take out from Brookdale to the overall corporate I mean revenue per subscriber grew by 13.3%, the gross margins declined by 100 basis points, was that related to royalty rates, the mix of ICD down at 50% gross margins, content costs, trying to understand where gross margins are going.

Robert A. Frist, Jr.

Yeah, it's affected by really well it's not affected by the Brookdale because there's no revenues from Brookdale and won't until we implement them which we noted it's kind of a second half phenomena of this year. So there's no impact from anything tied to the long term care market or the Brookdale market.

The gross margin as Gerry noted in the research product line, there's a little bit of margin pressure because there's lower price points on the CG Caps product lines which are rapidly growing product line and have the lower price point. We believe due to the mixed modality of delivering that the market is taking meaning not all phone based delivery but some email based and we are more phone based currently. We also, the Precyse margins are the same as they've always been in the last year and so that's not contributing to the chain but we did get more clarity on that relationship, given its sized to the overall growth the next, through 2014 and so we do have more information there as well and it is fair to say that since we haven't disclosed that split before and it is a large number, that split is a little lower than our overall rate for our other partnerships with our content partners.

But again that is more of a development partner and a pure content partner. We do a joint product development. We do joint sales launches and marketing launches. So the nature of, a few of our partnerships are more than just a content reseller. We're actually development partners. We integrate our products. We jointly invest in marketing campaigns. We jointly invest in sales efforts and product development, so both are SimVentures and layered all, Brookdale relationship and this one with Precyse. They are all a little different than our normal kind of content reseller partnerships and that's worth pointing out, because they are important and material to our overall performance.

Unidentified Analyst

Anyway to quantify the impact of whether the lower margins from research or the ICT-10 Precyse impact I mean it seems like there's a mix shift with the growth in ICD-10 towards the Precyse deal which is at a 50% gross margin and I guess as we see that through 2015, that seems like it's going to be a headwind and falling down gross margins?

Robert A. Frist, Jr.

It is a rapid growth product and it does have a slightly lower margin and other. Again, it's different in its nature than content partnership, reselling relationships. So, that maybe that's a fair observation.

Gerry Hayden

Yeah, I would also add that while we focus on the margin, the overall, the EBITDA or operating income expansion, it occurs on both products. It's just that one line item which is where you see royalties and the cost of fulfillment.

Unidentified Analyst

Okay, and then on the G&A side and other investments to make as you enter the post acute you added to the M&A team, it sounds like you are trying to fill out IT or are there other areas of catch or should we see that $4.8 million quarterly run rate as a good baseline?

Robert A. Frist, Jr.

Let's assume, let me see where you're looking, $4.8 million, the G&A, yes. So in the GA we moved some officers in the M&A team late last year, we continue to invest in deal cost that would show up in there that - this depends on the rate of pursuit of that pipeline and we've characterized them the past really year that we have an active pipeline which means there are deal costs in there on ongoing basis, as you've expensed deal cost as you're going out on all of them are rolling into the closing.

So we do see increased G&A in that area as well. So some of those are variable that are hard to predict, they based on the velocity of the pipeline of deals and some of them are steady state as you've noted like adding personnel to that capability in our company. So it's hard to what we keep going back to our full year guidance, but we as a reflection of our overall thinking of performance and we don't line item guidance.

Unidentified Analyst

But in terms of deal cost, I mean it seems like that's more variable in nature G&A with 270 basis points deleveraging point on how much would have that been attributable to deal cost versus your core G&A and investments you have to made that are more ongoing in nature that we should be projecting as part of your run rate?

Gerry Hayden

I think we've basically described the G&A, it's a combination of many things, labor is up year-over-year, contract labor is up year-over-year in that category, we mentioned the deal expenses non, this is income taxes other professional services, so it's a variety of things that is driving that increase, it has been some increase compared to different G&A function. So it's really investment across the board. Also one thing I want to emphasize to we might look to $4 million approval for Sy.Med, because it's earn-out payments, that's also in the results for this quarter in the G&A. So that its 250, they are just a quarterly item.

Unidentified Analyst

All right. I catch up there. And then (inaudible) cost if you note that $870K for the last year is that all going to be in Q3 for this year?

Gerry Hayden

That will be primary in Q4, when some of that occur which is October's Bobby mentioned in his remarks.

Unidentified Analyst

Okay, so Q4, but around the same $870K? That just got shift to from Q2 into Q4?

Robert A. Frist, Jr.

We haven't provided any details on that, but we have a long history of fairly consistent size it have been, it's going a little bit year-over-year. But we haven't provided any detail line item guidance on the cost of some of it. After the event, we tried to breakdown, its revenue contribution and expense contribution after the event.

So, I think it'd be fair to think about as modeling as in past years and just make sure you get it in the right quarter. Because, I guess from an analyst point of view for better, for worst, its move between quarters over the years, for different reasons.

This year, it's because of our great desire to have it in downtown Nashville and those will be available time slot in October that made since for everyone. So most importantly, if you model it as in prior years, just to make sure you get it in the right quarter.

Unidentified Analyst

Right.

Robert A. Frist, Jr.

Because it is a big expense that hits in that quarter which should be fourth quarter of this year.

Operator

Thank you. And our next question comes from Richard Close from Avondale Partners.

Richard Close - Avondale Partners

Yes, just a couple of follow-ups, first on the Brookdale agreement. I just want to make sure that this, the bundle pricing obviously the content relationship; we are talking this contract being the loss leader are we?

Robert A. Frist, Jr.

No, no, this is still a sale and we sold the products, we did not give them away. It is just that there are lot of ins and outs in the partnership that have revenue opportunities and investment. So no, we did not give the systems away, but there were lots of other components that change the total financial picture little differentially then a typical sale. So yeah, that's a good question.

Richard Close - Avondale Partners

Okay, I just wanted to make sure there and get that out there, and then second of all on the talent management side the performance center, competency center. In the past couple of quarters, you talked about selling a certain number of hospitals per week any updates there?

Robert A. Frist, Jr.

No, I would say that the velocity was consistent or kind of between what was the prior two quarters. So it didn't quite achieve the same a lot there as last quarter, but it was solid and steady and we see a great pipeline for the product, and we are working again as I mentioned really in my opening about, working new metrics.

We are trying to add everything from reporting the number of subscribers coming onto that incremental platform piece versus a lot of utilization metrics and we just haven't quite decide of which set of metrics to put out there, but steady consistent demand, steady market wins on the products, and steady new contracting both subscribers also utilization continues to grow quarter-over-quarter as well.

Gerry Hayden

And it's fair to say that if you continue selling the talent management area that's a platform sell thus that would have a positive impact on overall gross margins, correct?

Robert A. Frist, Jr.

That is correct. Generally, the platform components have higher gross margin in general. And so that is a correct statement.

Gerry Hayden

We are excited to continue to add subscribers in that area.

Operator

And we have one more person in queue. Our last question comes from Matt Hewitt from Craig-Hallum.

Matt Hewitt - Craig-Hallum

Just a couple of questions on the research business, first and foremost, if I heard you correctly the online margins are a little bit less than the phone based calls, did I hear you correctly on that?

Robert A. Frist, Jr.

No let me clarify that a bit. What we looked to say is that the patient instruments are the larger part of all the product sets and research first of all. Second, the area of high growth in the patient surveys is the CG-CAHPS Survey. The CG-CAHPS Survey has generally a lower price point in the marketplace than the CAHPS surveys on a per survey basis.

And we still deliver the majority of those surveys through a phone interview process which has a higher cost of goods resulting currently in a lower margin for that high growth area of CG-CAHPS than may be they are used to.

And in response to that, both the market and HealthStream is moving to a mail methodology which has the potential to improve the gross margins on the CG-CAHPS product set. We still believe strongly in the phone methodology and think the industry will move to a blended methodology what I would call a higher cost and therefore higher price point for those surveys done with the phone methodology and then a broader reach lower cost but higher margin use of mail methodology. So we wanted to share those dynamics with you because we're somewhere in between that migration, between moving to the lower price point but higher margin email methodology for this high growth area.

Matt Hewitt - Craig-Hallum

Secondly, there was a new survey just announced by CMS, that called [DCAHPS] and that's going to be basically 1.5 million adults over the next three years, figuring out the early stages of Affordable Care Act. I would assume that you are on top of that and that could represent an additional driver over the next couple of years for the research business?

Robert A. Frist, Jr.

Well, we stand top of all the trends in each area. We haven't modeled the impact of those types of products yet. We're still absorbing and managing growth in the CG-CAHPS area and we expect that to be the more, obviously the driver right now for growth and so we will talk more about those other instruments in the coming quarters.

Matt Hewitt - Craig-Hallum

Okay. And then one last one for me and I realized you are still prepping for the summit this year, but as we start to think about our models for next year, have you looked at possible dates for the summit next year given that's it's moved around a little bit the last couple of years?

Robert A. Frist, Jr.

That's a great question. We're actually -- as soon as you signed a contract for one location, you work on the next year and we are not committed to the space yet and we're trying to find good dates. And so we don't have an answer for you on that one yet, Matt. So, I am sorry. When we get in closer to and resolve that and pick the location, we will let you know, but right now all we have is the date for this year which is in October.

Operator

Thank you. I am showing no further questions at this time. I would like to hand the conference back over to Mr. Robert Frist for closing remarks.

Robert A. Frist, Jr.

Thank you very much. Again congratulations to our employee base, they are working hard to deliver innovative products and solutions. We've tried to paint a fair picture of both opportunities and challenges in front of HealthStream and we remained very excited about our overall progress and look forward to reporting the next earnings call as we continue to refine and develop and grow HealthStream. Thank you very much for your participation and look forward to next quarter.

Operator

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

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