HealthStream's (HSTM) CEO Robert Frist on Q2 2016 Results - Earnings Call Transcript

| About: HealthStream, Inc. (HSTM)

HealthStream, Inc. (NASDAQ:HSTM)

Q2 2016 Earnings Conference Call

July 26, 2016 09:00 AM ET

Executives

Mollie Condra - VP, Investor Relations & Communications

Robert Frist - CEO & Chairman

Gerry Hayden - SVP & CFO

Analysts

Nicholas Jansen - Raymond James

Matt Hewitt - Craig-Hallum Capital Group

Richard Close - Canaccord Genuity

Scott Berg - Needham & Company

Matthew Gillmor - Robert W. Baird & Co.

Vincent Colicchio - Barrington Research Associates, Inc.

Frank Sparacino - First Analysis

Ryan Daniels - William Blair & Company

Operator

Good day ladies and gentlemen, and welcome to the HealthStream Incorporated Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

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

Mollie Condra

Thank you and good morning. Thank you for joining us today to discuss our second quarter 2016 results. Also in the conference call with me are Robert A. Frist, Jr., CEO and Chairman of HealthStream; and Gerry Hayden, Senior Vice President and CFO.

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

So with that start, I’ll turn the call over to Bobby Frist.

Robert Frist

Thank you, Mollie. Good morning, and welcome everyone to our second quarter 2016 earnings conference call. We've a lot to discuss today and we will start with kind of an opening characterization to several challenges in the quarter, as well as a lot of a reasons for optimism and I want to elaborate on both dimensions of that.

We are going to turn our attention first to kind of the revenue side, and kind of open-up with a few highlights. So, the first highlight was that the top line revenues increased 5% to $54.8 million. And the second highlight, its important because there is going to be some [indiscernible] discussions today, it is that we’re maintaining our guidance of consolidated revenue growth of 8% to 12% for the full-year.

We are going to end up being a little more back-end loaded on revenue growth model this year than maybe someone thought we were leading into this report. And one of the things that gives us a lot of confidence as we lead into the second half is that we delivered record sales in our 26 year history, records sales, orders, in the first half of the year, but no good goes unpunished. Many of those sales were not converted into revenue in the second quarter, because the timing of those sales was heavily weighted to the end of the second quarter.

So again, this first half record sales in our entire history is one of the things that gives us confidence as we push into the second quarter. But a lot of those sales occurred in the last two months in the second quarter. And so they didn't quite come in exactly as we’ve [indiscernible] as we kicked off the year, but again the record sales gives us a lot of confidence as we move into the year.

Now they don’t materialize in revenues in the second quarter, even though sales occurred and as you know we pay the commissions for those kind of as we close the contracts were part of the commissions, but we’re a subscription based business model, so we’ve to remind everyone that when we make the sales, we wait until implementation to begin revenue recognition which is why we don’t see the full financial benefit of those sales in the second quarter.

As reported in our earnings release, we decreased our revenue guidance for RPX business and that reflects little bit of a challenge, little bit more information as we move to the middle of the year. That was prompted in part by the loss of an account that will have an effect on the fourth quarter RPX revenues, kind of forced us to reevaluate the churn in the business, in the fourth quarter. And a strong pipeline of sales is what -- it partially offsets to loss that account and so we lowered our guidance to the 6% to 8% growth range. And so, still better than in some prior quarters, but a little lower than maybe we expected coming into the midpoint of the year.

And another reason for optimism in the RPX business, again, the sales pipeline, but we also -- while we did identified a loss that will affect revenue in the fourth quarter, but also we had a strong win in the second-quarter. One of the things that was exciting about that win was that it was with a 20,000 person organization, the post-acute space and that organization drew on our full suite of HealthStream products. And so, that was exciting to see that not only did they go with RPX product lines in a competitive situation, they loaded up on our talent management and training and development products as well. And so, what was exciting about that was to see the full portfolio of HealthStream assets and capabilities come to bear to help a competitive win. And so it was actually a win for the segments of HealthStream -- two of the three segments of HealthStream with that rather large post-acute account. And as you know the post-acute segment is an area of focus for us.

So again, while guiding to 6% to 8% which is a little lower than we’ve had in the prior earnings release we see and with the caution of a lost account that we’ve been -- we’ve identified in the last -- since the last report that will come out of fourth quarter. We do have a strong indication of good system-wide win also entering into the second half of the year for RPX business line.

Reported revenues for the Provider Solutions or the Echo business, grew approximately 59%. If you factor out the deferred revenue accounting treatment, growth for the segment was relatively flat. And so, again, that can look a little challenging, but there is a couple of things going on there that I think again are exciting. One, the sales teams been ramped up and the sales orders are coming in at a rate faster than they had in the past and so we're excited about that.

Second, we’re selling a little less with the licensed software, little more the subscription software, and in the subscription model and so that has the effect of pushing some of the revenue out. And then third, the fast rate of sales result in a backlog of implementation that we’re going to work through the second half of the year, and you'll start to see the real growth of that unit kick in the second half of the year.

And so again, while this convergence of things for the Echo business unit occurred in the second quarter, we've done a lot of analysis and we’re entering the second half of the year with Echo with a lot of confidence based on the sales teams, sales performance, the backlog which we’ve confidence that our CLO of that business is working through. And so, again we’re maintaining our guidance there and in fact we will see the real organic element of growth kick in at Echo in the second half of the year.

And the Workforce Development segment, it comes with its own challenges. We spend over three years talking about the bolus of revenue from ICD-10, and we're nearing its financial impact from an absolute dollar sense. On the Workforce Development segment, it had a tremendous drag on growth in the last almost five quarters as it's been a decline after many quarters of contributing to our growth.

And so, the Workforce Development segment has high performing solutions like Resuscitation, Clinical Development and Compliance, that drove a 15% year-over-year organic growth for that segment, that excluding the impact of ICD-10 readiness solutions from both period. So if you factor out ICD-10 with the prior year and this year, you will see a 15% organic growth rate in the Workforce Development segment. Again, a little lower than maybe some had modeled, but 15% is strong and there is really good indicators of the pipelines for the products I just mentioned, Resuscitation, Clinical Development and Compliance that give us the -- again the optimism for the second half.

So hope that gives you a little walk through kind of with my sentiments on this quarter. There was a convergence of challenges, but an underlying strength that you have to dig a little deep to see and the confidence that we’ve entering the second half based on sales and execution.

So, I will turn it over to Gerry, who will dive into the P&L and balance sheet with a little more detail, and then back to my discussion of the business, products, and product launches and upcoming events.

Gerry Hayden

Thank you, Bobby and good morning, everyone. I'll provide some color to our financial results including certain items that impacted the quarter. For the quarter, consolidated revenues were up 5% to $5.8 million. Operating income [technical difficulty]. Operating income was down 10% to $2.3 million. Net income was down 5% to $1.4 million and earnings per share was $0.04 compared to $0.05 in the second quarter of 2016. Adjusted EBITDA was down 10% to $7.9 million from $8.8 million from last year second-quarter.

Now let's look at the four areas of our income statement, revenues, gross margin, operating expenses, and operating income. And as we review our results, we'll place the financial context on the impact of the ICD-10 revenue declines. Revenues, as Bobby mentioned, consolidated revenues were up 5% in the second quarter versus the same period last year.

We achieved this 5% revenue growth while overcoming the $4.6 million decline in ICD-10 readiness revenues from last year's second-quarter. When we exclude the ICD-10 readiness revenues from the second quarters of both 2015 and 2016, our consolidated pro forma growth rate to 16%. However, when we account for the change in the HealthLine Systems deferred revenue write-down, [indiscernible] second-quarter last year's, the pro forma growth rate adjust to 11%.

The Workforce segment is comprised of applications and content solutions, which are primarily subscription based and are targeted at improving the healthcare workforce. This is also the segment in which ICD-10 revenues are reported.

Revenues from our Workforce Solutions segment increased by $400,000 or 1% which increased [indiscernible] $4.6 million year-over-year decline in ICD-10 revenues. The second quarter pro forma growth rate for Workforce, excluding the ICD-10 readiness from both periods is 15% which is Bobby also just mentioned.

The second quarter of 2016 HealthStream's workforce ARIS was $35.70 compared to the last year's second-quarter of $35.35. Subscription-based revenues increased 1% compared to last year's second-quarter, while implemented subscribers decreased less than 1% over the same period last year. And as we noted earlier, growth in other subscription-based revenues offset the decline in ICD-10 readiness over the last year.

Revenues from ICD-10 readiness from training products were $2.2 million for the second-quarter, generated approximately 870,000 ICD-10 readiness subscribers. For the second quarter, approximately 390,000 subscribers completed their contracts with us, which included approximately 54,000 were ICD-10 only subscribers. Again in the second-quarter there are approximately 480,000 remaining ICD-10 readiness subscribers of which 415,000 are ICD-10 only.

HealthStream's Patient Experience Solutions provide valuable insight to healthcare providers to meet HCAHPS requirements, improve the patient experience, engage their workforce, and enhance physician alignment. Our Patient Experience Solutions segment grew revenues -- so revenues increased by $201,000 or 2% through the second-quarter of 2016 and second quarter of 2015.

Revenues from Patient Insights Surveys, a survey research product that generates recurring revenues, increased 2% over the second quarter of 2015. Revenues from other products, including surveys conducted on an annual or bi-annual cycles and consulting/coaching services, collectively increased by $96,000, or 4%, when compared to the second quarter of 2015.

The Provider Solutions segment, operating as Echo, a HealthStream company, provide us the software that is used to validate the professional credentials of potential employees. Echo products serve as the gatekeeper for workforce quality and healthcare.

In the second quarter of 2016, revenues from our Provider Solution segment increased by approximately $2.1 million, with the HealthLine Systems acquisition accounting for the majority of that increase. The $2.1 million HealthLine increase was due to the [indiscernible] by year-over-year change in the deferred revenue write-down, which is the accounting convention we requires to write-down the beginning balances to fair value as defined in GAAP.

Echo used to perform to our expectations, even though this quarter clearly saw flat revenue growth after considering the deferred revenue accounting convention. Business unit has posted strong sales growth, is driven from a backlog book business that becomes revenue in the upcoming quarters.

As Bobby mentioned, the last year's second quarter include more licensed based sales than this year's second quarter, but this year's second quarter included more subscription-based sales than last year's. So we’re talking about a product mix switch going on as well. [Indiscernible] we believe, the underlying indicators still support the Echo growth trajectory, which is why we remain enthusiastic.

Gross margins. The gross margin improvement trends that [indiscernible] last year have continued through the second quarter of 2016. The last year second-quarter, the gross margin was 57% compared to 58.7% gross margin this quarter in combination of factors that include the lower ICD-10 revenues, and growth in revenues from Proprietary Solutions with higher gross margins were key contributors to this trend.

Operating expenses, this quarter results reflect our ongoing plans to invest in product development to foster long-term growth and strengthen our competitive position. Product development costs grew by 25% from $5 million to $8 million to $7.2 million in the second quarter of 2016. This increase represents investments in all segments, Workforce, Patient Experience, and Echo.

G&A expenses in the second quarter of 2016 were 15.3% of revenues, which is an increase from last year's level of 12.9%. Several factors influence the G&A expenses, such as the rollout of our new financial platform, NetSuite in which we invested $300,000 during this quarter. This is a major project for us and we successfully completed the implementation during the second quarter. In addition, we incurred approximately $300,000 of expenses related to our ongoing M&A and business development initiatives.

Operating income. Operating income was $2.3 million in the second-quarter. It was adversely impacted by the $439,000, a deferred write-down related to the HealthLine acquisition we reported this quarter. The lower contribution from ICD-10 revenue streams, expenses related with the NetSuite implementation and M&A and business development expenses I just mentioned.

On our balance sheet, our cash position and overall balance sheet remains strong. Our cash balances at June 30 was $139 million. We have no outstanding debt and our full $50 million line of credit capacity is available to us. The cash position reflects a $3.2 million cash paid at closing for the Performance Management Systems, Inc acquisition which closed on June 30.

Our recently completed NetSuite implementation which I just mentioned, did cause [indiscernible] delay to monthly customer billings by growth, which is [indiscernible] slowdown the cash received for the second quarter, since we turn to our pre-established billing schedules and our focus on reducing days outstanding with increased collection efforts. We believe our overall capital position is likely to support our organic and inorganic growth opportunities and support other capital structure optimization and shareholder value maximization strategies as maybe appropriate.

Yesterday’s earnings release contains guidance for 2016 full-year. We expect the consolidated revenues will grow between 8% and 12% as compared to 2015 and the growth in our three operating segments will be as follows. Workforce Solutions 2% to 6%, Patient Experience 6% to 8%, Provider Solutions 80% to 84%. Revenues from ICD’s and readiness training, which were approximately $26.8 million in 2015 are expected to decline by approximately $19 million in 2016 and are reflected in the guidance range for Workforce Solutions.

For the full year of 2016 then, we anticipate revenues from ICD-10 Readiness training will be approximately $8 million to $8.2 million and we expect that only comprise of the approximately -- the approximate $6.1 million of [indiscernible] actual results, $1.1 million in the third quarter of this year, and probably $1 million in the fourth quarter.

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

We also look forward to our Client Summit in October of this year, meaning that the estimated net expenses of $750,000 for summit will be recorded largely in the fourth quarter of 2016. This guidance includes anticipated impact of the Performance Management Systems and Nurse Registry Consulting Corporation and [indiscernible] the acquisitions, because that include the impact of any other acquisitions we may complete through the remainder of 2016.

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

Robert Frist

Thank you, Gerry. As I mentioned on past calls, we’ve multiple strategies for growth. Many of those were organic strategies, launching new products, and also pursuing an active M&A pipeline. In fact, just yesterday we announced our second acquisition in the past 30 days, so I’m going to take a moment and talk a little bit about both acquisitions.

On June 30, we acquired Performance Management Services, Inc., and this is a company focused on competency-based performance development of nurses. We're excited to add to our Workforce Development Solutions their industry-leading clinical assessment tool, the performance-based development system. Its widely known to customers across industry as PBDS.

And PBDS is particularly well-respected among healthcare organizations for its insightful and predictive clinical assessments regarding the judgment of clinicians. And we're excited about this because we think we can add a lot of value to that core technology and it’s a kind of asset that’s leverageable across our network and so really excited to have acquired that well-established, although small organization against a type of organization where we think it will serve our customer base really well.

Yesterday, we also acquired another clinical assessment company and the company known as Nurse Competency is the leader in subscription-based clinical assessment and testing. It focuses on knowledge testing and so one focuses on judgment testing, and the other focuses on knowledge testing. And so, we like the way these two complement each other. In fact, we're combining those two to build out an assessment of product and service line inside of HealthStream. And so we're excited about how those two elements we believe will come together under the leadership of one of our clinical leaders and we will round out and invest in and build out an assessment business initially targeted towards a nursing.

And also exciting about that, the last acquisition is that Joe and Elease Caracci, the Founders of that organization are moving to Nashville. In fact, they’re here yesterday, so we could welcome them to Nashville. And we were already minority investors in that organization, so we knew them well and going to have confidence in them and their organization and where they wanted to take it. So we welcome them to Nashville as we combine these two entities into one to assessment business with leadership moving to Nashville to help us grow it. So it's all very exciting.

With these acquisition complete, we do want to comment that we continue to invest in as Gerry mentioned are in active M&A pipeline and business development pipeline as well, investing in partnerships and looking at a full range of activities from minority investing, which again we just completed one minority investment into an acquisition and an active M&A pipeline. So, we’re going to keep that business development going and try to keep a good cadence to it as well. It does reflect little higher level of investments in the quarter and therefore with higher G&A. As you can see completing two acquisitions and with an active pipeline, we're investing more in that form of growth.

Now commenting on a few of the service lines and product areas that performed in the quarter. The clinical courseware products were a large contributor to revenue growth in the quarter. Clinical products include content from our medical Association partners, clinical skills and procedures, and the product CE center. Our Association content continues to expand and so do the innovative ways which we plan to make all of this type of clinical content available to our customers.

Altogether, revenue growth from our clinical courseware products was up 23% year-over-year and a great area of focus. In fact, if you think of these two recent acquisitions, they gave a different dimension and angle to approach the clinical development business, not just content from Associations and partners, but now essentially testing and evaluation service to go along with it. So really excited about that area. It delivered 23% year-over-year growth and you can see some of our most recent investments being add into that segment.

And the HeartCode suite of products, which is our resuscitation suite, again delivered strong sales performance. In fact, in the second-quarter, the sales of our resuscitation product increased 91% over the first quarter sales. And you’ve to remember that the first quarter sales were pretty strong as well as we highlighted them in last earnings conference call.

Approximately 67 new customer contracts for the resuscitation solutions were signed in the second quarter, along with an additional 158 contract renewals. So the teams were very, very busy signing new business and implementing and renewing renewals. These products were focused on resuscitation and emergency cardiovascular skills and effectively with the standards of the American Heart Association, the innovations of Laerdal Medical and the delivery and technologies of HealthStream were revolutionizing the way resuscitation training occurs across America's healthcare systems.

Relatively speaking, the HeartCode products due carry a lower margins for the Company. I’ve mentioned that in the past. I want to remind you that they’re really outperforming on the revenue side. But we do involve three partners and the product, so we they do have a lower gross margin than some of our other products. So I want to remind our analysts of that cap [ph].

As of June 30, 2015 over 2.56 million CPR training certifications have been completed through HealthStream. And if you just think back, a few years ago, we were really kind of on the vanguard of moving people from the traditional method of books and instructor led to the form of online certification and management-based skill checks. So it's really excited to see that product continue to take hold in the market space.

In the second-quarter, our Patient Experience segment launched and implemented the first users on our new EngageRx portal. EngageRx helps our customers, our employee and site survey interpret their survey data and know what drives performance. They can also apply best practices for improving outcomes, and most importantly build action plans to train and develop their staff. So we’re kind of linking and bridging the concept of measurement and analytics with action planning, with the workforce. So we’re seeing it impact and that into a well received EngageRx kind of a new product capability for Patient Experience.

We also were glad to see Patient Experience capabilities advance with SMS text survey and it provides a link to the survey via text messaging. This is timely and cost effective technology, because it levers the strength in healthcare's largest phone survey vendor, because it utilizes millions of phone numbers we capture each year, and then converting them into an introduction to our modern web survey platform. And so we’re excited to launch this SMS text surveying capability. We think it will give us an edge in the marketplace, and again it leverages our strength of our call center operations in general.

And we think in general that the idea of speaking with your customers is better than sending them a mail survey, so we love that differentiation of talking to customers, listening to the voice of patient and collecting the data. And this SMS technology simply invite them in a more friendly, more rapid way.

In the third quarter this year, we look to welcome our customers to Nashville. About every 18 months we launch our customer Summit. What’s exciting about this summit is, we will be inviting the Echo nation [ph] customers and the customers of Echo to co-locate their conference with our conference or use with some of our conference and we think it will make an even bigger bash and more exciting, and one of the things that makes me most excited about this coming Summit is that as we’ve mentioned, we’ve a very robust product introduction cycle.

So some of the investments we’ve been making in the first half, you will definitely see a more rapid pace of new product introductions in the second half, beginning with dimension of the EngageRx portal today here for the Patient Experience solutions segment. And so we're really excited to welcome. We think this to be our biggest customer summit ever.

We remind the analysts that, it’s a major investment for HealthStream. We invest a lot to bring these customers here. We conduct R&D and use our technology teams, we market and show our new products, and we engage a very large customer base. We expect over a thousand participants this year across the board, including HealthStream it's going to be a exciting several day conference in Nashville. We remember to model the expenses in the fourth quarter, because it is a large investment. I think Gerry mentioned about 750,000.

So with that, we’d like to turn it over to the investment community for questions. Thank you operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Nicholas Jansen of Raymond James. Your line is now open. Please go ahead.

Nicholas Jansen

Hi, guys. I just want to dig a little bit deeper into the robust selling activity you talked about in the second quarter, and kind of how much visibility you have in the back half of the year growth acceleration? Because based on, I guess my math, you talked about kind of a true organic growth number of about 10% or so when you correct for deferred revenue in ICD-10,but on my math that has to go back to in mid-teens in the back half of the year to kind of even get to the lower end of your full-year guidance. So just wanted to get your thoughts on the visibility of that ramp and how successful selling activity needed to be in the second half in order to achieve those metrics? Thanks.

Robert Frist

Yes, great question. Fair observations. I think that we're encouraged in the second half because its largely now an execution and implementation game. The sales were really, really strong as we mentioned in the back half of the second quarter, in the last two months of this quarter in fact -- I’m sorry, the second quarter. And that gives us the implementation backlog to achieve the growth rates that we projected. So not a whole lot of new selling act to occur to deliver the numbers. We have a whole lot of implementation to do, execution and get the revenue recognition. We entered with the backlog. If we work through that backlog and then the new sales backlog created by the new sales, we still -- that gave us the confidence to maintain our revenue growth ranges. And so, it really is an execution game and we had a few bumps in the road and second quarter, but we think that we're up to it and we’re going to deliver that revenue recognition. And it really isn't as tied to our expectations for sales. Although we do have strong pipelines and great expectations for sales. As you get to the middle of the year on a SaaS business, the sales that occur from [indiscernible] really are more about the future, about the next year. And we plan to work hard, work with these implementation backlog to get the revenue rec we need to deliver the range that we have guided to.

Nicholas Jansen

That’s very helpful Bobby. And my second question which is the on gross margins the strength, obviously some of that tied to ICD-10 readiness going away, but how sustainable is that 58.7% level? Just how would we think about what you're assuming in the back half of the year on gross margins? Thank you.

Robert Frist

Yes, some of the margins that we expect a recovery on are like operating margins and a good example is this NetSuite implementation we talked about. That took us a little longer, little hard, [indiscernible] 15 years ago, you swap out a major infrastructure piece of our your business. And it just so happened in the first two quarters of this year work with that moment in time. We ended up taking longer and investing more than we had planned, but it was the right call and Gerry mentioned about 300,000 more investments to finish that project. And so there's some one-time things we’re confident that won't be recurring, and in fact, we’re also confident that getting through that chain will deliver operational synergies. And again, Gerry mentioned some delayed billing and some cash flow challenges, but now the cash flow systems were delivery invoices [indiscernible] platform. So it's just one of those things where you got to kind of look through the quarter for the future, and we had some one-time investments like that one that, that are behind us now. And the accounting team is exhausted, but excited because they can already see the operational benefits and then [indiscernible] excited, because of the increased visibility we’re going to get in the product line contribution margins, and Product Management is excited, because they’re going to get more financial detail that are reported on their business. So there was a one-time things in the quarter that we're confident will recur. On the gross margins, it's kind of a product mix question and based on the selling in the first half and the implementation schedules we think that gross margins will continue to maintain the fall off in ICD-10 revenues which has a lower gross margin than the one we just reported about 50% gross margin that tends to have a boosting effect. As we look forward, we think about ’17, the record HeartCode sales which has a lower gross margin may put some pressure on gross margins in ’17, but we’ll get to that in February. But for the remaining balance of the year, we feel pretty good about gross margins and then certain onetime operating costs that are behind us.

Nicholas Jansen

As always, thanks for all the color. Thanks.

Gerry Hayden

Thank you.

Operator

Thank you. And our next question comes from the line of Matt Hewitt of Craig-Hallum Capital Group. Your line is now open. Please go ahead.

Matt Hewitt

Good morning. Thanks for taking our questions.

Robert Frist

Thank you.

Matt Hewitt

First one, on product development. It sounds like you’ve got a heavy cadence of launches coming here in the second half of the year. That segment, 13% of revenue is now for several quarters in a row. As you start to get through some of these launches and introductions of new products, will that trend back down? I mean, I think your historical range was closer to high single digits. Will that taper off a little bit as we get through the second half of this year and into next year? Or do you anticipate that the thing elevated for a lot longer?

Robert Frist

Yes, I think that it's right to say we have, in all segments the Eco segment, if you look at it since the acquisition and particularly the last 12 months, we’ve added meaningfully to the technology development teams at Eco. But the rate of product introductions for them is really outstanding. They’re already got several ancillary and add-on products in the market with those teams and the rate of launching new products are going to continue. And they’re kind of add-on an extension products during new revenue stream. So in some of -- in that segment in particular you see a really -- an early increased rate through the fourth quarter last year and probably the second quarter of this year in investments and technology. And we do expect that to level a little bit as the second half of the year and some of those products into the market. In a similar vein, in the workforce segment, as we fall through this ICD-10 decline which has been -- a major impact particularly in this quarter and in the next quarter on a year-over-year basis even greater negative impact, but it absolute impacts the declining. We project about $1.1 million of revenue from ICD-10 readiness products next quarter. And remember that peeked at over $7.4 million over a year ago. And so that’s a material change in outlook. But along the way we haven’t stopped investing, and you will see a string of investments in fact about a month ago we saw soft launched on our website, you can read about our new nurse residency program which is in our workforce segment. It's a soft launch because we have it in our press release and in that part we already have paid pilots and one new contracted full customer for the new nurse residency product. In addition that product has higher price points and historical HealthStream products, so the second half will be loaded with launches. We won't gather any new debt teams in the second half of the year. We kind of got what we haven’t. And remember in the first half of the year we used contracts to hire labor to get our debt team staffed up to the staffing expectation until we had a, kind of an early ramp. And so, what I expect to see is maybe contract labor moves to fulltime labor and is stays relatively flat in the R&D lines for the second half of this year. We did it a little different this year. Instead of being just under hiring, we usually approved a lot of physicians in January and then takes time to hire them. We went ahead and rounded out all of our tech teams pretty quickly to contract the hire labor so we can get productive in the first half of this year. And our expectation and hope that those contract to hire physicians moved to fulltime and become more of our run rate and we won't see a lot of new tech hiring until next year’s budget cycle, and we’ll see how it performs on top line before we get to that cycle through our strategic plan. So hope that helps to understand why we have again confidence in the remaining two quarters of the year.

Matt Hewitt

It does. Maybe one just follow-up real quick and this kind of gets back to the gross margin. Obviously very strong quarter, it goes back to I think -- ICD-10 was the last time you had leveled this almost 59% this quarter. As we look out, not just even the second half, I think more like 2017 and beyond. And I know you’re typically not comfortable looking out that far in advance, but just generally speaking you’ve added new content. So were you owning; you’re not sharing with royalties or anything. You continue to ramp in those areas where you own the content. Is it -- can we start to think that maybe you’re generating 60% or even maybe a little bit higher gross margins than the not too distant future just given your mix?

Robert Frist

Well, I appreciate the question. You’re right. We don’t comment on ’17 and the future until we get to our strategic retreat in our budget process, and our three year planning cycle that occur every year. The only reason I gave a little hint was that, I want to remind people that the HeartCode products have three partners involved, and it's been a top performing product for us in the last two quarters. And it has a lower gross margin than even the ICD-10 product. So I did want to just kind of remind people of the structure of that product as you think forward and that's really the only commentary I’ll give going forward. That said, you’re correct; products like checklist management that's wholly owned and probably supports gross margin over 90%, performed really well in the quarter adding 10s of 1000s of subscribers. And we also saw our post-acute section perform well. We made some net big wins, and the really nice thing about that win is they bought products across our multiple segments, and so we felt encouraged by that. And so there are many challenges that manifest in the quarter, but back to gross margins I think we’ll stick with what we said for the remaining year and stick to our guidance and work hard to deliver that for the remaining two quarters of the year.

Matt Hewitt

All right. Thank you.

Operator

Thank you. And our next question comes from the line of Richard Close of Canaccord Genuity. Your line is now open. Please go ahead.

Richard Close

Yes, this is ...

Mollie Condra

I’m sorry. Can you speak up? We have little bit difficulty hearing.

Richard Close

This is Richard -- Richard Close.

Robert Frist

Hi, Richard.

Richard Close

Good morning. I was wondering if you could put any details -- more details around the record first half sales, in terms of what maybe the year-over-year growth was on your bookings?

Robert Frist

No, we don’t guide the bookings. But we wanted to just explain why, and we don’t talk about bookings. But we found it’s necessary to explain why we had confidence in our guidance this time, and it is based on the fact that we had a heavily weighted backend sales cycle. And in that part of the challenge and the opportunity right, because we had expected more of those sales to come in January, February, March and April, and instead they came in June -- May and June. And so that's really all the commentary we’ll provide on bookings and sales. But we want you know with some confidence that we did set records and it created an implementation backlog. So if we can just get through the execution of implementing we can deliver the growth rates that we projected.

Richard Close

Okay. And then, I’ve been following the company here for a decent amount of time. And I was just curious; I don’t remember really this happening ever in the past. Was there something that changed or anything that maybe caused that, the bookings to come later in the quarter?

Robert Frist

No, it's just kind of the cycle. I think -- and since we don’t ever talk about it and we’ve had those before, we just never had where we needed to explain the revenue side in so much detail, such a heavily weighted second half. And more so than we had planned and certainly more but given our annual guidance then you guys had all modeled. And so, we felt it's necessary to talk about it. But we’ve had cycles. I mean Q2 and Q4 are usually stronger periods in general. It's just that relative to maybe our plan and therefore the way use that modeling things, it was a little more heavily weighted in the last two months. So there’s really not much more I can say about that. We had modeled a little earlier in Q1 and so, a little bit of a miss on our part and it all came at the end of Q2.

Richard Close

Okay. And then ...

Robert Frist

There’s no particular reason that we can identify. We had some things slip from Q1 to Q2 and our team is down the way to reel them all in close them all at the end of Q2.

Richard Close

Okay. And then, with respect to the DSOs, can Gerry just go over that again? Was that anything specific or was it just the bookings coming in late in the quarter. What exactly, I didn’t quite catch that.

Gerry Hayden

Yes, sure, I’ll try to explain a little bit. During our implementation of the NetSuite financial platform, the April to May billing cycles in which the customers [indiscernible] later than normal, and so that resulted in a slowdown in cash receipts. And so that's what I’m trying to explain in my comments. We’re now back on schedule, but need to work hard to get those cash collections back and caught up and reduced, and it comes to zero balances.

Richard Close

Okay. And then my final question, and I may have asked this in the last couple of quarters. But the advisory board has restructured their sales force to move away from selling individual products to more a solutions sale. And Bobby, you talked about this post-acute win where they are buying patient experience as well as the core workforce I guess as well. Are you guys selling more on a product-by-product basis or a more a solution sale yourself? And how do you think about that going forward?

Robert Frist

Right, I’ll just remind you of how our sales organization is structured in general. This is kind of [indiscernible] we understand its structured around the buyers. We’ve identified about six or seven core buyers across our three segments and we found ways to structure the sales team. About half of the sales team are account managers that carry quota, and they build account level plans and so they are expected to bring in specialists from these seven or so areas. And then we target the VP of HR, the Head of Revenue Cycle or VP of Finance, the CNO, the CMO, the Head of Risk, the Head of Quality, those are all and -- experienced officer are all targets for the sales organization. Now we go in, in solution sale [ph] by specialist area. So you can kind of over simplify to think of about six or seven -- seven teams of 12 to 15 that focus on that buyer. And they do indeed go in and show all of the relevant products across our stream to that buyer, and so there are kind of groups of products and solutions that are taken in by these specialists to the specific buyer. And then the account manager’s job is to orchestrate how those six or seven specialists come in into the account plan for our existing account structure. And so, that -- hopefully that gives you a little indication how we’re structured. We’re doing a little better job now through the account planning process of bringing in two or three specialists for the time and kind of bundling up what we call a big H sale, which is kind of a HealthStream sale that includes solutions from multiple groups targeting multiple buyers. And so, we are getting a little better at that, at least in this one big system level and that was exciting to see all that cross selling occur in that one account. And also have the post-acute account which is exciting because we’ve told everyone that expanding the post-acute space is important to us.

Richard Close

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Scott Berg of Needham & Company. Your line is now open. Please go ahead.

Scott Berg

Hi, Gerry and Bobby, thanks for taking my questions. Just a couple of quick ones here. Gerry, could you help us reconcile the deferred revenues that were down more than expected in the quarter, kind of given the strong bookings that you guys have talked about in Q2. I guess I’d expect for them to be a little bit stronger and maybe try to understand what all the puts and takes are in involved with that line item in the quarter?

Robert Frist

Scott, can you say it again? Did you say deferred revenues or did you say ICD-10 revenues, what did you say?

Scott Berg

Sure, deferred revenues.

Gerry Hayden

Okay. The best way to describe that is, last year the impact on the first quarter of 2015 -- second quarter of 2015 was a reduction in revenues above $2.7 million all the way to the HealthLine acquisition. In this year’s second quarter that numbers will hit $439,000. So what I was referring to was, the increase in revenue is basically that change in that level of deferred revenue write down in a different period, so it's roughly $2.2 million swing. Does that help answer your question Scott, maybe I’m ...

Scott Berg

Yes, no it was more of total -- the deferred revenues in the quarter were down. Given the record bookings in the quarter or at least that you ...

Gerry Hayden

Balance sheet.

Scott Berg

Yes, in the balance sheet. Yes, not the -- not really related to the acquisition.

Gerry Hayden

Yes, sure. The biggest driver there is last year we saw quite a bit of ICD-10 contracts in the balances of deferred revenues as it all have been amortized into revenue and so that's why that balance is found in the balance sheet.

Scott Berg

All right. I guess, as a follow-up to that is, Bobby you had a good quarter on the post-acute side, you at least called out a large transaction that bought kind of a full suite of products. Can you maybe talk about sales pipeline there, and any increased traction that you’re seeing in post-acute care now that it seems like you’ve got some for content and technologies that are certainly more ready to sell into that segment than what we’ve seen over the last maybe 12 to 18 months?

Gerry Hayden

It's just been a steady contributor as part of our subscriber count every quarter and this quarter we highlighted one particular count that adds over 20,000 subscribers. So that was great to see. I would just characterize it has a nice steady pipeline, and we’re learning to target the middle and upper and lower, the whole spectrum of that market which has a lower, smaller organizations in it, you’ll learn to sell those and then obviously deliver one system level client this quarter. And so, I would say we’re just getting better at taking our suite in and finding what parts of our suite that we’ve sold for over a decade to the acute care market is applicable to the post-acute settings and we’re just getting a little better at that.

Scott Berg

Great. That's all I have. Thanks for taking my questions.

Gerry Hayden

Thank you.

Operator

Thank you. And our next question comes from the line of Matthew Gillmor of Robert Baird. Your line is now open. Please go ahead.

Matthew Gillmor

Hi. Thanks for taking the question. I wanted to ask another one on the sales activity. I know you don’t give the bookings numbers themselves. But can you maybe give us a sense for how you define bookings or sales. Is this an annualized revenue contribution or is it more of a growth value of the contract which could be spread over multiple years?

Gerry Hayden

Yes, it's spread over multiple years. So when we think of our internal measures, it's the total contract order value. And so that's correct to say that if we sign a two or three year contract, we have multiple ways to look at it, but the one we’re referring to was the total value of orders -- the total contracted value of orders in this first half of the year was greater than ever before.

Matthew Gillmor

Got it. As a follow-up to that, is it safe to say that the terms of the contract in terms of the duration are no different this quarter than in previous years?

Gerry Hayden

I think on average that's a fair statement. Yes.

Matthew Gillmor

Okay, that's helpful. And then on the patient experience side, you mentioned a large contract loss and then also this nice win on the post-acute side and you’ve given some information I think in terms of what contributed to the win on the post-acute side and being able to leverage multiple aspects of the business. Can you maybe characterize what the loss was? Was that on the acute hospital side and then what factors contributed to the loss, just so we understand that better?

Gerry Hayden

[Indiscernible] because it actually was post-acute, and we’re not naming names as of competitive situation and we lost the competition on the renewal. So as an existing account and we’ll work hard in a few years try to bring it back in, and they remain a customer for some of our other product service sets. So it wasn’t a loss for the customer, there’s a lot for the customer and for the patient experience business. And we’ll fight hard to try to win them back, but it was just a head-to-head competition and we lost.

Matthew Gillmor

Got it. Thanks for taking the questions.

Gerry Hayden

Thank you.

Operator

Thank you. And our next question comes from the line of Vincent Colicchio of Barrington. Your line is now open. Please go ahead.

Vincent Colicchio

Hi, Bobby, this is Vince here. Curious, were you able to cross sell other products to any ICD-10 subscribers in the quarter? And how conservative do you think your ICD-10 revenue forecast is for the year?

Robert Frist

Well, we’re always cross selling, but at this point the rate that they’re dropping off is probably faster than our ability to predict how many we’ll save by cross selling. So we kind of model them effectively all coming out by the end of Q1 next year. And so, we have a lot of, if it gets smaller and smaller we get more confident in its scale. And what we’re seeing now is the next two quarters being the one we’re in our third quarter and fourth quarter, we expect about $1.1 million in this quarter and a little under $1 million in the next quarter. And the reason it’s kinds of flat is that, a lot of the extensions we’ve signed carried people through to January and February of next year, and then we expected to go ahead and drop off in this particular product category we call ICD-10 readiness probably close to zero through Q1, a rapid drop off after that. So we’re pretty confident in this run out, and what we’re working on is the offsetting revenue from the new product called DNA and we continue to sell that as an offsetting product as well. But we are fairly confident that the numbers for your model will be about $1.1 million and a little under $1 million for Q3 and Q4.

Vincent Colicchio

Thanks for that color. And then, could you give us an update on the M&A market, have valuations gotten any better out there. What does it look like?

Robert Frist

I’m not seeing -- I’m not sure of seeing valuations get any better, but we’re pretty selective in what we’ve been doing lately. You can see from our last couple, we brought in some assets and people that we think are really leverageable across our network. So that's an exciting new area. And I would say that the pipeline is active for all three segments. So we’re not looking in any one area. We have a couple of ideas in each area, and we’re going to chase them all down and keep investing in this area. Because we do think that we have a strong network, and part of our network is to deliver a network effect in the long run for shareholders, and so there are definitely more technologies and assets that can lever the breadth and scope of our network.

Vincent Colicchio

And do you have any potential acquisitions in your pipeline that would involve proprietary content on the workforce development side?

Robert Frist

Well these last two actually were just that. If you think of content more broadly as data or database, in this case tests and databases and benchmark. And so, what we’re really excited about is these two acquisitions we just announced is that they have historical datasets that allow for proprietary benchmarking and the test themselves are a form of proprietary content. So both the test questions and the test answers which we have a lot of history on now will form a new type of content for us that I’m pretty excited about.

Vincent Colicchio

Okay. Thanks for answering my questions.

Robert Frist

Thank you, Vince.

Operator

Thank you. And our next question comes from the line of Frank Sparacino of First Analysis. Your line is now open. Please go ahead.

Frank Sparacino

Okay. So I’ll keep it short since we’re running out of time. I just wanted to go back to an earlier comment around the provider segment and the shift to more of a subscription versus pure perpetual license model. Can you give us a sense just to the magnitude of that change, maybe what the business was when you acquired in terms of license and where it is today, what you think it's going?

Robert Frist

Yes, I don’t think I have those numbers in front of me. I should have them, but I don’t. And so we might have to save that for next quarter. But the business had been around for almost 30 years and it sold all forms of software in its history including purely installed software. And along the journey they moved to a subscription selling model, and then a web hosted subscription selling model. And increasingly of course we’re selling at every turn that we can the subscription based web delivered model. But there is still a little bit of the legacy installed, revenue recognition and some installed sales but at a lower rate. So I don’t have the magnitude of those shifts and that's something that we can make a note of and talk about in the third quarter.

Frank Sparacino

Thank you, Bobby.

Robert Frist

Thank you, Frank.

Operator

Thank you. And our next question comes from the line of Ryan Daniels of William Blair. Your line is now open. Please go ahead.

Ryan Daniels

Yes, good morning. Thanks for taking the questions and the color so far on the record sales. I have one more follow-up there. Just curious probably if you could talk about what in particular is resonating. I know you talked about the necessitation products, but I guess in particular any specific platforms that are proprietary there selling well or other content that is accounting for those record levels?

Robert Frist

Well the really nice thing about the sales, well there were no huge single deals that carry that record, and they were spread across a lot of exciting areas. And so, for example our new knowledge queue product which you can think of as the third generation of our OSHA mandatory training product which really is what put us on the map is starting to get some traction. And so was it a couple of million in orders -- right, about a couple of million in orders on the new knowledge queue product which you remember we own wholly. So we own the content, the data, the platform, it's a fully vertically integrated product and so it also will have high gross margins as well. So it's fun to see a little traction in the -- in that particular product. Some of the used based products that involved control centers which that one in the knowledge queue as one of them are getting in the market. And so, we’re seeing steady contribution in the clinical area, I mentioned that as well. CE center well not breaking any records has been steady. The clinical association content has performed well. We mentioned the 22% growth rate across the clinical product portfolio. Really we -- and we had that big win, a really solid win in the post-acute setting where they brought across the entire portfolio, so it's really a nice balance selling quarter. Now I wish that it was balanced across the first six months of the year. It all seemed to occur in the last 50 days of the two quarters. So it didn’t quite happen the way we hoped, but it did happen.

Ryan Daniels

Okay. That's helpful. And then you mentioned now that you have the sales, the key is implementing those clients. Can you talk a little bit about your confidence level there both with your internal staff to do that, and then I’m curious of the clients bandwidth take that on and ensure that the revenue is recognized through the back half of the year as you anticipate?

Robert Frist

Well, some of it is depending on the customers. In all these cases when you sell this type of service software and solutions. And so, we try to carefully weigh that with our historical ability to execute. And we had some new execution areas like in the provider solutions segment where they’ve been working on improved and enhanced implementation processes for the last several months that we think will come to provision in the next coming quarters. So it is an execution challenge, but I think we’re up for it. We’ve got good teams there wherever the challenge. And I mean it gave us the confidence to reiterate our guidance. So we try to access all the risks involved with that, and we still feel like we’re going to deliver it.

Ryan Daniels

Okay, great. Thanks for the color.

Operator

Thank you. And I’m showing a follow-up question from the line of Robert Close -- Richard Close of Canaccord Genuity. Your line is now open. Please go ahead.

Richard Close

Yes. One thing I did want to ask is, with respect to the two acquisitions, I know they were small in nature. But when do you expect those to get ramped up and begin -- really beginning to contribute to revenue?

Gerry Hayden

Well, they had a small contribution revenue in the remaining two quarters, but it does represent a new investment area. To be clear, these are two small platforms and we’ll want to reengineer parts of them and add technologies to them like we do expect those technologies to leverage our investments in Juice Analytics [ph]. So we’ll be building new analytics capabilities wrapped around those products. And so it will take a little time to integrate. But we’ll see some revenue -- smaller revenue contributions even in the second half of this year.

Richard Close

And then finally, as you look out and see what the purchasing trends are. Are you more optimistic about the long-term growths of the company or less optimistic, any thoughts there?

Gerry Hayden

Well no, I’m not going to provide color going out into ’17 and ’18 and ’19. I think we clearly had some challenges this quarter that kind of converged on us, and the timing of things did happen as planned and we spent more in our big enterprise infrastructure system. But we dug deep and thought hard about second half this year and feel good about our guidance. And I think Richard, we go through a really detailed planning process in the remaining four months of every year, and we’ll come back out and share the plans for growth and opportunity in ’17 forward here. We always do that around February.

Richard Close

Great. Thank you.

Gerry Hayden

Thank you, Richard.

Richard Close

Yes.

Operator

Thank you. And I’m showing no further questions at this time. I would now like to turn the call over to Mr. Robert Frist for closing remark.

Robert Frist

Thank you to everyone following our company. The analysts in particular who work hard to convert our annual guidance into quarterly guidance and into quarterly modeling, which I know is difficult. We clearly had some challenges for the quarter. But there is some optimism [indiscernible] all throughout the Company, in all of its segments. And so we’re going to work really hard to deliver the second half of this year as we’ve just guided. We look forward to reporting our third quarter, and thank you to all employees working so hard through this period to put all these new systems, software infrastructure and execute the implementations that we need to deliver the second half of the year. Thank you. Look forward to the next quarter earnings report.

Operator

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

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