HealthStream, Inc. (HSTM) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the HealthStream Incorporated Fourth Quarter and Full Year 2014 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 is being recorded. I would like to introduce your host for today’s conference, Ms. Mollie Condra, Vice President, Investor Relations and Communications. Ma’am, please go ahead.

Thank you and good morning. Thank you for joining us today to discuss our fourth quarter and full year 2014 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 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 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. With that, I’ll turn the call over to our CEO, Robert Frist.

Thank you. Good morning, everyone. Welcome to our 2014 year-end earnings conference call. As many of know, who are familiar with our company, this conference call is particularly important as it’s the one time each year we provide our forward-looking guidance for the upcoming year which we are now a month and a half into here. We have many business developments to discuss today, so I’m going to jump right in. HealthStream’s full year 2014 metrics reflect a strong year of growth as revenues up 29%, net income up 25%, and adjusted EBITDA up 21%. Ending the year with revenues exceeding $170 million was an exciting accomplishment for the HealthStream team. In a minute, Gerry Hayden is going to provide more detail on the 2014 financial performance and our 2015 guidance in just a few minutes here. I think some of our biggest news I need to cover early, so I’ll jump right in on the HealthLine Systems pending acquisition. I’m really excited about the announcement we made last Friday where we entered into a definitive agreement to acquire HealthLine Systems. HealthLine Systems is a market leader in credentialing and privileging for healthcare providers in hospitals and health systems across the U.S. We expect this transaction to close later in the quarter pending required approvals. So we are excited to bring that to signature but we have a little bit of a waiting period here as we seek final approvals. We believe acquiring HealthLine Systems represents the next step in the execution of our planned strategy for credentialing, privileging and provider enrollment business. If you think back to our acquisition of Sy.Med Development, I think that occurred in September of 2012. You recall our entry into the healthcare credentialing business kind of began with that acquisition. And there was a smaller organization focused on really the provider enrollment process. Now, there is a combination with Sy.Med and HealthLine coming together will meaningfully strength and expand our presence in this business. Importantly, we're going to do that under the strong and established leadership of Michael Souza. All of you may remember Michael from his role as Senior Vice President of Sales. He led us to strong organic growth in the last several years and recently took on the Senior Vice President of Business Development role for us as we sort out how to strengthen our position with Sy.Med. In this role he gained a deep understanding of the credential and privileging business and help hand select the HealthLine Systems Company as a target for growth for us in an acquisition. HealthLine’s products offer an innovative expansion to our growing suite of healthcare specific talent management solutions. If you think about it the process of validating the professionals that are potential employees of hospitals places HealthLines’ systems and software in an enviable position of being the gatekeeper for workforce quality at over 1000 U.S. hospitals. There is simply a process for determining the credential sets of the workforce as it enters into employment in hospitals and HealthLine Software is used to orchestrate that process of validating their credentials. And so the front end of talent management is kind of managed at over 1000 U.S. hospitals by the systems and software of HealthLine Systems. So really excited about this early component of talent management. 2000 [ph] revenues of $18.8 million show a strong and robust company at HealthLine Systems generating operating income of $7.7 million and EBITDA I believe was around $8.4 million, $8.5 million meaning that we paid a very reasonable multiple to acquire a strong and profitable business in the healthcare solutions business. With our growth-oriented leader Michael at the helm and our commitment to add growth investments because we have to combine the Sy.Med operation with the HealthLine Systems operation we are confident that the new business segment with this combination of good growth wanting leadership and our commitment for growth investments will be an important: contributor to the HealthStream store on a go forward basis. This announcement was very exciting, it sets us up really well for the next 24 months and now I’m going to turn it over to Gerry to hit some of the financials highlights and then I am going to come back and do some deep dives into – many of our product lines and product sets. Gerry?

Thank you Bobby and good morning everyone. I’ll provide substantial color to our results. Here are some financial highlights. Consolidated revenues were up 22% to $45.3 million in the fourth quarter of 2014, while they were up 29% to $171 million for the full year. Operating income was up 20% to $4.2 million in the fourth quarter of 2014, while it increased 12% to $16.4 million for the year. Net income was at 50% to $2.6 million in the fourth quarter of 2014, while it increased by 23% to $10.4 million for the full year of 2014. Adjusted EBITDA was up 28% to $7.6 million in the fourth quarter of this year, while it increased by 21% to $28.9 million for the full year of 2014. Let's now look at five areas of the income statement; revenue, gross margin, operating expenses, operating income, and income taxes. Revenue, you’ve all seen from the release that our overall revenue growth rate is 22% for the fourth quarter compared to last year. The ICD-10 readiness solution, an important contributor to our organic growth contributed about $7.2 million to the fourth quarter revenues this year compared to $5 million in last year's fourth quarter. Excluding the ICD-10 readiness solution our overall revenue growth rate in the quarter was about 19%, which includes contributions from recent acquisitions. In addition, other product lines continue to perform well, including our clinical development courseware, where for example, our Lippincott Nursing Practice series revenues grew by 52% over last year's fourth quarter, while our Competency and Performance Center and related products grew by 80% over the prior year's fourth quarter. Research/patient experience revenues grew by 1% in this year's fourth quarter. Revenues from a Patient Insight surveys grew by 8%, but that growth was offset by lower growth or decreases in other products such as our annual and biannual survey's and BLG-consulting and coaching. Nevertheless it’s important to note that the research/patient experience group is still a contributor to our operating income and EBITDA for the company. The growth rate in subscription-based revenues was influenced in part by a slight decrease in ICD-10 revenues from the third-quarter. For the fourth quarter, customers began exercising their contractual rights to extending their contract term resulting in some revenue being shifted from the fourth quarter to future periods. We estimate that approximately $500,000 in revenues moved from this year's fourth quarter to future periods. As the $500,000 revenue remains in the fourth quarter we estimate that our revenue for subscriber metric will be $0.50 higher than reported levels. Now let's look at the gross margins. The gross margin of 57.3% in the fourth quarter of 2014 versus 56.5% in the fourth quarter of 2013 reverses the pattern from previous quarters whereby we experienced decreases in our gross margins on a comparative basis. One factor influencing the gross margin improvement is the flattening of the ICD-10 revenue curves. Specifically, as ICD-10 revenues growth slowed so too did the increase in the variable cost of royalties. The revenue mix excluding ICD-10 carries a higher gross margin contribution. On a full-year basis, the gross margins do show a decline between 2013 and 2014. The 2013 gross margin was 57.9% versus 56.6% for this year 2013. Let’s turn our attention to operating expenses. For the fourth quarter of 2014 product development expenses were 9.7% of revenues and represent a 40% growth rate over the fourth quarter of 2013. The full year of 2014, product development expenses as a percentage of revenue have increased to 9.6%, equating to a 4% year-over-year increase in that category of product development expenses. Similarly for the full-year, investments in our sales and marketing initiatives have increased by 24% over 2013, as we continue to add talent and resources that allow us to expand our product base and our sales force. G&A expenses at 13.8% of revenue are higher than 2013's fourth quarter level of 12.7%. A specific reason for this increase was the partial deal costs we incurred in 2014 for the HealthLine Systems acquisition that we announced back in February 13, actually last week, February 13. On a four-year basis it's important to note the trends. As a percentage of revenues, G&A expenses have declined from 13.9% in 2013 to 13.4% this year 2014. This has happened even though 2014 includes deal cost for both HCCS, which we closed in the first quarter of this year and the HealthLine Systems transaction we just discussed a second ago. Operating income, as you know from our previous investor calls, GAAP accounting rules require us to write-down acquired deferred revenue balances to fair-value as part of recording the initial transaction. This accounting convention results in reduced reported revenue in operating income until we have amortized the initial discount. The fourth-quarter results reflect the advertising impact of the deferred revenue write-downs totaling $244,000 in the fourth quarter of 2014 and $172,000 in the fourth quarter of 2013. The impact of deferred revenue write-downs was $1.5 million in 2014, compared to $839,000 in 2013. The full-year operating income growth rate was 11.6%. Income taxes, as you may have noted in our financial statements the effective tax rate in the fourth quarter of 2014 was approximately 38% versus our historical trends of 42% to 43%. In the fourth quarter, our booked income tax provision reflects an estimate off the research and development tax credit we anticipate to realize for the 2014 year. Accordingly, this tax benefit reduces our provision resulting in a lower effective rate this quarter. Now let's look at our balance sheet, our cash position in the overall balance sheet are strong, further enabling our belief to support organic development activities and inorganic growth opportunities such as HealthLine Systems. As of December 31, 2014, our cash balances were $121 million, a $5 million increase from $116 million at September 30, 2014. Also as you already know, we have no long-term debt but we did increase our revolving credit availability to up to $50 million from this previous $20 million level. In our earnings release yesterday, we stated that we anticipate funding the HealthLine Systems purchase price with approximately $60 million of cash on hand and $28 million of borrowings under the Revolving Credit Agreement. We continue to review and evaluate a variety of acquisition and business development opportunities while maintaining our discipline in terms of strategic fit and evaluation. We believe that this will end up cash and debt, provides us with financial flexibility to pursue development opportunities while introducing a modest leverage into the capital structure. Yesterday’s earnings release contained our guidance for the 2015 full year. Now before diving into the details, I’d like to highlight a few points about the HealthLine Systems acquisition. The press release includes full year 2014 HealthLine financial information. Our guidance is based on nine months of ownership in 2015 assuming a transaction closing in the first quarter of this year. The revenue and operating income guidance ranges contemplate the HealthLine Systems deferred revenue write down for GAAP accounting purposes. Our guidance indicate increased rates of investment over 2014, these are largely associated with product development. For 2014, as I just mentioned a few minutes ago, product development increased by 40% over 2013 and 2015 we just made this corridor increased by approximately 48% over 2014. The depreciation and amortization expense line should increase to account for the amortization of intangible assets that are related to HealthLine acquisition. We anticipate consolidated revenues will grow between 18% and 21% as compared to 2014 and will be derived from the following three areas. First, we expect revenue growth in the Workforce Development segment to increase in the 15% to 18% range. Second, we expect our Research/Patient Experience Solution revenues to grow by approximately 2% to 4%. Third, assuming once again a closing sometime by March 31, 2015 which implies nine months contribution to 2015 results, we anticipate HealthLine Systems revenue to be between $7 million and $9 million which once again reflects the write-down of the acquired deferred revenue balance as required under GAAP. We currently anticipate ICD-10 product category will be between $26 million and $28 million in mid-2015 similar to last year’s levels. We anticipate that 2015 operating income will decrease between 25% and 35% over full year 2014 as operating income range includes the following: Between $5 million to $7 million of write down of deferred revenue balances of the recently acquired or to be acquired HealthLine Systems. Approximately $1 million in transaction and closing costs also related to the HealthLine Systems acquisition. An increased rate of investment over full-year 2014 in HealthStream's product development related to new products, enhancements to existing products, and integration of acquired products including an increase in investment in the HealthLine Systems products. And finally an increase in sales and marketing investments, including the Company's customer Summit, which will be held in Nashville during the second quarter of 2015. As I mentioned just a few seconds ago, we anticipate funding the HealthLine purchase price of approximately $60 million of cash on hand and $20 million in borrowings under Revolving Credit Agreement. Accordingly, we expect to incur between $650,000 and $700,000 in interest expense beginning in the second quarter of this year 2015, which will be reported in other income/expense which is below operating income on the income statement. We expect effective interest rate on these borrowings to be approximately 3% per annum. We anticipate that our 2015 capital expenditures will be between $11 million and $14 million and our effective tax rate will be between 42% and 44%. And this guidance does not include the impact of any other acquisitions that we may complete during 2015. Thank you for your time. And I’ll now turn the call back to Bobby.

Thank you, Gerry. Now it’s time to take a little deeper dive into the some of the product lines and solutionaries of the company. First, let’s cover the Patient Experience Solution area. Since the passage of the Patient Protection and Affordable Care Act 2010, CMS is increasingly using its HCAHPS, patient experience surveys as part of their quality reporting programs. For hospitals, their HCAHPS scores are directly tied to the CMS Value-Based Purchasing Program where their Medicare reimbursement rates will be impacted by these scores. The patient experience business has a challenging forecast with a growth rate of only 2% to 4% for a few key reasons. At the end of 2014, this solutionary lost a meaningful patient survey account when the account consolidated services to another vendor. That means that some of our growth is necessary to just backfill this loss as the key contributor to the lower forecast to growth rate of 2% to 4%. And that just occurred really in the end of 2014 and so we had to pull back some of that revenue expectation into 2015 and therefore a lot of our energy will go into backfilling that, and so the lower growth had 2% to 4%. Second, we’re seeing a growth in the CG-CAHPS surveys. These are the physician office experience surveys. While majority of these surveys are still done by phone, we are encouraging to shift to an eSurvey methodology. The eSurvey methodology has a lower price point and however a higher margin. As the shift occurs, we expect margins to improve on lower revenue growth and so that’s the second contributor explained in the revenue growth rates in the Patient Experience Solution area. Third, we’ve modeled flat growth rate for the acquired consulting services BLG while we work to restructure and improve this service offering. That acquisition is proving a little more challenging for us and we can’t continue to work to bundle those services with the sold services, the patient experience measurement capabilities that we have. So for those three reasons, we have a lower growth forecast on the Patient Experience Solution as we enter into 2015. And so in an effort to begin to improve that business in the third quarter of 2014, HealthStream announced that it has leased office space to build and open a new Patient Interview Center at Nashville. The new facility officially opened earlier this week and overtime we expect a lower operating cost for this facility to improve margins overall in the Patient Experience Solution area. For the full year 2014, we completed a record 1.9 million total surveys which is 11.3% higher than the prior year and our operating teams are making steady improvements to manage the volume of this growth. Let’s turn our attention to ICD-10 which has been a topic of great importance over the last eight to really 10, almost 12 quarters now. And we are finally here reconciling the past and the concerns with the fact that we now believe that we’re going to be able to deliver similar revenues prior to last year. And so effectively we’ve kind of been able to we believe kick the can down the road to 16 on ICD-10 issue. However, if you have a really high growth driver which is true in our Workforce Development Solutions and it starts to go flat as we just projected, which we perceive as a strong accomplishment given its early rapid growth, it’s very dilutive to the overall growth rate of the Workforce Development section and so it itself going kind of horizontal on it as a contributor to the lower growth rate on the Workforce Development segment. So let’s look at a few of the details around ICD-10 and remind everybody of the facts. Retail prices for the ICD-10 readiness solution are generally between $15 and $125 per user per year. The majority of contracts are still two years and we have a 50-50 revenue sharing agreement with our partner giving us a 50% gross margin on ICD-10 solution sales. After several postponements, the current date set by CMS for the transition of ICD-10 coding systems remain set at October 01 of 2015, so this year. And as of late last week, a hearing was held by the U.S. House of Representatives Energy & Commerce Committee Subcommittee on Health and there seem to be apparent support for maintaining the coming deadline and little resistance to and desire to change it. So we believe that this time it’s going to stick. In light of the last postponement however of ICD-10 readiness that confused many of our customers and that occurred in the second quarter of 2014, we offered our ICD-10 readiness solution customers the option to purchase a one year extension of their current solution at a 50% annualized discount. Customers who accept this offer are eligible to blend unbilled payments remaining on their existing term with a discounted payment of their extension term, then spread the number of payments of the existing term plus the extension term. Customers receive a discounted extension and lower periodic payments which we receive greater total revenue from the account over an extended period of time and so earlier in the prior quarters we were unable to identify the up-take of that offer, but I’m pleased to report that now after a quarter at year-end 2014 80 of our ICD-10 readiness customers had chosen to purchase the one-year extension offer, thus amending their contracts over a longer period of time and for a greater total dollar amount. This higher rate of adoption than originally expected and we consider it to be a positive development. After three consecutive quarters of nominal subscriber additions that rounded to 1.6 million we are excited to see increased levels of contracting bringing our total 1.78 million subscribers and so finally some movement on the total subscribers for ICD-10. The net effect of these developments is that we now anticipate our full year 2015 revenues from our ICD-10 readiness solution to be between $26 million and $28 million roughly comparable to our 2014 revenues. While this flattening of revenues for ICD-10 readiness is better than we originally anticipated and we will probably still see some decline towards the end of the year. It will of course have the effect of reducing the overall growth rate of our workforce development segment. On Monday of this week, our ICD-10 solutions partner Precyse announced the launch of an exciting new product called Precyse University DNA, which we are a primary carrier for and our technologies play a primary role in the development of the new capabilities of Precyse University DNA. Precyse University DNA is a solution enabled health organization to pinpoint performance gaps for coding, documentation, and other revenue cycle functions. Although current ICD-10 readiness products were designed to prepare the workforce for the looming ICD-10 deadline, the new Precyse University DNA is designed to maintain critical coding and revenue cycle competencies over time. So it’s much more of a sustainment product than the product we've been addressing the last two years. So, really excited, just in the last few weeks to have a new product that we believe has an extended shelf life and compelling reasons to upgrade from the readiness solution to the DNA solution. In fact, already which was preannouncement, three contracts have been signed for Precyse University DNA prior to its official launch and utilizing some of our new data and analysis tool sets. So, I’m going to shift gears and talk a bit about the hardcore suite of products and other category of products has been a strong and steady contributor to our growth over the years. This product is focused on teaching resuscitation skills to healthcare professionals and it’s offered through our partnerships that layered all medical and American Heart Associations. In the fourth quarter, we saw a 32% increase in completions over the prior year quarter. And so we continue to see all the gauges of consumption and utilization as project moving in a positive direction indicating strong market acceptance and continued growth of this product set. So we're very excited to see a 32% increase in completions over the prior year. Another new product Checklist Management, which was launched just in the second quarter of 2014 finished the year with over 120,000 implemented subscribers. As you recall Checklist Management is a powerful product that replaces widely utilized paper-based processes. So, really excited to see a new product go from zero to 120,000 subscribers in just two short quarters. For our competency center and performance center products the fourth quarter represented a peer to steady progress, both contracted and implemented subscribers showed sequential growth. For example we implemented over 58,000 new subscribers in competency and performance center in the fourth quarter. Another new product that we are excited to see and is having positive early results is our CE Center. And I preview the CE Center for you during the last quarter's call kind of let the cat out of the bag a little bit early, but we described it as a Netflix like subscription product designed to meet the state license requirements for nursing and allied health professionals. For this product we partner with the Lippincott, a top brand in nursing and academy medical a top brand in allied professional education. Hospitals purchase CE Center and make it available to staff for their professional development. We've seen considerable momentum with this product adding 63 new contract since its launch in August. You should begin seeing contribution through our ARIS from this exciting product throughout 2015. So the uptake of that product has surprised even us. Some of our preliminary budgeting in just the fourth quarter alone with 63 new accounts signed for its utilization. I think it’s the integration of that product with the core platform that's coming together with a considerable competitive advantage in the market and of course it’s completeness and the quality of content it finally has all the right elements to be a growth driver for our company. So, we surprised ourselves a bit with 63 new accounts signed in the last 90 days of the year. Finally, on February 3, 2015 we announced the launch of HealthStream Recruiting Center, a new module and capability of our core talent management platform. I don't have a lot to report on that except that we're excited about it and in the two and a half weeks since the announcement we already have a qualified pipeline and contracts pending. So, we’re really, we've kind of launched at our national sales meeting a few weeks back and then took it to market and we see some early acceptance of it as rounding out our Talent Management Suite. Across HealthStream, our employees are celebrating the news that several of our products received outstanding industry recognition in the fourth quarter. Our resuscitation solutions won two Brandon Hall group gold awards for excellence and the best advance in gaming or simulation technology and the best advance in the unique learning technology. Our COI-SMART product line, which was acquired through our HCCS acquisition, also earned a Brandon Hall gold award for its excellence in best advance in time and labor technology category. I like to congratulate our employees, our partners and customers for the innovative use of these products and the outstanding outcomes they are achieving with these products. So I feel like we are getting a little bit of our project module back in our product set and that's encouraged us to continue to invest in an exciting and bright future horizon and so you see a little bit more of an investment theme again as we enter into 2015. Finally, everyone at HealthStream is gearing up to host our annual customer Summit. We point that out on this call for two reasons; one, we expect this attendance to set new records again, and to be an exciting event in April 29 through May 1 here in Nashville. And secondly, since we didn't have it last year for those of you modeling our company you want to add some extra expenses into a marketing for this exciting annual customer Summit - actually it's around, every 18 months is our cycle. And we’re really gearing up now, just a few months to go until that large customer Summit. With all that in hand and laying out all of our exciting growth plans and also our challenges as we enter into ‘15, I’d like to turn it over for questions for the investor community.

[Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum, your line is open, please go ahead.

Good morning and thank you very much for the update and the opportunity to ask some questions.

Glad to do it.

Before the Summit, ICD-10 and thank you for going into detail on that, but could you help quantify what the impact the growth rate will be in ’15, I mean as we kind of walk through them as said, the contracts that have been extended taking advantage of the contract option, how much of a magnitude was that, you know 2% to 3% hit to you in the top line growth rate in 2015 or is it just too difficult to calculate at this point?

I think the easiest way to think about it is that it was our single largest growth rate contributor in the last say 24 months. And now for the next 12 months it will show slight declines, which means if you think of it in the context of the overall segment of workforce development you got an important product line, we’re really excited now that it’s actually going to hold its own. It's going to kind of go as I said go horizontal in that 26 million to 28 million. If you add up the sum of all the prior quarters it was around 28.4 million and now we are telling everyone that we expect to be between 26 million and 28 million in this year. So you have what was in the prior 24 months a grower showing now effectively zero or slight decline in growth. So, it has a meaningful effect, a dilutive effect for the growth rate of that business segment. And that's why we want to highlight some of the other high-growth products that we’re growing in the 50% range and the 80% range like competency center to show that there are still a lot of high-growth smaller products, but again one of our biggest drivers for growth is now going horizontal. In fact we had predicted a steeper decline in it beginning in the second quarter and now looking at it with these extensions we’re basically taking the revenue contributions and it would look more like a bell curve tapering off and now this is kind of plateauing for almost a full year across the top of its revenue contributions. So if you think about it, it climbed the peak revenue contribution in about the third quarter of last year and we’re going to be able to maintain essentially that peak level of contribution around the $7 million level, it might bounce around $6 million, $8 million, $7 million, $5 million for the remainder of the year and so we’re effectively going to have a six quarter plateau of contributions from that product. When you look in the context of a growth rate, it’s very damaging. When you look at it in the context of the expected decline, we are actually pretty excited. These extensions are just – every time we sign one now, it gives us revenue out 24 months from today and takes the peak down. As you saw, we had expected a higher contribution even in the fourth quarter. But when we signed 80 extensions, it pulled a $0.5 million of revenue out of the fourth quarter and pushed it into the future. And so that hurt the ARIS calculation but again in some ways I think if it is taking the top of the bell curve and smashing [ph] it down and stretching it horizontally. And so I view it as a financial victory that we are able to do that. The other exciting thing is buying has more time introduced the new product, which is called DNA, and DNA has a higher we think value proposition and a more sustainable value contribution meaning the existing ICD-10 products were geared for really getting ready for the deadline. They are kind of classified it as a readiness or a change management product. DNA is designed for perpetual maintenance of confidence of the coding and revenue cycle staff. And so now we have a product to sell into the department, the VP of Finance that we think we can continue selling for years. And so we don’t know, but it’s our ambition to make this more sustainable product, try to continuously backfill what will be a declining revenue stream eventually now looking like into 2016 on ICD-10 products. I hope that all helps. There is just a lot that’s going on there but essentially bought more time, spread out the revenue and we’ve had a great uptick in the last quarter suddenly of our extension offers.

Yeah, that does help. And I guess kind of sticking with the growth topic, HealthLine obviously looks to be a very nice acquisition and thank you for providing the financial metrics for last year. But could you comment what was the growth rate that they have been experiencing either in 2014 or the last couple of years.

Yeah. So the growth rate was fairly low in the single digits and you could tell from its extreme profitability and we paid a very reasonable multiple around 10 times EBITDA, you can see its operating income there is very strong and its size relative to our size is going to be a meaningful contributor and so, overall, a profitable business. Some of that is because it wasn’t in a high growth mode. And I think I sell some of the pre-analysis from other analysts, they talk a little bit, they kind of assume that and in fact they’re right. So it’s kind of a low growth high profit. But what’s encouraging about that is that, over 1,000 hospitals are using the products and our more extensive customer base and most importantly the growth oriented leadership that we are putting into place with Michael Sousa, who as you know, was a key contributor to our growth rates in the past five years. He was really excited to step into this new role and of course this is still pending acquisition, so hopefully it will close this quarter. We will put our highest growth oriented officer to help drive growth. You can also see now we’re increasing our investment into the Sy.Med not only to increase to integrate it with Sy.Med, increasing our investments to help on Sy.Med, not only to integrate with Sy.Med to make it a cohesive unit and Sy.Med has a really great operating team as well, but also to give Michael Sousa some flexibility to invest in growth investments in both technology, integration and the sales team to continue to strengthen it. In general, we found in this space that both the competitors and the company we acquired has underinvested in growth oriented investments. So I expect a pretty rapid growth in the sales organizations for this new business unit we are speaking up. Of course I must caveat the pending HSR approval on a few more hoops we have to jump through in the next say hopefully 30 days.

Right. One more from me and then I’ll hop back in the queue. In the press release, you had commented that you had a large health system that contributed to the 324,000 new implemented subscribers. Can you provide some details on to who that customer is, was that competitive conversion or was it more of a Greenfield situation, anything on that front would help.

They were on a different platform. It wasn’t been one of the platinum platform to the industry, but it was a takeaway. It was driven by the robustness and completeness of our solution, their existing customer of other products and so we were able to use our cross selling ability to bring them in. And on those, we implemented 324,000 subscribers and so the first thing is, if you think about the prior seven quarters, we are implementing about 130,000 each quarter for seven quarters if you took an average. Our teams here activated more than 2X, 324,000 in 90 days and so we are looking forward to the CMS revenue contribution. Another interesting fact is that customer was a customer of another product for a very small subset of their employee population. So if you think of a large health system in excess of 100,000 subscribers, they were already buying another product and their revenue per subscriber was above 50. But suddenly we bought on the balance of their employee population to the core platform at a much lower entry level purchase price. So it immediately depressed the revenue per subscriber both at that health system and it was large enough to contribute to the ARIS drop across our network. But if you really think of it, it’s really a – you can see it as a positive because now we have another 100,000 people to sell incremental product too that we didn’t have before that. So it was – I’ll call it a moderate competitive win meaning they are on a lighter industry platform. It was a cross selling strength and so they did use other products. From both research and patient experience and learning, it did have a dilutive effect to the ARIS calculation both at the account level and our broader number calculation. But if you really concentrate on it, I look at it as we now have 100,000 more people to sell more products too on a go forward basis.

Great. Thank you very much for answering the questions.

Thank you. Our next question comes from the line of Ryan Daniel with William Blair. Sir, go ahead.

Yeah. Guys, can you hear me okay?

Yes, go ahead Ryan.

Okay. Thanks for all the details and for taking the question. Let me start with one on HealthLine. It seems like from a strategic perspective, the transaction gets you closer to a more robust upfront platform for recruiting and credentialing and pre-hire questionnaires, field assessment. So how far along the recruiting spectrum does this get you versus where you envision the product leading to be for future growth?

Yeah. So it’s interesting. Credentialing and privileging are very unique dimensions of managing a workforce to unique healthcare. And they kind of sit between recruiting and so our new applicant tracking system is kind of part of the frontend of recruiting. As people key in data, it gets shifted over into these credentialing and privileging systems, and then there is kind of two more steps that happen as part of on boarding and managing the clinical and provider workforce and that’s credentialing and privileging. And so it kind of fills and niche, it’s not on the very frontend of recruiting, it’s kind of post recruiting, post hiring but its immediate process of on boarding. You have to credential the workforce and verify their [indiscernible] essentially to accept them as employees. And then you have to grant them practice rights and that’s the privileging process. And then to get money for their services, you have to send a lot of their data that you’ve just verified off to the different insurance companies so that you can get reimbursed for their work. And it’s that little window that board all three of those functions are very unique to managing a healthcare workforce and they sit between what I call the ATS recruiting, behavioral screening selection tools and the learning systems and performance of used system. And so it’s in my mind it’s like a unique little window, part of the spectrum with talent management. In fact in most industries, it doesn’t exist and so wouldn’t be thought of as a part of account management. In hospitals, it’s managing out of the medical office, so not even managed out of HR. But it does in fact – it is part of the continuous spectrum of managing the healthcare workforce. And so those processes of credentialing and privileging occur continuously. So the privileging process has to be revisit for all those providers based on different policies at different intervals, one to two years. And the credentialing process is ongoing as you have to monitor things like sanctioning and other elements. And so they are continuous and ongoing, they are core part of getting validated data collected on your workforce. They are critical to reimbursement meaning you just simply can’t get revenue if you’ve done things like enroll it and you have to have accurate data to get providers enrolled and they fill out a real unique dimension of talent management in my mind in healthcare.

Okay. That's very helpful color and then maybe one more on the transaction just from a financial standpoint. So, if we look at the operating income impact you’ve got the write-down of the acquired deferred, you've got some transaction cost and then also the amortization of acquired intangible all healing the operating income line, so, I’m curious if you could give us a little bit more detail on what the impact of this transduction is on your operating income outlook for ’15?

I think right now that will be more detailed financials followed in the not-too-distant future, but right now it’s safe to say that if you think of the deferred revenue discount, I mean you have taken a business that generates $18.5 million in revenue and rolling in to get $7 million to $9 million of revenue and so it hits at the revenue line and operating income line. And so it is the majority contributor to the forecast of decline in operating income as this deferred revenue write-down. It is the majority contributor to why we are guiding the operating income down and it’s based on an accounting convention more than financials and the cash flow or the economics.

Okay that's helpful. We will look for more detail there. And then last one on Precyse University DNA can you just talk a little bit more about the financial relationship there, I guess two-fold; number one, is it a similar revenue share agreement to what we have seen with ICD-10 and then number two, any view yet and I realize it's early, but any view on what the average revenue per user might look like for that versus the kind of lower end that you’ve guided us towards on the ICD-10 readiness product, thanks.

Yes and we use that related to the characterization because they are just known as Precyse University, but you can think of this Precyse University is kind of a readiness and orientation product and DNA is next-generation. So the price points will be higher, they will target smaller audiences and they will be more recurring. As you noted the price points on the readiness, we gave a broad range of selling, but it ended up for most of the now 1.7 million, 1.8 million subscribers that we ended up at the very bottom of the range. We are on the 15 and right around the bottom of that range is an average. The price points on DNA will be higher, it will target smaller populations, but we hope that it proves to be a little bit more of a perpetuity. One other important note is that it is a 50-50, so DNA is 50-50 on a go forward basis just like the prior agreement and we have released some exciting capabilities that are central, technological capabilities that are central to making this product what it is. And in the coming months you're going to hear more announcements about those capabilities, but they do center on the use of data benchmarking, analytics and certain capabilities that didn't exist in Precyse University until we released these technical capabilities. So, I’m going to leave that as a little bit of a teaser, but Precyse University is real, we have contracts on it, we believe it’s more of a perpetuity product, it will be a higher price point, it is 50-50 and it is based on some exciting new technology we’ve been developing for about 18 months.

Alright thanks again for all the color.

Thank you.

Thank you and our next question comes from the line of Scott Berg with Northland, your line is open, please go ahead.

Hi Bobby and Gerry congrats on a solid fourth quarter.

Thank you.

Thank you.

Yeah couple of quick ones from me. Gerry was there anything else on the calculation of ARPU this quarter outside of the large customer that was converted and came online in the slightly lower ICD-10 revenues that would have contributed to the lower ARPU number quarter-over-quarter or does that really comprise the vast majority of that difference.

That I think goes to the factors that comprise off the vast majority of the differences.

Great. Okay, that's fine. Bobby on the HealthLine product, obviously a profitable company in an area that should fit very well from a software perspective into your product suite, but what's needed from an integration perspective to make the use of it more seamless with the customers of other applications?

Well it right now can be installed and it can be delivered software as a service kind of a host of a cloud-based model and there is a mixture of both those deployments of course over time we like to see it more cloud-based than installed. The data flow between that, so once you verify credentials out and you grant privileges and can maybe before that you're going to want data to flow over to the learning performance of your systems and so [indiscernible] cut out for us to make that all seamless and so over a 1000 hospitals use this software and interestingly when we did our review of this we heard customers quote that the data coming out of that piece of software was sometimes considered the source of truth on the their workforce, meaning they actually use that data to populate their HRIS system and Talent Systems. And so we were really excited to be moving into a line of business set where the data is so well vetted and qualified and quantified that it is often considered as source of truth data set inside of these health systems. And so, but to get to your question we will have our work cut out, which is why you are seeing the increased investments. We're going to need to hire some additional development teams to begin to get that data flow in more seamlessly between and among our systems and it’s going to take time.

Okay great and then as you look at the survey business and growth obviously is now guided very high in 15 base on the larger customer that you lost at the end of this fourth quarter, what's the right way to think about the growth of that business on a go forward basis, is it a mid-to-high single-digit type growth in terms of profile or should be expected to accelerate back into the medium low team double-digit area?

I think, I mean first of all there is no way to say it other than we are disappointed. We haven't been able to deliver better than single-digit growth out of that unit and every time we seem to get our wheels moving we have a little bit of setback like this one, this loss of customer and so that's clearly disappointing. That said we have great operators in this group and they continuously find ways to improve margin and contribution from the business. I think the burden is on us now that we've kind of getting our hands around ICD-10, we are rounding out our talent platform, completed a significant acquisition for us or at least a pending significant acquisition. We need to get our heads a little more around the product innovation in that area. The way we’ve done in our talent suites in other areas and so it is probably a matter of a little more attention to innovation in adding new product sets. As you know we acquired the BLG group, which is a service-oriented group, we have improved particularly a debt that’s selling services and consulting. I figure it is still – I still believe it as a critical move because those services are needed if you're going to improve an HCAHPS outcome and there is a lot of great IP bottle up inside of that company we bought and it’s kind of incumbent on us now to get this growth rate up above single digits back to double digits to put an emphasis in this year in preparing for ‘16, you know get operations straight, deliver the 2% to 4% growth, and start to make investments again a little bit of that theme in product innovation of that area because we think there is plenty of room around this patient experience opportunity. No one has really figured out how to move the needle on those HCAHPS scores, which changed reimbursement. And so I think innovation is the key and so therefore you hear a bit of an increase in investment in R&D in this area as well.

Okay great. And then last question for me probably for Gerry is, you used some debts for the acquisition yet you have enough cash and considering that that's going to cost you this year will call it roughly $700,000 in interest, why use that instead of just using the cash that you have on hand?

Well certainly we have to use the ERP at the close of transaction, but it is really a judgment call in terms of trying to change some flexibility to move quickly on some smaller transactions and at the same time we begin to I would say gracefully bring some leverage into the capital structure. So it is more I would say judgment and flexibility, we have enough cash plus remaining debt capacity to do some smaller transactions and so we're just trying to balance out the capital position.

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

Thank you and our next question comes from the line of Richard Close with Avondale Partners, your line is open, please go ahead.

Great thank you. Congratulations on a solid year. I was wondering if I could piggyback half of Ryan’s questions with respect to the operating income guidance, just as we think about I guess the deferred revenue and transaction costs, excluding those how should we think about the $7 million to $9 million in revenue attributed to HealthLine, should we be applying that 41% type margin and if so, if you back that out doesn't that imply that the core operating income is essentially declining year-over-year or am I doing my math wrong.

I think I – this is Gerry. Rich, I think I’d to offer more conceptual answer which is that the operating income guidance is consolidated taking into account all the factors and so I don’t know that I’ll be using the historical standalone margins. As Bobby mentioned, they seem higher massive investments weren’t made in prior years, but I think my suggestion is that you use the premise that the guidance assumes all the different factors.

Okay. I can follow-up with you after. A couple of other just housekeeping, I’m excited about the CE Center and those products and the uptick here near term or since you launched in August, can you talk a little bit about what the price points are on that product?

On the CE Center product?

Yeah.

Well, for competitive reasons, we don’t want to put it out there but we are doing our best to have a better product at a lower price to competitors. Hard to think about that just for competitive reasons, we are maintaining flexibility on pricing there.

Okay.

But…

That’s fine. I completely understand. And then I guess my next question is, I think a lot of other – there seem to be a lot of competitors or maybe I’m wrong on the credentialing side and just your thought process on the competitive environment and what the market opportunity is on that and is it more like a best of breed opportunity where you guys can take market share from being best of breed or is it just a bolt – people view it as a bolt-on and just use their existing vendors.

Well, let’s see it. It is a competitive landscape. There are at least three or four meaningful competitors in this space. It is my understanding they’re all around similar size. We think HealthLine was the leader in both size and profitability, and we think just our observation about it is, it’s a very profitable space that needed that competitive shake up, needed some investment growth oriented attitude. And so that’s what we’re going to bring to it and I think by bringing it we expect to start to win a higher percentage of the deals that come and move. In addition as we get it a little more integrating our platform, there should be more inherent advantages to being part of a broader suite than a standalone application. Those theses will take time to prove out. Minimally it’s a profitable component now of our business and it also has a interesting fact of the deferred revenue write down. Right as we enter in probably what may be a more challenging period on ICD-10 in 2016, we will get the deferred revenue write down treatment back and the revenues will essentially start to surge in the contribution from this acquisition, which kind of been – all the contributions in the first [indiscernible] accounting convention get kind of eliminated. And so it will surge back in 2016 creating a nice counterweigh to any challenges we may face in 2016 with ICD-10. So from a financial planning standpoint, it seems like a very good deal. It is very profitable. We are putting growth oriented leadership into it. And I think to get to the heart of your question, the ultimate integration with our broader platform should give us a competitive advantage we need to start to switch organizations to our HealthLine Systems platform.

Are these with HealthLine, is it a one to two year contract or how are the typical contracts, how should we see it?

When initially signing the multiyear contracts and they roll into one year auto renewals.

Okay.

And so they are not quite as long-term as our current agreement. And I think that’s industry norm, but probably our time will see that shift as people sign up for them as part of the way we sell.

And my final question Bobby is, we didn’t hear much about post-acute, is there anything to add or update us on the post-acute?

Well, we made some moves in December and January continuously to add to that sales team. So we now have on a territory basis a full team they are fielding and we didn’t and so we gone from two or three up to 10 or more in the sales organization. And so we’ve kind of dabbling in it, we built out our partnerships last year from zero to seven. We appointed Executive Leadership over it in December, actually effective January 01 a Vice President level market leader for us, really excited about that. That person came out of our sales force as well. So now we have a market manager. We led the team go from just a few to over 10 now and we are really ready to go to market this year. So we are pretty excited about where we are. I didn’t talk about it because there is so much to talk about, but we’ve made I think again we are a slow and steady group here. We acquired a couple of big customers. We enhanced our own libraries. We added six additional content partners. You figure out our pricing model and then in the last 90 days, we’ve appointed executive level leadership and added seven more sales people.

Excellent. Thank you very much. Congratulations.

Sure.

Thank you. And our next question comes from the line of Steve Rubis with Stifel. Your line is open. Please go-ahead.

Hi, thanks for taking my questions. I’ve got two. The EU1 [ph] is earlier in your prepared remarks you sort of signaled the appetite or interest in possibly doing some more acquisitions this year. Can you give any color on your general areas that you are focused on as opportunities?

Yeah. We definitely – that’s probably two years ago started to add executive leadership. So we have a Vice President of Integration, we are general counsel who serves as our Head of Business Development. Now it’s Michael Sousa moving into this new presidential role assumingly close. And so we’ve got real executive leadership and support for an active M&A program. And so it’s fair to say that our future vision includes a little bit more of an inorganic or includes more than say five years ago of an inorganic contribution to growth and deploying our capital and capital structure and selecting our debt a little bit. And so the areas we are interested of course are talent suite continuously needs adding to, occasionally our ecosystem, we invested in partnerships to build new product offerings. Just in the last couple of years we’ve done some minority investing like in Juice Analytics to get very specific technologies built. We round out our solutionaries. So if you think about last year, we thought about compliance solution and we acquired HCCS. Two years ago, we put our toe end to credentialing and privileging, and this year we made it a real segment. If you look at the combined financials of Sy.Med which will publish soon with HealthLine it’s now a real meaningful contributor. And so if you think across compliance, revenue cycle on ICD-10 patient experience, we go across those segments and strengthen them. So BLG strengthen patient experience, HCCS strengthen compliance, HealthLine strengthen and built a unit out of credentialing and privileging. And so we kind of think in these core solutionaries how to either add a new solution area or strengthen the existing one. So I think I’ve covered all, but adding technologies like the Juice Investment which is a minority stake in a small company they acquired rights to technologies or strengthening core solution sets or value propositions we offer or entering a new one. And so credentialing and privileging went from a very small piece with Sy.Med two years ago to now a meaningful part of our business. So that’s the way we think about the way we add to the M&A program.

Great, thanks. Then my other question is more around, it’s more of a long-term strategic question given you’re making a pretty big bet on credentialing as you’re building into new business. I’m wondering if I hear your strategic outlook there is based on the EHR helm, maintaining the status quo where it’s sort of epic and certainly [ph] dominate everything or what happened to the cloud based player comes in who offers some credentialing solutions as well, is that a concern, have you thought about those scenarios?

Sure. I think overtime our advantage will be integration and cross selling, and again we view this as a unique dimension to talent management instead of unique dimension of the electronic health record system. And so either of you could play out, we like our position pretty good.

Alright. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Frank Sparacino from First Analysis. Your line is open sir, please go ahead.

Hi, guys, can you hear me okay?

We can, yes.

I just had one question, Bobby. As it relates to I guess compliance and may be even I guess touching credentialing. In light of the Anthem breach I don’t know if you’ve seen more sensitivity on the provider side to security, any thoughts there Bobby just in terms of may be short term or longer term impact for you guys?

Well, security is top of mind for everyone and it seems like no one, no matter what they invest is able to provide an absolute assurance to it. Moving to credentialing and privileging, it provides us some outreach into new types of datasets. They are not as sensitive as the datasets we already manage through our Patient Experience Solutions, which is really electronic patient information which is covered under HIPAA laws. And so we already have robust protocols around the management of HIPAA oriented data and I don’t think that once you do that, you are not really incrementing your risk heading about moving into data about the providers themselves. We already have a higher security need around the patient data they already exist in our firm.

Thanks.

Thank you. And I am showing no further questions at this time. I would like to turn the conference back to management for any further remarks.

Well, thank you. If there are no further questions, we’ve been waiting for this time for some period of time to share our experience of 2014 and summarize it. We look forward to tap on the challenges and opportunities in 2015. Hopefully everybody has a good clear view into the future with us, the best that we can tell today. We look forward to updating you in the few short months as we wrap up Q1 and report on how we’re doing against these expectations. So thank you all very much and look forward to seeing you on the next call.

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