HealthStream, Inc. (HSTM) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the HealthStream First Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mollie Condra, Vice President, Investor Relations and Communications. You may begin.

Thank you and good morning. Thank you for joining us today to discuss our first quarter 2015 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. So with that, I’ll turn the call over to our CEO, Robert Frist.

Thank you, Mollie. Good morning, Gerry. Good morning everyone. Welcome to our first quarter 2015 earnings conference call. Our first quarter 2015 metrics reflect strong financial growth with revenues up 23%, operating income up 45%, net income up 40% and adjusted EBITDA up 39%. And as usual, I’ll let Gerry dive into more details in the financials. So I will cover a few business updates. The first thing you may have noticed on our first quarter earnings release is that the nomenclature reviews for our business segments has been slightly updated. We’re now reporting on three segments. The first segment is Workforce Solutions, Patient Experience Solutions and newly established Provider Solutions which -- the last one is comprised of the HealthLine Systems and Sy.Med acquisitions that are now combined into our Provider Solutions segment. Workforce Solutions segment performed well again in the first quarter of 2015. This business segment is comprised of applications and content solutions for customers which are primarily subscription based. In the first quarter, we contracted over 150,000 net new subscribers to the platform for Workforce Solutions which increased the total number of contracted subscribers to approximately 4.43 million subscribers. Our Patient Experience Solutions segment increased revenues by 8% in the first quarter over the first quarter of 2014. Revenues from patient insight surveys, the survey research product that generates recurring revenues, increased 14% over the first quarter of 2014. Also, in the first quarter, and I think this is good news, two large health systems contracted for over $1 million of our BLG consulting services which is now part of the Patient Experience Solutions segment. And that new order value, that contracted value represents an uptick in the sales momentum for that part of our Patient Experience Solutions segment. We’re reporting on our Provider Solutions segment for the first time in this quarter. If you think back to our acquisition of Sy.Med which occurred in September of 2012, you can recall our entry into the credentialing and provider enrollment business, and I am pleased to report that on March 16 of this year, we completed the acquisition of HealthLine Systems, a leading healthcare credentialing and privileging company based in San Diego. Now through the combination of Sy.Med and HealthLine, we will meaningfully strengthen and expand our business presence in this area and kind of launched today the Provider Solutions business segment. By providing software that is used to validate the professional credentials of potential employees, HealthLine Systems’ Echo products serve as the gatekeeper for workforce quality for over 1000 US hospitals. We believe that credentialing, privileging and provider enrollment are unique dimensions to managing talent in healthcare. Our Provider Solutions segment helps ensure that hospitals surround their patients with the best workforce possible. Senior Vice President Michael Sousa has been appointed President of our Provider Solutions business segment. We’re excited to see the plans for that segment of all and the growth trajectory began to take off here in the remainder of the year. Gerry Hayden will now dive in, take a look at some detailed financials and then I'm going to come back and talk about a few product lines, so we can quickly get to questions.

Thank you, Bobby and good morning everyone. I’ll try to provide some color to our financial results. Some highlights. These are all of course first quarter of 2015 versus last year’s first quarter. Consolidated revenues were up 23% to $47.2 million and operating income was up 45% to $4.8 million. Net income was up 40% to $2.7 million and fully diluted earnings-per-share were $0.10 in the first quarter of this year compared to $0.07 last year. Adjusted EBITDA was up 39% to $8.4 million. Now let’s look at four areas of the income statement: revenue, gross margin, operating expenses and operating income. Revenue. Revenue within the Workforce Solutions continued to perform well. Strong implementations of learning center, competency center, performance center and checklists were meaningful contributors to our revenue growth. Also, in Workforce Solutions, our clinical development offerings including Lippincott Nursing Practice series grew by 51%. Our ICD-10 readiness solution contributed $7.1 million to first-quarter revenues this year compared to $6.6 million in last year's first quarter. Full year guidance for this product remains at $26 million to $28 million of revenue for 2015. The HCCS acquisition which closed in early March of last year continues to perform well for us and contributed an additional $2 million to revenue in the first quarter 2015. The comparisons over the prior year first quarter include two additional months of ownership versus last year and the complete amortization of beginning deferred revenue write-down. The Patient Experience Solutions revenues grew by 8% in this year’s first quarter. Revenues from our patient insight surveys grew by 14% but that growth was offset by lower growth with decreases in other products such as our annual biennial surveys and patient experience coaching. As we mentioned in the last quarter’s call, this solution area lost a meaningful patient survey account when it consolidated services to another vendor. This account completed the final survey cycle with us at the end of the first quarter and we will experience the lost business impact through the remainder of this year and is therefore reflected in our lower guidance. In the first quarter, workforce annualized revenue per subscriber or ARIS increased to $34.63, representing a 4% growth over last year's fourth quarter and a sequential increase of $0.20 over the fourth quarter 2014. Subscription-based revenues grew by 25% while – and subscribers grew 19% over the same period last year. Now the gross margins. The gross margin in this year's first quarter was 57.3% versus 55.9% in the first quarter 2014. Slowing growth and lower margin ICD-10 readiness solution revenues leads to higher blended gross margin. Operating expenses. For the first quarter 2015, product development expenses were 9.9% of revenue and represented a 31% increase over the first quarter of 2014. In addition, we incurred $2 million in capitalized software development costs in this year's first quarter. On a combined basis, income statement expense and capitalized software development, we invested 14% of revenues in product development in this year’s first quarter. Product development is an area where we expect accelerated investments over the rate we’ve seen in this year's first quarter. G&A expenses at 14.7% of revenue were higher than 2014's first quarter level of 13.6%. Attributed [ph] reason for this increase was the approximate $1 million in transaction costs we incurred in the first quarter of this year to complete the HealthLine Systems acquisition. On a pro forma basis, excluding the HealthLine deal costs, G&A expenses would have been 12.6% of revenues for the quarter. Operating income. As you know from previous 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 and operating income and to amortize the initial write-down. The first quarter 2015 results reflect the amortizing impact of the deferred revenue write-downs totaling $578,000 compared to $369,000 in the first quarter of 2014. Excluding the impact of deferred revenue write-downs, operating income grew by 45% in this year's first quarter. For the remainder of the year, we expect to see significantly higher deferred revenue write-downs due to the HealthLine Systems acquisition. Now look at our balance sheet. Our cash position in overall balance sheet remains strong and support organic development activities and potential inorganic growth opportunities. As you may already know, we funded $88 million HealthLine Systems purchase price with a combination of $60 million in cash and $28 million from our revolving line of credit. Our cash balance at March 31 was $64 million and $20 million remains available under our line of credit. We continue to review and evaluate a variety of potential acquisition and business development opportunities in terms of strategic fit and evaluation. Yesterday’s earnings release contained updated guidance for the 2015 full year. We anticipate the consolidated revenues to grow between 18% and 21% as compared to 2014 and will be derived from the following three areas. First, we expect the revenue growth in Workforce Solutions to increase in the 15% to 18% range. This Workforce Solutions growth range excludes Sy.Med which had revenues of approximately $4.5 million in the 2014 full year results. Sy.Med is now included in the Provider Solutions segment as Bobby mentioned a few minutes ago. Second, we expect our Patient Experience Solutions revenues to grow by approximately 1% to 3%. Third, we expect our new segment Provider Solutions which consists of our recent HealthLine acquisition and Sy.Med to contribute between $11 million and $14 million in revenues. We expect HealthLine Systems to contribute between $7 million and $9 million of this total, which is the estimated amount after the write-down of the acquired deferred revenue balances as required under GAAP. The company anticipates that revenues from its ICD 10 product category will be between $26 million and $28 million, similar to last year's levels. We reported strong results in the first quarter 2014. Going forward we anticipate our full year 2015 operating income will decrease 25% to 35% over 2014 as our guidance takes into account, among other things, the impact of the recently completed acquisition of HealthLine Systems. Associated with the acquisition of HealthLine Systems, beginning in the second quarter of this year, we will start incurring $6.5 million to $7.5 million of deferred revenue write-downs and amortization of intangible assets associated with the transaction, interest expense and planned investments in sales and product development. As just mentioned, we funded the HealthLine purchase price with approximately $60 million in cash on hand and $28 million in borrowings under our revolving line of credit. Accordingly we expect to incur between $400,000 and $500,000 in interest expense beginning in the second quarter of 2015, which will be reported in other income expense on the income statement. We expect the effective interest rate on these borrowings to be approximately 2% per annum based on current rates. We expect the 2015 capital expenditures will be between $11 million and $14 million and effective income tax rate to be between 42% and 44%. This guidance does not include the impact of any other acquisitions that we may complete during 2015. Thank you for your time. I’ll turn the call back to Bobby.

Thank you, Gerry, for this pack full of information and details on the finance, appreciate the update. I’ll run through a few product updates and we’ll get the questions here in just a few moments. First, in February of this year we announced the launch of HealthStream Recruiting Center and already we have a qualified and building pipeline for that product set and have signed our first customer under contract. So very excited to see progress in 30 days on a brand-new product, the HealthStream Recruiting Center. Our new product, Checklist Management which was launched in the second quarter of 2014 added thousands of newly contracted subscribers in the first quarter of this year and importantly we implemented over 80,000 subscribers in the first quarter, so cumulatively we are now approximately 200,000 subscribers using the product. As your recall, the Checklist Management is a powerful product that replaces a widely utilized paper-based processes throughout the hospital. We see them associated with competency management, for example, as a use for the Checklist Management tool. Another new product which has begun seeing positive early results is CE center. I previously described to you the CE Center as a Netflix-like subscription, and what that means is that it's a combination of content partners’ content into a flat rate unlimited use subscription and the product is designed to meet state licensure requirements for nursing and allied health professionals. For this partner -- for this product, we have partners like Lippincott and Academy Medical and plan to add additional partners over time. We’ve seen a great momentum on this new product. On average we’re signing about one new account per week during the first quarter. So really good to see CE Center taking off as we hoped it would. Turn our attention a little bit to ICD 10, and consistent with what we announced last quarter, we do anticipate the full year contribution from ICD-10 readiness solution to be between $26 million and $28 million. And also, as we mentioned, that's roughly comparable to the prior year's revenue contribution for that product set. Revenues from ICD-10 readiness solution were $7.1 million in the first quarter which is relatively flat sequential growth as we previously guided. In fact, we’ve seen several quarters now in that range between $7 million and $7.5 million. I think it's about four quarters in that range. And so we’re seeing a plateauing of the contribution from the ICD 10 product set. So the thing about that, though, is that it was such a high growth product earlier on that as it flattens, it has the effect of reducing the overall growth rate of the workforce development segment. We continue to see strong performance of our HeartCode suite of products. This product is focused on teaching resuscitation skills to healthcare professionals. It's offered through partnerships of Laerdal Medical and American Heart Association. As of March 31, 2015 we had approximately 1.7 million cumulative training certificates that have been completed through HealthStream and importantly approximately 113 new HeartCode contracts were signed in the first quarter of this year. About half of those are renewals and half of those represent new HeartCode business. So a really strong sales organization on the use of simulation technologies for training and development of the healthcare workforce. Associated with our Patient Experience Solutions, we opened and began operations and started conducting surveys from our new patient interview center here in March and so we’re excited to see capacity ramp up in our patient experience solutions business. It’s also important to note that financially the cost of delivering the surveys is lower out of this facility in Nashville than some of our other facilities. So over time we hope it helps improve margins for our patient experience solution business. And finally, I will just mention that – just in front of us is an exciting week. We expect approximately 700 customers and partners to be in attendance and hundreds of HealthStream employees to participate in our HealthStream Summit. It will be held here in Nashville at the Omni’s, a few blocks away from our headquarters and it’s exciting times, about three, three and half days dedicated to our customers, our new product introductions and our partners importantly, kind of our ecosystem of partners there to show and we have an exhibit hall, about 20 or more vendors will be present. So it's really an entire system and products of services and partners that are presenting there to our approximately 600 to 700 customers that will be present. So I am really excited to announce that and appreciate all the work that’s gone in by our staff to get that event ready. Now I’d like to turn it over to the operator to your questions from the investor community.

[Operator Instructions] And our first question comes from Richard Close of Avondale Partners.

Gerry, I had one clarification or just comment on the Sy.Med revenue. I appreciate you telling us the 4.5 million for 2014. Is there any way to just gauge what the quarterly breakout was for 2014 on Sy.Med just so we can try to tidy up our models on a go forward basis?

We will see over the course of the year as we report quarter to quarter, you'll get a better look at that. But we’ve kind of always leaned to annual guidance in that case.

But is it running – if it was 4.5 million for the entire year last year, so use approximately about 4 million, I mean a 1 million number for each quarter; is that eventually ballpark it?

I think that’d be appropriate.

Bobby, I was wondering if you could go in a little bit more on, I think it was, you call it, clinical development of 51% growth. Just talk a little bit more about those products and the opportunity on those products? And then just rephrase me on the recruiting, I guess, data point that you gave, you sold one new hospital [ph] and what exactly is that product?

Sure. So well first, I want to comment on a go forward basis the of Provider Solutions segment we won't be breaking out Sy.Med from HealthLine. We’re integrating the product lines of product sets and we will provide kind of segment level details and so we wanted to give this initial breakdown, so you can see the independent contribution of HealthLine but on a go forward basis, it will be just one unit and we will be talking about its growth rates and product sets. In fact, we’re working on a way to combine the branding and simplify the messaging around Provider Solutions. Secondly, on clinical product sets, generally the clinical product sets are products likes CE center. We have a product from Lippincott, which is a large and well-known brand in nursing education and development that does very well. It’s a clinical practice series to enhance skills for nurses. It’s very targeted set of content and assessment tools to determine clinical competency and knowledge and those products continue to perform very well for us, adding both the sales team there and the product sets. And so as we’ve added new products that are clinically focused like CE center, we see the whole area developing very well. In fact, products like Checklist often accompany the sale of these clinical products because they're used to watch and manage the ongoing development of staff and check off their competencies over time. So that whole product set is doing very well. We highlighted one in the script that’s growing about 51% but really all of them, CE center, Checklist which is associated and the Lippincott practice series are all doing very well. So is the third part of the question – it was the recruiting center. Yes, so that's a new dimension to our platform offering. It's focused on the pre-hire process and selection process managing the applicant pool. And we’re of course new to that line of business. We’re excited to have a robust offering that includes some unique analytics approaches and so the pipeline is building on that. Of course it’s new to our sales team and they are building a nice pipeline. We’ve already closed our first contracts. We’re glad to see that that part of managing talent, the pre-employment period, we now have some focus on and we expect to see some continued growth over time in that area as we add assessment tools and other tools that are used in that pre-employment period, because selecting and credentialing and engaging the workforce prehire we think is very important to getting a quality and qualified workforce in the healthcare. So we view it as part of the continuum of selecting, managing and engaging talent to get the performance needed to improve patient care.

I had one final question. If you looked at recruiting product set, I guess I am curious your thoughts on how penetrated you are within your customer base or what you think the total addressable market is within that base?

Well, new products like the one we just talked about, the recruiting center, obviously it's brand-new. It's a fairly established market segment. Most providers have some of these recruiting tools in place. We think we have some unique capabilities that give us opportunity. But it’s an important product to be on the continuum of talent management. You know we could go through 10 different segments. The learning segment, we have a really strong presence, over half or over 60% of hospitals utilize our learning platform for development. The competency and performance centers continue to do well adding 1000 subscribers each quarter and in particular when sold through the clinical lens we think that's a more open opportunity than maybe performance reviews, which are either done on paper or are less adopted in general the concept of the annual review in our segment but a growing area. So we feel it across our clinical products, our content solutions like resuscitation. There's plenty of TAM to go. We don't guide to some kind of absolute opportunity. There are publications out there that talk about the education spend, training development spend in the marketplace that place it in excess of billions of revenue if you think of $400 to $500 per employee per year times 5 million employees in acute care alone. So that the TAM can be very high. We’re operating from a ground-up growth strategy, layering in new products and we think each of them has strong growth potential.

And our next question comes from Jeff Garro of William Blair & Company.

I wanted to ask a few questions on the new Provider Solutions segment. First, if we look at the HealthLine financials historically and the expected impact for 2015 before the deferred revenue write-down, and we don't see a lot of growth there but we know you guys are very bullish on this new segment. So hoping for a little further commentary on why the combination of HealthLine and Sy.Med together will produce some type of competitive advantage and allow you to capture more of this credentialing market?

I think we’ve conducted some recent surveys that hospitals have a desire to have a more integrated suite of services in that area and the Sy.Med applications of provider enrollment seem to be kind of a missing element. As you know, Sy.Med predominantly initially focused on the physician office market selling directly into that, not as much to hospital market. They had some hospital presence when we bought them. What we’re hopeful for and we see opportunity in is to see some cross-selling of those products, the Sy.Med products directly into hospitals when bundled as part of a suite, the credentialing and privileging capabilities of the HealthLine products. So we’re seeing that. We also have a visionary leader in Michael Sousa that’s building roadmaps for extending each of these three areas into new areas and we’re excited for those opportunities as they come online in the next 24 months. But we think it is a good combination of Sy.Med and HealthLine together because it provides a more complete service set and solution set to the buyers for that type of product in hospitals.

You mentioned the progress over the next two years, so maybe you can help kind of set our expectation and the investor community, should we be looking for particular milestones over the next few quarters in terms of new bookings capturing across all opportunity on unifying the go-to-market strategy, that you also referenced, or should we be thinking about a longer term time horizon to really develop those joint solutions?

Yes, I think we’re going to see some early progress, although I would say in the first year, though the accounting treatment essentially negates the financial contributions of that acquisition in the first 12 months of the acquisition, it’s just they had a high deferred revenue balance and we have to write it down and it hits both the revenue and the expense structure, the profitability of the unit. And it’s the main and significant contributor to why our guidance overall for the year is that deferred revenue write-down is probably contributing over 78% of the region, why we’re forecasting our operating income to drop overall as a company. And remember, that’s just an accounting convention, accounting treatment. Overall if you look at the filings we’ve just done on HealthLine, you can see the business was a very profitable business with a very stable customer base. It was low growth but extremely profitable and we plan to trade a little bit of the profitability for growth under this new leadership of Michael Sousa. I would think of it therefore as a 36 to 48 month horizon but contributing meaningfully profits beginning in the second year because of the accounting treatment all those profits and the ability to show the revenues of the business will come back after the first 12 months for that acquisition. So it's really interesting, though, the accounting treatment really does take away all the financial contributions of this unit for the first year and then in the second year it comes back – it will come back just on paper, will come back incredibly strong even though the revenues and cost structures will be similar to the first year during accounting treatment period. So I would view it as a 36-48 month story but contributing profitably all the way along the way and we’re going to try to shift to higher growth mode here during that timeframe.

A follow up there. As we get past this first year period, how should we think about the business model, the recurring nature of the revenue and just kind of more specifically on operating metrics, will revenue from the Provider Solutions segment be included in your ARIS metric?

We’re going to have to work on that to figure out how it falls in. Certainly it derives revenue from the hospital. We may have to evaluate the metrics so that we can unify these units little more to show revenue per hospital. And we’ve got some work to do on that. The ARIS metric was designed to show the power of the subscription solutions of the workforce area. This is certainly a contributor on a per facility basis and we need to think of a way to -- and it is highly recurring and that really nice contracted base with very very low turnover and very solid and high margins because it is a software business as well. So we are very excited about how it will contribute after the first 12 months kind of the stuff period, here the first 12 months.

Thank you. Our next question comes from Matt Hewitt of Craig Hallum.

A couple of questions. When you’re talking about the ICD-10 you primarily talked about the readiness solutions. Obviously you’ve recently launched the Precyse University DNA, it seems, it sounded like there was a lot of interest and potentially going to be a lot of demand for that product. How will that start to factor in, will you be breaking that out so that we can differentiate between readiness and essentially the continuing ad portion of the DNA platform, or how should we be thinking about the ramp in that product?

A couple of things. The product area will comprise of two or three products now, not just one and we’re trying to do everything we can to offset the potential or known decline that will occur in the readiness product, we also call preparedness product. And so the first answer to try to offset that as we move forward as we approach the deadline and we talked about this for almost 2 years now is the new DNA product. And you're right it was recently launched and very well received. It is the first product by the way to launch to take advantage of our nearly 18 months of investment in Juice Analytics and we’ve built an infrastructure now that allows both HealthStream and our partners to corral and organize data from across our network to build comparative benchmarking analysis and really take control of managing the workforce to a certain competence level but through the lens of comparing them to a national performance standards. And so the Precyse DNA product is the first product to launch that includes what we call control centers. It's incorporated into the product and the control center allows for the data and performance data across the country to flow into a unified warehouse and be utilized by those customers to check performance of their individual staff and their hospital performance against national standards. It’s really really exciting and it’s getting a great reception and there's really nothing else like in the market. It's kind of a new way to manage talent to a specific business outcome, in this case, maintaining competence over time and coding. And so Precyse and HealthStream are very excited about this new product. It’s based on new technology. And that’s the first offset. We’re already getting contracts on that product and we see in their term contracts in the two and three year contracts. They are not about the ICD-10 deadline of course over time and so we are cautiously optimistic. The initial reception is good. The second thing we’re going to do is build out through partnerships and some organic build offerings for broader revenue cycle content and development tools. And so we made some good progress there and have some announcements pending that will strengthen. And so the second offset category is going to be broadening into – again we found this buyer in the financial area for the readiness solution and now we have the DNA products for ongoing maintenance of competence and soon to come the revenue cycle products. So we’ll have a whole category here and the effort is to simply for the next couple years just try to find ways to push off the decline from the preparedness or readiness solution which again we’ve talked about now for over two years. It’s deadline driven, very much tied to the mandates to shift to this ICD 10 system. And so DNA and revenue cycle products we hope will be offsets as we move through ‘15 and into ’16. We will not report them separately because we view them the three products together as a product category, so a bit of in the forecast of 26 to 28 is just a little bit of DNA revenue and hopefully DNA revenue will grow throughout the year as we get towards thinking about ‘16 with the other new products. So that’s where we think about the category, we’re going to fight to just try to maintain its contributions. Certainly this year we've achieved that and already management team is focused on trying to do the same thing for ‘16 although that will be more challenging. But we’re already on, and that’s our focus is already on ‘16 for the product set.

I guess a follow-up question based upon some of the details there. How should we think about pricing on the DNA, is it similar to, I mean, all fee or cost for the juice component of the control centers, obviously just helping us understand that would be great?

Well, the price point is a little higher for the product. It targets a much smaller population of people than the readiness or preparedness product. So this product is really for training and developing of the coding workforce and then a subset of the overall, what we call the preparedness product, the preparedness product was kind of information for everyone and training for everyone. This is really, it gets a little more into the nuts and bolts for a subset of that audience. So it does have a higher price point but it has a smaller potential audience. The framework with Precyse, because we’re 50:50 partners, we provide all the technology to make the new products work and now the DNA products are now not just based on learning platform but on our analytics and what we call our control center platform. And you'll see more announcements as this evolves over time and just as an FYI to investors, it’s based on the efforts and investments we've made in the juice development efforts. But it's folded into the 50:50 share in the DNA products as well. So we view it as providing more architecture to provide more unique capabilities to our partners, to provide more unique talent management capabilities to our customers. And it's folded into the 50:50 split. We may design products that are just information products designed on the control center that would be only ours and not folded into a partner’s products. So remember the architecture can be used by HealthStream or by our partners to build these new talent management tool sets, again we call them control centers. So that’s the way we think about it and we’re very excited, it creates a real -- for the first time it leverages the network effect for the benefit of our customers when they buy these new products. And we don't think any competitor has anything like it.

Maybe one more from me and then I will hop back into queue. Could you provide an update on the long-term care opportunity? You announced a couple obviously large partners and customers, I guess, about a year ago. Just any update on how the market opportunity looks today, any penetration that you’ve been able to achieve, color there would be great. Thanks.

Sure. It’s small but steady and certainly part of those 150,000 new subscribers come in through subscribers that are acquiring part of our platform for the post-acute. We continue to round out the content and product offerings in that area and so we’ve added some additional content partners. It's a slow and steady build. It’s going to be ongoing and continuing part of our story. We probably won't break it out. It'll just be kind of rolled in to the way. As you know we think about our market, now it’s not just the 5 million people in the acute settings but another 3 million in the post-acute settings. And so we’ve now just expanded the runway to continue selling all products and we’re learning a little more about which products are more relevant for the post-acute settings. And so it’s an evolving story and now it’s just kind of an integrated part of our story. We expect to add thousands of subscribers each quarter from the post acute markets.

Thank you. And our next question comes from Frank Sparacino of First Analysis.

Hi guys, probably maybe first just last couple of days, there has been some news as it relates to how school compares to our ratings being reported publicly and I know that it’s no surprise to many but I don’t know if you are seeing anything new as it relates to the HCAHPS market or most of the growing is still coming from the AmiPro [ph] and CG side of things but any thoughts there?

But you are right in that assumption, the CG is the piece that’s helping us grow, the CG HCAHPS, it’s higher volume and lower margin for us. This whole area of our business has struggled in the last several quarters and the projected growth rate is way below our standard. So we've begun to add some new officers to the group to bring new innovation and concepts for growth. We saw a little bit of a turnaround on the consulting services. We hope to sustain that but over $1 million of new orders for the consulting services associated, the star ratings is an attempt to create more understanding and visibility of the prior metrics which are more just kind of statistical in nature about what quartiles, and quintiles and where you sit, and so that’s an effort to bring more visibility to the whole program, but we’re not seeing any immediate impact of that on our market potential. So you're right to identify the growth area, the CG HCAHPS, unfortunately it’s a higher volume, lower margin. We noted that our call center is coming online which should help try to offset that improved margins because it has lower-cost to service out of Nashville than out of Maryland and we don't see an immediate impact of the star ratings discussion that’s happening right now.

Thank you. And our last question comes from Matthew Gillmor of Robert Baird.

Just one quick one on guidance. I wanted to understand the thinking around maintaining the EBIT outlook in light of the first quarter upside. I guess EBIT came in about 2 million above Street estimates but you’re also absorbing higher write-downs deferred revenues compared to your previous expectations. Should we think about this as offsetting items or are there other items we should consider as you think about that the updated guidance?

I would say – appreciate you bringing this up. We do have and set aside some in our planning some additional growth investments in everything, first it’s just basic integration investments to get Sy.Med and HealthLine integrated. And so if you think of kind of the cost categories here that are going to drive this 25 to 35, many of them are associated directly the HealthLine Systems to deferred revenue, the amortization of intangibles, the interest expense and some integration set aside money. But I would also say that we've taken opportunity to set aside some additional expected growth investments for the rest of HealthStream. And so we expect to do a little more hiring in sales and of course this year we have things like our Summit which we didn't have last year in marketing. So that adds to this guidance. We’re going to add more people in developments. So we mention that and that’s not just for HealthLine, it’s for HealthStream proper. We have a lot of ambition and lot of designs for new products across the company. So we’re going to be adding development teams throughout this year. Now one of our challenges has been and even in the first quarter, we had about 50 open positions on our website. We’re over 930 employees now and we still have not been able to hire at the speed which we had hoped and so it’s kind of put us in a perpetual deficit from our expectations. In fact, in many ways we had hoped to hire more in January and February and have a little lower performance in Q1 because we hoped to spend a little more on earlier in the year on product development and sales and marketing. So we’re going to do everything we can to catch up on those investments throughout this year and again most, and I’d say 70% to 80% of this revised – of this 25% to 35% decline is tied directly to three or four elements associated with HealthLine. However say 20% or 25% is associated with organic growth investments and new product development and new sales efforts kind of across the board. And so hope that helps kind of categorically. We will do what we can to get these people on board and hired to get these investments flowing in these growth areas.

And as a quick follow up, as you think about these investments you’re making this year, do you expect to get some leverage off of those investments next year as a percentage of revenue or will there be additional investments next year to grow the business?

Well, I view us as a small company with continuous growth opportunities. We bet those opportunities each year and determine how to staff them and if we think they’ve got good 3 and 4, and 5 year IRRs we will invest in them. And so we’re coming out of an exciting retreat with new products like our control centers and we see lots of things to invest in. So I can't really comment on next year but I would say we’re a growth oriented company and we want to continue with those investments certainly in this year and as part of our current guidance. I really can't comment on ‘16 yet. It’s just – it’s little too far out and we have a retreat and a lot of thought to do before we determine the rate. You would note though that things like G&A you can see really good leverage on G&A in the numbers of this quarter. And so when we weren’t able to hire everybody, we expected that you can see the leverage in the G&A and so G&A as a percent of revenues was one of the lowest it's been, which is one of the reasons we saw those margins kind of accelerate in Q1.

Thank you. And we do have a follow-up question from Richard Close of Avondale Partners.

Just a follow up for Gerry. You mentioned capitalized software in the quarter, I think the number you threw out was 2 million, if I am not mistaken. Is that something we should expect that level on a quarterly basis as we progress through 2015?

Yes, that’s in our run rate. I think this is probably a good assumption. End of Q&A

Thank you. And I am showing no further questions. I’d like to turn the call back over to Robert Frist for closing remarks.

Thank you everyone. We look forward to reporting the next quarter and of course I invite all customers and excited to celebrate with all employees our customer summit next week. Thanks for attending. We look forward to our next report.

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