HealthStream, Inc. (HSTM) Q1 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the HealthStream First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I’d like to introduce your host for today's conference Ms. Mollie Condra, Vice President of Investor Relations and Communications. Ma'am, please go ahead.

Thank you and good morning. Thank you all today for joining us for our first quarter 2016 results. Also in the conference call with me are Robert A. Frist, Jr., CEO and Chairman of HealthStream; and Gerry Hayden, Senior Vice President and CFO. I’d also like to remind you this morning that this conference call may contain forward-looking statements regarding future events and future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the Company's filings with the SEC, including Forms 10-K and 10-Q. With that, I’ll now turn the call over to Bobby Frist.

Thank you. Good morning, everyone. Welcome to our first quarter 2016 earnings conference call. We've got a few financial highlights, some exciting product announcements, Gerry will cover some financials and will head right into questions. Let’s get started, compared to the first -- to the prior year first quarter, our topline revenues increased to approximately 15% to $54.1 million and we ended the quarter with a strong balance sheet of about a $150.5 million of cash and marketable securities along with a $50 million up-tapped line of credit and we don’t carry any long term debt. So the strong capital position allows us to utilize multiple strategies for growth and we’re going to outline some of those here in this call and some of those strategies include developing and launching new products and pursuing an active M&A pipeline. In the first quarter of last year our M&A program for example, produced the largest acquisition in company's history in HealthLine Systems. We're pleased with the first year results generated under the leadership of Michael Sousa and his growing management team. Yesterday Michael presented a summary kind of a one-year anniversary summary and in that, he presented an exciting product development roadmap for Echo which is Echo HealthStream Company. He announced also several key customer wins. So, it’s great to see some strong traction on the one-year anniversary presentation from the Management Team of Echo HealthStream Company. We feel really good about this acquisition and how it's merged in with the prior acquisition signed at HealthStream and may be more importantly it’s been reorganized as Echo with a strong leadership team. We're really encouraged by the opportunities we see in this space represented by the Echo Organization. We continue to have an active M&A pipeline. We're seeing opportunities across all three segments of our business. As we stated previously, we're open to a range of different types of opportunities including those who help us gain market share, leverage our customer base and platform and provide technologies that plug in to our new mobile enabled user interface and that's a segue to discuss the mobile -- mobile-enabled user experience that we've rolled out recently. It's really exciting because in the last 60 days since we last spoke, we’ve added another million users to that platform. So, we’re close to completing one of the more exciting rollouts in the company’s history and we’ve now crossed the $4.3 million subscriber mark on this new mobile user interface. The interface -- excitingly, we’ve also added multi-language support and we've started to see health systems across the country where their employees are selecting other than English as their primary way to interact with our platform. In fact Spanish appears to be the second most popular language and that makes sense to us as we have major customers and markets where that is an important language. But we’ve also activated French, German, Japanese, Portuguese, Mandarin and Deutsche options as well and interestingly through our relationship with Laerdal and see some international uptake. We’ve seen utilization on all of those languages on our platforms. So it's really exciting to see that for the first time. Our customers are delighted with new HealthStream experience and that’s evidenced by their positive tweets. We’ve celebrated along with some of the largest health systems in the country as they've activated this new mobile user experience and we're calling this the HealthStream experience because it serves as a front door to [myriad] of applications, not just our learning platform. So we're celebrating these key milestones passing through the one-year anniversary of the HealthLine acquisition and the deployment of an additional million subscribers to our mobile user interface, the new front door to HealthStream. We call it the HealthStream experience in this exciting time inside HealthStream. Let’s take a look at some of the financial highlights. I would like to turn it over to Gerry Hayden.

Thank you, Bobby and good morning, everyone. I'll provide some color to our financial results including certain items then impacted the quarter. Few highlights first for the quarter; consolidated revenues were up 15% to $54.1 million as Bobby just mentioned. Operating income was down 48% to $2.5 million. Net income was down 45% to $1.5 million and earnings per share was $0.05 compared to $0.10 in the first quarter of 2015. Adjusted EBITDA was down 4% to $8.1 million from $8.4 in last year’s first quarter. Let's look at four areas of the income statement, revenue, gross margin, operating expenses and operating income. As we view these results we'll play sufficient context on the impact of the ICD-10 revenue declines. First revenues. As we just mentioned, consolidated revenues were up 15% in the first quarter with strong contributions from our workforce solutions and provider solutions business segments. We achieved this 15% revenue growth while overcoming the $3.2 million decline in ICD-10 readiness revenues from last year's first quarter. If we exclude ICD-10 revenues from the first quarters of both 2015 and 2016, our consolidated pro forma revenue growth rate is 25%. The Workforce Solutions segment performed well again in the first quarter of 2016. This business segment is comprised of applications and content solutions which are primarily SaaS subscription based and are targeted at improving the healthcare workforce. This is also the segment in which ICD-10 revenues are reported. Revenues from our Workforce Solutions segment increased $3.7 million or 10% when compared to the first quarter of 2015. The ARIS grew in the first quarter of 2016 to $36.67 through $34.63 in the first quarter of 2015, reflecting expansion in both subscriber counts and revenues from our customer base. On a sequential basis, this metric declined about 2% from the fourth quarter's $36.96. As of the end of the first quarter of 2016, approximately 578,000 subscribers completed their ICD readiness commitments. Of these 578,000 subscribers, 200,000 were ICD-only subscribers, while the remaining 378,000 remained in the subscriber count with no corresponding ICD readiness revenues. At approximately $18 per subscriber per year or $4.50 per quarter, resulted the $2.6 million sequential decline in the ICD readiness revenues category. Growth in other revenue categories, sorry other than ICD-10 readiness was strong enough to maintain the ARIS. HealthStream’s Patient Experience Solutions provide valuable insight to healthcare providers to meet CAHPS requirements, improve the patient experience, engage their workforce, and enhance physician alignment. Our Patient Experience Solutions segment revenues were even between the first quarter 2016 and the first quarter of 2015. Revenues from Patient Insights Surveys, a survey research product that generates recurring revenues, increased 4% over the first quarter of 2015 with that growth partially offset by lower growth in our employee survey business, which is conducted on either annual or bi-annual cycles. The Provider Solution segment, operating as Echo, a HealthStream company, continues to perform to our expectations. By providing the software that is used to validate the professional credentials of potential employees, Echo products serve as the gatekeeper for workforce quality and healthcare. In the first quarter of 2016, revenues from our Provider Solution segment increased by approximately $3.2 million, with the HealthLine Systems acquisition accounting for the majority of that increase. The $3.2 million HealthLine increase was net of approximately $955,000 deferred revenue write-down, which is the accounting convention requiring us to write-down the beginning balances to fair value as defined in GAAP and as you'll recall, we closed the HealthLine Systems transaction in mid March of 2015. Now our gross margins, the gross margins have been stable in the 57% range for the past year, and increased slightly to 57.7% in the first quarter of 2015 versus 57.2% in the first quarter of 2015. A combination of factors that include lower ICD-10 revenues and growth in revenues from Proprietary Solutions with higher gross margins were key contributors to this trend. Now some words on operating expenses. This quarter's results reflect our ongoing plans to invest in product development to foster our long-term growth and strengthen our competitive position. Product development cost as a percent of revenue in the first quarter 2016 were 13% of revenues versus 10% in last year's first quarter. This increase represents investments in all of our segments Workforce Solutions, Patient Experience and also Echo. G&A expenses in the first quarter of 2016 were 14% of revenues, which is the same level as last year's first quarter. Several factors influence the G&A expenses such as the rollover of our new financial platform, NetSuite and a full quarter of HealthLine Systems results compared to a partial quarter of results in the first quarter of 2015. Operating income, our operating income was down $2.5 million as I mentioned a few minutes ago in the first quarter. It was adversely impacted by the $955,000 of deferred revenue write-down relating to our HealthLine acquisition, as well as lower contribution from ICD-10 revenue streams. Now a quick look at our balance sheet, as Bob mentioned a few minutes ago, our cash position and overall balance sheet remains strong and reinforced by a positive cash flow from operations as evidenced by our $8.1 million adjusted EBITDA for this quarter. Once again it’s important to know that adjusted EBITDA also reflects the impact of lower contributions for the ICD-10 readiness revenues. Our cash balances at March 31 was a positive $150 million. We have no outstanding debt and our full $50 million line of credit is available to us. We believe our overall capital position is likely to support our organic and inorganic growth opportunities and support other capital structure optimization and general value of maximization strategies as maybe appropriate. And we continue to review and evaluate a variety of potential acquisition and business development opportunities, in terms of strategic fit and valuation but while also evaluating additional avenues for creating shareholder value as I just mentioned. Yesterday’s earnings release contains guidance for 2016 full-year, which guidance remains unchanged from our announcements in February a little while ago. We anticipate that consolidated revenues will grow between 8% and 12% as compared to 2015 and the growth in our three operating segments will be as follows. Workforce Solutions between 2% and 6%, Patient Experience 8% to 12%, Provider Solutions 80% to 84%. Revenues from ICD’s and readiness training, which were approximately $26.8 million in 2015 are expected to decline by approximately $19 million in 2016 and are reflected in the guidance ranges for Workforce Solutions. For the full year of 2016 then, we anticipate revenues from ICD-10 Readiness training to be approximately $8 million with respect will comprise of approximately the $3.9 million results from the first quarter, $1.9 million in the second quarter of this year, $1 million in the third quarter and $1.1 million in the fourth quarter. We anticipate that our full year operating income will increase between 10% to 14% over 2015. We anticipate that our capital expenditures will be between $14 million and $16 million and our effective tax rate will be between 39% and 41% for the full year 2016. We also look forward to our Annual Client Summit in October of this year meaning that the estimated net expenses of approximately $0.75 million for summit full recorded largely in the fourth quarter of 2016. And finally this guidance does not include the impact of any another acquisitions that we may complete during 2016. So thank for you time. I’ll turn the call back to Bobby.

Thank you, Jerry. A few more business segment updates and then we go to questions. First our Patient Experience Segment, we have had some exciting announcements. We’ve recently launched Express Surveys. These are our census based surveys, which allow customers to better guide performance improvement efforts. Express Surveys are brief 10-question surveys, which are according to our research they’re aligned and provide the most important measures of the patient's experience and are delivered via email, text and interactive voice response technology. CG Express and ED Express, are our first express surveys and they're enhanced through wings to improvement resources in the HealthStream Eco System including courseware, evidence-based practices and our ATI coaching engagements. Express Surveys represent a very cost-effective offering for customers to collect more of their robust datasets that are relevant to fuel their patient experience improvement initiatives. Another area of great -- that's an exciting announcement an area of great sales momentum is with the sales or Resuscitation Solutions. In fact sales of our Resuscitation Solutions led the way in the first quarter. We're particularly pleased that approximately 20% of these sales of the Resuscitation Solutions suite were into the post acute care settings, which as you know is an area where we’re trying our products and services to see how they’ll be adopted, and so we saw some really great uptick of the resuscitation products into the post-acute settings. The product is focused on teaching from resuscitation skills to healthcare professionals and its offered through our partnerships with Laerdal Medical and American Heart Association. A few details about that, as of March 31, 2016, approximately $2.3 million cumulative CPR training certifications have been completed through HealthStream. New HeartCode sales were strong in the first quarter. We actually added over 100 new customers to our Resuscitation Solutions suite in the 90 days of the first quarter. While the sales of Resuscitation products were strong, the clinical courseware products, actually were driving a lot of the revenue growth in the first quarter, because of strong sales in the prior, preceding quarters. Clinical products include content from our medical association partners, the clinical skills and procedures product sets and our CE center, all put together under this clinical products umbrella. As our association content continues to expand, so do the innovative ways in which we plan to make them available to our customers and so in the second half of the year, we expect some additional product introductions in the clinical products area, clinical product and clinical training area. And we’ve mentioned some of those in prior calls like that Duke, Frail and Elderly Care programs -- certificate program as an example of some of the innovations coming in our clinical products area. So we’re excited about the new introductions ahead of us. In fact revenue growth form clinical courseware products was up 58% over the prior year same quarter. As we head to questions, I guess, I’ll remind everybody that our annual shareholder meeting is coming up right around the corner, to be held Thursday, May 26 at 2.00 PM Central, here in National Headquarters office and I hope many of you and all shareholders are welcome to visit and participate in that meeting. At this time, I would like to turn it over for questions for our team.

[Operator Instructions] Our first question comes from the line of Scott Berg with Needham. Your line is open. Please go ahead.

Hi, Bobby and Gerry. Congrats on a very good quarter here. A couple of quick ones for me. First of all Bobby, on the new user interface, you obviously have a majority of your customers, excuse me of your implemented subscribers on the new platform. But can you talk about maybe how you're seeing any impact of the new platform with win rate or deal activity or maybe opportunities in the pipeline?

Well, I think it was a modernization that was much required and sets a high bar and our sales team is excited to demonstrated our platform of course across all forms of devices and browser types and so it really enhance our ability to show the flexibility of our platform. I don’t know if that contributed directly to win rates, but it certainly is a core asset of the organization and it also provides as I mentioned with capability for a multiple languages. So it comes with a lot of exciting advances beyond just mobility and scalability to platform and multi-browser support. It also has allowed if you take a big health systems down in Southern United States and certain areas where there may be more of a concentration of Spanish speaking employees, we can accommodate those type of capabilities and interestingly some of those health systems have expanded internationally down into Mexico and areas where our platform is now able to support that expansion for our U.S.-based customers. And then finally as you noted or as I noted in the call we actually do support our platform some products that are sold internationally. We’re not international. We don’t -- in that business have employees internationally, but the platform as we sold as a manager in conjunction with Laerdal Medical and so we’re actually seeing uptake in other languages I mentioned already in the some of the more far reaching like Mandarin. And so we are excited to provide all those capabilities all at one time and to the 4.3 million existing implement subscribers.

Great. I guess as Gerry as I looking at the balance sheet just a housekeeping item really quick, as your DSOs in the first quarter were the lowest of any first quarter in several years. Anything attributable to driving them lower or was is just standard better cash collections in the quarter.

I would say, first of all because some of the cyclical and things can change quarter-to-quarter little more attention we placed on those last couple of quarters, but it’s a cost and point of financial attention.

Nothing other than the normal stuff sounds like.

That’s correct.

Okay. Great. Bobby last question for me, your 10-year revenues were just marginally ahead of your prior kind of guidance for Q1. Anything driving that particular, maybe it was timing of customers falling off just trying to understand if there was going to be upside in those numbers through the rest of the year as we go through or the guidance that you gave was consistent with 60 days ago. Just trying to ballpark or handicap what the rest of the year might look like there.

I think that the run out numbers that we gave which I think dropped from now this quarter of about 3.9 to 2 and then roughly two quarters of one, so one in the third quarter one in the fourth quarter. I think we expect to run out, to play out as we’ve outlined it. We're a little higher in Q1. There is adjustments made into each quarter that are made based on utilization patterns and close out of contracts from the ending of year that boosted a little bit higher. But we still do hold to the trajectory we've given which since see a decline from about $3.9 million in this quarter to roughly $2 million next quarter and then $1 million and then $1.1 million. And so we believe that is an actual trajectory for that product.

Great. That’s all I have. I'll jump back in the queue. Thank you.

Thank you.

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

Yeah, good morning. Thanks for taking the question. Let me start with a follow up on ICD-10. Gerry you gave some numbers on the subscriber count. I am curious if you can just give us at this point in time how many subs are currently there are ICD-10 only that are either at risk or that you need to convert to other programs.

The remaining you mean.

Exactly.

I think most of them are pretty much gone by now. This is a big quarter for the reduction in the ICD-10 only, many of whom were wrapping up by the calendar year end December 31. I think it remains mostly close around the platform.

Okay. That’s helpful color. And then Bobby I guess one for you on the user experience. A lot of decision on that in your comments and then some Q&A already, but I’m curious if you're seeing any different uses among the customer base given that platform, meaning are they consuming more content, is it leading to more of the other platform sales or anything you're noticing on the maybe more tenured users on that platform?

Well, first I wanted to offer a quick correction to I think Gerry’s comment I think and looking to ICD-10 users, I believe there are probably -- I think we announced 370,000 or so for ICD-10 only in the prior quarter and about 200,000 of them have come off since then. So I believe probably about a 170,000 ICD-10 only remain and may be Gerry can fact check that. Unfortunately I am remote today and so Gerry if you can fact check that by the end of the call, that would be great. And then can you repeat which platform were you talking about to see the cross selling.

The user experience, just with the mobile platform with the new experience are you actually seeing more courseware consumption or different use?

Yeah, sure what was exciting about it, it that it was originally conceived as a new application front end to our core application, our learning platform and what has evolved into over the last year is really a front door for all of our applications. And so we're in the process now, but for example one of the primary features of it is this -- is it to do like a way to govern activities upcoming for someone. Historically if you look back a few years the only thing that would appear on to do list were activities associated with the required learning, but through the new APIs were developing we can now feed other to do items out of other systems in the HealthStream right into that front door, which is as you know widely accessed. In fact I think recently, we had about 600,000 logins to that application that new UX in a single day and so what we are doing is all of our application suites are now riding through this new interface. So, if there is an even trigged out of the use of our Conflict of Interests Smart platform we call COI Smart, that will be the first one to debut where activities that trigger action requirements will also trigger your to-do list to its centralized depositary for 4.3 million people. And so we're opening it up. It kind of represents an opening of our platform and in the first place its open to as our own -- as our other applications. And so it will be a road over the course of this year as more and more of our applications relate to, are linked to and technologically integrate with that front end. And then our ambition of course over time is to open up those API and others to link into that central access point. We're not there yet but that’s a bit of our journey and we're starting to see exciting opportunities evolve because of this kind of open architecture approach.

Okay. Great, that’s helpful. And then final question just on Echo, you talked about some new customer wins that were internally announced and I won’t ask who that is, but is that something one that’s reflected in the Q1 numbers that are still on the common. And then number two, you talked a little bit about product development, are there any very specific target areas for Echo that we should think about going forward?

Well, there is a co-host of derivative products as I look at the new product roadmaps being built by Echo and it's really exciting because it integrates assets from across the company. And so for example, the concept of provider scorecards that would take data from the core credentialing system, but also potentially from the patient experience business we have is an interesting concept on the roadmap and underway from an execution standpoint. The customer wins we have a bit of back -- an implementation backlog in the provider solutions area. In fact, the wins were coming at a really good pace, but they're not fully implemented and so similar to the phenomenon of our core business there is kind of a contracted number and then an implemented number and some of that is still in front of us as we catch up to those implementation on the provider solution side. And it now holds a very similar model of signing contract and moving into the implementation phase. So, we’re still optimistic. Now we’ve got large growth expectations on Provider Solutions. Some of those come from just the year-over-year comparisons and the timing of the acquisition, but some of them come from organic growth and new products in that very category. So, there is a lot of optimism and energy in that area of our business right now and we’re seeing customer wins result. In fact some of the point -- touch points of integration with other applications at HealthStream I think are meaningful competitor differentiators and I'll give you one more example. We’re currently in the process of making available to the credentialing system, the credentials that originate out of the learning platform, which will reduce the work burden on the customers of the credentialing platform, for example the credentials associated with the completion of resuscitation training, which is largely delivered through our learning platform is a data point that would proved very useful because it’s often required in the credentialing process for providers. And so facilitating the movement of that data from our learning platforms into our credentialing platform we think will provide additional leverage down the road with customers as a real work reduction opportunity for them. So I've given a few examples of points of technological integration, but your core question was are we seeing the customer wins in the numbers yet, I would say they've garnered implementation backlog, but they're part of the growth forecast which is already put forward. So we're excited to see those new wins.

Okay. Perfect, very helpful. Thanks for the color.

Thank you. And our next question comes from the line of Nicholas Jansen with Raymond James. Your line is open. Please go ahead.

Hey, guys just wanted to dig a little bit deeper into the product development expenses. We’ve seen those grow as a percent of revenue 500 basis points over the last four years and certainly you’ve outlined another a number of key initiatives over the last 12 months as we think about kind of revenue drivers. But provide a better sense of where you are in the revenue recognition process associated with that product development expense increase. Just want to get a better sense of what inning we're in from a -- are we still very early from capitalizing on this increased investment. Are we starting to see the benefits in the numbers thus far?

It's a great question, a fair question. As you know each year we go through a three-year planning cycle that we refresh each year in the retreat process into the year and then we announce our new investments and we have accelerated product development investments each over the last two years. And I would say we're still mid inning four, five. We've got a lot of exciting things right in front of us. In fact, couple of them announced here in the call today. The patient experience solutions area, these new express surveys is still in front of us. It's relatively new. We're rolling it out. It adjusts our model to compete with a more senses based approach of some of our competitors and we're excited about those innovations. In this last retreat process in November, December, we essentially approved two new investment plans on the business of Provider Solutions being and Echo being the other and they're early in their product investment cycles as I've mentioned on this call in both of those segments. And then we see a steady increase because of the HR talent management in the core business R&D investments. So we obviously can think of it as three areas of investment and two of them are little earlier stage Provider Solutions and patient experience and one is just the ongoing innovation curve of the core business. So hope that helps. I've put a couple of them in the fourth inning and a couple of them in the fifth and sixth inning.

That's actually very helpful. And then we think about the Echo business year-over-year growth, obviously the growth included the HealthLine transaction, which fueled the overall number and certainly some OpEx associated with the deferred revenue write-down. But how is that business performing on an apples-to-apples basis and I guess I know that business before wasn’t really growth targeted and you guys are making investments to kind of accelerate the growth there, but just wanted to get a better sense of apples-to-apples in Echo?

Yes, well we're pretty excited about the things we're seeing in the last couple of reports. We're seeing solid organic growth and the businesses that are now part of Echo historically had, well at least the HealthLine business had a lower growth rate. It's a very profitable business, but as you noted, a very low emphasis from a number of headcount on sales and marketing investments and we're changing that. We're building a sales organization and adding to the ones that existed and integrating them better with the SyMed sales organization and we're beginning to see the fruits of that. So on an apples-to-apples basis we're seeing increased win rates in sales rates. What's also exciting is some of the products of those two combined business now [indiscernible] as Echo were installed products and while that accelerates revenue recognition we're selling more of the SaaS and the subscription-based products and remotely hosted managed products and while that spreads out revenue more, it's consistent more with the business model of HealthStream and so it will take longer time to matriculate in the revenues with both the shift in the model, but the win rates are increasing in the last, really the last 100 days for that business line.

That's very helpful. And then lastly for me from an M&A perspective, have we seen private multiples start to adjust to public multiple realities or are multiples out there still elevated in areas that you're looking to deploy capital to? Thank you.

Well it's interesting. We have an [indiscernible] program. In fact some of our G&A expenses are up or due to a couple of things that Gerry identified like the complete overhaul of our accounting finance system, which is the first time we've done that in a decade. But also because we've an active M&A pipeline, we actually had one deal that was moving along that we halted during the first quarter. So some of those expenses are in our numbers and unfortunately won't materialize into a deal. That deal stopped on valuation concerns and kind of growth trajectory concerns in the due diligence process. I would say that I think everyone feels little pressure on multiples including the private sellers. I don't know if they all look into the full reality. I think that, that will exist the next couple of years as a percentage of our compressed multiples for private companies and as you know there is always hold out that -- and maybe some for good reason that claim to higher multiples because of their exceptional growth rates. But I would say we're seeing some sensitivity, but not quite enough from a buyer standpoint.

Appreciate all the color Bob. Thanks. I'll hop in the queue.

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

Great, I was wondering if we could just scrub the ICD-10 subscriber numbers a little bit more. Just wanted to make sure I understand that and Gerry I’m not sure if you have information there, but if I go over the fourth quarter call you guys mentioned they were about 360,000 or 390,000 subscribers are ICD-10 only. So I’m not sure which number is correct there. You reference 370,000 here this morning. In the fourth quarter you talked about 30,000 rolling off and then you guys threw out a 165,000 effectively were captive subscribers by buying one of your additional products. And then we have the 200,000 number that you listed here today or mentioned today. So that pretty much takes me down to call it zero. So, I just want to make sure that differs from the 170,000 number Bobby that just said. So I just want to make sure…

Let me try to walk through it a little bit, I'll just try to walk through it together a little bit and again I don't have the table in front of me, but I’ve got a pretty good sense for it. A few quarters ago, we peaked at about 1.8 million subscribers on ICD-10. So kind of start with that number. We peaked at about 1.8 million subscribers on ICD-10 about three quarters ago and since then the number has been declining and the revenues been declining. So if you look at the sequential declines in revenue you can see them dropping. Remember there are two categories of ICD-10 readiness customers. The first category are those that have other HealthStream products and so when their ICD-10 readiness contract runs out, they will remain a customer of HealthStream and they will remain in the ARIS, but that revenue associated with ICD-10 will obviously be gone. And then there is the ICD-10 only subscribers that, that was literally the only product they had purchased from us and so when they reached the end of their contract and assuming they haven’t bought anything else, which is our current modeling assumption for that number, they will go to zero in our model. They will drop out of the numerator and the denominator of ARIS. That number we believe at the end of the year was about 370,000 and of ICD-10 only subscribers remaining on the platform and then in this quarter about 200,000 of them have dropped off. And so leaving about a 170,000 of ICD-10 only subscribers to eventually over the course of next three quarters, come off of the numbers. The balance number we gave, the 570,000 that we gave represents the total number of ICD-10 subscribers that reach the end of their commitments in the first quarter. So that number is comprised of roughly 200,000 that were ICD-10 only and then the balance number, which would be 378,000 which, 378,000 that’s the balance number that are also, that reached the end of their term and therefore dropped the revenue but remain on our platform. So these are really just think about is about 578,000 were using ICD-10 and through the course of the first quarter dropped off. On average they're generating about $4.50 per revenue, per person, which represents the $2.6 million decline sequentially in ICD-10 revenues. I hope that helps and then maybe Gerry can add some color because there is an averaging convention as well if you're referring to its impact on ARIS it gets a little more complicated because of the way we average the numbers over the quarter. But I believe those are accurate numbers and so if you look at the run out of ICD-10 we have enough subscribers at $4.50 per subscriber to generate about $2 million in revenue in the next quarter and so let's just say just around roughly to $5 to generate about $2 million, at $5 a head and then in the third quarter it will be down to subscription number in total that will generate about a million in revenue, and then in the fourth quarter there will be some carry through in adjustments we expect will generate about a $1.1 million in revenue from ICD-10. So we expect by the first quarter of next year the entire $1.8 million would be out of the network and not generating revenues from that limited ICD-10 readiness product. I hope that helps if you could follow that along.

So one thing about I think I spoke earlier when Ryan asked this question, you're right. It's about 370,000 subscribers are ICD-10 only at the end of Q4 of '15. So your math is right.

Could you guys give us an update in terms of how many ICD-10 only that you’ve been able to cross sell an additional HealthStream product? I think that was a 165,000 that you mentioned last quarter.

That number would have occurred like last year and as we were trying to market to them, we're now at this run out point where, we’re still try to cross-sell the remaining 170,000 on to something new like DNA would be great. But the expected conversion of the remaining balance of a 170,000 ICD-10 only is zero based on the late model. That doesn’t mean we're not trying to convert them, we are, but remember there is a larger number left on the core platform that are existing customers. There is only 170,000 left to convert in the remaining three quarters and we're of course working with them, but in the model we put it at zero.

Okay. And I guess thoughts on gross margin Gerry may be how we should think about that going through the year, clearly ICD-10 rolling off that takes lower margin business out of the equitation you've been selling a lot of platform revenue here over the last year with competency center, performance center. And I thought that may be gross margins would have increased a little bit sequentially and may be your thoughts on how we should look at that going throughout the year.

I think one thing to remember that's important, I'll let Gerry chime in as well, but we're in different locations, so its little harder to coordinate, but the clinical courseware products are really, really doing well and some of them also have high cost to goods and high royalties. They come from very powerful association brands and nursing organizations and medical publishers and so in those scenarios they have similar gross margins to say the ICD-10 and some of those key products. And so you have to remember that that is an area that delivers 58% revenue growth over the prior year quarter and it has similar gross margins with ICD-10. Fine improvements in some of them, but similar for many and so you have to remember that really high growth area in addition to the platform pieces is in a clinical curriculum area and it has a high cost of goods as well.

So I'll echo that, but also don’t forget this is the, that HealthLine systems transaction closing in March of last year. This is the last quarter where it's called incremental to HealthStream’s overall results. So Q2 of '16 will be comparable to Q2 of '15. So your product mix becomes more and more comparable that will also be a factor you should consider as well.

Okay. My final question Bobby can you give us an update on the DNA product and the CE center. You've thrown some stets out there in the past in terms of number of contracts and subscribers those type of things if you can give us any update that would be great.

Well, this quarter the highlight and so we prepared numbers around the hardcode and resuscitation products and we didn’t prepare updates on the CE center and DNA. Both are plugging along. They had relatively stronger quarters in the fourth quarter of last year than in the first quarter of this year. So we hope to see them continue to pick up their pace throughout the year. They’re very strong pipelines and so we feel good about them. More so CE center secondarily, the DNA products, but we saw such tremendous progress with the resuscitation suite at this time we did the detailed look the $2.3 million completions and the 100 new contracts, those were the analytics we put for this quarter. A little bit stronger fourth quarter though from recollection for those products. We’d a great selling season as we wrapped the year and brought a lot of business in the fourth quarter setting us well financially for this year. A little weaker first quarter on those two in terms of new order value, but steady progress on all three fronts, the strongest of the three was the hardcode and resuscitation products.

Okay. Thank you.

Thank you. And our next question comes from the line of Peter Heckmann with Avondale. Your line is open. Please go ahead.

Thank you. Good morning. Just a few more questions, have there been any -- has there been any measureable change in the competitive dynamics given some of the M&A activity we’ve seen in e-learning and credentialing? Are you seeing competitors that are gaining efficiency scale or being able to bundle services that’s having an effect on you competitively.

I think that some of our offerings are really fundamental and well positioned in the market and we don’t feel that there is anything particularly new about the competitive landscape. And other areas in the core platform I’d say that, that continues to intensify when we talk about learning and have the talent suite and so that environment continues to intensify and be more challenging. That’s the sale to the HR department. So it’s good that we're showing strength through the provider solution sold into the medical office and credentialing areas of the hospital and into the clinical side which is the CNO and CMO. It’s good to have those relative strengths happening now as the competitive landscape on some of the pure software sales is escalating. It’s not really any different than the prior mix of competitors because of M&A. You may be referring to a merger that occurred in credentialing space. We do not see that as materially changing the competitive landscape for us. We feel like we have that at hand and it won’t change our win rates and trajectories in the Provider Solutions business. And so in general we’re seeing relative competitive strength in the Clinical Solutions areas the Provider Solutions areas. We have some enhancement to help us competitively in the patient experience line that’s a tough competition there. We compete against a really strong dominant provider in that space but that hasn’t changed and it's been that way for years. And then in the pure talent sales, I’d say that that continues to intensify and we’re working to continue to enhance our offerings in that area.

Got it. Okay. That’s helpful and then just a little bit more clarity if you would on the year-over-year increase in areas, did the recent enhancements including the mobile ready, did that provide any uplift on pricing or if not can you talk about some of the areas that are contributing to the year-over-year increase that was stronger than what we had modeled.

Yeah, there is a lot of moving parts in and out, probably the largest contributor to its movement is the strange movement of the ICD-10 coming in and out. And so it’s interesting because the ICD-10 product set is below the average areas. And so the ICD-10 only subscribers that are coming out, they tend to boost the average. However, you have to remember that more than a majority or existing customers and those subscribers take in the ARIS in the denominator, but the revenue from it comes out. And so the net effect of that we believe is kind of a downward pressure and so it’s the relative movement of those two things that is moving this metric, probably the most heavily weighted variable in moving the metric. In addition though you remember our sales in the clinical courseware areas are performing very, very well and that has -- those are usually same-store sales growth, which pushes the ARIS the upward and remember that was a 58% gross over the prior year first quarter. And so again that’s another upward pressure on ARIS. The net effect of all of that was upward year-over-year and slightly down sequentially.

That’s helpful. Alright, thank you.

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

Good morning. Thanks for taking the questions. I am going to go a couple high level ones here Bobby if you don’t mind. First as we look at the post ICD-10 landscape obviously, you had put HealthStream in a position to benefit and to help hospitals and clinicians deal with this new regulatory change. As you look out over the next couple of years, do you envision or do you see any other similar type situations and given your experience of ICD-10, do you think that HealthStream has now put themselves in a position to be that go-to educator in those circumstances?

There are couple of macro trends that we're trying to position ourselves really well for that are not quite a level of mandate, but we see a dire need in these areas. One area is the on-boarding of the new workforce. So the new millennial nursing workforce coming into practice for the first time given the shortage of the experience nursing workforce toolsets to help orient strengthen their confidence and skills as they come into the workforce, its almost mandatory now that we’re going to have to employee that younger workforce. And it's interesting because five years ago somehow systems strategy with the looming shortage was to simply pay a little more, recruit the seasoned nurses that were experience from other health system back and forth and fight over the existing talent pool. That battle is no longer going to work as each year we get closure to seeing faster retirement rates and so the new nurses have to be hired and brought in and have to be put patient bed side. And so we’re working on a series of products that will help onboard, build the skills and build the confidence. Remember they're coming from nursing school without a residency requirement and although many hospitals built residency type programs, try to build confidence and skill in the first year. There is a lot of turnover in the first year and there is a lack of confidence and justifiably because they haven’t been taking care of patients. They've been in school and we have a lot of tools that we're building and working on to focus on incorporating this new millennial nursing workforce into the care provider environment and so note there is some work in the stimulation area. We’re actually doing pilot programs with some large health system of what we're calling a residency program, which is a more robust curriculum for these new nurses and we've built confidence study tools for example with professors at Standford that will become standard measurement instruments to see how these new nurses perform in their first year. So that's a macro trend a big one and one that we're focused on as an organization. One other macro trends is just as movement towards pay for performance and in general, but more specifically the accountable care organization with the shared risk pools, it creates a lot of need for post acute and acute settings to coordinate care. And a lot of incentives for those work forces to be coordinated and how they provide care delivery. And so the Duke Frail Elderly Certificate program is an example of a program that addresses the needs of both these new shared risk organization that targets the post-acute settings and the acute settings with its educational effort. And so that’s the first of a series of products that we call pathways that are geared, in this case focused on shared risk and targeted to both subsectors, the acute and post-acute settings. Those are two example macro trends that we’re trying to prepare for the I think pressure to healthcare systems in the U.S. that we’re aware of that we think can drive business growth in the coming years.

Okay. Great. Thanks. And then maybe two more from a penetration standpoint, I think you've broken it out historically roughly $5 million in the acute space $3 million in the post acute, any update on where you think you are from penetration standpoint in the post-acute? I realize it’s probably still very early days, but given your comments about the basic life support adoption there, are you seeing a faster uptick in that post-acute space?

Yes, we’re encouraged by the recent trends. We continue to strengthen the sales organization that focuses on post-acute settings, providing yet more specialization in their approach. We continue to add content partners, strengthening the ecology of the ecosystem to offer specific products to that segment and then we're getting better at figuring out how to cross sell existing products like you mentioned the BLS product into that segment. And finally in some case we have to tweak our platform a bit or add a new content partner or just a price point to get the growth we want in that area. But we are seeing some encouraging signs early in the year here and we mentioned one of them, which was about 20% of the outstanding performance on the recitation suite came from post acute setting in this past 90 days.

Okay. Great. One last one and I think you've commented on this in prior quarters, but if you could refresh my memory, the ICD-10 readiness platform that you talked about here in the call, roughly 450 was the average sale price. The continuing, just the follow-on offering, if I recall it was higher price point, is that accurate expectations for their product as we move forward?

Yeah, that product I think you're referring to the DNA product and there is actually a series of products that use that format that we're pretty excited about. One is focus on the quarters. So, it’s a small subset of what the preparedness product was focused on, but definitely a higher price point. We haven’t disclosed the price point, but it is a higher price point focused on narrower audience. We've launched a new Case Manger Program, which we're really excited about. It's also under the precise joint efforts of development and it has a higher price point again focused on a smaller population on the operation side. But in the revenue cycle side of the case managers that are often associated with the managing the patient flow and so those are two examples of higher price point more focused curriculum sets that are in the market now that we're excited about.

Great, thank you.

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

Hey. Good morning. Thanks for taking the question. I wanted to ask about the Patient Experience segment. It seems like growth for the patient insight was a little slower than the recent trends. So first can you help us understand what drove that kind of modest deceleration? Was there any client attrition or was that just normal fluctuations in the business? And then second, your guidance for the Patient Experience segment obviously implies a ramp for growth for the rest of the year. So, can you help us understand what drives that acceleration throughout the rest of the year?

Yes, sure I think we’re pretty optimistic that we've got a good leadership team in place and they're building a pipeline and have some new products like I mentioned. We're pretty excited about this shift to add products that are more senses based approach, which has been a move of some of our competitors that’s resulted in the success and we're seeing interest in that from our base. So these express surveys we're launching, we think help round out our offering and hopefully provide some uptake in the second half of the year. We’ve seen a normal amount of churn in the customer base. There is three or four big providers in the space. The dominate one is Press Ganey and we see, we have a continues process of trading accounts and sometimes they net a little better, sometimes we net a little better. This past quarter not particularly atypical, but there is that kind of constant churn as customers decide to switch vendors between four or five core providers of the service. So those are the reasons for optimism. Some new product concepts that are hitting the market now and a stronger management team. That churn is always there and I don't know if it is particularly atypical this quarter but it’s definitely a factor in the growth rate.

Got it. That's helpful. And then Gerry mentioned in his prepared remarks looking at some value maximization strategies and I know you obviously announced the buyback last quarter. Was that comment meant to encompass something beyond a buyback or more specific to that? Thanks.

Yes I think clearly put a buyback mechanism in place and it’s at management discretion. We did not exercise anything under the buyback program in the first quarter of its existence. So watch that carefully over time. We also refer when we talk about maximization strategies to our M&A program. So we talk about organic and inorganic growth and I think those three are our core strategies for enhancing shorter value and generally what we’re referring to right now when we talk about growth and potential for growth and earnings and growth and therefore shareholder value or growth in cash flow, core metric we watch is EBITDA and operating income. And so we generally when we talk about that, we’re talking about those three things. Organic, inorganic through acquisitions which is active. I even noted that we have a constant investment now in the M&A pipeline. And so when we talk about investments in that, we concluded the cycle of due diligence. We had cost for us in the quarter and that's common ongoing now cost of doing business. So we have a focused team on the M&A pipeline area. So that's what we mean when we talk about shorter value creation.

Okay. Thanks a lot.

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

Hi guys, given the time I will just take my questions offline, thanks.

Thank you. I’m showing no further questions at this time. And I would like to turn the conference back over to Mr. Robert Frist for any closing remarks.

Thanks everyone for participating in this call. Hopefully we were able to answer everyone’s questions and our employees are doing a fantastic job delivering new products innovations to the market. So we'll celebrate those launches together as we move through the year. look forward to updating on our next earnings conference call. Thank you all.

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.