HealthStream, Inc. (HSTM) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the HealthStream first quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, 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 2018 results. Also on 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 risk and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Form 10-K and 10-Q. So, with that opening, I will now turn the call over to CEO, Bobby Frist.

Thank you, Mollie. Good morning, everyone. Welcome to our first quarter 2018 earnings call. Let's jump into some highlights. Our first quarter performance was generally in line with our expectations and sets us on track to deliver full year revenue growth of 6% to 8% and operating income % growth over 2017 of 20% to 30% under ASC 605 and 25% to 40% under ASC 606. So, you'll just note right off that we're going to have a lot of interesting accounting dimension discussions today as we talk about our earnings growth and trajectory. And so, I'm going to leave a lot of that detail for Gerry. So, we'll do a couple of business highlights. Certainly, one development worth highlighting in the first quarter was the successful the successful divestiture of our Patient Experience business on February 12 to Press Ganey Associates for $65.5 million in cash. We recorded a book gain on the sale of our Patient Experience business of $20.3 million. The proceeds we received from this transaction gave us some opportunity to return value to our shareholders and our board of directors declared a $1 dollar per common share special cash dividend, which was paid right at the end – or after the end of the quarter on April 3 of 2018 to shareholders of record as of March 6 of 2018. In our workforce development, we're continuing to transition towards higher margin products. For example, and we announced this several calls ago, we co-developed an OB risk curriculum, obstetrics risk curriculum which is focused on reducing risk by providing staff with knowledge and skills to identify early warning signs of maternal and infant distress. Reducing risk in obstetrics is extremely important to our customer because it's one of the areas with the highest medical malpractice claims. And by our ownership stake in this curriculum is going to – it facilitates our transition towards a higher margin solution, a solution that combines the platform that we have with some content, which we're now an investor in some of that content and overall has the effect of boosting our margins for that solution area. Additionally, we're committed to creating a marketplace which brings choice and selection to our customers. A great example of this is the development work we're doing for our new resuscitation product set, and that product suite is set to launch in early of 2019. We believe there's benefit in often alternative methods, new technologies, new partnerships focused on developing core clinical competencies. In this case, the resuscitation set of clinical competencies. As a reminder, at the end of June 2017, we announced that our current agreements with Laerdal Medical for the HeartCode and RQI products will expire on December 31 of 2018. HealthStream retains the rights to and expect to continue selling HeartCode and RQI for the next eight months and we will provide uninterrupted service to our customers for the duration of their contracts, which can be extended through December 31 of 2020. HeartCode and RQI generated approximately $46.4 million of trailing 12 month revenue. At the end of this year, we will stop selling those products and expect the revenue from them to decline in 2019 and to run out over the course of 2020. In prior years, our HeartCode and RQI products were some of our highest growth and lowest margin products in our company's portfolio. They were growing over 20% each year. We have factored into our guidance lower expected sales on these products resulting in single-digit revenue growth in 2018. As we've previously shared with you, we've already signed two partnership agreements to develop a new higher quality, lower-priced suite of resuscitation products. These agreements span a minimum of seven years beyond product launch, again slated for January of 2019. We are pleased to report that our new partners are deep into their product development cycles and are, therefore, tracking to launch this exciting new suite of product in early 2019 as we have planned. This new product suite will carry approximately double our existing resuscitation product margins. Therefore, the actions we are taking to create more choice for customers will result in a higher margin for HealthStream in the coming years. Of course, as we prepare these new products to go to market, our capital investments will increase throughout 2018, which is reflected in our capital expenditure guidance that Gerry will provide briefly. In our Provider Solutions segment, we believe the implementation backlog levels are now at a workable, sustainable level, integrating the three entities of this segment as one business unit has greatly advanced in the last several quarters. We have one leadership team, strong unified rebranding launch is all complete and in the marketplace. In January, we announced the introduction of Verity, a HealthStream company, which is the new name of our Provider Solutions business that combines Echo and Morrisey businesses. At the same time, we launched our new SaaS platform base for this business, also named Verity. We expect to start bringing new customers on the new Verity platform in the middle of this year. Over the next 36 months, we expect to migrate existing HealthLine and Morrisey platform customers to the new Verity platform. Fortunately, we have extensive experience and expertise in making such platform migrations happen over time. With greater integration and unification of our providers solutions business segment, we are seeing increased levels of cross-selling among the products that originated from each of our three businesses in this segment. Our privileging solution, for example, from Morrisey, our Echo OneForm and Echo InForm from Sy.Med and our Echo Verify and Echo Monitor from HealthLine are all providing and proving to be popular for cross-selling among our Provider Solutions customers, providing the needed trajectory for the short-term revenue growth that we have forecasted. We're going to dive into some of the accounting treatment and the revenue and margin look. I'll turn it over to Gerry Hayden for a few minutes and then I'll wrap up with a few more business comments.

Thank you, Bobby. And good morning, everyone. Before reviewing our first quarter results, I'd like to note that, one, all results are from continuing operations only. For example, 2017 and 2018 results exclude the gain on the sale of our recently divested Patient Experience business segment and results of operations of such statements prior to the divestiture. And, two, 2018 results are presented in accordance with the new Accounting Standards Classification 606, revenue from contracts with customers, also known as ASC 606, whereas results for 2017 are presented in accordance with ASC 605. Some highlights. Consolidated revenues were up 6% to $54.9 million. Operating income of $3.7 million in the first quarter of 2018, up from $2.4 million in the first quarter of 2017 with $1.4 million positive impact in the first quarter of 2018 following the application of ASC 606. Net income from continuing operations of $3.6 million in the first quarter of 2018 and that's up from $1.7 million in the first quarter of 2017, with an approximate $1 million positive impact in the first quarter of 2018 once again from the application of ASC 606. Earnings per share, or EPS, from continuing operations were $0.11 per share diluted in the first quarter of 2018 compared to EPS from continuing operations of $0.05 per share diluted in the first quarter of 2017. Adjusted EBITDA from continuing operations of $10.2 million in the first quarter of 2018 and that's up from $8.7 million in the first quarter of 2017. And once again, there's a $1.4 million positive impact in the first quarter of 2018 from the application of ASC 606. As you can probably tell from my opening, there are two financial reporting developments in the first quarter that warrant explanation. The first is the Patient Experience divestiture which occurred on February 12, 2018. Our income statement shows a single line item for income or loss from discontinued operations, which capture the results of operations for the Patient Experience segment. The 2018 amount of $20.2 million captures results of operations from January 1, 2018 after closing at February 2018. The Patient Experience impact of adopting ASC 606 and the after-tax book gain recognized on the Patient Experience divestiture. The second financial reporting development is the implementation of ASC 606 into our GAAP reporting. There are two areas affected by our ASC 606 reporting – revenue recognition and commissions accounting. In the first quarter of 2018, reported revenue was virtually identical between historical ASC 605 method and the now GAAP ASC 606 approach. The more significant difference between ASC 605 and 606 is commissions accounting, in that commissions are capitalized and amortized under ASC 606 when the same costs would have been expensed under ASC 605. A large number of 2017 sales transactions went live during the first quarter of 2018, resulting in commission payments being capitalized in accordance with ASC 606. The amortized commission expense recognized in the first quarter of 2018 was lower than what would have been recognized as commission expense from the same period under ASC 605. Now, let's return to our usual investor call format with the review of certain areas of our income statement when we touch on highlights from each business segment. Revenues from our Workforce Solutions segment increased by $1.2 million in the first quarter of 2018, overcoming a $554,000 decline in ICD 10 readiness revenues from the first quarter of 2017. In the first quarter of 2018, revenues from our Provider Solutions segment increased by approximately $1.7 million or 20%. The Morrisey Associates acquisition represents approximately $772,000 of that increase. Revenues from other Provider Solutions products increased $873,000 compared to the first quarter of 2017. Now, let's look at gross margins. Our gross margin was 59.4% this quarter and represents a 200 basis point improvement over the previously reported full-year of 2017, which results included the Patient Experience segment. Now, some operating expense discussion. Operating expenses for the quarter were up 1.5% over the first quarter of 2017 when the ASC 606 version expenses for 2018 are compared to reported 2017 operating expenses. The combination of capitalized software investments and product development expenses increased 1.5% between this quarter and last year's first quarter. Software development remains a priority and we have maintained our development capacity. We have, however, reached a point of equilibrium where amortization levels are equal to the levels of software development capitalization. Sales and marketing. As we mentioned earlier, sales and marketing expenses are where we see the impact of the new ASC 606 standard and its impact on comparisons with the prior year. Now, specifically, the capitalization of commissions under ASC 606 in 2018 defers the expense over several years, while commissions were expensed in the first quarter of 2017. This creates a situation under which sales and marketing decreased by $492,000 or 5.1% between this year and last year.. Under ASC 605 protocols, sales and marketing expenses would have been $1.5 million greater had commissions been expensed in a similar fashion to 2017's first quarter. Depreciation and amortization increased by 3% over the last year's first quarter. This rate of increase is lower than recent quarters and reflects the full inclusion of amortization on acquired intangible assets from the Morrisey Associates acquisition in both the first quarters of 2017 and 2018. It's also important to note that depreciation and amortization still reflects increased levels of capitalized software development amortization as we continue to invest in product development. G&A expenses in the first quarter of 2018 increased over the first quarter of 2017. Compared to the first quarter of 2017, G&A expenses grew by approximately 7.3% and were about 14.1% of revenues, which is attributable to increases in software expenses and facilities costs. Operating income. As I mentioned a minute ago, our operating income under ASC 606 was $3.7 million in the first quarter of 2018 compared to $2.4 million under ASC 605 in the first quarter of 2017. The increase in operating income reflects revenue growth, leverage on product development and the capitalization of commissions under the new revenue standard ASC 606. Once again, this commissions accounting change represented an approximate $1.5 million reduction in expense versus what commissions expense would have been under ASC 605. In addition, this quarter's results overcame the approximate $275,000 margin loss from the decline in ICD 10 revenues over the last year's first quarter. Now, let's look at the balance sheet. Our cash position and the overall balance sheet remains strong. Our cash balance at March 31 was approximately $195 million, a $64 million increase since December 31, 2017. The $64 million increase, of course, reflects the net cash proceeds from the Patient Experience divestiture in February of this year, but does not yet reflect the $32.5 million cash flow, $1 per share cash dividend which was paid on April 3, 2018. We have no outstanding debt and our full $50 million line of credit capacity 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 shareholder value maximization strategies as may be appropriate. The first quarter 2018's effective income tax rate was 10% and reflects two themes. First, this quarter is the first when our operating results are taxed at a lower 21% federal rate for corporations. Second, stock option exercises during the quarter generated excess tax benefits, which also reduced the first quarter's effective income tax rate. Our updated full-year 2018 guidance reflects the first quarter's impact on the full year effective income tax rates. Finally, some guidance. Yesterday's earnings release reiterated our guidance. In addition, we have provided guidance under ASC 606 to better allow for comparability going forward. Most notably, because the capitalization of commissions expense under ASC 606 produces 2018 operating income results in a different range when compared to ASC 605. For that reason, and subject to all the qualifications and explanations we've just provided, our updated guidance includes ranges for both ASC 605 and ASC 606 where the information is relevant. For 2018, we anticipate that consolidated revenues will increase 6% to 8% as compared to 2017. We anticipate that revenue growth in our Workforce Solution segment will be in the 4% to 6% range and our Provider Solutions segment to grow 10% to 20% when compared to 2017. And we believe that these same revenue guidance ranges are applicable to both ASC 605 and ASC 606 scenarios. We anticipate operating income for 2018 to increase between 20% to 30% as compared to 2017 under ASC 605. Under ASC 606, we anticipate that operating income increased between 25% and 40%. The primary reason for the different ranges pertains to the capitalization of commissions under ASC 606, which had the impact of deferring commissions for the extended period versus current period expense under ASC 605. We anticipate that capital expenditures will be approximately $20 million during 2018 and we expect our effective annual income tax rate to range between 21% and 22% for 2018. This represents an effective tax rate of 26% to 28% for the remaining three quarters of 2018. As we just mentioned, the first quarter of 2018 experienced a 10% effective income tax rate due to the lower corporate overall rate, but also excess tax benefits from stock option exercises during the first quarter of 2018. And finally, this guidance does not include the impact of any acquisitions that we may complete for the remainder of 2018. Thanks for your time and I'll turn the call back to Bobby.

Thank you, Gerry. A few more highlights to kind of bring everybody up to speed on. Within our Workforce Solutions segment, I'd like to call our non-acute sales channel, which had a strong sales in the first quarter. Our non-acute sales team is led by a HealthStream veteran who recently rejoined the company and that team, with his leadership, continues to add a growing number of platform subscribers through our non-acute channel. During the quarter, we saw notable sales of over $1 million in the non-acute space. So, congratulations to the non-acute sales team and the progress in that segment. Our clinical solutions continued to perform well. I mentioned earlier our OB risk products, which has that higher-margin approach where we have blended investment into the content and the platform and the data. Another clinical solution maybe worth highlighting is the progress with our checklist management application. Currently, we have 800,000 healthcare professional subscribers to the checklist management application. And in addition to its standalone benefits as a software application, it has demonstrated additional value when uniquely integrated with clinical content for the validation of nursing skills. So, we see that checklist management tool we announced a few years back now has 800,000 subscribers on it and growing relevant to the continued training and development of the clinical workforce. In January, we announced the launch of our new nurse residency pathway program. And it's a great now because of how it combines and utilizes all of the capabilities and assets and many different content libraries that we have available. So, it's a blended curriculum for these new nurse residents, the new nurses, recently graduated nurses. And it's an innovative comprehensive approach to improve the nurse onboarding process. It's a 12-month blending learning program that closes the academic to practice gap for new nurses, while improving their confidence to practice and improve their retention rates. As an early adopter, CHRISTUS Healthcare reported a 52% increase in their new nurse confidence levels and a reduction in turnover by 12%. This is significantly less than the national average that the turnover rate and a really great result in improving confidence levels. Of note, this product represents a higher price point compared to most of our other products. It's priced between $400 and $1000 per student for the one year curriculum. And if you look across our product portfolio set, usually, our products range from $5 per person per year up to $150 per person per year. So, this new blended curriculum at $400 to $1000 is a pretty exciting development for us. albeit it's targeted at a very select and small group of hospital employees. A typical hospital [indiscernible] employee. Two or three cohorts of 20 new nurses a year as they train and onboard the new nurses. So, targeting a smaller population, but a materially higher value proposition than many of the other products in our portfolio. So, we're excited to be bringing that to market and see its – both outcomes, orientation and the results we're getting with some of our early customers. In closing, I'd like to remind everyone of our annual shareholders meeting, which will be held Thursday, May 24 at 2 p.m. Central here in our Nashville corporate office. I hope many of you would be able to attend and visit with us for that meeting. At this time, I'd like to turn it over for questions from analysts.

Thank you. [Operator Instructions]. And our first question comes from Matt Hewitt with Craig-Hallum. Your line is open.

Good morning. And congratulations on what was a pretty busy quarter.

We're glad to get some of those transactions completed and freeing us to focus again on growth. So, yeah, it was a busy quarter and a successful one for shareholder with the dividend. So, we're pleased with it.

Absolutely. Just a couple of questions from me. First off, the commission capitalization, is that a one-time benefit or is that kind of a new – I understand the change in the accounting, but was there any catchup or anything one-time nature in that? Or is that going to be the model going forward?

So, Matt, this is Gerry. So, it's the underway practice, policy. In terms of the numbers for the first quarter, I think I tried to explain we had a substantial essentially high commissions quarter based on production from late 2017. So, the fact that a lot of those – because they were capitalized this year as opposed to expense creating a one-time differential in how the expense from it would flow through. That should normalize going forward, though.

Okay. Thank you. And then, regarding the gross margins, obviously, significant improvement with the divestiture, I would expect that your gross margins will stay high, but is there going to be some lumpiness within that line item or kind of 59%, maybe even getting to 60% gross margins, is that what you're anticipating?

Yeah. So, just real quick, the obvious reason the improvement – the Patient Experience gross margin was quite lower than the combined workforce and provider. I don't know the lumpiness. We'd like to see that continue due to gradually increase. And Bobby mentioned about higher-margin products that may have a benefit on the margin going forward as well to get that maybe above 60%.

Okay. And then, maybe one more and then I'll hop back in the queue. Another nice quarter of new customer additions and fully implemented subscribers. And, Bobby, you mentioned that you saw a nice quarter and post-acute space. Maybe talk – it's been a little while since we have kind of delved into that area. What are you seeing in that market? How quickly can you ramp that sector versus the acute care? Any incremental color would be appreciated. Thank you.

Yeah. There's not a lot of incremental color. We're steady Provider Solutions in that space and it's been a steady contributor over the last year. It's nice to highlight a particular win every now and then of a larger account. We have our work cut off. So, we continue to assemble more complete solutions and partnerships that meet the needs of that area and we've got a lot of work to do there, but it's good to have steady progress and keep doing – having good results. I do think, overall, at the macro level, it's going to be increasingly important area, these non-acute areas. A lot of the provision of care is occurring in new care sightings and through new models. And then, the insistence of the ageing population to kind of age at home, the home care markets will be increasingly important. So, I think, just overall, the provision of care in the next five to ten years will continue its shift. And maybe a better way to say this it's growth in these non-acute markets, not a shift necessarily away from the hospital markets. But if on a relative basis total demand increases, there will be a faster growth rate in those non-acute settings.

Understood. Thank you.

Thank you. And our next question comes from Matthew Gillmor with Baird. Your line is open.

Hey, thanks for the question. I wanted to ask about the workforce growth rates. Obviously, the number of implemented subscribers were – I think they were up about 6%. I think the total revenue growth in workforce grew 3%. So, I guess, that would imply a little bit of pricing pressure. I know you don't give the ARIS metric. But I was hoping you could sort of explain that divergence in the implemented subscribers versus the total revenue growth, if there was anything to call out?

Yeah. There's a few things worth calling out there. The first is it's amazing, but we're still seeing a little bit of the after-effect of the ICD 10 readiness roll-off. If you remember from a couple of years back, we had a product surge based on a government mandate. And on a comparable basis, we're still having – on a relative year-over-year basis still seeing a drop in that specific line item which drags growth down. What's interesting, though, the new product we introduced in that area will soon crossover, probably in the next quarter or two into positive territory, meaning that the new products will – on a year-over-year basis, the whole product will be completely sunsetted and won't be in the comparable. So, we'll just show growth in that product category for the new product, and so it should start to reflect kind of a net growth for that category of product in our company. The other thing is, as you know, over the last three or four years, we've been intentionally working on building this marketplace of choice and selection and we analyzed all of our content partnerships and have taken upon ourselves the task of improving choice and selection, bringing more than a single product per category and creating a blended set of opportunities for our customers. And that blended set of opportunities means that some of our past partners have had to – we've not renewed our relationships with them and they've exited our ecosystem. And so, we have a few cases where we used to represent a singular product in a category. And now, it's our ambition to represent multiple products in the same category. And so, old partnerships that weren't comfortable with that have moved out of our ecosystem. So, we've got a few cases, much smaller in scope and scale than the resuscitation business where we're still working through that transition. And most of them have about met their transition point, meaning the old product has been replaced by multiple new products. So, we have more diversity, selection and, in many cases, higher margins for those news products. Well, the last three or four years have been intentionally going from kind of representing a single product per category to a catalog of products from multiple products bringing choice of selection to customers. And in doing that, we've lost a couple of content partners. again, overall, we added ten content partners last year and lost two. So, the net growth in the ecosystem is pretty staggering as we create that marketplace. But in the process, there are a few clinical products where the remnants of revenues from those prior partners are trailing downward and the new product categories are just starting to overlap them. And so, we're seeing that pretty flat growth in workforce, that 3%, because we're lapping those issues. And, of course, the biggest issue that faces us is the last remaining category where we have a single product. In fact, it's my view that industry only has a single option today. And through HealthStream's new work with the two new partners I mentioned, we'll be bringing two more options or at least – in January of singular powerful option, in addition to the older options that exist in the market. And so, in summary, if you look at workforce at that 3% or so growth rate that some of you have identified, it's because of this transition to what I'll call marketplace economics and our shift towards co-investing and some of the solutions to improve margins. And it's going to take us a little time to work through that. And so, hence our guidance of the 4% to – or the 6% to 8% and lower guidance for our workforce segment until we work through those issues. But I'm really pleased because I think in – we only have one remaining issue in front of us. It's a big one. It's resuscitation. But the others we've identified and years ago it began a transition in the clinical skills environment, for example, we have two of the largest three clinical skills providers connected to our ecosystem, but we dropped one. And so, we went from one to two and it's a shift in our ecosystem. I hope that provides some clarity. We're nearing the end of this process to migrate our marketplace and we're excited that we have the clarity of purpose to bring choice and selection and often lower prices to our customers through this marketplace approach. And that's some of the dynamic of the growth rate in the Workforce Solution area.

Okay, that's helpful. Thank you. And then, as a follow-up, I was hoping you could sort of update us on the competitive landscape for learning management solutions. And, I guess, we can see your penetration rate given the subscriber numbers you disclosed, but I was curious if hospitals today are using multiple learning management systems. And the reason I ask is, in the past, I think you've called out a little bit of elevated competition. So, I just wanted to get an update on the dynamics.

Yeah, I think that's fair. There is just – every major talent platform has a learning platform. Every major talent platform provider works to sell their solution set into healthcare. Some have relative strengths over others in the healthcare environment. That's why we see a little bit of a shift to emphasis on products like our checklist management tool, our competency evaluation tools which are more specific to the clinical workflow. Overall, in the software applications that provide for talent, learning and development and a little emphasis on the learning management system. We now have a really strong suite of clinical development significant platform. That's why we highlighted the checklist management tool, which generates almost as much value as the LMS on a per person basis. And it's up to 800,000 subscribers. And so, I'm sure it's a little more competitive. We continue to hold our own. We'll have a little more churn in the pure LMS that we have these new ways of connecting customers into our larger ecosystem, so that they can use our checklist tool and buy from any of our content. 70 content partnerships through this unified marketplace. So, overall, if you said pure LMS, sure, there's plenty of competition. I'd say we've held our own really well, generating still really high renewal rates. But we do expect some more churn in the LMS market and we're equipped for that, meaning that we've got other ways for them to subscribe to our broad solution set in our clinical development applications. So, in general, although the competition is up, we still feel well positioned with our software applications and our marketplace approach.

Okay, thank you.

Thank you. And our next question comes from Scott Berg with Needham. Your line is open.

Hey, Bobby and Gerry. Thanks for taking my questions. I guess, kind of a follow-up to the Workforce Solutions segment question is, you've obviously had a lot of moving parts on the revenue and products guide the last couple of years. Kind of the last component of that, I think, is the resuscitation changeover to the new vendors. But as we're starting to see a model above without the Patient Experience products as well, what do you think is the end markets growing at? What does your model look like two years from now when all of this is kind of cleaned up and it's a normalized operating business shall we say?

Well, we still feel like we're working to be a growth-oriented company and we still find there's lots of opportunity. I think one of the reasons we give the example of the nurse residency program is that we think there are higher value propositions to offer than maybe a historic programs that were $5 or $10 or $15 per person per year. We think that in these spaces that the quality of care is directly correlated to the investment in competency and skill development of the workforce. And not only that, but risk and medical malpractice and all of the other dimensions to improved quality outcomes for patients are also directly correlated to investment in human capital development. And I don't mean like HR human capital development. I mean clinical skills, team skills and clinical care provision and risk avoidance through more knowledge of identifying risky situations for patients. Appropriate protocol is for help. So, I really feel that we're still tip of the iceberg on the total potential. I think it's one of the few remaining industries that hasn't quite figured out the need to invest in true skills and human capital development. I think if you look at the aviation industry and the cycles that they put their pilots through to create safety, look at the nuclear and military complex industries and the investment in training and development and the quality outcomes they get, and yet we put out healthcare reports that show deaths attributable to human error are staggering. And I just still firmly believe that the only way to fix that is by the investment in the development of the healthcare workforce at significantly higher levels than today. So, our typical products are $5, $10, $15 per person per year subscription and we have, as you know, dozens of them. But this new nurse residency program which affects turnover rates, helps with – it engages the workforce for a full year, gives the full tool set of assessment and content and then tools like checklist tool we mentioned, benchmarking services to know the speed of onboarding and retention rates. If you pulled our tools up together, it has a materially different value proposition than a $10 continuing education course. And that's why we highlighted today that that course is starting to perform well. And price point in that course being $400 to $1000 per nurse. I think an example of the niche product, again, we gave the sample cohort of a 20, 25 new nurses coming in. But you can see generating $15,000 to $25,000 for 25 new nurses is materially different than selling those same 25 nurses at $10 CE course. So, all that said is we feel like we're still tip of the iceberg on potential for growth. We've tried to get some examples of our view of the future, of the full marketplace. We've divested out the segments that had more manual labor and call center involvement for data collection to have higher gross margins overall in the coming years. And we've taken on the single biggest challenge to our model, which was we built a long history of representing singular products per category instead of building a marketplace, kind of like Amazon as a marketplace. We're now moving into the era where we're co-investing in content creation like Netflix. We're building a marketplace, a little bit like Amazon and we're providing more value proposition on training like the nurse residency program. So, you can see from that, I'm excited about the future. But that said, we have a $46 million transformation we have to get through in the next three years with the resuscitation business. And it's our hope and expectation in that case that we create choice and expectation not only with our new partners, but someday potentially reengaging old partners in a [indiscernible] system, although as we sit today that doesn't seem probable or plausible. It would be our long-term ambition to create choice that involves all partners at the table, much like an Amazon would. So, we're excited about all that. I hope that helps provide some clarity about our view on growth and potential.

Thanks, Bobby. That's very helpful. And then, the quick last question I had is, you called out a nice win on the acute side with a million dollar plus booking there. How many of those do you think that are out there in that segment? Is this kind of the start of the – maybe of the new sales opportunity there? I don't know what the composition of that deal looks like in terms of products that they bought. But that's a pretty meaningful level in what's still kind of a newer area for the company.

Yeah. I don't know. There's not as many big systems in that space. There's a lot of fragmentation. I think the market needs to improve quality and continue to consolidate. So, maybe through, over time, more consolidation of the way the home health models evolve and market-leading companies providing foundation for that consolidation like Amedisys here in Tennessee. Those are good examples of why our opportunities might increase. But for the next several years, it's still a highly – the post-acute settings are still highly fragmented. In some cases, with tens of thousands of effectively, I'll call it, the mom and pop care providers, the smaller, single-state, single-facility even owned nursing facilities and home care providers. And so, I think if you think five years out, we should see more larger systems be developed. I think the acute systems that our big customers today are expanding into those spaces, and so they're taking us there with them. And so, I'm pretty optimistic about the opportunity there. The next 24 months is still highly fragmented, hard to get to. You've got to make a lot of calls to a lot of small places to get them. But we think there are 3 million people in that space. The way we've defined it, there's many more million in the way others would define it. And we think of the potential developing each of those healthcare worker as a pretty important pathway for us.

Thank you.

Thank you. And our next question comes from Frank Sparacino with First Analysis. Your line is open.

Hi, guys. If we just put the resuscitation aside for a moment, if we looked at workforce, Bobby, can you just give me a sense as to the relative size and growth rates of some of the key products in there?

No, Frank. We're not going to do that. We have four or five key product sets. We break them out occasionally when needed. Resuscitation now of necessity of its both scale and what's going to happen with that business. We're broken it out for disclosure for everyone to follow along that important story. But it's still a competitive dynamic and we want to occasionally drop some hints about what's growing like our checklist management tool, 800,000 subscribers now. But, in general, we think it's the mix of how we provide those services is a competitive advantage for us. And the relative growth rate scenarios, like you see the decline in the ICD 10, which this revenue cycle is a category for us, is still trailing on a year-over-year basis downward, but is about to start popping up. And within the clinical solution areas, the clinical skill is an area of focus that – because it's growing through – it's finishing its transformation. Actually, I think it's starting to lap like this quarter and last quarter. It's just started to provide some growth. But we're not going to break them out on a product by product basis. First of all, there's just too many products. And second, the mix of those products is important to our strategy, how we take them to market.

No, that's fair. And maybe just one follow-up, Bobby, in terms of the comments you've been making around the change from a single clinical product per category to more of an open marketplace, when I think HealthStream historically, I think one of the advantages or sort of moats you had in healthcare was some of the relationships and really exclusivity you had around content. And under this new more of an open marketplace, does that change your opinion in terms of the competitive dynamic or has that train sort of already left the station?

Yeah. It might a little bit. But there's no shortage of assets and tools that we're building to continue to maintain a competitive advantage. But, for example, we're beginning to build and have started to offer products that offer benchmarking services that stay on our network. So, content partners can launch products and utilize our benchmarking tools to build benchmarks around their products which are then available to the people in our network. And so, data is becoming a more important part of the value proposition of selling through our network and consuming through our network. If you're a content partner, you get more intelligence about the consumption, licensing and adoption of your products and utilization rates. If you're a customer, you get data that allows you to benchmark across the most extensive healthcare network that exists. Now, 4.8 million subscribers. And so, as you know, we announced two or three years ago, the investment in Juice Analytics. Those tools are measuring and we can now offer content partners a way to enhance their products with benchmarking services. So, that's one example. We're also building tools that automate the purchasing of content and marketplace light tools that we think also give a competitive advantage, the way our customers plan their annual budget cycles, plan their purchasing and consumption of licenses across 70 or 80 different vendors. We think we provide one of the only, if not the only unified toolset for managing hundreds of subscriptions across millions of people in a way that suits the budgetary and planning needs of these health systems. So, we think there are strong reasons to sell through our marketplace. And then, at our scale, we're able to aggregate enough demand for products that we can usually get a most-favored nation's pricing, so that when sold outside of our channel, we're connecting to other LMSs or through other channels or partners or even direct selling on their own. They can't achieve the kind of scale. And so, we're usually able to get some favorable terms, even if they're not exclusive. And, in fact, in many cases, we don't want exclusivity because we'd rather have most-favored nation, so that we can be more Walmart or Amazon-like, bringing the lowest prices to our customers, but the highest volume to our content partners. And so, that dynamic is taking hold a little bit more as we move to a marketplace. And, again, reinforces I think the power and strength and position of our marketplace.

Thank you, Bobby. That's very helpful.

Thank you. And our next question comes from Rob Munnings with William Blair. Your line is open.

Yeah. Hey, guys. Thanks for taking the questions. I know you talked a little bit about the partnerships for HeartCode replacement products. When can you actually start marketing those to clients? And has there been a lot of discussion around these in the renewal conversations? Thanks.

Yeah, sure. So, we cannot market, sell or distribute any competing products. And in fact, our sales teams are full force in effect selling the existing products that are the Laerdal, AHA products. We're full ahead trying to achieve and beat all of our budgets and sell as much of it as we can and get our customers to consume those products all the way through 2020. So, we're excited to be partners today through the end of the year with Laerdal. And so, our full focus and energy is on selling and marketing and distributing their products. That said, we have announced partnerships, but not announced the timing. Beginning in January, we'll be able to sell and market and distribute additional product that present some options to customers. We have – as far as renewing existing partnerships, right now, we have that at a zero probability. And that's just the message from the existing partners, Laerdal. That said, we'll begin our outreach to the AHA directly to see if they are interested in being a part of our marketplace. We hope they will because they should, we think, be excited about reaching the network we've assembled over the last 20 years of 4.8 million healthcare workers. So, we will reach out to them over time, but our priority right now is selling the existing products through the end of the year and then launching the new products beginning in January of 2019. And so, until January of 2019, though, we can only develop product and encourage partnerships. We cannot sell or market or distribute any competing products which creates a little bit of business pressure on us, obviously. It's hard to kind of day one of January of 2019 be the first news we can deliver of these new products to customers. That will create definitely a gap between our ability to close deals. We probably won't have a lot of wins in January because that's when the first – that these customers will really see these products and hear that they're available and what they're capable of. So, it does present a business challenge that we can't market ourselves, distribute them now. But, again, the teams are wholly focused on the products they have and excited to sell them and they're getting great result for customers.

Okay, great. Thank you. That was very helpful. And then, I guess, for my second question, could you talk a little bit about how your partnership with Press Ganey has advanced? And are you generating any significant revenue from the licensing of your infrastructure or is it kind of too soon to tell there?

We're really excited about that. We're really new to it. We're still helping them and they're absorbing the customer base that they acquired from us. And I think they're excited about that. They've got a high-quality customer base and there's a lot of transition work for them to do and they're making incredible progress with that and introducing their more broad and complete set of tool in the area of Patient Experience to those customers. That said, they've appointed a couple of senior executives to help develop our relationship and we've entered into a multi-year agreement. And again, I guess seven is our new number, but it's a multi-year – over seven-year agreement in place with them. And so, we're going to have a very deliberate journey to develop product and bring their brands to market through our channel. And so, as far as revenue generations, yes, we're generating some revenue from the licensing of our technologies. We haven't disclosed the amounts, but they've made some commitments to us to use our technologies to reach their customers with training and development – branded Press Ganey training and development applications and content. So, we're really excited about all that, but it will evolve over the next nearly seven years. And right now, everybody is wholly focused on taking care of the current business we have and making sure they're successful, all those customers, hundreds of customers are successful in their transition to Press Ganey's tools and platforms and off of the HealthStream platform. Our focus likely for the rest of this year is to help achieve that transition. But we're excited – both companies have appointed senior officers to go on a multi-year development journey to build content and curriculum. And fortunately, it will be brining Press Ganey branded developmental resources to our network which is exciting and unique. So, we're really excited about that. And they've agreed to some levels of exclusivity on the use of our technology platform. So, we should be a very important channel partner for one of the most important brands in healthcare.

Okay, great. Thanks for the color. I'll hop back in the queue.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Mr. Robert Frist for any closing remarks.

Thank you to all the analysts that follow our stories and write and communicate our opportunities and challenges. Thank you to our employees for delivering another solid quarter of progress in our transformation. And we look forward to reporting the next earnings call in a mere 90 days. We'll see you soon. Thanks. Bye.

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