HealthStream, Inc. (HSTM) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the HealthStream, Inc. Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the confidence to your speaker today, Mollie Condra, Vice President Investor Relations and Communications, Mollie Condra.

Thank you, and good morning. Thank you for joining us today to discuss our fourth quarter and full year 2019 results. Also, in the conference call with me are Robert A. Frist, Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K and 10-Q. So, at this time, I'll turn the call over to Bobby Frist.

Thank you, Mollie and good morning everyone. Welcome to our fourth quarter 2019 earnings call. It's a great call because be reflect back on the prior year performance and set a stage for 2020 as well. So, as 2020 kicks-off HealthStream and all of our employees remain focused on delivering innovative solutions that develop, the people of health care, the caregivers, the confident, competent and credentialed professionals. And to fulfill that vision and direction, we've had many exciting developments in 2019, that I think set us up really well as we enter into 2020. In 2019 for example, we added two members to our executive team, Scott McQuigg, new Senior Vice President heading up our hStream Solutions and Scott A. Roberts joined as our Chief Financial Officer. We moved into new corporate office, location in Downtown Nashville, consolidating multiple offices and bringing nearly 400 employees together into a single site and location, which is a really powerful from a coordination and operation standpoint. We launched the new corporate social responsibility program, which we’re really excited about. We’ve coined it Streaming Good, and all of our employees are engaged in Streaming Good back into our customers, into our communities where we work. We updated our logo and published a new constitution that guides our actions and behaviors in 2019. So all of this was a great refreshing of our culture and our strength as an organization. In addition, we welcome over 90 new Health Streamers to our ranks. So we're adding across the country, into all areas of our operations, targeting growth, including our sales organizations. We started the year with the acquisition of Providigm and we ended it with the acquisition CredentialMyDdoc. We're really pleased to welcome the new employees from Providigm and CredentialMyDdoc into the HealthStream family and excited about the contributions that their products bring to our customers. We started the year off by launching a new American Red Cross suite program and a new skill validation program using technology enabled manikins. And importantly, we ended the year with over $38.8 million in contract order value for these two exciting solutions. These updates set the stage for an exciting and productive 2020. So just a few financial highlights. We ended 2019 with strong financial results. For the full year 2019 revenues were a record $254.1 million and adjusted EBITDA was in all time high at $46.9 million. We ended the year with a cash balance of $172.9 million. And Scotty in a few minutes will dive into more details about our financial performance at the end of year, and also importantly our guidance in 2020. I want to provide an update in this framework we started a few quarters ago, the three business transitions that are in front of us. They present challenges and opportunities. The opportunities are to enhance gross margins and strengthen our overall ecosystem. And the challenges of course associated with one of the transition to the loss of product revenue stream that's been important to the company in the past. All three transitions are designed to move us towards being a higher margin, more profitable company in the coming years. In fact, last quarter, we set a goal crossing through the 60% gross margin by the third quarter of 2020. And already in the fourth quarter of 2019, we pass through the 60% gross margin. So in the first transition, we have transitioned our sales and marketing efforts from a legacy resuscitation products to our new resuscitation offering. As a reminder, the new Red Cross resuscitation suite program is comprised of BLS, ALS and PALS competency development curriculum. It brings an updated, highly adaptive competency-based development solution to healthcare professionals. It's really a world class program and we're excited to represent the Red Cross program to our customer base. It offers certification to healthcare professionals successfully demonstrating proficiency of the life setting resuscitation knowledge and skills necessary to be consummate professionals. The program is now live from multiple accounts and we're seeing a growing number of healthcare professionals achieve certification through this exciting new program. And a little more color on the progress and really in some ways we surprised ourselves. I think when we entered the year, it's a new product, a new market, a new brand, a new credential, even some new technology supporting it. And we entered the year fairly conservatively setting our budget and expectations around $10 million in sales order value. And obviously with $38.8 million we’ve greatly exceeded that. In fact, if you look at how it transpired over the course of the year, the sales momentum grew throughout the year. Our new resuscitation offering, we landed six new accounts in our launch quarter at the start of the year, really during March, in the first quarter. And 15 new accounts in the second quarter, 48 new accounts in the third quarter and 39 new accounts in the fourth quarter. Together, for the full year of 2019, these 108 accounts, and when we say the full year of 2019 we've launched really in February, so it's really around 10 months of selling. These 108 accounts totaled over $38.8 million in contract value for the new resuscitation offerings, which includes the skills component on the technology-enabled manikins and the Red Cross didactic and certificate part as well. These new contracts are from a mix of over 3,000 hospitals and healthcare facilities, from across the continuum of care, including new and transitioning customers. So, we saw acceptance in new markets of this Red Cross resuscitation suite program and the Innosonian skills validations program. We saw acceptance of that in the acute market, as well as in the pre and post-acute markets we call the continuum of care. When we began the journey, there were three questions. There were many questions about whether or not the market would even accept another solution. It's clear that the market not only views our new resuscitation solutions, a growing solution set as viable alternatives, but also they've embraced them as evidenced by the $38.8 million in contracted order values. The second transition to cover involves the adoption and migration to our new VerityStream platform. This has been in progress many years as we've acquired many platforms and thousands of customers in the credentialing, privileging and enrollment space for providers. And now through this consolidation effort towards the new VerityStream platform, we're making great progress. In the first quarter of 2018, we announced the launch of VerityStream, our new platform for managing credentialing and privileging in healthcare organizations. In the fourth quarter of 2019, we updated our name of this business for VerityStream, which we believe better conveys our unique vision of providing customers a subscription to a continual stream of platform enhancements, evidence-based content and curated data. As at the end of 2019, new customer accounts for VerityStream grew to over 200 contracted customers. This exceeded even our stretch goals internally and a lot of this was new customer acquisition. On average, therefore over four new customers per week were contracted during the fourth quarter. These 200 plus customers represent a mix of new customers and existing customers who chose to migrate from our legacy credentialing and privileging platforms to the new VerityStream platform. Given the high quality of the new platform and our history of successfully migrating existing customer to improve solutions, we anticipate continued progress, both in terms of new sales and migrations of legacy customers. The migration journey is one that’ll require several years to fully accomplish, but we're seeing the benefits of the early adoption already for customers that get access to the broader suite of capabilities. The third transition to talk about, involves our customers upgrading to the hStream platform-as-a-service architecture and platform. We define that as the essential technology working behind the scenes that powers all activity in the HealthStream ecosystem. Features and functionality like a universal ID creates the potential for mobility of information across our applications, services and suites. In the fourth quarter, we added approximately 370,000 hStream subscriptions, bringing our cumulative total to approximately 3.15 million subscriptions, which is up from 2.78 million contracted subscriptions at the end of the third quarter of 2019. I want to remind everyone that, these three business transitions all represent new multi-year journeys. In fact, we kind of used a categorization or an analog to give an example of the expectations here. To provide perspective, last quarter I said that, we were nine months in to a 36 month journey. And what I meant by that was each of these are migrations or transitions or company is undertaking. And each of them was a multi year journey. None of them would be accomplished in one quarter. And yet, we don't expect any of them to take five years. And so we set up this idea, this framework of our progress against the 36 month journey on each of the transitions. At 12 months into the 36 months journey, I can say we're making real progress on all three transitions. At the end of these journeys, we expect a higher margin, more profitable company. At this time, I'll take a break and turn it over to our CFO Scotty Roberts who will give more detail and end with his guidance for 2020.

Thank you, Bobby, good morning. The discussion of our financial results today is for continuing operations only. And comparisons are against the prior year fourth quarter unless otherwise stated. Before I go over the fourth quarter though, I'll briefly touch on our results for the full year of 2019. Our revenues finished the year at an all-time high at $254.1 million which is up 10%. Operating Income of $14.7 million, which was down 5% but included a $2.2 million charge associated with the stock grants employees that was facilitated by our CEOs contribution, personally owned HealthStream stock during the second quarter. Our earnings per share was $0.44 per diluted share, which was up 7% and our adjusted EBITDA was also an all-time high at $46.9 million, which was up 13%. For the fourth quarter, our revenues were up 5% to $62.7 million. Operating income was up 18% to $3.3 million. Our income from continuing operations was up 21% to $3.6 million. Our EPS from continuing operations was $0.11 per diluted share, compared to $0.09 per diluted share in the prior year. Our adjusted EBITDA from continuing operations was up 18% to $11.2 million. In addition, we completed the acquisition of CredentialMyDoc on December 16th for $9 million in cash. Revenues from our Workforce Solutions segment totaled $50.9 million for fourth quarter, and about 4% over the prior year. The legacy resuscitation revenues decreased by 11%, or $1.5 million, and were $12.6 million compared to $14.1 million in the prior year. For the full year, revenues from these products increased by 8% and totaled $58.9 million, compared to $54.6 million for 2018. And I'll discuss our 2020 revenue outlook for these products in just a few moments. Excluding revenues from both the legacy resuscitation products were $12.6 million, and the Providigm acquisition of $1.7 million, our other workforce products grew by 4% in the fourth quarter. Revenues from the provider solution segment were $11.8 million and grew about 10%. And this growth is primarily from professional services for client implementations, and sales of platform subscriptions. As I previously mentioned, on December 16 of 2019, we acquired CredentialMyDoc, a SaaS based credentialing company, which will be part of our provider solutions segment. The acquisition brings approximately 300 new customers to VerityStream, primarily in the continuing market. Fourth quarter revenues from the acquisition were not material. Our gross margins improved to 60.3% compared to 57.5% in the prior year. This improvement occurred because of the declining revenue from our low-margin legacy resuscitation products, which has been replaced by contributions from some of our high margin products. Our operating expenses excluding cost of revenues were up 9% across the following categories. Product development expenses increased by 12%, sales and marketing expenses increased by 5%. Depreciation and amortization increased by 18% and G&A expenses increased by 6%. Overall, our operating expenses increased by $2.9 million, compared to last year. Gross and operating expenses was primarily due to growth in staffing levels, which were up 13% since last year's fourth quarter. And in the year we added over 90 additional employees. Incremental operating expenses from the Providigm acquisition and higher depreciation associated with the relocation of our corporate office also contributed to the growth of operating expenses. Our operating income improved by 18% to $3.3 million and our adjusted EBITDA also grew by 18% to $11.2 million. Now, I'll switch to our balance sheets and cash flows. Our cash and investment balances ended the quarter at approximately $173 million and our working capital was $119 million. Our cash flows from operations improved to a record high of $65.7 million for full year 2019, compared to $44.3 million in the prior year, which is an increase of 48%. Our DSO for the fourth quarter was also a record low at 39 days, compared to 51 days in the prior year. Our capital expenditures incurred in the fourth quarter were $4.7 million and our full year capital expenditures approximated at $31.5 million. In 2019 we deployed $67 million of cash, which was used to fund two acquisitions, two minority investments and capital expenditures. Ending the year with a strong balance sheet with $173 million of cash and investments and access to a $50 million line of credit facility. We believe we're well-positioned to continue making investments throughout 2020 to support our business development pipeline and other strategic initiatives to increase shareholder value. Now I'll turn to our financial guidance for 2020. For 2020, we anticipate the consolidated revenues will range between $247.5 million and $255.5 million, with revenues from the Workforce Solutions segment ranging between $197 million and $203 million and revenues from the Provider Solution segment ranging between $50.5 million and $52.5 million. When compared to the midpoint of these guidance ranges, consolidated revenues are expected to be down 1%. Workforce is expected to be down 4% and Provider is expected to grow by 13%. The decline in workforce revenues is largely due to the $23 million or 38% decline in legacy resuscitation business. While we have discussed this headwind over the past 2 years, it's impact will be apparent this year. For 2020, we expect revenues from the Legacy Products to approximate $36 million. Quarterly revenues expected to be as follows. First quarter of approximately 11 million, the second quarter of approximately 10.5 million, the third quarter of approximately $8.5 million and the fourth quarter of approximately $6 million, to approximately zero revenues thereafter. Excluding the legacy resuscitation business, we anticipate workforce revenues to grow between 7.5% and 11.5% based on our guidance ranges. For Providers Solutions, we expect revenues from the recent acquisition of CredentialMyDoc to contribute approximately $1.5 million with the remainder of the growth coming from new sales, conversions and implementation of the VerityStream platform. We're in the early stages of VerityStream customer conversions, which were going slower than we anticipated, while new sales have exceeded our expectations. Our ability to balance new customer acquisition, conversions and timely and scalable implementations will be the biggest drivers of growth in this segment over the next several years. We anticipate that operating income will range between $12 million and $14.5 million. This range includes a onetime favorable contractual adjustment of $3.4 million that occurred in the first quarter of 2020. This contractual adjustment resulted from the resolution of a mutual disagreement relating to various elements of a past partnership. The amount of $3.4 million related to accrued but unpaid royalties associated with the partnership agreement, and the resolution of the agreement resulted in no royalties to be paid. The favorable adjustment will be reflected as a reduction in the cost of goods sold in the first quarter of 2020. Even factoring out the benefit of this onetime adjustment, we still expect gross margins to exceed 50% for 2020. Our guidance anticipates operating income will be down compared to last year, the most significant reason being the $23 million decline in revenues from the legacy resuscitation products. The CredentialMyDoc acquisition is also expected to result in a reduction in operating income of approximately $1 million primarily due to amortization of intangible assets and deferred revenue right downs. In addition as a past years, investing back into the business is a top priority. 2020 will be focused on continued investment in our product offerings, including developing or acquiring more content assets to improve long-term gross margins. And expanding our sales, product development and operations teams. We anticipate growth in headcount of approximately 70 new employees over the course of 2020, which equates to an increase of approximately 8%. We also expect an increase in amortization expense from capitalized software and content to increase between 17% and 19% as a result of our investments. We anticipate that capital expenditures will range between $24 million and $26 million. We believe that having ownership in content assets will improve our margins over time. And we anticipate doubling our spend from $3 million in 2019 to $6 million in 2020. Our annual effective income tax rate is expected to range between 23% and 25%. And finally from an acquisition standpoint, we maintain an active business development pipeline, that our guidance does not include the impact of any acquisitions that we may complete during 2020. And that concludes my comments, and I will turn it over to Bob.

Thanks, Scotty. I got a few closing remarks here and then we'll move to questions. As part of our vision to improve the quality of care, HealthStream is helping our customers tackle the national opioid crisis by partnering with thought leaders and innovators to share knowledge and best practices with learners across the continuum of care. We've selected two partnerships to be part of the solution on the opioid crisis. We partner with a National Quality Forum, a national not for profit organization, to transform their NQP playbook on opioid stewardship into an online learning curriculum offered exclusively by HealthStream. The opioid stewardship program will be released next quarter. Also, Aspenti Health, an industry leader in addressing substance use and pain management population health issues is partnering with HealthStream to co-develop the responsible opioid administration solution. This program includes three micro certificates geared towards clinical care providers across the continuum, meeting the 2018 enhance pain assessment and management standards from the joint commission as well as the Center for Disease Control, the National Quality Forum and other industry-leading authorities. We're excited to be part of the solution for our nation's opioid crisis through our partnerships with the National Quality Forum and Aspenti Health, given the ever-changing nature of the health care industry, a lot of pressure to navigate through the challenges of increasing regulation, new competition, shifting reimbursement models, and new technology often falls directly on the healthcare workforce. Developing this workforce to be confident and competent and credentials is necessary for health organizations across the continuum of care. Our vision to improve the quality of healthcare by developing the people, who deliver care has never been more relevant to our customers. Alongside the transitions that we're going through, we never lose sight of the big picture and our purpose as such transitions are temporary, while the opportunity to positively impact the industry is ever present and ongoing, whether through our contributions addressing the opioid crisis or advances in learning methodology like our recently announced new virtual reality based team leader training program. HealthStream is making this difference broadly in the industry. As we conclude, I want to take a moment to thank our employees for their hard work and delivering a great year in 2019 and it really set us up well for 2020 inspite of the challenges we face for some of our legacy products. They're an outstanding group of vision-driven employees and individuals and I'm proud to work alongside of them as we deliver this change in improvement into the healthcare industry. At this time, I'd like to turn it over to questions. Thank you.

Thank you. [Operator Instructions]. Our first question comes from the line of Ryan Daniels with William Blair.

Yes. Thanks for taking the questions. Bobby, one for you. Obviously great momentum with the new resuscitation product, nearly 40 million in direct value. What has been the reaction? What drove that kind of surprise out-performance there? Is it better pricing? Is it the flexibility of the modules, the VR, expanded sales force? What's really driving that significant upside for you guys?

Well, as we entered, there's just a lot of trepidation in general because the market really has been defined by one player for 20 years and there's just generally, budget cycles, acceptance issues, a longer sales cycles. But what I think has happened is a new unique confluence of modernization of the approach. The flexibility, combination of the flexibility we've built into the HealthStream platform. We call it the interval flexibility allows for a more flexible use of the program and the incredible thoughtful and modern development that went in by the Red Cross to build kind of a modern adult learning methodology, video-based using healthcare professionals, not actors, not animations. That's really striking a chord as a progressive, thoughtful and effective program. Price has been a variable, but it hasn't been the main driver. We think, it's important to have disruptive technology that isn't enhanced and better at a lower price, but that hasn't been the driver. It's an important part of the equation. We've definitely, as you noted, strengthened the sales team throughout last year as we saw momentum building, we actually added to the sales team and that continued through as recent as January of this year. So it's a confluence of many things. And, this has been carefully in development for almost three years now and now 10 or 11 months in the market. And I think the Red Cross had a scientific credibility. The international standards and guidelines are met in its development. The sales team and growing confidence in the application. I think, importantly to Healthstream has been in the market so long, we're a trusted advisor to our customers. And when we offer up new programs to our customers, it's been our experience that they at least listen and take a review of those new programs. So we were conservative in our original budgeting because we just didn't know just flat out didn't know how it would go. And, we're have growing confidence that some of the first initial hurdles were through. It'll never cease to be a challenge to continue growing it but, but for many reasons we have confidence. And related that just as an FYI, this will be the end of reporting the quarterly sales momentum of the products we're going to fold into the workforce is now part of our guidance overall. We think it's competitively unnecessary to talk about account wins and number of accounts in order value. We've established now over $38.8 million in orders, it's a valid products scientifically valid and accepted by customers. And so we're going to follow the results of this back end like we always have the product. And we reported in great detail, the quarterly run out through this year of the legacy products. So all the detail necessary for modeling for the legacy products is now in your hands as analysts and the investor community. In addition, we've clarified that in 2021, we expected approximately zero revenue from the legacy products. So from a modeling standpoint, as you look forward to 2021, you should be careful to model those declines. Because they're rather steep and continuous declines and the legacy products from here forward and again, well articulated. So I didn't mean to jump off into legacy products. But thank you for the question. I think we surprised ourselves on all fronts. But it really shouldn't be a surprise because we had teams of excellent people working on this for over two years before the launch. And they really delivered a great product to the market.

And that's very helpful detail. And I guess the follow up would be in regards to the $38.8 million. Can you give us a feel for the average length of those contracts? So I guess the missing piece of the puzzle is how quickly that $38 million will roll into the revenue stream. I'm assuming those are kind of multiyear contracts is trying to get a feel for that impact on this.

Sure, sure. So we'll provide that color now. And then again, probably won't talk about it anymore. But right now, we're fortunate that most of our contracts are averaging four years or more. And so that'll spread the revenue recognition. And as you said, the onboarding of revenue they have to be implemented before they can be recognized, of course and then the revenue starts and the average contract length is probably mostly four right now, four years. And so that should help you figure out how to model the inbound revenues from the initial orders in 2019.

Thank you for all that color. I really appreciate it. Thanks.

Thank you. And our next question comes from the line of Matt Hewitt with Craig Hallum.

Good morning. Congratulations on the strong year.

Thank you.

First up, regarding the VR-based training. Obviously you're still in beta testing, how should we be thinking about that market opportunity either from a number of subscribers or, and I know you don't typically talk about TAMs. But just trying to get a sense for how big that opportunity could be and when you expect to go live with that?

So what's interesting about that is that it's largely an ignored paradigm in this training approach. So, for example, a lot of emphasis in the legacy and existing programs is on the skills and competence of the individual. We believe that the team dynamic the dynamic of the responding professionals, their interaction, the decision making they have during a code crisis is an essential element to the outcome. In fact, it may prove over time to be a very essential or important or statistically relevant impact. And so VR, what it does in general, it allows for interactions of multiple individuals, a realistic simulations of stress, and the environment resources to be aligned with the experience of the environment. So the hospital is equipped in the ER in certain way. It's different than a field equipped situation. So it allows for a different type of learning. Now, Matt, I think we're very new. And what I'm most excited about this program is that we announced has been in development for over a year, probably close to two years. And we did just announce it. The hardware that empowers it is evolving in such a rapid pace is what's making most excited is that as little as six months ago, to effectively run a VR program required almost a dedicated room with spatial sensors in the room, and a dedicated PC plugged into a headset. There are new technologies emerging as we speak, that everything is self-contained in a sub $1,000 headset, no PC, no spatial monitors set up physically in the room. And so we think that the adoption soon like now can begin to see some early uptake. All that said though it is a new modality, a new methodology and new technology. And we're excited that now our component piece of the story. We think it will have a growing importance over time for not just resuscitation training, but all forms of clinical trainings that have a team dynamic or situational awareness is critical. That said, I would be extraordinary conservative and not putting the line items down or revenue expectations for now. We'll report on the progress of our pilot programs throughout this year. And its impact and maybe some early adopters, but I wouldn't be modeling it as a financial opportunity and discount or you're going to stick with the guidance we've provided you. There's small assumptions for pilots in that guidance that are paid. But I would view this as a kind of a dawn of a new era of training and training models. And we're glad to be right at the front of it. And the product will be available for sale as an add on module. We think it's relevant to the entire market. And whether and how fast they adopt it will require you to change management and adoption new methodology. So, ultimately, I think that this is a method of training that should be relevant to essentially every professional in every environment.

Okay, that's helpful. And then regarding CredentialMyDoc, how should we be thinking about the cross selling opportunities for that. Those apps as this year progresses?

How should we think about what the?

The cross selling opportunity?

I think again, that's a small tuck in, they've got a great audience. They focused on a particular niche of the market. And so, we're going to, it'll take us some time to figure out the exact cross sell opportunities. The main thing it did was add a, really nice niche over 300 customers that become opportunities for us. But for now it's, I wouldn't model hStream synergies or cross selling for now. Give us a little time to bring it in like we've done the other three and consider how it can be migrated to upgraded technologies or access to more of the technologies we offer. So, for now, again, I just kind of conservatively model. We gave an indication of its revenue, Scotty did about $1.5 million. And I will kind of stick with that.

Okay. And then last one, regarding the hStream obviously, you continue to make progress on converting customers to the new platform. Are there any large contracts that are up for renewal that we should be watching for or trying to model for this year? Thank you.

No. I don't think individually modeling that is necessarily, still useful just yet. We're still converting the existing core foundation in HLC subscribers. So, a large part of these are conversions, but also of course new additions are coming in as well. We have factored into the guidance we gave you the overall financial impact of our expected renewals, non-renewals, the challenges and opportunities we have for renewals and non-renewals. So, the guidance we've given you financially sets you up to we believe in accurate way to model it.

Understood. All right. Thank you very much.

Thank you. And our next question comes from the line of Andrew Cooper with Raymond James.

Hi. Thanks for the question. We've covered a lot of kind of the qualitative grounds, so I think I'll ask a numbers one. But, just as we think about gross margin, obviously the quarter was really strong. Is this a new sort of run rate baseline to think about from here or is there any sort of noise as we go through 2020, where there could be some sort of lumpiness up and down, especially as we think about the legacy resuscitation obviously sort of rolling out through the course of the quarters, just should we be thinking about 4Q as the floor and continue progress or is there any noise on that front?

Yeah, Andrew, this is Scotty. I'll try to answer your question. Gross margins in Q4 were definitely impacted by the decline in the legacy business and we've given you a guidance on revenue expectations for 2020 in that. Probably the biggest driver of the gross margin improvement is going to continue to be that low margin product that blows off and margins will improve and what we're also introducing some of our new products which have higher margins that are factored into our guidance instead of a combination of low margin product rolling off and higher margin products coming in. I would also mention, I talked about in the guidance that, there's a first quarter event that occurred that's going to give us benefits to that operating income and into gross margin. So, there's a $3.4 million benefit that we are reporting in Q1 and that will create a reduction in costs or revenues. It will increase our gross margins in Q1. So, I wouldn't model off of the expected Q1 margin that will likely see, but I think getting into the 60% range is where we're expecting to end the year.

Okay. That's helpful. And then, as we think about that sort of further out and from a little bit more of a strategic perspective, I think you had said 65 as kind of the bogey for the start of '21. Is that still sort of the longer term kind of goal to get to once you've rolled off obviously the entirety of the legacy resuscitation? Or with some of these higher margin new product is there potential for that to continue to creep higher as we think longer term and what Healthstream could look like from a from a margin perspective at scale on some of these newer products.

Yeah, I think you heard in some of our dialogue, our increased investment content from $3 million to $6 million, we believe that should help have a potential impact -- positive impact on gross margin. Obviously, the role of the legacy resuscitation product interacts with new products like the VR team leader training that we helped develop, where we put some development dollars to help gross margin. So I think overall, we would stick to what we said which was, we initially said 60% at the second half of 2020. We do think at this point, it's safe to say we've crossed over the 60% for 2020. So couple quarters early. Will reiterate that in Q1 of 2021, we believe it should be around 65% plus or minus a point. And without going any further, I think that's probably as far out as we want to get in front of ourselves. But I think as you think about modeling that next year, we should be in a 65% 63% to 66% range for 2021.

Okay, that's helpful. I'll leave it up for follow up. Appreciate it.

Thank you. And our next question comes from the line of Vincent Colicchio with Barrington Research.

Yeah, Bobby. I'm curious what portion of the resuscitation accounts were prior uses of available products? And also another question is, has it been any competitor response from Laerdal from your early traction?

Yeah, so the mix is it's a nice mix of new and converted customers and both large and small. So we had some big wins that were conversions and some big wins that were new. For example, Fresenius is a global provider of dialysis services that was a huge head to head win, complete conversion of percentages and hundreds and hundreds of locations. That was a net new account. And CHS that we announced earlier, this example of a large-scale conversion to an existing account. So they really and I think those two are a nice example of it was a nice mix of newly acquired and legacy. Again, without disclosing exact percentage because I actually don't know it. It was a really balanced selling and growing opportunity.

Yeah and then the other question was has there been any competitive response from Laerdal.

There always be competitive responses and there some irony into that as well because we're as you know we have a business relationship and a functioning operational partnership with them to ensure that their products are available to our customers as well. We do not sell or market or distribute them. But we do have a good compatibility agreement in place so that our customers can benefit from their products if they select them. And so, their competitive response is up to them. And we're here to facilitate the delivery of these great programs to a very large customer base.

Okay thanks. Nice quarter.

Thank you. I'm sure no further questions at this time. I will now turn the call back over to CEO Robert Frist for any closing remarks.

Thank you for listening and facilitating this earnings call. We look forward to reporting the next quarter comes through faster the next call is right around the corner. Thank you and enjoy the rest of your day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. And you may now disconnect.