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…

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…

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…

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…

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.