Mollie Condra - Vice President, Investor Relations and Communications Robert Frist - Chief Executive Officer and Chairman Gerry Hayden - Senior Vice President and Chief Financial Officer.

Ryan Daniels - William Blair Matt Hewitt - Craig-Hallum Capital Scott Berg - Northland Capital Richard Close - Avondale Partners Frank Saraceno - First Analysis Steve Rubis - Stifel.

Good day, ladies and gentlemen and welcome to the HealthStream Inc. Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would like to introduce your host for today’s conference call, Ms. Mollie Condra, Vice President, Investor Relations and Communications. You may begin, ma’am..

Thank you. Good morning and thank you for joining us today to discuss our third quarter 2014 results. Also in the room with me today are Robert A. Frist, Jr., CEO and Chairman of HealthStream and Gerry Hayden, Senior Vice President and CFO.

I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements.

Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company’s filings with the SEC, including Forms 10-K and 10-Q. With that, I will now turn the call over to our CEO, Robert Frist..

Thank you. Good morning. Good morning, Mollie, Gerry. HealthStream offers several market leading workforce development solutions. The solutions span compliance, resuscitation, ICD-10 readiness, competency and learning management and many others.

Our research/patient experience solutions combines survey results with consulting to help healthcare organizations improve a patient’s experience while in a clinical setting. Our core solution sets continue to grow and this report will talk about some of the focused areas of growth, challenge and opportunity for the company.

Our performance was strong in the third quarter with quarterly revenues up 32%, operating income up 22%, net income up 50%, and adjusted EBITDA up 26%. Subscriber growth to our solutions was a strong contributor to our performance.

Each individual end user utilizes at least one HealthStream subscription-based solution is counted as one subscriber regardless of the number of subscriptions contracted by or for that end user.

As of September 30, 2014, HealthStream had approximately 3.83 million total subscribers implemented and approximately 4.13 million total subscribers contracted to use one or more of its subscription-based solutions. In the third quarter, we contracted approximately 150,000 net new subscribers.

Progress with our workforce development solutions continues to benefit from both an increase in the number of total subscribers as well as a greater courseware consumption across the subscriber base. As a result, our metric, annualized revenue per subscriber increased 16% from $30.95 in the third quarter of 2013 to $35.91 this quarter.

Strong contributions to this growth included product and solution sales from ICD-10 readiness, resuscitation, compliance and clinical offerings and from our competency and performance center applications.

I will now turn the call over to Gerry who will provide financial highlights and then I will take it back and we will dive into some product line updates..

revenue, gross margin, operating expenses, operating income and income taxes. Revenue, you have seen that overall revenue growth rate is 32% from third quarter, which is a combination of continued organic growth complemented by recent acquisitions.

The ICD-10 readiness solution, an important contributor to our organic growth, contributed about $7.4 million to third quarter revenues this year compared to $3.9 million in last year’s third quarter.

Excluding the ICD-10 readiness solution, our overall revenue growth rate in the quarter was about 25%, which includes contributions from recent acquisitions.

In addition, other product lines continued to perform well, including our clinical development courseware, where for example, our Lippincott Nursing Practice series revenues grew by 75% over last year’s third quarter, while our Competency and Performance Center revenues grew by 87% this quarter.

Research/patient experience revenues grew by 16% in this year’s third quarter. The BLG acquisition, which closed in September of 2013, contributed an incremental $618,000 to patient experience revenues and Patient Insights service grew by $378,000 or 7% over the third quarter of last year.

By now you have most likely seen our announcement about expanding our survey operations with a Nashville-based interview center.

Over time, the patient interview center in Nashville will grow to support contract expansions from our existing customers such as Community Health Systems requires investments in personnel and capacity beginning in the fourth quarter of 2014. Now let’s look at gross margins.

The gross margin at 57% for this quarter was less than 58% gross margin in the third quarter of 2013.

In a similar pattern to the past several quarters, platform products with higher gross margins performed well during this quarter, the third quarter of 2014, but lower gross margin solutions such as ICD-10 readiness, resuscitation and clinical solutions grew even faster, which resulted in a gross margin decrease.

In our research/patient experience segment product mix changes and the addition of BLG resulted in a reduction to gross margins quarter-over-quarter. Let’s turn our attention to operating expenses. We continue to make investments in product development.

For the third quarter of 2014, product development expenses were 9.5% of revenue and represented a 31% growth rate over the third quarter of 2013. On a year-to-date basis, product development expenses as a percent of revenue have increased to 9.6% equating to a 40% year-over-year increase in product development expenses.

Similarly year-to-date investments in our sales teams have increased by 32% over 2013 and we remain committed to adding talent and resources that has allowed us to expand our product base and our sales force. Our G&A expenses at 13.6% of revenue were similar to last year’s third quarter level of 13.5%.

Year-to-date 2014, G&A expenses were 13.3% versus 14.2% of revenue at the same time last year. Operating income, as you know from our previous investor calls GAAP accounting rules require us to write down acquired deferred revenue balances to fair value as part of recording the initial transaction.

This accounting convention results in reduced reported revenue and operating income until we have amortized the initial discount. The third quarter results reflect the amortizing impact of the deferred revenue write-downs as the write-downs was $150,000 in this quarter and $167,000 in last year’s third quarter.

Including the impact of deferred write-downs which reduced operating income by $555,000 over 2013, year-to-date operating income has grown by 8.9%. Income taxes, as you read in our earnings announcement, we were able to recognize research and development tax credits to reduce our cash income tax requirements.

Our booked income tax provision also reflects the eventual realization of these credits by virtue of a lower effective tax rate. The $670,000 tax benefit represents approximately $0.02 in earnings per share this quarter.

Accordingly, we would have reported $0.10 earnings per share without the research and development credits meaning this tax benefit accounts for 17% of this quarter’s earnings per share.

Although we continue to utilize our net operating loss carry-forwards, we are planning for that time when we have fully utilized that tax benefit, which we anticipate will be some time in the next 12 to 24 months. Now, let’s look at our balance sheet.

Our cash position and overall balance sheet are strong, further enabling our ability to support organic development activities and inorganic growth opportunities as they may arise.

We continue to review and evaluate a variety of acquisitions and business development opportunities while maintaining our discipline in terms of strategic fit and evaluation. As of September 30, 2014, our cash balances were $116 million, a $4 million increase from the $112 million at June 30, 2014. Also as you already know, we have no long-term debt.

Guidance, yesterday’s earnings release contains updated guidance, we anticipate the consolidated revenues will grow between 28% and 30% as compared to 2013, which revenue growth reflects the impact of the deferred revenue write-down related to the HCC acquisition, which we did earlier this year.

We expect the revenue growth and workforce development segment, which includes HCCS, to increase in the 33% to 35% range also reflecting the impact of deferred revenue write-down related to the HCCS acquisition. We expect our research/patient experience solutions revenues to grow by approximately 10% to 12%.

By the fourth quarter of 2014, revenues from our BLG acquisition, which we closed in September 2013, will be fully comparable between the two years. We now anticipate that operating income will increase between 5% to 10% over full year 2013.

This range includes approximately $2 million related to the impact of the HCC acquisition and incorporate startup costs we expect to incur (has already) the Patient Interview Center to begin survey work in the near future.

The improvement in this operating income guidance range results in the slower than anticipated rates of hiring and better than expected performance from the HCCS acquisition. This guidance does not include the impact from any of the business development activities that we may complete during 2014.

And we anticipate that our 2014 capital expenditures will be between $9 million and $10 million and we expect our effective income tax rate to be between 37% and 39%. And this effective tax rate incorporates the research and development tax credits, which you have recognized in this quarter. Thank you for your time. I will turn the call back to Bobby..

Thank you, Gerry. So, let’s look at some market and product line updates briefly and then we will go to questions. Over this month, we announced plans to open a new Patient Interview Center here in Nashville, Tennessee.

We expect to relocate members of the research/patient experience team that are currently located at our corporate headquarters, along with an initial group of interviewers to the new office space.

This move will free up approximately 10,000 square feet in our current headquarters, while also giving us the opportunity to expand our interviewing capacity in a measured iterative fashion according to market demand over time.

We are pleased to be in a position to grow alongside our clients to meet their increasing needs with this newly leased and we are – as we bring it online this new interview center.

Having celebrated the 1 year anniversary of our acquisition of BLG on September 9 of this year, we are also working to incorporate BLG services as part of our overarching solution to improve the patient experience.

Our updated financial outlook for 2014 revenue growth for the research/patient experience segment decreased due to sales declines, which related in part to our decision to restructure how BLG products are sold.

Ultimately, we believe the restructuring will be of increased benefit to our company and to our clients, but in the short-term, we have experienced revenue declines in BLG, which will blend the lower growth rate overall to patient experience solution.

We are excited about expansion and momentum in our family products comprising our clinical development solutions. This evolving solution set now includes our Checklist Management tool that was launched last quarter, our competency and performance centers and our competency dictionary.

Checklist Management tool is a powerful product that replaces paper-based processes and therefore either it serves our customers as an entry level competency management tool or complements the competency center as a method of validation.

We are observing that the Checklist Management is becoming a first step for many customers to adopt automated competency management. Our customers are expressing much enthusiasm and demand for this new product, which is relatively easy and quick to implement in healthcare organizations.

At the end of the third quarter, we had tens of thousands of subscribers for this new product that are either implemented or in the process of being implemented.

So, we are excited to see the uptake of this new checklist management product, which is part of the continuum of products in healthcare work or competency management, again, just released last quarter.

During the third quarter of 2014, we also continued to expand our customer base for more advanced components of our clinical development solution, the healthcare competency center namely. As Gerry reported earlier, revenues for our competency centers grew by 87% this quarter. Let’s turn our attention a bit to ICD-10.

It’s both have been a great opportunity and presents a year-over-year challenge as we look forward into ‘15 and ‘16, but I will like to characterize and refresh of the details around ICD-10 products that we call ICD-10 preparedness or readiness solution. So, let’s look at a few of the details.

Retail prices for our ICD-10 readiness solution generally range from $15 to $125 per user per year, with the majority of contracts being for two-year terms. So the term on these contracts is generally shorter than the terms on most other solutions from HealthStream.

Sales to-date indicate an enterprise level focus on orienting the wide range of employees impacted by the transition to ICD-10, that’s led to an average price per user to fall at the lowest end of the retail price range near to the $15.

In addition, another characteristic of this revenue stream is we have a 50-50 revenue sharing arrangement with Precise giving us 50% gross margins for any sales of ICD-10 readiness solution.

In light of the most recent postponement of the ICD-10 transition deadlines by CMS, last quarter we offered our customers of this solution, the option to purchase a one year extension of their current solution at a 50% annualized discount.

Customers who accept the offer are eligible to blend unbilled payments remaining on their existing term with the discounted payments of their extension term then spread the payments over the existing term plus the extension term.

Customers receive a discounted extension and lower periodic payments, while we receive greater total revenue recognized over an extended period of time, so that characterizes the offer that we made recently to customers.

For the third consecutive quarter, our cumulative number of subscribers of the ICD-10 readiness solution remains at approximately 1.6 million. Two years ago, we described the revenue opportunity from our ICD-10 readiness solution as a bolus.

Last quarter, we stated our expectation that the peak revenue contribution from this solution would occur in the second, third and fourth quarters of this year and we projected that it will begin to decline thereafter.

Based on preliminary responses to our extension offer and our sales forecast for the fourth quarter, we now expect the peak revenue contribution to span the second, third and fourth quarters of 2014 and the first quarter of 2015 and to begin declining thereafter.

Therefore, for ICD-10 readiness solution, we expect a similar revenue contribution in the fourth quarter of this year as we just delivered in the third quarter of this year. I hope that helps with characterizing the opportunity that has been presented by the ICD-10 readiness solution.

We are working diligently with our partner, Precise to introduce next generation products as we enter into the next year. But we still have to deal with the year-over-year comparability particularly in the second half of ‘15 as it relates to the sale of this product.

In closing, I do want to comment a bit on the Ebola outbreak as it seems to have had a global impact and also a specific impact on the U.S.

acute care health system and I want to express my heartfelt appreciation to the healthcare professionals that are on the frontlines facing the current Ebola outbreak and dealing with the planning and the readiness preparation that they are undertaking for and on behalf of our country.

As our hospital customers are turning to us to support them in their preparation we have assembled an active interdepartmental Ebola task force that is working hard on this issue for our customers. Yesterday for example we launched a webinar-based course on Ebola from one of our partners that is being made available to hospitals, free of charge.

We have notified our customers about this resource and expect to begin to see uptake of that education and training actually beginning today.

In addition, we are creating an Ebola reference and support center on our website that will house resources used – for use by hospitals, including several components linked to the CDC, World Health Organization and other public health organizations responsible to establish protocols.

Additional industry partners’ content as it becomes available, we expect many of our partners are in a publishing mode and producing new courseware that should become available in the next several weeks and months.

Specific guidance for using HealthStream products in preparing their staff, for example, our customers can use the learning center to now deploy and track training on Ebola protocols as set forth by the CDC, because we bundle those protocols into an assignable object that now will let them assign it as they are on our platform, assign it to their workforce and track their participation as opposed to just viewing it on a website.

They can also use the Checklist, the new checklist manager to activate CDC provided checklists and so we are beginning to incorporate CDC Checklist into the Checklist Management tool.

This hot new tool that we have launched last quarter and allow them to manage the checklist provided by the CDC in the checklist manager in the management of Ebola protocols.

We expect these protocols to be rapidly evolving and hope to keep passing information along from the CDC forward to all of our nearly 4 million subscribers to make them available to our customer base.

And as content and partnerships come online and provide services whether free, sponsored or charged for, we plan to organize those resources for easy access throughout our network to all of our customers. So, we can be a part of the solution to the challenge our country faces.

At this time, I’d like to turn it over for questions to the investor community and back to the moderator who will organize the questions..

(Operator Instructions) Our first question comes from Ryan Daniels with William Blair..

Yes, Bobby. Good morning. Thanks for all the color. I had a quick follow-up question on ICD-10.

You referenced the extension offer you made with the discounted payment terms, can you give us a little bit more color on how that was received by your client base and how many people as a part of that 1.6 million subs have actually moved forward with the extension?.

Yes. So, a couple things on that. First, not many contracts have come up for renewal yet. So, there is not a lot of people that are faced with the decision yet of meeting the 1-year extension, but of the limited number of those that do face and have come up to that and faced that.

A meaningful number about 40%, again, this is of a very small subset of them had already accepted the offer and another meaningful portion have indicated that they are going to accept.

Again, I remind you that this is a positive indicator, but I will call them very, very early returns meaning that not many customers at all have faced the decision that they need the extension. In the coming quarters, we will see more customers come up into that decision and we will see their reaction.

So, I am not sure, it’s a full indicator, but of course, I would rather be in the positive direction than otherwise. So, I would say, early indications are favorable..

Okay, that’s helpful additional color. And then a quick question on the BLG group, you mentioned you are restructuring there a little bit how the products are sold.

Is that a restructuring of the revenue model and kind of how you price that or recognize sales or is that more of a sales team infrastructure change?.

It’s – and so there is a couple of things going on there. We have a couple of objectives with the BLG group and their excellence and expertise.

The first is and it’s going to be a longer term journey, investment journey is to capture their intellectual property, some of their software planning tools and their IP books and others and create them into publishable subscription products. And so that process is underway and requires investment.

The second was to incorporate their consulting services and IP into the sales force that we – the existing sales force we already had prior to BLG. And I would say that integration is not going as well as we hope meaning we still haven’t quite learned to position and sell their services the way we would have expected.

So, we are not getting the growth results we expected out of it and – but we still believe it’s the right thing to do. We have a very strong patient experience solution sales team. It’s just a new product set for them and they have got to learn the language of selling these value-added services.

And as we bring more of the IP online, they will have more productized solution to sell from the BLG group, but right now, it’s the consulting that they sell.

And just frankly, we haven’t very good at it yet, but I think it’s – we are still very optimistic about it and confident that it’s the right capability to add to that group to add to the overall capability of patient experience..

Okay, that’s very helpful. And then last question, I will hop back in the queue. Just on the Lippincott solutions, I think Gerry mentioned, they were up over 70% year-over-year, which is pretty strong growth for product you have had for some time.

So, number one, any color on what’s driving that? And two, I think you may have started offering some unlimited bundle, so maybe that’s driving growth, but just any thoughts on the strength in that segment?.

Well, just in general, the clinical area continues to be a relative strength for us.

In the talent development spectrum, new tools like Checklist Management are seeing great receptivity and they are used to manage kind of a rudimentary level of checklist of competency check-off, not like competency center, but they are used commonly in the competency management and evaluation process. So, we are seeing good uptake there.

The content from Lippincott also is very targeted clinical content and we are just seeing good enterprise level subscription to that library. And one of the great moves I think we made a few years back was of course that we integrated it in a thoughtful way with our platform.

So there is benefit, it becomes assignable and trackable and reportable in unique ways, because it has delivered to our platform. So we are seeing very good uptake.

And finally, in the clinical content areas in general and in the talent platform in general, we also have been adding and plan to continue adding to the sales organization, so that we have more people carrying the message into the market. We are just finding that it’s a particular unique strength.

You mentioned the bundling, we do have a new product that’s yet to be officially rolled out, but it’s – I will call it a Netflix like subscription product that we are seeing some early orders on. We are very excited about. That is not yet contributing to revenues in a material way. But we’re very optimistic for next year.

And so we have assembled a certain set of content which includes Lippincott content as kind of an anchor or top brand. But other brands, as I mentioned, it’s a Netflix like model. And early returns are very positive. Again we’ve taken the time to integrate the technology to deliver this bundle.

The marketing and messaging we have very carefully assembled the content partners that will be a part of this solution and we expect a strong launch of it in January. But we do have some pre-orders and initial contracts coming in that are very exciting for this new product, this new as of yet unnamed product.

I will go ahead and name it, CE Center and you will see it move forward and you will see some launch announcements early next year as we orient our sales team around this new subscription product, that we are very excited about..

Okay. Thanks, for the color and congrats on a strong quarter..

Thank you..

Our next question comes from Matt Hewitt with Craig-Hallum Capital..

Good morning, congratulations on a great Q3..

Thank you..

A couple of questions.

First on the research segment, it sounds like that it was the BLG is the reason that you reigned in at the guidance for that segment, but you are also rolling out a new facility in Nashville, it sounds like that’s more on the survey side of the business, are you seeing incremental growth there or are there some contracts coming onboard early into ‘15, that you are trying to prepare for?.

There is a little of both, there is a little bit of capacity management across our entire workforce of space. As we mentioned we have some of the operations for those service lines in our Downtown Nashville office and we need to have expansion space here.

There is definitely a need to expand capacity as our managed call centers and are owned call centers, our reaching capacity. And we definitely brought our new customers. We noted the 7% growth rate. Again, not the strongest growth rate in our portfolio, but it is growing.

And we do have some large contract expansions that we are going to need the capacity, and we would rather service them out of this Nashville call center than some of our managed or even our other owned call center. So there is a bit of capacity management there and readiness, but you did heard us talk about it bringing capacity online over time.

It’s not an immediate doubling of capacity, just because the square footage is larger. There is a bit of shifting between corporate other product and service lines that have growth in personnel and the ability to expand the call capacity of that product line..

Okay, great.

Another question, SimVentures, you haven’t talked about specifically about that in the last couple of quarters, I am curious could you provide an update on how that partnership is progressing, maybe if you can quantify the revenue contribution from that segment?.

We haven’t broken out the revenue in this earnings announcement. I think some of it might be in our other filings, I am not sure of that. But it definitely is a smaller component of our overall growth story today, the products of SimVenture, as we consider successful, meaning SimVentures as EBITDA positive and contributing to growth overall.

So we are excited that it is serving that function. The products of SimVentures typically get bundled, with other products sold, generating a royalty back to the venture and then therefore to the two partners that co-own it. And so for example one of the venture products is called SimManager and SimManager is bundled with sales of HeartCode.

And therefore generates a small royalty back to the venture partners, because SimManager is bundled with HeartCode.

And so overall again, a small overall contributor to revenue, but a critical function of innovation and the model is they aren’t – their products, the venture builds capabilities that are bundled with solutions sold by Laerdal and by HealthStream and generates revenue streams back to the venture, which the partner share in.

So, that’s the model description.

It hasn’t grown as fast as maybe we had hoped, but it is providing vital and highly differentiated software to both Laerdal and HealthStream to take to market and position the companies well in an area of expected future growth, which is the adoption of physical simulation in training and developing the workforces, really globally, but in particular in the United States..

Okay. Maybe one more for me and then I will hop back in the queue.

Juice Analytics, you have started to be a little bit more open about the partnership there or the investment there, I know it’s still in the R&D phase, but when are you expecting you will have some products ready for prime time out of that group?.

I think we will begin to see some non-revenue generating, but customer beneficial facing products early next year, meaning we will begin to provide some of the benchmarking tools that we think add value to specific products as part of the product offering as a new enhancement to the product offerings next year.

Over time, over the next several years, we expect that those will result in tools and additions that can be revenue generating in and of themselves but I would start to say that we will see some of the commercial availability of the Juice created toolsets early next year.

and you will see them as kind of bundled capabilities of existing products that I think will give our customers unprecedented data and analytics capabilities, particularly beginning to leverage the overall strength and knowledge base across the entirety of the population of the 4 million subscribers.

And this will be kind of unprecedented capability and given our size of market presence not replicable by competitors.

So we are very excited that for example Precise and our ICD-10 products is beginning to incorporate Juice Analytics capabilities into next-generation ICD-10 products, which will allow for unprecedented benchmarking across the 1.6 million subscribers. And again capabilities at other – that other competitors just simply won’t be able to replicate.

So again, we will see early releases and impacts of probably what I will call non-revenue generating capabilities that we think will be unique and differentiated early next year. And then I will say over the next several years, we hope to turn some of those into revenue-generating and highly differentiated data-driven product offerings.

But again, this is a very preliminary, but we are about a year into the R&D and seeing exciting product developments, both with partners and internally that we think hold our promise for the future..

Okay, great. Thank you..

Our next question comes from Scott Berg with Northland Capital..

Hi, Bobby and Gerry. Congratulations on a starring third quarter..

Thank you..

A couple of quick ones for me.

Gerry had mentioned additional investments from a general perspective is, how do you view the opportunity over the next, I will call it, generically 12 months and I know you are not guiding to ‘15, but do the additional growth investments going forward, is it more a marketing and awareness or is it more headcount related or something in between?.

Yes, it’s a great question. And I would say it’s almost, I am going to say across the board meaning we are in an exciting place in our trajectory. When we release new products like Checklist Management, those had development initiatives behind them.

Each year about this time, we wrap up our strategic planning process and begin to release hires which you can watch on our website as we release hiring around the new development teams and software and new sales hirings.

In fact just in last three weeks we started to post new sales physicians around our post-acute offerings, I think, four new ones there. Our clinical area, we expect to start hiring almost immediately in the sales organization and the clinical solutions as I mentioned earlier.

Sometime between now and year end, we will probably post up new development positions that we are expecting to hire as we enter next year. Marketing and others we look at more common sizing approaches trying to grow the marketing budgets alongside with revenue growth. Another expense that will be in next year that’s not in this year is summit.

And so you need to be cognizant of that as again we won’t provide any detailed guidance until our February call as we have done in the last 8 years, but these are some things you need to be thinking about.

And then finally, while again we are not providing company guidance, we have tried to provide as much color as we are able to around product line guidance, specifically ICD-10.

And we are trying to very carefully articulate the challenges that ICD-10 presents as we move into ‘15 and ‘16 making sure people understand the bolus description that nature of this revenue stream, our efforts to backfill, grow with other exciting products like I mentioned CE Center and data products are all important, but we can’t ignore the fact that the ICD-10 products will begin their decline in ‘15 creating year-over-year comparability issues kind of overall, because it’s been such a strong revenue and growth contributor to the company.

And so every quarter as we get new data price point, number of contracts, length of contracts, our expectations around when the beginning of what I will call the backside of the revenue curve for ICD-10 will begin.

Fortunately, this quarter, we are able to push it out yet another quarter, because of these extensions and stronger than expected sales organizations for the fourth quarter that we are expecting.

So, we are glad to be able to push it back, but it doesn’t change the inevitability of the challenges it will present especially as we enter the second half of next year the way it looks now. But overall, so we plan to make investments in all these areas.

So, products to backfill ICD-10 like the CE Center we mentioned, products with precise, the next generation ICD products, sales team investments that you are already seeing posted on our website and technological and development team investments.

So, in general, we are just feeling like a small, young and growing company that sees opportunity in front of itself and needs to invest in all areas across the organization. And also you shouldn’t ignore the fact that our growth in the future will be driven by a mixture of organic and inorganic growth. So, we are increasing our investment.

We think we have such a strong ecosystem that we need to be on the constant lookout for acquisitions that can strengthen our overall ecosystem. And we are investing more meaningfully in the teams of people that scout, negotiate for, find and close transactions. We have done a few in our – last couple of years after a period of not doing many.

And we have announced that we continue to search and negotiate for and try to close on acquisition opportunities, but it’s important to note that as you think of next year, we will be investing continuously in that pipeline whether or not it yields results.

So, I don’t know if that answered your question, but that means investments in all areas and then even specifically we have disclosed investments in areas like the need to expand capacity in our call center with this new 22,000 square foot lease, which accommodates growth across all business units and so continuous investing in all areas to manage against our growth..

Thanks. I’d like to hear....

And generates revenue streams back to the venture..

You have a lot of things going on right now, which is always good. Moving on to the research segment generically, you talked about how BLG is underperforming a little bit relative to your expectations to be able to sell that.

The space edition obviously talks to some other synergies and in general growth in the other areas, but how would you quantify your expectations for general growth of that product segment for you guys within research, because I think historically we talked about in the likely of mid double-digits, mid-teens growth opportunity.

Obviously, you are bringing in this year, but from a general perspective, not guiding to ‘17 should our expectations be that – that continues to be a mid-teens grower or is this more of an opportunity to reset those expectations as maybe more of a lower teens growth opportunity moving forward?.

Yes. I think couple of things. The patient experience solution combines the numbers from BLG, which is underperforming expectations and a bit of a drag to the expected overall growth rate. We hope that our corrective actions and that we have made the right moves will start to pay off in the coming months, quarters and years.

But that’s definitely something that will and ironically a strong positive impact, bit anomalous on growth, because it wasn’t year-over-year comparable in the analysis period-to-period. And the period we are just releasing it, it looked like it contributed in a strong way to growth, because there is only a partial quarter in last year.

So, again, be thoughtful of your analysis there, because overall BLG help pull up the growth rate this quarter of that product solution, because it had a full quarter this year and a partial quarter last year.

So, you have to be careful – so if you look at the 7% number we disclosed the growth rate in the patient experience surveys that’s the current growth rate of that product line, which is clearly not in mid-teens.

We do expect – we have announced some contract expansions that are compelling, existing customers are acquiring business and the business is coming our way and in fact already signed on the contract.

So, we do have the need to expand capacity, but we did say it will be more of an iterative and incremental growth in capacity to meet the contract expansions over time. So, I hope that provided some color and some thoughtfulness as you think about that product line.

Generally, it has been a lower performer against we just announced nearly 70% growth rates on a couple of other products, the competency contributions, for example, from competency center and the clinical solutions I think with a nearly 80% or....

75%..

75%..

87% on the competency….

75% and 87%. So, there are areas of extremely high growth. And then this particular solution is still growing, but much more midland growth..

Okay, that’s all I have. We will jump in the queue. Thank you..

Our next question comes from Richard Close with Avondale Partners..

Great, thank you. Congratulations on a very solid third quarter.

I was curious if we could just dive down on the next generation products for ICD-10, just to be clear the guidance that you gave or the sort of target peak quarters extending into first quarter, that doesn’t include any second generation products, correct?.

No, it does not..

No, it does not. We will reflect any thoughts about second generation products as we provide guidance next year in February..

Is there any window into what the second generation products are? I mean, you talk about the $1.6 million and that’s more on an enterprise level, it’s at the lower end of your $15 to $125 price range.

Is it possible to say hey, the second generation products maybe more for the clinically focused as we get closer to the October 2015 day and it might be a higher price point or any thoughts on that?.

Yes. I think couple of quick characterizations. One, the next generation products, which are over a year in development are incredibly exciting. They do things that the first generation products don’t do. We mentioned some of them. They will incorporate some Juice Analytics capabilities.

Overall, they are just truly next generation products, not just an iteration, but very exciting.

They use elements like gamification, benchmarking, leader-boarding, but it is safe to say that they will target as people renew and extend, their need for enterprise licensing will go away and the products will target much smaller subsets of the original subscriber base on an ongoing basis.

It is also true that we expect those subscribers to be at a higher price point. And so it will be the – we use this as a beachhead with our partner precise to make a material move into the ongoing development and training needs of coaters nationally and the broader potentially revenue cycle related opportunities.

We plan to expand the product offerings again along with precise and hopefully some association partnerships to include broader areas of business that essentially we found a new buyer through this ICD-10 product. And our opportunity is to expand the toolsets and offerings we have for that buyer.

And so in the next year, not only will the product – it will focus on fewer people, be a higher price point and be truly next generation capabilities. We will expand to that buyer into the revenue cycle areas by the middle of next year and so we will have a broader product set to sell to that buyer.

And so in that way, we hope to work to backfill these revenues the best we can..

Great. I appreciate the details there. With respect to BLG, I just want to make sure that I am understanding this correctly you are disappointed I guess on the consulting and in advisory portion in terms of integrating that with your existing business.

And I am just – is there any thoughts in terms of the weakness there or not living up to expectations that we would anticipate any type of write-down with respect to that acquisition?.

Yes. We would – that would be talking about next year, I think and so we are going to differ all that to our February call, but right now, we are still optimistic for the product line. We are seeing an uptake in the pipeline for the product line.

And it’s just taking us a little longer to get the strong sales organization to carry their product and represent it and show it on integrated fashion with the current products. So, I would say it’s not a current expectation as I stated today of any type of write down on that product set..

Okay.

And then Gerry I was curious if you can just talk to us about the deferred revenue guidance, I think you were at $2.5 million to $3 million previously and going to $2 million, I guess now for the year, if you can just walk us through that change?.

Yes. The number you are referring to is in the previous quarter’s guidance and the $2.5 million to $3 million was a combination of deferred revenue write-down estimate, transaction costs, any potential hiring and so on and operating expense doesn’t (seize at) HCCS.

So, if you have gotten into the owning it for now last six months, it’s performing at a little better than we first expected. And so that $2.5 million to $3 million range is now about $2 million, so that number comprehends all the different pieces that might have been part of the HCCS transaction in the first year of ownership..

Okay, alright. And I am – getting back I just have two final questions.

Getting back on Ryan’s question on the bundle, can you tell us is that additive or does that cannibalize existing content subscriptions or consumption?.

No. I think as you are referring to the bundled solution....

Yes..

We kind of newly announced the CE Center. No, we really think it represents a unique opportunity to help organizations provide the necessary content for their staff to meet licensure requirements in a better and more organized way.

And so a lot of the clinical solutions we are selling today are incorporated into on-boarding programs, so they are very specific risk areas, whereas this product has a more open, broader library offering that allows people to do elective learning meaning they can kind of choose the components they want to take but it’s in fulfillment of say state licensure requirements.

So, there is a nice mixture of, it’s a product to meet a professional need, but not an institutionally directed need if that makes sense. In other words, the hospital is unlikely to say you need to take these 10 courses from this new bundle.

They are more likely to say here is a solution, a bunch of courses that you can choose from to meet your personal state licensure requirements and it’s going to be provided to you by your institution.

Whereas their current Lippincott products and clinical products we mentioned are more directed meaning that the Chief Nursing Officer determines that the employees need access to this reference or clinical library in their work and they license those products to the – in a more directed fashion to target to those clinicians.

So there are kind of two things going on. So we don’t think that they cannibalize each other. We think they support each other..

Okay, great.

And my final question, we haven’t really talked that much about post-acute, I think it was mentioned briefly, but if you can give us an update there obviously you have had a ton of success I guess when you launched that last year and then just any updates and your thought process or thought on that sub-segment?.

I think as we enter the next few quarters, again, finishing our strategic retreat and planning process, you are already beginning to see like on our website we posted I think four new sales positions and they will probably – we will continue to add to those.

So specifically for the post-acute areas we are finding that the hospitals in the new the ACO model are drivers of extending services out to the post-acute settings.

And so, both our existing sales team and our new sales team has opportunity, now we actual product sets to offer to be bought both through hospitals and extended to their new relationships and vice versa. So we are excited about the opportunity, it’s becoming a part of our adds each quarter.

We are not breaking out adds by product lines anymore, because it’s just confusing or by segment, but our overall growth and ability to maintain adding subscribers to our network is now beginning to be added to by the opportunities in the post-acute setting.

And so we think it’s an important – those important 18 months go to extend our market definition beyond acute into the additional 3 million people work in post-acute. And what I would say it is now kind of part of the ongoing quarterly delivery of new subscribers will be coming from this new segment.

And while we are not breaking out or quantifying it, it is adding in the thousands to the new subscriber counts each quarter..

And a follow-up, are we still targeting the 20,000 to 50,000 on a quarterly basis? Is that still our goal?.

Well, it’s a tough one, because in an effort to try to manage expectations of what I thought was a more normalized or acceptable rate, we have used that as a range for 5 years. In the last several years, we have continuously beat the range fairly regularly. And so I probably need to reevaluate that range and think about it.

We know that it will be increasingly more difficult to add brand new subscribers in the acute setting, but – and we are learning the rate that we can offset that, which will get a little more difficult because of our absolute penetration there, but in the post-acute settings, we are seeing uptake.

And so I am going to need to maybe think about that question in the first quarter earnings call next year when we provide guidance, I will give you a better answer.

I would say, it’s a bit been obsoleted, the 20,000 to 50,000 by our actual performance the last say eight quarters, but I have been trying to be cautious about it, because of the challenge and the opportunity I just presented.

And so let me think about it and maybe when we do our comprehensive guidance for ‘15 in February, we will try to come up with a new range..

Okay, great. Thank you. Congratulations..

Our next question comes from Frank Saraceno with First Analysis..

Hi, guys. Just two quick questions.

Bobby, first maybe on HCCS, which looked to have a very good quarter, is there anything you would point out as it relates to the market there and just how that assets performing?.

The HCCS assets, yes. So, HCCS assets – we are obviously very pleased, the management team there, Ben Diamond and his entire team have really done a great job trying to understand the HealthStream culture, bring all the strengths of their already strong culture.

When we conducted due diligence on that acquisition, they had some of the highest customer satisfaction scores that we have seen. And we hired independent third-party to call customers and ask them about their satisfaction.

So, they began from a really strong place, but more impressively, they have really worked to adopt and not resist, but learn from and add to from their existing culture, but add to the HealthStream culture. And so their sales teams are operating very effectively.

We have taken them from their old model of having maybe 6 or 7 to cover all 10 of our territories. So, we have expanded their sales team. Their sales leadership, (Bill McGann) is just doing a great job organizing that team into kind of what I will call our matrix sales organization.

They are beginning to assume broader responsibility across our compliance product sets. And so they have compliance thought leaders in their organization and they are stepping up. And some of our regulatory and compliance products that are historical products to HealthStream, they are beginning to take responsibility for.

The net effect of all that to, in addition to the fact that they had a broader product set than we had in compliance is resulting in more awareness across compliance officers and more strength to what used to be just a mandatory training that we offer to be more of a compliant suite.

And also you should know to have a software solution, which is we are working to integrate technologically called COI-SMART, that is a SaaS-based application, a little niche application, but it is performing very well.

So, if it’s not evident, while we have had challenges in some areas that we have mentioned, BLG and learning to sell consulting as an organization and we have got a lot of work to do there, but we will get it and have great teams there as well.

But just kind of the ops in the spectrum, HCCS seems to be firing on all cylinders assuming broader responsibility and delivering great financial results to the company. So, we are both proud of and excited about their work..

And maybe lastly just following up on that, Bobby, do you have a sense or you are willing to share what you think the potential market is there in terms of how big that compliance side could be? And related to that is just when you look at the sales that are happening today, are those largely just new sales or are in fact – are they looking to replace some existing compliance solution that perhaps wasn’t adequate enough?.

Well, they have a great mix of products of what we have now. For example, we didn’t really have a great product when hospitals faced a corporate integrity agreement. We didn’t have a great content offering to help them through the mandatory training and orientation programs that are required under a corporate integrity agreement.

Well, HCCS has a great program for that and now HealthStream does. And so as customers that face that unfortunate challenge, we have been able to cross-sell. So, our existing base is very broad as you know and we have been able to reach out to some of our health systems that face that challenge and support them in a journey with new product offering.

So, you call that a cross-cell. Other products like the COI-SMART application that I mentioned are almost completely Greenfield meaning we don’t see a lot of competition for it. It’s kind of healthcare tailored and it’s a niche product, so not as big and broad as maybe our learning platform, but still we see Greenfield in that product.

So, it’s a nice mix of cross-selling existing products into HealthStream’s existing customer base and Greenfield opportunity like the COI-SMART application that has been built. That’s a unique niche software application..

Thank you..

The next question comes from Steve Rubis with Stifel..

Hi, Bobby. Hi, Gerry. Hi, Mollie. Thanks for taking my questions.

Can you help me understand the impact of Checklist Management in terms of the aspirational price of a subscriber? In your company presentation, you show some slides that reflect what a customer might be worried about a per sub basis based on a solution walkup and how does Checklist Management change those numbers?.

It’s – what’s happening now is lot of the modules are steady and incremental adds, but not exponential or doubling adds. And so a lot of these products from our Authoring Center to Checklist Management are uniquely positioned to add incremental revenues, but not leaps and bounds. They are high margin – high gross margin products.

And this one is very exciting, because it’s rate of uptake, but I would characterize it at the lower end of contributing. There is a new contract that’s kind of an entry level product. It’s simple to use and implement.

And so I can’t give you the price point of the number, because we don’t do that by product, but it would be a small increment to those models that we have shown in our previous Investor Relations slides..

Okay, that’s fair.

Can you walk us through the value proposition of the research/patient engagement segment? Specifically, what is the growth opportunity here especially around surveys and do you think there is an opportunity to take share from competitors?.

Yes. So, that market on the whole, there is things I like about it and things that I don’t like about it. So, the thing I like about it is that it’s a defined competitive landscape.

There are 4 or 5 core and quality competitors, but the talent management arena, where compete is Wild Wild West and everyone from Oracle and SAP to much smaller innovative incubated companies are competing and hundreds of competitors, including some of the giants, whereas the patient experience and research solution a) is very healthcare specific, b) it’s rooted in federal requirements.

And so CMS requires the certain collection of the data and submission of the data and we are a qualified vendor to do that.

And so there are very few – there is a list of maybe 30 or 50 qualified vendors, some hospitals self certify taking that number higher maybe 70 or 80, but overall there is a process you have to go through to become a certified vendor. So, it’s a defined competitive landscape. That’s what I like about it.

So, the things I don’t like about it is in the pure data collection component, it is more of a takeaway business. And so I like that it’s not thousand competitors, but you do have to move that work from another existing vendor. So, it’s less Greenfield making it more challenging to grow at high rates.

The innovation therefore is the important component. It’s helping an organization move the needle on their score, not just collecting the data and showing them their score that will be ultimately the differentiator for any of us and our competitors.

In our view of the world, training and developing and selecting the talent that ultimately shape the perceptions of these scores, is the way to move the needle. And so over time, we plan to as you see consult with the organizations about how to build a more patient-centered culture, talent selection tools.

So, you hire the right people to have the right attitude, because attitude is reflected in those scores later by how patients remember their experience. Training people to be aware of how the scores are created and what’s measured in these CMS required surveys. So, training is a key component.

So we think we have a lot of the right assets to actually add value to helping a hospital improve their patient experience. Ultimately, the vendor of these say five competitors that actually improves the patient experience as reflected in improving score, I think we will gain market share against its competitors.

And so at its core, the data collection component of the businesses is a bit commoditized and it’s a bit of a takeaway market, but it’s a race to see you can innovate enough tools and capabilities to actually help an organization, improve the patient experience as reflected in those scores and whoever does that, we will start growing in beyond the 7% range.

And so we are working hard to invest through BLG product innovations and new tools and analytics capabilities to try to be the first to move the needle..

Got it. You had a one quick follow-up and then I will yield my time to everywhere else.

Have your clients talked to you at all about emotional intelligence or working in ways to quantify and understand emotional intelligence of their employee base in your – especially in your talent management offerings?.

So, it’s interesting we are beginning to build in collaboration with other partnerships. So, we have a partnership with a professor out of Pepperdine that uses behavioral screening tools to screen employment candidates and ultimately rank potential – high potential leaders based on behavioral screening criterion.

And so while not exactly getting an emotional intelligence, we are beginning to see and in this case foster and actually invest in the development of behavioral-based screening tools that we think will add value to our customers both in the selection of new employees and the promotion of internal candidates.

And so we have built – you may know this, we built a capability into our platform called Nine Box. And Nine Box is the tool that helps you visually sort out your workforce based on X and Y criterion.

And in order to make that effective though, we engage this professor out of Pepperdine is an expert in workforce behavior and predictive analytics to build and we are in the process of validating an instrument that will help sort out high potential future leaders based on behavioral science.

And so maybe on exact question about emotional intelligence, answer to it, but directionally, I expect to see more and more tools introduced through HealthStream and HealthStream Partners that select, sort, and assign and use behavioral science to achieve selection and sorting and promotions of employees..

Thanks..

And I am not showing any further questions at this time. I would like to turn the conference back over to our host for closing remarks..

Sure. So, I hope we have brought the proper balance to both opportunities and challenges. Of course, we celebrate a very strong third quarter. And with our increased guidance, we look forward to a strong year end wrath.

We miss our resident questions from our resident short – to bring the appropriate emphasis to both the challenges that we face and the opportunities.

Hopefully, you get a sense from this call of all the investments we are making in exciting new products that will drive future growth, but also the challenges of backfilling the ICD-10 revenue, which are real challenges that will put a lot of thinking into how we guide for ‘15 in our February call. And so we look forward to that next call.

We will provide year end results and a forward look into ‘15 for the first time in great detail. Now, thank you for participating and we look forward to the next call with investors and shareholders and congratulations to our employees for the strong third quarter..

Well, ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day..