Mollie Condra - VP, IR & Communications Robert Frist - CEO & Chairman Gerry Hayden - SVP & CFO.

Peter Heckmann - Avondale Matt Hewitt - Craig Hallum Capital Ryan Daniels - William Blair Richard Close - Canaccord Genuity Scott Berg - Needham & Company Steve Rubis - Stifel Nicholas Jansen - Raymond James & Association Matthew Gillmor - Robert Baird Frank Sparacino - First Analysis.

Good morning, ladies and gentlemen, and welcome to the HealthStream Incorporated Third Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference Mollie Condra, Vice President, Investor Relations and Communications. Ma'am, you may begin..

Thank you and good morning. Thank you for joining us today to discuss our third quarter 2015 results. Also in the conference call with me are Robert A. Frist, Jr., CEO and Chairman of HealthStream; and Gerry Hayden, Senior Vice President and Chief Financial Officer.

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 those 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 with that this morning, I will turn the call over to Bobby Frist..

Good morning and welcome to our third quarter 2015 earnings conference call. We have a lot to cover today. So I'm going to jump right in. As you may recall from our previous two earnings releases we have updated the nomenclature that describes our business units.

We're now reporting on three segments, the Workforce Solutions segment, the Patient Experience Solutions segment, and the Provider Solutions segment. So I want to dive into each of those three just a bit and provide a few highlights, will turn it over to Gerry for some financial review.

The Workforce Solutions segment performed well again in the third quarter of 2015. This business segment is comprised of applications and content solutions for customers.

They are primarily SaaS subscription-based solutions and they're targeted at improving the healthcare workforce to make sure they can understand the job they're doing, improve their competence skills and knowledge.

In the third quarter, the Workforce Solutions annualized revenue per implemented subscriber or ARIS increased $0.48 over last quarter to $35.82. This is slightly below the prior year quarter but it does represent the third sequential quarter of improvement.

Many of our new products in the Workforce Solutions segment are performing well; I'm going to highlight a few of those. Last quarter we talked about CECenter, I described that product as a Netflix-like subscription product designed to meet state license requirements for nursing and allied health professionals.

We see continued momentum of this product we added 35 new accounts in the third quarter alone.

Turning to our Patient Experience Solutions group, which are really targeted to provide insight to healthcare providers to meet the HCAHPS requirements, to improve the patient experience, and to engage the workforce, and also target to enhance physician alignment.

Our Patient Experience Solutions segment increased revenues by 7% in the third quarter over the third quarter of 2014. Revenues from the Patient Insight Surveys, this is a survey research product that generates recurring revenues increased 14% over the third quarter of 2014. In September of 2015, HealthStream introduced Echo, Inc.

to the marketplace as a newly formed company and this was a combination of two prior acquisitions HealthLine systems and SyMed Development. By providing the software that is used to validate the professional's credentials of potential employees, Echo products serve as the gatekeeper to workforce quality and healthcare.

In the third quarter of 2015, revenues from HealthLine Systems were $2.7 million and included new customers like Children's Medical Center in Dallas and Spartanburg Regional Medical Center.

Echo customers include over 2,000 healthcare organizations representing 1,200 hospitals and 800 physician practices which currently use one or more of the solutions from this business segment. Together our three business segments help ensure that hospitals surround their patients with the best possible workforce.

Our focus, as an organization and across our nearly 1,000 employees is to tune in and help the nation's workforce is about 8 million people that work in the healthcare provider space. And our focus is on helping determine their qualifications, to improve their knowledge, to assess their competencies and skills.

And as an organization, we believe, that we are well positioned to continue help develop and assess America's healthcare workforce. Take a moment turn it over to Gerry Hayden for a few financial highlights and then back to me for some product lines..

Thank you, Bobby, and good morning everyone. I'll provide some color to our financial results including certain items that affected the quarter. For the quarter, consolidated revenues were up 21% to $53.8 million. Operating income was down 9% to $4.3 million.

Operating income was adversely impacted by the $2.1 million reduction for the deferred revenue write-down associated with the HealthLine acquisition. Net income was down 24% to $2.6 million and earnings per share was $0.08 compared to $0.12 in the third quarter of 2014.

Both measures were adversely impacted by the HealthLine deferred revenue write-down and this year's third quarter earnings per share calculation includes the impact of our equity offering in May of this year. Adjusted EBITDA was up 17% to $9.3 million and it was also adversely impacted by the aforementioned deferred revenue write-down.

Now, let's take four areas of the income statements and take a look at those, revenue, gross margin, operating expenses, and operating income. Revenue. For the quarter the overall revenue growth rate was 21% and the nine month growth rate was 22%. Revenue within our Workforce Solutions segment grew by 21% over the first nine months of 2014.

Workforce Solutions is compromised of Compliance Solutions, Clinical Development Solutions, Resuscitation Solutions, revenue cycle management solutions and Talent Management solutions and some examples of performance in that area for example HeartCode which is part of Resuscitation Solutions grew by 31% over the first nine months of 2014.

Competency and Performance centers components of Talent Management Solutions grew by 45% on a year-to-date basis. Our revenue cycle management solutions including ICD-10 readiness are also part of the Workforce Solutions segment.

In the third quarter, our ICD-10 readiness solution contributed about $6.3 million to revenues compared to $7.4 million in last year's third quarter. Full year GAAP 2015 guidance for ICD-10 readiness product is approximately $26 million. Patient Experience Solutions revenues grew by 7% in this year's third quarter.

Revenues from our Patient Insights Surveys grew by 14% but that growth partially offset by lower growth in our patient experience coaching business and other products including surveys conducted on either annual or bi-annual cycles.

In the Provider Solution segment, the HealthLine acquisition which closed in March of this year in performing to our expectations and contributed approximately $2.7 million to revenue in the third quarter of 2015.

The $2.7 million recognized revenue is net of approximately $2.1 million of deferred revenue write-down which is the accounting convention requiring us to write-down beginning acquired balances to fair value as defined in GAAP. From a consolidated perspective, our organic business was solid in the third quarter with a growth rate of 15%.

Now, gross margins. Gross margins have been stable in the 57% range for the past year. A combination of factors that include lower ICD-10 revenues and revenues from Proprietary Solutions with higher gross margins were key contributors to this trend. Operating expenses.

For the third quarter of 2015, product development expenses were 11.5% of revenue and represented a 47% increase over the third quarter of 2014. This quarter 11.5% of revenue compared with 9.6% for the full year of 2014 and 8.9% in 2013.

On a combined basis, income statement expense and capitalized software development from the cash flow statement, we invested 14% of revenues in product development year-to-date through the third quarter. We expect to continue increased levels of investment in the fourth quarter of 2015.

G&A expenses were 13.2% of revenue and reflect another full quarter of HealthLine G&A expenses in our income statement. Our year-to-date G&A when adjusted for the $1 million of HealthLine systems transaction and closing cost in the first quarter this year continues to trend to 13% of revenues and below.

This is the lowest percent of revenue we've seen since 2012 and this shows continued progress versus our historical recent results. Operating income.

Operating income as I mentioned a few minutes ago was $4.3 million in the third quarter, and once again was adversely impacted by the $2.1 million reduction for the deferred revenue write-down accounting convention for HealthLine Systems acquisitions. Now the balance sheet.

Our cash position and overall balance sheet remains strong and were reinforced by positive cash flow from operations as evidenced by a $9.3 million of adjusted EBITDA this quarter. Our cash balance at September 30 was $145 million, up from $140 million at June 30 of this year.

We have no outstanding debt and our full $50 million line of credit capacity is available to us.

We believe our overall capital position is likely to support our organic and inorganic growth opportunities and we continue to review and evaluate a variety of potential acquisition and business development opportunities in terms of strategic fit and valuations. Yesterday's earnings release contains updated guidance for the 2015 full year.

We anticipate that consolidated revenues will grow between 19% and 22% as compared to 2014, and will be derived from the following three areas. First, we expect revenue growth in Workforce Solutions to increase in the 17% to 19% range.

This Workforce Solutions growth range excludes SyMed which had revenues of approximately $4.5 million in our 2014 full year results. SyMed is now part of our Provider Solutions segment. Second, we expect our Patient Experience Solutions revenues to grow by approximately 5% to 7%.

Third, we anticipate our Provider Solutions segment which consists of our wholly-owned subsidiary Echo, Inc. which Frist mentioned a few minutes ago, to contribute between $12.5 million and $14 million of revenues.

We expect HealthLine systems to contribute between $7 million and $9 million of this total which is the estimated amount after the $6.7 million of acquired deferred revenue balance write-down as required under GAAP.

We expect our full year 2015 operating income will decrease between 15% to 25% over 2014, as our guidance takes into account among other things the impact of the HealthLine Systems acquisition completed in this year's first quarter, and our plans to continue companywide increased levels of investment in sales and product development in the fourth quarter of 2015.

We anticipate that our 2015 capital expenditures will be between $13 million and $15 million and our effective tax rate will be between 42% and 44%. And finally this guidance does not include the impact of any other acquisitions that we may complete during 2015. Thanks for your time and I'll turn the call back to Bobby..

Thank you, Gerry. Like to give a few product line updates and then turn it over for questions. Last week was an exciting week after a lot of work and energy went into the development of KnowledgeQ. We're able to announce its availability and have begun the sales roll out to take this exciting new mobile enabled solution into the market.

It's designed to achieve help hospitals and health organizations achieve compliance for regulatory training. We call them the annual mandatory training requirements. And it's also the second product from HealthStream and our partners which follow Precyse University DNA that includes a control center application from HealthStream.

And you may recall as investors that we began investing the development of this control center technologies through our investment in the company called Juice Analytics about two years ago. So we're excited now to have two products in the market that rely upon this new analytics framework connected to our entire network.

The components of KnowledgeQ include an application, courseware, some standardized assessments, and the ability to create national comparison benchmarks within the product.

We believe that's impaired that healthcare leaders and this includes line managers, officers in charge of particular areas of the hospital need to be given information at the point where they can make meaningful improvements in their programs and in this case in their compliance program.

And be giving meaningful information at the time of need to help to manage the cost of their programs. And so KnowledgeQ through the use of this control center technology gives them the tools they needed to do this in ways that were never before possible.

I look forward to reporting you our progress as we introduce this product to the market and hopefully get some sales momentum on these new innovative data driven products. Like to turn our attention to the revenue cycle solutions area, which historically was comprised of a single product the ICD-10 readiness product.

But now includes the ICD-10 readiness product which is sun setting and the Precyse University DNA product that I just mentioned, which is based on the control center technology which is the new replacement product. In addition, we have exciting products in the pipeline for early next year in the revenue cycle solutions area.

So by early next year, we hope to have this as a solution group area where we found a new buyer in the hospital in the financial management section of the hospital.

And instead of having one product to sell the ICD-10 readiness, we hope to have and expect to have a suite of products by the end of Q1 next year to sell into this area, the important area of operations at the heart of revenue recognition for hospitals and healthcare organizations.

So take a quick review of the existing products in this revenue cycle solutions area.

At $6.3 million in revenue that represented the third consecutive quarter of decline for the readiness product, which peaked about a year ago, exactly a year ago in the third quarter of last year it generated $7.4 million in revenue which represents the peak revenue contribution from that product.

And then since that peak contribution in Q3 of '14, we delivered $7.2 million, and then $7.1 million, and then $6.8 million, and then $6.3 million in revenue. So the cumulative year-to-date on the readiness product is about $20.2 million.

We do expect to wrap the year on this product at about $26 million which is consistent with the prior quarter's guidance; we said $28 million for the category but $26 million for the ICD-10 readiness product which means that our estimated revenue from the readiness product for the fourth quarter is approximately $6 million.

And that will represent again a sequential decline in the quarter, the fourth quarter. We're pleased to report that the new product, the ICD-10 product is called Precyse University DNA is performing very well.

DNA is the follow-on product to Precyse's ICD-10 readiness solution and let's talk a little bit about what it is? It's a data driven product that leverages our partner Precyse's coding expertise, while also using the control center technology to use the data flowing through our network.

And again we call this technology the control center technology and it's the same technology used in the KnowledgeQ product that we released just late last week. And it offers a one of kind solution for maintaining revenue cycle management competence and the workforce, in healthcare workforce.

It offers customers the ability to assess and compare the level of competence against national benchmarks. DNA empowers hospitals to manage their coding workforce kind of actively looking at their knowledge in six areas, the main areas of expertise in coding.

We signed additional 21 new contracts for DNA in the third quarter and cumulatively in its history since its introduction we've generated about $8 million in order value on the DNA product. So about $2 million in additional order value across 21 contracts in the third quarter.

DNA offers us an opportunity to retain the 7.5% of our platform subscribers that have only purchased the readiness product. And so as you mentioned, as you remember in our last call, we mentioned that about 360,000 subscribers, which is about 7.5%, 8% of our subscribers are customers of HealthStream for only one product, the readiness product.

And this DNA product gives us yet another opportunity to go and cross-sell them to retain them as customers. In terms of revenue, we expect revenue cycle management solutions category again to generate approximately $28 million in 2015. I will turn our attention to the Resuscitation Solutions category; we haven't updated on that in a while.

In that category is the exciting product of HeartCode, and HeartCode has been a steady contributor to growth over the years. There's also a new product in this category that uses a data driven framework as well.

This product is focused on teaching resuscitation skills to healthcare professionals and is offered through our partnerships with Laerdal Medical and American Heart Association.

As of September 30, approximately 1.9 million cumulative CPR training certifications have been completed through HealthStream, and we added approximately 100 new HeartCode contracts in the third quarter of 2015. So this represents new HeartCode business.

It's just exciting to see this product continue to deliver results into the market, provide steady growth driver for organization, and as Gerry mentioned, this continued contributor in double-digit growth rates to our overall growth. I'd like to update on a few other exciting transitions.

We're in the midst now of transitioning our entire customer base to our new mobile responsive smarter user experience that we announced in August.

After almost two years in development and hundreds of prototyping sessions and over 60 different coders from our programming development group have been involved in its development, we've now crossed the 1.8 million subscriber mark on the new mobile UI, and we're rolling out at a much faster clip now.

We went from pilot and now we're rolling out in segments of about 250,000 every few weeks. And so we've done a really fantastic job. We're at about 1.8 million of our 4.5 million subscribers that are on the new mobile UI and feedback has been very positive. The workflows are improved for the students. It's very student-centered or professional-centered.

They get organized to do this around how they operate day in and day out and receptivity because of the intuitive workflows and mobile enabled capacity, the responsive design which means its works on a iPhone or an android device, it works on multi browsers, Safari is now supported and so as well two or three other browsers and so multi platform as well.

So it's an exciting dawn for our customers as we move them to the new mobile UI and exciting for us because of our success in migrating them almost 1.8 million subscribers to this new experience. We call the HealthStream experience is absolutely fantastic and represents over two years of development work.

To see that going to the market is very rewarding and exciting for everyone here that's worked on it. We are in a period of great innovation and we've talked a lot about increased investments which we plan to continue through the fourth quarter into product development.

But the new products are now rolling out at a very fast clip, of course the new user experience, I just mentioned, two control center enabled products, one from a partner called DNA and one internally developed called KnowledgeQ are now in the market.

Our PQRS survey is new physician quality reporting survey is a new product of our research organization. We've also launched compensation management and recruitment center, new talent management applications in the last year and it doesn't stop there.

We have an exciting next two quarters of product introductions; we may have hinted at new products around readmissions. We've been working for about a year with Duke to build a new certificate program there.

Lots of exciting new analysis and I'll just hold those back as they roll out over the next two quarters but fantastic period of new product innovation to prepare yourself for some of the challenges and we've mentioned those.

The ARIS metric will continue to be under pressure as we enter into the next year because of the ICD-10 readiness products and the challenge that we face with that product rolling off. As you may recall and we've talked about for over two years that product was based on a federal mandate and that deadline has now passed.

As of October of this year all health systems are required to report under the new ICD-10 guidelines and we were very strong in our ability to take up a very market leading product, deliver it to 1.8 million subscribers, and help this country get ready for the ICD-10 change out.

The federal government delayed that change out two or three times which stretched the life of this product. But now we're past the deadline and we do not expect any new sales of the readiness product.

We've shifted all of our attention to the new DNA product and so now we look to that category of revenue to try to figure out how to backfill the declining, sequential declining revenue out of the preparedness product as we talked about.

And we do expect that in the next year that the rate of decline after we've just given the guidance to the fourth quarter and we will give guidance in February about next year.

But I would say for those of you modeling our business, we expect the rate of decline in that particular revenue stream to accelerate as we enter next year post deadline, and with no new sales of the existing product to occur. However, as a category we have a new sales leader in that area of our revenue cycle.

We have new product introductions pending both with Precyse and organically developed.

And the new DNA product, as I just mentioned, with dozens of new contracts in the quarter is performing very well so we have a lot of optimism that will continue to grow that segment, I mean not overall, it will have the downward pressure of the declining preparedness product.

But we do have products in the market now that try to grow that area for our business overall. With those comments in hand, and as we look forward to new product introductions in the next two quarters, I'd like to turn it over for questions from analysts..

Thank you. [Operator Instructions]. Our first question is from Peter Heckmann with Avondale. Your line is open..

Good morning everyone, nice results..

Thank you. It was a good quarter..

Definitely. Bobby, I just wanted to get -- see if we could fine tune on your last comment there on acceleration of the sequential decline of ICD-10 into 2016.

Doing a nice job rolling out new products and offsetting that, but is there a way you can give us a little bit more color in terms of how to think about 2016, might that revenue stream fall from say 13% of revenue to 86% of revenue on its way to question mark that -- that's what I'm really trying to figure out.

And I know you're not going to give full 2016 guidance for February, but can you tell us how you're thinking about that because obviously you have better insight into that, at least the contract flow than we do..

Yes, so a couple of things and you're right to observe that and we've tried to provide just absolute clarity within this year each quarter, quarter as always we guide in February as you know and then we update every quarter and now we're left with one quarter, and given a pretty targeted number for that quarter of $6 million.

And we have also carefully advised and think everyone should thankfully -- thoughtfully process that we expect the rate of decline to be much faster as we enter next year.

However, without the full context of the offsetting products which are new in the market, the full context of the budget cycle we're in now and all the other growth products we've decided that it would be counterproductive to provide guidance on a single revenue component of our entire business.

And so we're going to wait until February as we've done for 10 years to provide thoughtful, complete guidance on the company which will have all the ins and outs of all the product lines, including within this category much more great and thoughtful detail.

We're in the budget cycle now approving the investment as we enter into next year and we've exciting new products to offset it. And so we think that at this time we need to not guide on a single revenue line in our model but we need to wait as we have always done for February to provide comprehensive 2016 guidance.

I will note though that analysts need to be -- continue to review their thoughts on how this product came in and will go out of our system, looking at the early ramp period which were are fully disclosed back in late '13 and '14. Think about the two-year cycle that was in the contracts.

These were shorter-term contracts now they were extended multiple times as the Federal Government moved the deadline but we are post deadline now and we're not seeing growth out of that single line item revenue. Obviously it's in it's I guess third or fourth quarter of sequential decline. So I'm sorry that's all the color I'm going to provide today.

I know there's going to be a lot of questions about that. Most of you have modeled it in a decline for next year and made your own assumptions. I think as a group and as a category we're going to have to wait until February so that we're through the full analysis of the full picture of 2016 guidance for the full company..

Okay, I appreciate that. And just my second question that would be on Echo. Can you talk about the build out of the sales force and kind of remapping or rebranding those combined businesses and based upon the markets that you're selling into.

How do you feel about that business as good as you did two quarters ago, better, and how do we think about that business kind of growing over time if you can give some color there?.

Well, a couple of things that are just kind of important to note. One, we haven't quite figured out yet although we talked to all of you in the market about coming up with a new metric that's more encompassing of our overall growth picture than the AIRS which represents our Workforce Solutions.

Actually, the SaaS based subscription products of Workforce Solutions as a metric. And so we're looking for, and I want to put this out there to capture our other two segments in a more comprehensive metric we've been thinking about revenue per hospital or new ways to create proxy's to revenue per subscriber or bed size or facility size.

And so it's a bit we don't have as clear guidance on those growth trajectories for the Echo Company.

However, we're very optimistic and excited under the leadership of Michael Sousa, the newly appointed President of that Group, we have a robust and visionary roadmap for that segment including posting of new sale hires, Michael is a growth oriented executive and we've been through the integration process now for about nine months and we're turning our attention to growth and we have great opportunities there to both introduce new derivative products which I think you'll see growth in that segment come from leveraging the assets across all of HealthStream into new derivative products.

The credentialing, privileging, provider, enrolment, and contact center management, is kind of these are all gatekeeper type of products for the healthcare workforce. They all sit on the frontend of the process determining the qualification of the workforce.

So as I feel we think there is no greater area of promise than to help healthcare organizations select and get the right workforce in their organization and this credentialing, privileging, enrolment, and early contact center work that we do there is vital to being the front door to the quality -- keeping quality and healthcare.

And so I think there is a lot of promise in that product line, we remain as excited as we were two quarters ago. The executive in charge of that group has a Board supported growth plan that includes beginning to hire sales organization really right now. He has just selected and hired his COO.

And they together are going to begin to ramp their sales organization and their development organization as well. So you will see increased investments in this area of our business.

But kind of categorically if you think of our Talent Management and Workforce Solutions segment as post-employment, there is some pre-employment dimensions there like recruiting center, but this has a particular focus on the early stages of the workforce and determining their capabilities to be a high quality provider.

So we remain just as excited as we were two quarters ago..

Thank you. Our next question is from Matt Hewitt with Craig-Hallum Capital. Your line is open..

Good morning. I want to echo the congratulations on the strong quarter..

Thank you..

Couple of questions. First one follow-up on ICD-10, and then, I want to move on that. First on ICD-10 how should we be thinking of the crossover, when the readiness solution contract are rolling off at some point you're going to reach a period where you're crossing over with the new Precyse DNA contract.

Is that something that will occur in 2016 or is it two years out and I'm just trying to think about the ramp as the revenues came on and then the contract extensions.

And at some point I just don't know if it's '16 or '17 you're going to reach that crossover point and if any granularity you could provide there would be very helpful?.

Well, yes, so first as I noted that there are no new sales of the preparedness product going on, any customers that's even interested in that product we're showing the DNA product to now. And we're both using that to sign extensions for people that just want extensions on their base contract and will give them a year extension.

We're also selling brand new under multiyear agreements. And their challenges around replacing the revenue stream of preparedness because those contract life spans are typically short say two years whereas the DNA contracts are three plus years.

And so, if you do the same dollar value of orders in a multiyear contract it gets spread over more years and so it has lower offsetting ability. So just to be clear it won't, in the near future next several years it certainly won't offset the declines in ICD-10 preparedness product. And so that's about all the color I can give right now.

We've given exact numbers for the fourth quarter and we'll provide a lot of detail on next year, but I would make sure you thought carefully about your model and the fact those are two-year contracts that they are rolling off now at a faster rate.

Remember also that ARIS will have pressure on it as well because approximately 7.5% of our subscribers is one reasons we added so many subscribers in last two years were only on the preparedness product and we're doing everything we can to cross-sell them into DNA and on to other products as well to keep them as customers.

But now just given the nature of that and the time remaining there will be fall off in the percent of our subscribers that are only ICD-10 preparedness customers.

You know just its -- I'm not excited about that but it's also, in many ways a demonstration the power of our network that this federal mandate create an opportunity, we were able to seize it completely, and be market leading and the ability to deliver to deliver the solution to our network.

We've been able to cross-sell customers and we have new exciting replacement products already in the market. And so it's generally the new category of revenue for us but it will go into sequential and more rapid decline as we enter New Year and unfortunately until February that's all that I can say..

Okay, thank you. One additional question regarding the investment, you guys you had talked about in advance you continued to make those investments to launch the product some of which we've seen, some are coming.

A couple of times during the prepared remarks both you and Gerry mentioned that this investment is going to continue through Q4 you were almost specifically talking about how it's going to launch or continue ramping through Q4. But I guess in the past you may be talked about a period of investment.

Should we read that to mean that the rate of investment is going to slow in 2016 as these products are launched and that you'll kind of revaluate at that point or should we anticipate that 2016 is another year of elevated investment?.

We've couple of things in that area. First, remember our guidance was originally negative 25% to negative 35% operating income growth over prior year. So we did expect to invest this year at a higher rate than we actually have executed, because now we have revised our guidance to a new range almost 15% to 25%.

So we've given a whole new range because we simply can't invest at the expected rates fast enough although we have over 2 million in projects that we've approved in the last 100 days to accelerate outsource development because we won't able to fully hire all the people we expected.

And so we're boosting our temporary workforce to try to get the work done that we had planned on doing. That said we will not be able to fully invest as we had planned this year.

So I would imagine some of that increased rate of investment will carry into next year because we have not been able to fully deliver the full investment this year we planned. And so that's probably the best way to characterize it that we would seek continued investment into next year..

Our next question is from Ryan Daniels with William Blair. Your line is open..

Yes, thanks for taking the question. Bobby, I'm curious to get a little more color on the new user experience and I guess specifically with the early adopters are you able to track mobile use or the time it's taking the complete course where they kind of validate a better workflow.

And then second part to that, the expectation that that will increase demand for content on the platform because user friendly and workflow friendly and if that can help longer-term areas as we look forward? Thanks..

I do think the new UI will be very helpful to our overall positioning, competitive positioning in the market. Certainly there is a increasingly a mobile workforce through both positions and the new millennial's as they enter the workplace. So being mobile enabler responses on it is a critical comparative element.

So we're pleased to have over 1.8 million customers using that interface. We are able to see utilization although I don't have those numbers in my fingertips of the new mobile component.

So we can tell when people login from a phone or an iPad or an android device and have been given a few of those updates in last month or so I don't have in the tip of my finger, so I won't try to quote them. But we're seeing identifiable mobile utilization come into the network now.

I mean before as browser base so and it's a little harder now with the new UI we code it in a way that we track and can see where the content and all is being consumed. I don't have any date yet on accelerated content consumption.

That is more of a function of the content design itself and so it's important to note now that our over 50 content partners need to design or sponsor design content to be fully compatible. And so that's going to be a long journey for them to optimize their content.

We have made sure it's kind of backwards compatible with old content but at the same time they would greatly benefit from a redesign of their content over time, and that will take them time, each organization goes through its own process of becoming mobile enabled and particularly sponsor design.

So no particular data on speed to completion but definitely a broader satisfied user base addressing a greater set of needs including physicians that remotely access more to their phones and the new millennial workforce..

Okay. That's very helpful color. And then, I was a little surprised with the strength in the patient experience survey growth in the quarter. You've been talking about the client loss at year-end '14 for a while and I thought that could turn negative, I think you had expected that.

Was there anything in particular that drove the outperformance there or anything temporary or bigger new contracts, how should we think about that?.

Yes, and so there is an area of particular performance in those product lines, the clinicians and group surveys, the CG-CAHPS survey group has been doing really well. We've introduced improved modalities of surveying mobile and e-surveying as well to help that area.

We're going to see a greater use of e-surveying instead of phone surveying as we move forward although all will continue to grow. We are pleased to be able to increase our guidance in that area initially it's come in the 3% to 5% range and now it's up around 7%. So we've been able to boost our expectations just within this year.

So there is a lot of kind of steady improvements here and there, and we've got a lot of work to do in that area and a new leader as we may have mentioned in the last couple of conference calls that is really helping energize and organize that area of our business..

Okay. Thanks. And then final question I want to talk about one of your performance metrics as well as you talked about ARIS perhaps having a little less meaning as it doesn't include the provider services and reflect what you're selling to hospitals.

I'm curious what's your longer-term thoughts are on the net subscriber ads each quarter because as I understand it, that doesn't really give the company any credit from selling platforms like HCC or HPC or Checklist et cetera into the existing HLC client base.

So how should we or how do you as a management team think about that net subscriber count and the value it adds today versus may be three or four years ago that allowed other products to cross-sell?.

Yes it is a little tricky because it's under pressure in a couple of different ways. And denominator for example we do expect a falloff from the ICD-10 preparedness products and that will pull both some revenue out of the top but also start to pressure that net new subscriber number as some of them falloff.

And so overall the ARIS is still relevant obviously and it does pick up the cross-sell by when we sell more say the Checklist management solution into the existing base.

But on just focusing on the numerator or denominator it may not you have to think hard about what it's going to say in the next year because it will be under different pressures from different directions overall.

And so it's not quite as meaningful as it's once was although for that area of our business which is we now have two other segments it is still an important indicator the fact that it is under pressure is important itself..

Okay, fair enough. Thank you..

And so one way to think about it too is I used to give a number and have actually always said it that we targeted 20,000 to 50,000 net new subscribers every quarter for I mean I think I've said that now for about five years. And obviously the last couple of years we just kind of blown that number away.

One of the meaningful contributors to being out of that range was the ICD-10 preparedness federal mandate. And so as you've seen these last two quarters we've kind of returned a little more to that range that 20,000 to 50,000 range from a net new subscriber standpoint.

That doesn't mean however we're not selling, tens of thousands subscribers on HCC, HPC, Checklist because that would only show up in kind of the aggregate score..

The next question is from Richard Close from Canaccord Genuity. Your line is open..

Great. Thanks congratulations. Just a follow-up on a couple of Ryan's questions I guess. With respect to when we think about the DNA contracts on ICD-10, I think you said 21 contracts were signed in the quarter; $2 million in revenue are contract value associated with that.

I think that's about half the value of what you stated in terms of last quarter on a cumulative basis I think the number was 35 contracts for $6.4 million in value is there any -- how should we think about the size of these new contracts?.

In the last -- in the prior quarters we had one big health system that was on the preparedness product move to DNA. And so it moved that contract order value pretty materially. Also that wasn't just one quarter data I think that was a cumulative set of data over a couple of quarters that was the six man order value.

So we actually feel really good about the pipeline in fact I got an email early this morning from my Head of Sales that the pipeline is catching up in size and scope to the CECenter pipeline which is another really hard product for us.

So we remain excited about it when a big system moves from that product or adopts that product you'll see spikes in total order value because again if a big system comes in and buys two or three years were across 100,000 plus subscriber it's going to move a needle on that that reporting period.

Watch one reason we never reported NOV we just said in this one area because of the preparedness level detail we gave around this ICD-10, we've given little more detail about order values. We will probably revert back to just focusing on GAAP and revenues in the future. But we want to show you that the contract velocity is good.

And remember that last number was a cumulative cover to couple of quarters this is just one quarter. So good contract velocity, good pipeline, the one reason is a little bigger in prior quarters because we have one big health system kind of sink its teeth into the new product which we're really excited about.

And the pipeline again is showing the same kind of strength as we're seeing in CECenter now from a both velocity number of contracts and a size. So we're pretty excited about it..

So as it relates the subscribers to Ryan's question I think last quarter you told us that 20,000 just solely ICD-10 subscribers rolled off.

Was -- is there any update that you could provide us for the third quarter what that number was?.

No, I don't have that number, it did drop off I don't think it's bigger than 20,000 but it did drop off. They're getting to be so many component to ARIS like about two dozen, that's hard to pick which ones to talk about. So we're just looking at the aggregate metric now and we're going to stick to that until we comp with a new metric.

So but it did there was definitely some PO off, there was some cross-selling as well, and so but and I don't have that number exactly this time we had in last time but..

Okay. And just a follow-up on some of the products obviously you have a lot of new stuff out there either in the market recently or expected to come to market, you didn't really talked that much in terms of I guess CECenter or Checklist manager or management.

Do you have any steps related to those products that you could provide us as you did last quarter?.

We've kind picked one or two products to get a little detail each quarter. So I didn't deep dive to those product managers this time. They all continued to show good momentum I mean it's part of our growth rate we reported that 15% overall ex-acquisition growth rate. And in the Workforce Solutions as you noted several of them are 20%, 30%, 40% growers.

And so Checklist fits those -- that category. Although I don't have the detailed numbers on, I gave the more detailed look at the HeartCode Resuscitation products this time instead of the Checklist. But we've got a lot of great products that are just going to be steady contributors as we move forward and growing sales organization is taken to market..

I guess my final question would be for Gerry. In discussing the operating expenses, sales and marketing was significantly below what we were looking and I was just curious what the sales and marketing compared to what you guys were thinking internally.

I know you're trying to ramp up sales force and whatnot, but any clarity on that whether maybe we were aggressive in our assumptions for the third quarter and you were focusing in on really more investment in the last four months of the year, or just is that more of a timing thing or was there anything that was maybe I guess out of whack for you guys in the quarter?.

I'll try to explain what the sequential changes in Q2 and Q3 were that might help give some clarity. So first of all Q2 at summit that we discussed in the last and then did recur again in Q3. So that will be one difference. Part of the body's star contribution to employee occur at Q2 in that category on the expenses.

Commissions, there's some deferred commissions at time to time you have those in Q2, but not Q3 because that's more of a accounting timing convention. But also the rate of -- those are three particular things, Richard.

A general comment has been a lot more attention these in the last couple of quarters about product development investment versus sales but we do want to still increase the size of the sales force obviously..

Just a little more color on the sales force, even without considering the sales position that are posting in Echo product, the Echo company, we've got about 10 open sales and marketing positions currently, probably there are a few more that even be posted.

So about 10 open, four of those are in revenue cycle, one of Post Acute, one in clinical solutions, one in talent management, and two or three in lead generation marketing team.

So we've got several open positions hopefully before as we do every year we try to ramp up the sales organization as we had and get ready for January's national sales meeting. And so you can see there. And in addition there will several posts in our website for hiring an Echo, then strengthening the sales team at Echo..

My final question, Bobby, would be I think November is the timeframe you do a deep dive with your board in terms of the upcoming strategic initiatives for the company, and as you enter the closing of the year how would you characterize the company's position and growth opportunities as you look out over the next two years, as compared to maybe in the recent past?.

Yes, so some areas under a little more pressure obviously we had a very opportunistic period here around the ICD-10. And we've got to work through that but we have an huge and exciting pipeline of new products to kind of carry us forward.

Some areas we're experiencing more extreme competitive landscape like the pure software sell to HR, there are probably two dozen different competitor selling parts of the talent management platform. So that area is very competitive.

That said, the way we bundle platform up into solution, the solution selling groups now, revenue cycle, compliance, simulation, resuscitation, provider solutions, and patient experience solutions, those are the themes that we think are critical to success in the macro environment of healthcare.

And we're on those themes and we're aware of the new trends that are coming and even have new products in other areas like we mentioned readmission and the work with Duke.

We're moving our attention to using data and manifesting data, turning it into information, making a part of solution sets whereas in the past there's more platform and content only.

And as we look forward to the next three years, you can see now two new products where data being turned into information is a core part of the value proposition on a go-forward basis. So at our retreat which we just held on September a lot of discussion around this kind of more comprehensive view of being a solution provider.

And so I think we're focused in the area of greatest need around the workforce. There are workforce challenges on tremendous, the need for a more competent engaged and qualified and pro forma workforce has never been higher, and we're at the heart of how that actually happens. So we don’t just analyze it.

We help organizations get an outcome of out their talent. And I think that's different than just selling software to organization and saying good luck with your talent management.

We come in and we say we can help lower the cost of your compliance, we can help improve your resuscitation outcomes, we can improve your patient experience scores, we can improve the quality of your inbound workforce through more efficient credentialing and privileging.

We’re really helping solve the problems of healthcare which are enormous and at scale. And so I think this next generation HealthStream which brings data into our element of our value proposition we're at a critical, an important and exciting inflexion point.

And there's a lot of discussion around how to accelerate those elements of our business model to create value from them for shareholders. And we're excited about that challenging because it's a new era, but we are very excited about it and we think very well-positioned with a lot of our work on the new UI.

We're glad to have that deep into the market now so that we can turn our attention to refining new solutions by KnowledgeQ and DNA..

Our next question is from Scott Berg with Needham & Company. Your line is open..

Couple of questions quick ones for me. First of all, Gerry, you moved up your CapEx assumptions for the year, its $1 million, $1.5 million at the midpoint, so it's not a significant number but it's not that kind of catch my eye.

You talked about what the additional investments you're expecting kind of in those categories this year?.

Hi, yes, it's probably two things one a corollary to the idea of prior development, there will be more capitalized software going to the balance sheet as part of a financial accounting treatment.

The second is we did add some extra capacity around the -- to be prepared of the ICD-10 deadline, anticipating may be a spike in user demand and access pre October 1. So those are the two major differences for that $1 million difference or so..

We have also put in some new renewed focus on security and put in some hardware infrastructure for better and improved the security as well. So we made some important investments and infrastructure recently which we're glad to have done..

Great. And the last question for me, Bobby, you tackle it a little bit or a couple of questions though. The Patient Experience segment saw a meaningful outside growth is the start of an uptick there in that business it's been a little bit slower the last couple of quarters.

Is the increased usage in demand that you're seeing there you think sustainable more than just third and the fourth quarter or you see in the back half of this year or is this something that you kind of help to accelerate that business into next year?.

I don't know, I think we will finish our budget process and make some real final decisions about the next year. We have new leadership of refreshing products and so we have new reasons to be optimistic about our competitive position as we enter next year. But we also have the drag of the legacy of the low growth.

So I'm not quite prepared to say we've got that on the hook yet. But we directionally it's going in the right direction and we're really excited about the way the leadership team is now organized to set it up for growth. And the same thing is true of the Echo business line and we've acquired two businesses combined them. We have great leadership.

We have a great vision and roadmap, but they are early to execution and we're really excited about that area. So those two segments we're optimistic and we feel great about the teams running them and they are well-positioned.

But we've got to finish the year out and think hard about the timing of the impact of these teams and people on new products and of course provide a detailed look into that in February..

Great. That's all I have at the moment. Thanks for taking my questions..

Thank you. Our next question is from Steve Rubis with Stifel. Your line is open..

Hi thanks for taking my questions. Thanks for talking about the ARIS metric, I won't ask a question about that since you sufficiently talked about it. But what I would like to ask about is the ICD-10 product specifically the Precyse DNA.

Can you talk a little bit more about what types of hospitals are your likely customers are these small community hospitals are they larger hospitals? How do you view new RCM players entering the field impacting this opportunity and then why does the Precyse DNA second generation solution work given that you're not an RCM provider or EHR provider?.

Yes, so may be take some of those backwards. I mean the first thing is why does it work given we're not an RCM software provider and so just to be clear we do not plan to get into the revenue cycle software business where you're actually providing the software that manages revenue cycle that's not a plan of ours from a competitive landscape.

We plan to focus on developing the workforce that's in the financial department in a way that they are knowledgeable and skilled in the areas of responsibility.

Coders are key part of that area of responsibility and we plan to have the very best tools and resources to assess the quality and confidence and knowledge of that particular part of the workforce. And so we don't plan to be in the revenue cycle business. We plan to be in the development business for the workforce in revenue cycle.

So I do want to make that clear. And DNA is simply the best product to do that.

It is a thoughtfully created by our partner Precyse based on a long history of knowing what makes for quality coders, you may recall they provide themselves a revenue cycle company and provide an outsource workforce of the highest quality and more knowledgeable than even the existing workforce in hospitals.

So their programs are designed to train their own staff to be the top rate best quality workforce in the industry and we've now commercialized that into a product set. So we're well-positioned also to use a data in unprecedented way.

So we've aligned the assessments of the workforce with the risk areas of upcoding and undercoding so that we think that the training we're providing has likely correlation with areas of identifying risk that could occur from people making mistakes in coding and so the use of data at the scale that we have it is unprecedented with our partnership with Precyse and so we think we're best positioned.

And finally the products in the category expanding and so for example we've invested real capital almost $0.50 million with Precyse to build an entirely new product set around case managers and this is a great area of need to train and develop and assess the quality of your case management group.

And I was recently at a large HealthStream said that over 2,000 case managers that needed training. And in the first quarter of next year, we expect to announce a new product line with our partnership in Precyse focused on case management and training the case managers.

So and there is other products that haven't mentioned is well do out in the first quarter in this category. So we will have as many as four products in this category, the readiness product which is essentially retiring, the DNA product which is best-in-class.

I just mentioned the case management product which should be coming out in the first quarter and then some new partnerships that are going to have brand name recognition that I can't announce yet but will give us additional offerings to this financial department of hospitals.

So the competition in the area from an educational standpoint we're trying to co-op some of that competition and have them distribute through us and you'll see a little of that as we announce our new partners. Hope that helps Scott and you're still there.

Is that Steve, okay Steve?.

It's Steve. Sorry about that. I had unmute for a second.

The follow-up is can you talk a little bit about the customer opportunity base is it large hospitals, small hospitals, any color you could give there?.

Yes, sure. So I think the good news here is that kind of the midmarket and above where we're going to see meaningful needs here where they're trying to work with larger, they have got more ability to invest in area of revenue cycle management optimizing that workforce.

So I would say that medium and above we will still sell to the small market but I think that at system levels where we will see some of our sales opportunities..

Thank you. Our next question is from Nicholas Jansen with Raymond James & Association. Your line is open..

Hey congrats on the good quarter. Two questions first on just a follow-up on the DNA product. I think you're talking about $2 million in revenue for 2015 associated with that platform.

But you only have about $8 million of order value today and I think from my interpretation of your discussion earlier that $8 million is going to be flow through over multiple years. So just want to get a better sense of how are you coming up with that quick revenue for that platform.

And then on that point in the third quarter what was the revenue associated with DNA, so we can kind of get a sense of what 4Q looks like?.

Yes, so the full year revenue for DNA revenue would be $2 million. And we had about 6 million orders remembering these are say three-year contracts. And so if you can take 6 million orders spread over three years you're going to get about $2 million in revenue roughly.

But we also have some extensions of contract that converted quickly to DNA and so we're able to convert revenue which dropped the revenue from preparedness product and moved it to DNA kind of quickly, so those are -- and you're right in your assessment about $8 million in total orders spread across slightly longer-term contract than the preparedness products.

So it won't come as fast into revenue rec as the prior products. But your assumptions were correct. So $26 million of our $28 million in this category will come from preparedness, $2 million will come from DNA in this year, and then our total kind of contract backlog is now at about $8 million on DNA which is spread over multiyear.

So your analysis was correct..

Okay. That’s helpful.

Did you disclose the third quarter revenue number for that product?.

We didn't disclose the revenue; we kind of updated the order value. And so the cumulative year expectation in revenues remained at $2 million.

It's really hard at this point in the year to move that as you can imagine even if you sign big contracts, it would go over say 36 months you only get one month of revenue rec even if you signed it in November..

Okay. That's helpful. And then a more strategic question you guys do have a very ample capacity on the balance sheet to look at deals.

I know there's been some activity in the HIT arena during the third quarter, some of those multiples might have been outside of your price range or comfort zone but just wanted to get a better sense of how you think about deploying that cash on the balance sheet any areas within your existing product solutions said that you feel might be needing of weeping up a little bit to be more comparative.

Thank you..

Yes, so we definitely think across each solution area Resuscitation what we should we add, clinical development what should we add, compliance what should we add, provider solutions what should we add, patient experience so we do kind of go across those segments now and think about other nice additions to them.

And in each category we have at least a couple of ideas that we're interested in. Now you're right to say the market is hard and multiples are high. So we're going to be careful and make sure that there is a really good strategic fit and a good case to be made for IRR and be disciplined investor.

So we're not afraid of paying a high multiples that we think we can get a return. Our history has been on the conservative side. We expect to remain careful and thoughtful in our analysis to make sure that we can get the appropriate leverage out of these acquisitions into our network.

We do have more of an ecology effect here where we can lever assets into our network and we're excited about that so it give us the opportunity to think about revenue synergies and opportunities for smaller companies into our network. And so we have a good pipeline across all the segments. We also may have a history of minority investments.

I think over three of them now where we've taken minority stakes in small innovative companies.

Juice Analytics is our favorite example but there are others where we bolster our technological capabilities by taking minority investment, securing the right to the technologies we need for our vertical for healthcare while allowing those companies pursue growth in other markets as well.

So both minority investments, acquisitions that fit our segments, and again we have opportunities in each segment that we're evaluating. And we expect to maintain a same kind of discipline although I would say we're willing to pay if we think that fit and leverage as appropriate..

As always Bobby takes all the caller..

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

Hey, good morning. Thanks for squeezing me in. Just one question for me and just dovetailed off some earlier comments Bob you made but I wanted to ask about KnowledgeQ and the other control center solutions. So for KnowledgeQ the announcement you mentioned the ability for hospital to reduce cost associated with their training program.

Can you give us sense for how impactful that is in terms of the cost for the hospital client? And then also just generally how are you approaching the pricing strategy for KnowledgeQ and some of the other control center solutions that have an analytic component compared to some of the legacy products that don't have a analytic component?.

Right. So great question we're excited about this product. So the first thing is on the approach to cost savings so really interesting but what we've done is we've taken a Bureau of Labor and Statistics data set and stood up alongside of our data sets.

And customers can elect to import their own data set as well into the benchmarks if they want to do more detailed cost analysis. But built in the KnowledgeQ as a whole analysis thread on the cost of running your annual mandatory compliance program and that’s never been done before.

So if a customer is utilizing this product they get kind of a running investment scorecard, calculating hours spent and time spent and applying labor rates at different types of positions across their hospital. So it's like a built-in ROI or cost calculated is running and as we accumulate more data that benchmarks will become more meaningful.

And then overtime of course we show them how the configuration choices that there are numerous choices they make when they run their compliance program can affect costs. And so the idea as to give them the data to adjust the configuration changes I will give you one example.

We've just entered into a two year agreement with a large health system under our research team have a team we called a living labs team and we’re going to use actual cost data the tool set of KnowledgeQ and we’re going to look at how their policy decisions in compliance affect their cost of their program and will be using the tool sets of KnowledgeQ to help them to manage and actively understand and make policy level decisions for example how frequently should people be required to take mandatory’s how long is it before knowledge starts to drop off before they introduce this new risk.

When you decide how many courses to assign to someone is that based on data or not? How do you set your testing thresholds so you can test people out of content by setting testing thresholds higher lower and the data will help and inform that and obviously someone test out of course by scoring a 99 they don’t spend two hours in the course which saves time and money.

And so the idea of KnowledgeQs to given the data to make those types of policy decisions and we've just entered into a new two year agreement using KnowledgeQ with the large health system to help manage the cost and understand the nature of their investment and their compliance program.

And those tools now that their built or available to Precyse to add those kind of cost calculators into their DNA product. And so there is a leverageable architecture, once we stood up the [indiscernible] of labor and statistics data set and make it available into this tool set.

Now, other partners can build into their control centers these cost calculator. So we are out actively promoting the control center technology to associations to our 50 content partners so that they two can release date driven products.

As far as pricing, KnowledgeQ is a separate product, there is an upgrade path from our current annual mandatory courseware library but it requires a additional subscription to buy the new mobile enable regulatory courses and the new control center powered knowledge queue products so it's kind of there is for existing customers there is an upgrade path for new customers it has the higher price point then the old what we use to call the regulatory library, and so because it's so much more powerful now with the data as I mentioned..

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

Hi guys, I’ll keep you short. Just Bobby, may be just an update from your perspective how the conversion of the readiness clients is going moving them to DNA, I don’t know if you got any sort of expectations, targets on your side but just an update there..

We do, and end one thing I want to see what happens of course is this fourth quarter lot of the contracts as you remember the – deadline were extended through just path the line we just – into the fourth quarter.

And it will be interested to see how many of them are in a kind of coding crises where they know they need something they got continues what they are doing and the product we’re offering as DNA.

So I like to see an uptick in the rate of sales on DNA in fourth quarter give me confidence as the people face the decision of just completely dropping and thinking about coding as a one-time preparedness investment, will they make the shift in the fourth quarter it's as saying we need this in the ongoing issue for us and you should know that we’re 15 years into ICD 9 and you know until few weeks ago we were still training on that area.

So this is a continuous issue of managing the excellence of this workforce and we think this product is well positioned.

One thing that I just don’t know yet is we know it will have be a steady and successful product because its level of innovation is unprecedented but one question I have is will conversion rates step up in the next couple of months because people face the reality of being under ICD 10 and dropping their preparedness products.

So I’m a little bit optimistic that we’ll see an uptake in the rate in the fourth quarter but since it hasn’t happened yet, we’ll report on that on February..

Thank you. And I’m not showing any further questions. I’d like to turn the conference over back to management for closing remarks..

Thank you for everyone participating, congratulations to our employee on delivering an excellent result in the quarter. I know you’ve been resource constrained as we tried to get the hiring onboard. We need to get the job done, so we've tried to free up some additional capital to help you get projects done that you under do, so.

Thank you to our investors who followed our story and followed the challenges and opportunities of Health Stream. We look forward to reporting our next quarter and full year guidance in February for ’16. Thank you all and we’ll see you soon..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day..