Mollie Condra - VP, Investor Relations and Communications Robert A. Frist, Jr. - CEO and Chairman Gerry Hayden - SVP and CFO.

Matt Hewitt - Craig-Hallum Capital Jeff Garro - William Blair & Co. LLC Peter Heckmann - Avondale Partners Nicholas Jansen - Raymond James & Associates Richard Close - Canaccord Genuity, Inc. Claire Mencke - Sidoti & Company.

Good day ladies and gentlemen, and welcome to the HealthStream Fourth Quarter and Full-Year 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’d now like to introduce your host for today's conference Ms.

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 fourth quarter and full-year 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 CFO.

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

Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the Company's filings with the SEC, including Forms 10-K and 10-Q. So with that, I’ll turn the call over to Bobby Frist..

Good morning. Welcome to our fourth quarter, full-year 2015 earnings conference call. We have a lot of ground to cover this morning and I’m excited to dive in. Compared to the prior year, 2015 top line revenues increased 22% to $209 million. While adjusted EBITDA for the year was up 17% to $33.8 million.

It’s also a point to reflect that, importantly we’ve passed another financial milestone in the fourth quarter of 2015. We produced positive retained earnings for our shareholders of approximately $1.6 million.

We ended the year with a strong balance sheet of $149 million in cash and marketable securities along with a $50 million untapped line of credit and no long-term debt. And we reflect it a bit on this strong capital position entering into ’16 and thinking of the ways to deploy it.

It allows us to utilize multiple strategies for creating shareholder value into ’16 and ’17. Of primary area of course is developing and launching new products. Second to that pursuing an active M&A pipeline and third you may have seen in our announcement in the headline that we’ve established a share repurchase program.

All three of these we expect to be able to pursue simultaneously as we enter into 2016. We continue to invest in new product development to drive organic growth with releases on new software and product releases.

In fact, this is a period of great innovation and product introductions for HealthStream, really proud of all that has been built and launched in the last 12 months, but also looking forward to a series of new products in the next 12 months.

With product releases like our new user experience, which now has over 3.3 million subscribers on the new user experience, the Precyse DNA product earlier in the year ’15 and the more recent KnowledgeQ which is a data driven outcomes focused product, one of the first of its kind, all released in 2015.

We also have exciting pending releases in the next few months, areas of organic investment and development. We expect to release a program called the Nurse Residency Pathway program. We’ve been in development in this program for over a year, working with organizations like Stanford to develop a new Nurse Residency Pathway program.

Correspondingly, we were launching with Duke University a Frail and Elderly Certificate program. This program is targeted to the broader market space, including ACOs, hospitals, and homecare organizations, because it’s focused on transitional care moment.

So it’s appropriate in the new healthcare environment to launch programs that facilitate the reduction of readmission risk and a program that’s specifically targeted to the pay for performance models that are emerging. I’m excited to also enter 2016 with an active merger and acquisition pipeline and we’re continually evaluating opportunities.

In the first quarter of this year we’re seeing an influx for sellers across all three of our business segments. And we stated previously that we’re open to a range of different types of opportunities as we think about M&A.

Those that help us gain market share in any of our three segments, those leverage our customer base and our platform, and even new technologies that may accelerate launching of new product concepts into our networks. So, new technology platform or component pieces that could accelerate the adoption and ever widening use of our platform.

Finally, the Board approved and as far as capital allocation, the Board approved a share repurchase program and that gives us another means of utilizing our capital position to help create shareholder value. You may have seen that it’s about a $25 million program.

It’s a management discussion program throughout 2016, so we hope to be able to acquire some shares throughout the year. In the last three years we’ve described another important area that I think I need to cover is the business opportunity associated with ICD-10.

This is a deadline driven, industry wide initiative and as early as three years ago we mentioned that it would create a bullish type of revenue stream for the Company. Now with the deadline past us we’re on the back side of this financial opportunity.

The great thing about this opportunity was that HealthStream was able to play a major role in preparing the U.S healthcare workforce for this federally required one-time transition to the ICD-10 coating system.

We were a part -- played a role in preparing of a 1.8 million healthcare professionals and generated total sales to the Company of approximately $78 million associated with this opportunity. Having pass the transition deadline and after many delays with the deadline by the federal government, we pass the transition deadline in the fourth quarter.

And we can now better quantify the decline in revenues from this product category; we call the ICD-10 readiness training product category. So we now expect that this will decline approximately $20 million in 2016. And what’s really great about this was, one it show the power of our network.

When an opportunity presented to us, we were able to seize it and be the number one provider of this form of training to the nation’s healthcare systems.

And the other thing that’s about this, that I think is exciting about our business model is that even with this $20 million decline we’re still anticipating annual growth next year 2016 of 8% to 12% with all these great product introductions and the existing portfolio of products.

So 8% to 12% expected growth rate inclusive of a $20 million decline of this ICD-10 readiness product. One part of the successful transition into ’16, given such a decline was our longer term strategy around ICD-10.

Now that we’ve established a new buyer in the financial department of hospitals, the director of finance, the VP of finance, we now have introduced a series of products also in conjunction with Precyse, that target the more ongoing needs of revenue cycle management and the continuous preparation of the coding workforce in healthcare.

So we’re pleased to report that our new ICD-10 product, which is not oriented to the one-time event of preparing the nation for those switch, but its called the Precyse university DNA product and its targeted more to the ongoing training needs of this financial department, specifically the coders and revenue cycle associated people.

It’s performing very well. The DNA is the follow on product to the ICD-10 readiness solution. The DNA product as we call the Precyse DNA product, is a data driven product. It leverages our partner Precyse's coding expertise, but also HealthStream’s proprietary control center technology.

If you flip back a few years ago, we made capital investments in organization called Juice Analytics and went about developing new analytical frameworks that could connect to our backbone of 4.5 million subscribers and the Precyse DNA product is one of the first to take advantage of that backbone technology, we call control center technology.

So it’s exciting to see that product do well in the marketplace. And it also provides a back filling effect a little bit to the loss of the $20 million ready -- readiness revenue as we call it.

This control center technology that’s built into the DNA product is also now part of our new KnowledgeQ product and while that product is new and only generate a few sales, its building a great and strong pipeline of interest across larger health systems. So we will be excited to report on that throughout the year.

We’ve offered our -- with this new technology infrastructure, we’ve offered our partners and HealthStream the ability to launch new products that are data driven, allow comparison against national benchmarks and DNA as a product it does just this.

It allows the hospitals and healthcare organizations to benchmark the quality and confidence and knowledge of their coding workforce against the entire nation’s workforce, giving them outside -- an inside and outside look at the quality of their workforce.

In the fourth quarter we signed additional 16 new contracts for DNA and cumulatively since its launch in Q1; over 82 contracts have been signed for DNA, representing over 12.4 million in order value.

So we’re excited to get these new organic investments into the market, some of these new backbone technology is starting to manifest into new products and we look forward to ’16, because we think these new products have the potential to save money and save lives and really change the way the industry thinks about managing key initiatives.

With those elements as background, and share repurchase program, the active M&A program, the investment organics, strong balance sheet, good year-end financial performance, we’re not -- we are up against some good headwinds with such a drop off in the $20 million from that specific product line.

But we feel like we’re fairly well prepared for it and we’re excited about as we enter ’16 with such a great arsenal of new products and a strong war-chest [ph] of capital. I’d like to turn it over to Gerry to address the detailed financials..

Thank you, Bobby, and good morning everyone. I'll provide some color to our financial results including certain items that affected -- that impacted the quarter. So for the quarter, consolidated revenues were up 23% to $55.9 million. Operating income was down 56% to $1.9 million.

Net income was down 22% to $1.8 million and earnings per share was $0.06 compared to $0.09 in the fourth quarter of 2014. Adjusted EBITDA was down 4% to $7.3 million from $7.6 in last year’s fourth quarter. Let's look at four areas of our income statement, including, revenue, gross margin, operating expenses, and operating income.

I will also take a few minutes to explain our lower effective income tax rate that we experienced in the fourth quarter. Revenues. Consolidated revenues were up 23% in the fourth quarter with contributions from each of our three business segments, Workforce Solutions, Patient Experience, and Provider Solutions.

The Workforce Solutions segment performed well again in the fourth quarter of 2015. This business segment is comprised of applications and content solutions which are primarily SaaS subscription based and are targeted at improving the healthcare workforce.

Revenues from our Workforce Solutions segment increased by $6.9 million or 19% when compared to the fourth quarter of 2014. For example, HeartCode which is part of Resuscitation Solutions grew by 31% year-over-year.

HealthStream’s Patient Experience Solutions provide valuable insight to healthcare providers to meet CAHPS requirements, improve the patient experience, engage their workforce, and enhance physician alignment. Our Patient Experience Solutions segment increased revenues by 6% over the fourth quarter 2014.

Revenues from Patient Insights Surveys, a survey research product that generates recurring revenues, increased 9% over the fourth quarter of 2014 with 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.

We were pleased to see our Patient Experience segment perform a little better than our earlier guidance. A faster uptick of CAHPS in attrition rates lower than our projections contributed to this slightly stronger performance. The Provider Solution segment, operating as Echo, a HealthStream company, continues to perform to our expectations.

By providing the software that is used to validate the professional credentials of potential employees, Echo products show as a gatekeeper for workforce quality in healthcare.

In the fourth quarter of 2015, revenues from our Provider Solution segment increased by $3.2 million, net of approximately $1.5 million of deferred revenue write down, which is the accounting convention requiring us to write-down beginning balances to fair value as that term is defined in GAAP.

Our gross margins, gross margins have been stable in the 57% range for the past year, but increased slightly to 57.7% in the fourth quarter of 2015. 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.

As we’ve mentioned in previous calls this year, our 2015 plans call for increased rate of investment to support the Company’s growth. Fourth quarter operating expenses reflect increased investments in several key growth categories, including product development and marketing.

G&A expenses also reflect the fourth quarter investment trend as this category was 14.9% of revenues versus 13.8% in the fourth quarter of last year. For example, implementation costs associated with our new financial management system are included in the fourth quarter G&A.

On a year-to-date basis, G&A expenses are stabilized at 2014 levels or about 13.5% of revenue when adjusted for $1 million in closing costs, we incurred in the first quarter of this year relating to the HealthLine systems acquisition. Operating income.

As I mentioned earlier, operating income was $1.9 million in the fourth quarter was adversely impacted by the $1.5 million reduction for the deferred revenue write-down relating to the HealthLine acquisition as well as the increased rate of investment in product development, marketing and G&A costs which we discussed a few seconds ago.

The fourth quarter effective income tax rate of 11.5% reflects the benefit of $435,000 of federal research development tax credits, because Congress renewed the R&D credits in December of 2015, we recorded the entire benefit in the fourth quarter of 2015.

The full-year [indiscernible] of 2015 of 37% is the same as 2014, which here also included R&D tax credits. Our guidance for 2016 effective income tax rates reflects the fact that Congress permanently adapted the R&D credit provisions in this year’s legislation.

Our balance sheet, as Bobby mentioned, our cash position and overall balance sheet remains strong and was reinforced by positive cash flow from operations as evidenced by a $7.3 million of adjusted EBITDA in this past quarter. Our cash balance at December 31 was $149 million, up from $145 million at September 30 of this year.

Once again, as Bobby mentioned, we’ve no outstanding debt and our full $50 million line of credit capacity is available to us. We believe our overall capital position is likely to support our organic and inorganic growth opportunities and support our share repurchase program, which as you know we announced with our earnings yesterday.

We continue to review and evaluate a variety of potential acquisition and business development opportunities in terms of strategic fit and valuation. Our share repurchase program provides additional avenues for creating shareholder value. Yesterday contained our initial guidance for 2016 full-year.

And as you may have seen, we anticipate that consolidated revenues will grow between 8% and 12% as compared to 2015, and the growth in our few segments will be as follows. Workforce Solutions between 2% to 6%.

Patient Experience 8% to 12%, and Provider Solutions 80% to 84%, revenues from ICD-10 readiness training which were approximately $26.8 million in 2015, our strategy declined by about approximately $20 million in 2016 and are reflected in the guidance range for Workforce Solutions.

It is worth noting that without the revenue impact of the ICD-10 readiness product in either 2015 or 2016, the year-over-year growth rate for Workforce Solutions segment will be projected to be between 17% and 22%.

For the year 2016, we anticipate revenues from ICD-10 readiness training to be approximately $7.3 million which we -- essentially comprise of approximately $3.2 million in the first quarter of 2016, $1.9 million in the second quarter, $1 million in the third quarter and $1.1 million from the fourth quarter.

We expect our full-year 2016 operating income will increase 10% to 14% over 2015. We anticipate that the capital expenditures will be between $14 million and $16 million and our effective income tax rate will be between 39% and 41% for this year as well.

These effective income tax rates reflect the permanent impact of the federal R&D credit that we just discussed a few minutes ago. This guidance does not include the impact of any other acquisitions that we may complete during 2016. So thank you for your time. I'll turn the call back to Bobby..

Thank you, Gerry. I thought I’d do a few more reflections before I turn it over to Q&A. And so thinking back about 2015, our mergers and acquisition program produced the largest acquisition in the Company’s history was HealthLine Systems in San Diego, California. So almost a year-end and I feel good about that acquisition.

We are still -- we’re pleased with the results generated under the leadership of Michael Sousa, and the leadership team he is assembling and the team that was acquired, there is a lot of great energy; the HealthLine Systems as you know was merged with SyMed, a prior acquisition.

Both of them found really good purpose and fit together and they’ve been rebranded as Echo, a HealthStream company. So we’re a year-end to that investment. It’s the largest in our history and we’re feeling really good about its potential and its actual performance.

For the fourth quarter of 2015, our metric that we call ARIS, the average revenue per implemented subscriber was $36.96, and that metric is reflective of HealthStream’s Workforce Solutions segment.

And so compared to last year’s fourth quarter, which is $34.43, there was an increase from a $1.14 per implemented subscriber over the third quarter of 2015.

So the ARIS metric showed a little bit of positive moment and if you think about something that drive that one example of product driving growth in ARIS, which is again revenue per implemented subscriber is CECenter. And CECenter is another product that we’re very excited about.

It was a strong contributor to the 20% increase in subscription based revenues when compared to last year’s fourth quarter. You may remember that I described the CECenter as a Netflix-like subscription product.

It’s designed to meet state license requirements for nursing and allied healthcare professionals with a library of approximately 1,500, maybe 2,000 courses by now. And we’ve seen continued momentum in this product, for example, we added 31 new accounts in the fourth quarter representing approximately 30,000 subscribers.

So we continue to see really good uptick of this product. It seems to be meeting a real need and help fulfill state license requirements. And in fact now we’ve over 290,000 subscribers on CECenter and a very strong pipeline entering into 2016. The activity CECenter is also very high, so our partners are excited to see that have content CECenter.

We’ve completed over 1.3 million courses during the short span of time and this growing product uptick. Our Resuscitation Solutions, which were also subscription based products, continue to perform strong and the HeartCode suite of products, in particular.

This product is focused on teaching resuscitation skills to healthcare professionals, advanced cardiac life support, basic life support, and pediatric advanced life support, known as PALS. And we’ve created that and launched that product with partnerships with Laerdal Medical and American Heart Association.

And so some of the most powerful brands in healthcare have assembled to really change the nature of how people are trained in resuscitation. Change the nature of the approach and most importantly the scientific evidence is now point to the fact that these HeartCode suite of products are changing the outcomes and CPR.

We’ve over 2.3 million cumulative CPR training certifications that have been completed through HealthStream now. So you can see that the product is having a broad impact of over 2.3 million certification processes that have been undertaken through the HealthStream offering.

So its really exciting to see, because in our heart-of-hearts here at HealthStream we know that this product is having an impact, so in conjunction with the American Hearth Association, Laerdal and our nearly 1,000 employees we take great pride in being part of a really changing a specific clinical outcome for patients in healthcare.

I’d like to close by updating you on a few other exciting items. The first is really been the pivotal milestone process, the transition to our new smarter user experience.

We announced that in just August and it took us almost two years of development in R&D to build that, that new -- essentially a new front-end, a new front door to HealthStream and this new user experience have been rolling out at a very, very rapid clip.

In fact, recently some of the larger health systems remaining in our network went live and we’ve crossed the 3.3 million subscriber mark on the new mobile enabled user interface. Customer feedback most importantly about the new user experience has been very positive.

The work flows have been simplified and the application is centered on the individual and so it’s really a workflow tool for the individual, helps them get through their required training and education.

It also over time become a gateway to our other products where items that may require action like to do’s or a calendar or scheduled events could appear in this new front-end, this new HealthStream user experience.

So you will see our other applications starting to flow data and information into this new front-end that’s now in our belief one of the most widely adopted SaaS applications in the marketplace at 3.3 million subscribers.

I do expect for the middle of this year, we will have an entire 4.5 million subscribers on the new user experience, a new front-end to HealthStream. It’s also important because it’s built with responsive design.

And what that means is that it works on iPads and iPhones and Androids, and laptops and desktops and it’s just how it behaves based on the device being used. It also works across multiple browsers including Safari, Chrome, and Explorer.

So if there is a hospital out there, it’s adopted one standard and other is taking their workforce mobile, HealthStream is now the right home for the development, training and assessment and competency journey for that employee. It’s an exciting development as we move our customers to new mobile UI.

It creates a new experience for them and a new front door for many or hopefully some day all of our HealthStream applications. I look forward to reporting on the finished adoption curve for this product in the coming quarters and I look forward to your questions. I'd now like to turn it over for Q&A..

[Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum. Your line is open..

Good morning. Congratulations on the strong finish to the year and thank you for taking the questions..

Sure. Thanks, Matt..

A couple, first could you help us understand the cadence of the $20 million of ICD revenues that you anticipate falling off this year? Is that more back end loaded?.

Actually the -- we gave -- we just gave in and we’ll find and repeat the quarterization of that. We actually gave it with pretty good precision. Let’s read that. I think it’s important for everyone to hear. So Gerry, will you read the -- so the quarterly revenue we’re going to drop from about $26.5 million down to $7.3 million.

And what we did Matt, was we brought the $7.3 million across the four quarters, so you could very specifically model it. You will know the exact -- the actual revenue from the preparedness product on each quarters. So the numbers are ….

Yes, the $7.3 million will comprise of approximately $3.2 million in the first quarter, $1.9 million in the second quarter ’16, $1 million in the third quarter of 2016 and then $1.1 million in the fourth quarter..

So you can see Matt that even in the first quarter, if you think of the fourth quarter revenue from that product, I think $6.6 million. So it’s going to drop from $6.6 million to $3.2 million during this quarter, the first quarter. And then with the rest of the quarter, so that’s a very -- hopefully that really helps in your modeling..

No, it does very much.

And as we get, I guess, as we look at -- and I know you’re [indiscernible] this, but Q4, will that just be the Precyse DNA contribution at that point or there would be a little bit of a tale that drags into 2017 probably?.

Let me -- let's add some more color. So the numbers we just gave you are only the revenue from the preparedness product, the ICD-10 what we call the readiness or preparedness product. So, the DNA revenues are incremental to those numbers.

And so we’re expecting millions of dollars of revenue from the DNA product which increment the numbers we just gave you.

So we gave you this specific revenue curve of the preparedness product, a legacy product and as you can see it’s winding all the way down to $1 million of revenue contribution in the quarter, but DNA is going the opposite direction and we expect millions of dollars in contribution.

Its part of our overall growth rate we’re able to project is because DNA is growing. And in fact what we did gave you, we didn’t gave you the quarterization of that, but we did tell you that we’ve sold about $12.4 million of orders on DNA.

Now those are slightly longer term contracts and the revenue will be spread over multiple years, but you can see with $12.4 million already sold of DNA we’re beginning the revenue recognition process and that product is on the growth path..

Okay. That piece is important. So thank you for clarifying. I guess, shifting a little bit to the patient experience, that was a nice uptick there that the guidance is obviously pretty strong for that segment.

Have you picked up some new customers or is this a broader adoption of the CAHPS, the additional CAHPS survey?.

It’s a little bit of both. It’s a highly competitive landscape. There are four or five major competitors, but we’re holding our own and able to grow a little bit in that environment. We are growing at a similar rate to some of the market leader, the market leader in the space.

And so we’re glad to be holding our own terms of market share as well as expanding relationships with additional customers.

In addition, we put some new leadership in a few quarters ago, and we’re really excited about Greg Loffman [ph] in the team that he is organizing to pursue this opportunity in addition to better organizing some of our intellectual property assets from the BLG acquisition, you may recall, so we can generate additional subscription revenue.

So in general, with -- it’s our lower growing segment, but we’ve got a growing -- a little bit growing confidence in that segment and some new product introductions coming as well..

That’s great. All right. Thank you very much. I’ll hop back in the queue..

Our next question comes from the line of Jeff Garro with William Blair. Your line is open..

Good morning, guys, and thanks for taking the question, and congrats on the quarterly and full-year results as well. I want to dig a little bit deeper into the net subscriber account.

I know it’s not your favorite metric at this stage of the Company’s growth, but still hoping that maybe you could help us quantify how much of a headwind do ICD-10 fall off is going to be? How -- what percent of ICD-10 writing that customers are converting to DNA versus how many were ICD-10 only and if we should think about kind of a bigger seasonality around net subscriber growth in 2016, really more specifically whether we’re likely to see more pressure on that number in Q1 as some of those writing this contracts fall off?.

Yes, we did see -- so a couple of things. The preparedness only, the ICD-10 related customers that were tied to the what we call the legacy of the preparedness product, we had estimated our -- and this is a little bit of a range, but between 5% and 10% of subscribers.

So I think at one point a few quarters ago, we quantified at around 390,000 -- 360,000 subscribers were ICD-10 only. And we’re beginning to see some of those peel out of the subscription.

So if we’re unable to get those subscribers to subscribe to anything else, and there is a half a dozen things it could subscribe to not just DNA and keep them as a subscriber they will in fact peel out of our ARIS number.

And so we did see that starting to happen even in the fourth quarter we had a pretty good number of them peel out, probably close to 30,000. And some of them were converted, but some of them peeled out. And so we will see pressure on ARIS at least that dimension of ARIS which are those ICD-10 only subscribers.

That said, you could see from last quarter, I believe we contracted, that was a number of ….

165..

165,000 to other products, and so we had a strong offset including DNA in that number.

So, yes, I think it’s fair to say that the metric has a lot of pieces moving in the numerator and the denominator with products like CECenter adding subscribers, DNA adding subscribers, but that rather large body of people about 360,000 that we estimate to be on the preparedness product only.

They’re definitely at risk, and in fact you can tell from the decline in revenue, we’re expecting most of them to peel out of a number. The question is whether we’ll recover them in a year or two years or when on other products.

And so, right now, I would say its correct assumption that, a; the metric is under pressure and, b; there’s still a very large number of people that could potentially come out of the metric in the course of ’16. And in fact from our forecast of a drop of $20 million in revenue, you can see we have a lot of expectation in fact that they will come out.

The question is; when will we get them back in?.

Absolutely very helpful color. My next question is more around, the key areas of investment driving your operating expense spend in your 2016 guidance.

Should we think about it as more product development, additional sales and marketing resources or incremental investment into the new provider solution segment or really a broad mix of the above?.

It’s interesting it’s a fair even spread. When we went through our strategic retreat process this year we allocated some increased investment into our key exit business. So with Greg Loffman’s [ph] leadership we presented a plan to the Board that was approved. That required some additional investment.

Similarly our Echo line of business, it was a very profitable business that we acquired, but relatively low growth especially relative to our expectations and history as a company.

And so, Michael Sousa and his team put together a growth oriented plan that required hiring dozens of people, a few dozen people, maybe around 20 or so people around there. It was a mix across sales and product development throughout late ’15 and throughout ’16. And so, that’s a growth oriented plan.

We’re going to try to take what's a very profitable business and there’s a robust product introduction schedule for the Echo suite as well. In addition as you know, our talent products and our -- what we call outcomes apps [ph] that are based on control centers. We’ve got a rich roadmap there.

So really it was very fairly even spread across the three business segments. And all growth oriented a mixture of sales personals, our sales team in aggregate grew. We usually do most of our hiring on the sales team between really November, December, January and February. So, a lot of that hiring is done.

We’ve grown the sales organization, and those costs are now in place and it will take some time to get some productivity out of those hires. So, I hope that touches on, but really it’s across all three segments and divided fairly evenly into sales additions and product development..

That’s very helpful color as well.

Last question for me before I hop back in the queue; I was hoping maybe you could elaborate on the thought process behind the share repurchase program? How this use of cash compares with M&A opportunities in the current market?.

Yes, I think it’s a great question. We wanted to point out our overall strength in the balance sheet relative with the size of the program. The first thing is, we’ve implemented two of these programs in the past. One of them was incredibly effective. It was a management discretion program.

It allowed us to come in and out of the market with certain parameters that our Board supported. When we saw that the stock was undervalued and we executed the full program that was authorized and ended up with incredible returns for shareholders.

The second program was authorized in a similar fashion, and it was only partially executed using management discretion at the time as well. And the part that was executed was again financially very, very successful for shareholders. We went through the process in our retreat, and always in our retreat which is several months back now.

We look at all forms of investment. The active M&A pipeline, our access to capital, we do IRR projections. And in this case, we had prepared even as -- far back as four, five months ago, hypothetical IRR calculations based on stock price and stock movement.

Given the -- and so, the IRRs would compare favorably based on again using management discretion over the next -- over the course of the year in the purchasing, but we projected IRRs for that program similar to the IRRs of our M&A program. So that had allowed us to put the instrument in place here as we announced yesterday.

That said, the pipeline is very strong, and we’re hopeful that we can advance the M&A pipeline, and that they’ll similarly contribute to IRR. And so it was a balanced approach, a relatively small use of our available capital and we felt like it was good.

And also in light of the particular environment in the last month, we’ve seen incredible volatility in SaaS based business evaluations, and we thought it would be wise to have this instrument in place knowing how we think about our value and our SaaS model.

And in the context of some of the challenges that we’ve been talking about for three years, now manifesting in 2016 like the 20,000 share -- the $20 million drop off, we thought that given all of those things, I would be really wise to have this program in place and a great way to create shareholder value as we enter into ’16..

Great. Thanks again for taking the questions..

Our next question comes from the line of Peter Heckmann with Avondale Partners. Your line is open..

Good morning, everyone.

Gerry, could you comment on what amount is remaining for deferred revenue that will need to be written down from a HealthLine and whether that will all be written down in the first quarter?.

Yes, it will be about $1 million, $2 million or so over the course -- declining rate over the course of 2016. There was roughly $7 million in 2015, and about $2 million remains that will be amortized in ’16..

Okay, that’s helpful.

And then are there any particular onetime items that you would call out in your GAAP operating income, growth guidance?.

Gerry Hayden:.

--:.

Sure. Sure.

But you’re guiding off of the GAAP number?.

Yes, we are. That’s correct..

Okay. That’s helpful. And then, just lastly in terms of Echo and how we would think about that business longer term, little bit of a competitive market in trying to do a transition.

But is that the type of business that based upon industry metrics can be a mid single digit grower over time or would we expect that maybe something even greater than that?.

Well, I think we’re hopeful to maintain higher growth rates in that, and through new product introductions. So putting us in a position where over a 1000 institutions use us for managing the credentials of their workforce, we think presents an opportunity for a lot of derivative product and product concepts.

And so, by hiring additional development capacity and preparing new product launches, we think we can drive additional growth. But that will take some time. We’re a year in, and we were assembling a really good team to lead us into the future there.

But I would say in general, we’re hopeful of higher growth rates than single digit certainly, and part of that is our investment. Our sales organization which we’re excited, we have good history with that and also a good product roadmap for the Echo product sets..

Okay. That’s helpful. I’ll get back in the queue..

Our next question comes from the line of Nicholas Jansen with Raymond James. Your line is open..

Hi, guys. Nice job on the strong finish to ’15. I guess, my question will be surrounding kind of operating margin leverage. Obviously a lot of moving parts with ’16 as you’re cycling through kind of the investments that you did in the back half of ’15. You do loose a lot of profitability associated with ICD-10.

But should we think about exiting ’16 and going into ’17 where we can -- we could probably think about margins starting to expand relative to contract?.

Well we put a little bit of, in our guidance range they do overlap. But we have a little bit of hopefully operating leverage built in to the ’16 forecast. And then consistent with our history we usually make those decisions about the rate of investment in our retreat. And so, I really can't get too far into ’17.

It really depends on the investment opportunities and the IRR calculation and the project prioritization that we come up with throughout the year present to our Board near the end of the year and then get approved.

And so, it’s really -- it’s such a consistent revenue model subscriptions that we can kind of meet and determine the rate of investment that we would like to achieve, and we preserve the ability to leverage or de-leverage the company in any given year.

This year we’ve obviously tipped our hand that we think we can achieve a little bit of leverage, not a lot. But if we end up at the higher ends of our ranges, we’ll show some operating leverage. If we end up at the lower ends, we’d be kind of flat, but not down in ’16.

So that’s a long [indiscernible] as we kind of reserve the right to leverage or de-leverage earnings in ’17..

That’s fine. Thanks for the color there. And then, secondly I think last quarter you did give some revenue parameters surrounding kind of the DNA Precyse ICD-10 product. And I wasn’t sure if you were going to think about disclosing that going forward into ’16 and ’17? Just wanted to get a better sense, I think you said many millions.

But if you’re trying to quantify that, how big of kind of net ICD-10 headwind is it built into the ’16 objectives relative to gross? Thank you..

Well, that’s great question. We’ve sold over $12 million, and if you think of these in terms of two and three year contracts or maybe a little longer, you can start to see the annual contribution from the DNA product. A lot of that signing was done in last year really.

So, at $12 million of contract value and spread over two and three years contracts you can start to get a sense for the annual contribution of that product. We probably won't update that as a line item going forward.

We’ll consider the category of revenue cycle which would take that plus add the run out on the preparedness product plus the new revenue cycle products maybe case management and they have other products that are either pending or just launched. And we’ll consider doing that full category.

But we’ve given I think a pretty good color on those two variables. You can roughly see how the decline is, the most immediate offsetting variables the DNA product and we gave you the order value of that, and so you kind of get a sense for the offset. It’s not a very large offset, but it is something you can put into your model..

Okay.

And then lastly, just back on the readiness product dropping to $7.3 million in ’16, should that virtually go away in ’17? There might be a little bit of contribution, but just to make sure we’re all thinking about growth properly, should that ’17 number be closer to zero?.

I think at this point that is a fair statement. We are not selling that product anymore. They’re limited to no extensions on that product. The new product is being purchased as DNA, if there’s an interest in that category from customers. So I think it’s fair to say that that product will continue to run its way all the way down..

Nice job guys. Thanks..

Our next question comes from the line of Richard Close with Canaccord Genuity. Your line is open..

Great. Thank you. Congratulations on a good year. Just want to hit on, I guess, continue on Pete’s line of questioning with respect to the operating income, and how we should think about the deferred revenue.

You had about 6.8 -- I think it was $6.8 million in deferred, and that essentially, doesn’t that all come back to operating income essentially in 2016 or shouldn’t it, most of it?.

Yes, we’ll see radically it does. That’s right..

So are you essentially saying with your guidance, your implied operating margin guidance off of GAAP that you’re taking about $2 million to $3 million of that and reinvesting that into the business.

Is that essentially what you’re doing?.

Well, I’d say there’s a couple of factors -- couple of three factors. There’s the -- for Echo HealthLine, we have another quarter of ownership to get a full year into our numbers. The $2 million of deferred revenue write down that remains to be recognized in 2016 plus growth on Echo as well. So those factors all -- are in the guidance..

Okay.

And then, as we think about the M&A activity, is there any particular segment, your three buckets or divisions of revenue that you see in more activity or maybe you think is a likely candidate to see an acquisition in?.

Well, we really have seen a little bit of a change even in the last say, well across January and February of the number of sellers in the market. And we’re trying to understand the valuations and how they may or maybe not have been changed given the market conditions for public companies.

But we’re seeing available really acquisition targets across all three segments, and so we’ll be working to prioritize and make sure we put our energy in the right areas. But I would say, we’re seeing available candidates that could strengthen any of our three segments.

And in fact more narrowly within workforce, there are two or three key solution areas where we see opportunities to strengthen those as well. So we can't promise anything there, we have an active pipeline, and we’re always evaluating. I would just say that in January and February, we see more things to evaluate which is encouraging to us..

Okay. I want to hit on the subscribers a little bit. I guess, on contracted subscribers are a nice bump there.

Was there anything -- any area in particular that contributed to that like long-term care or any, or is that just acute hospitals?.

It’s a little bit of everything, it’s a nice mix. I highlighted one which was CECenter. I mean, clearly when we add subscribers to CECenter, that’s a good add at least to the revenue per subscriber. Now there’s really over a dozen ways people can become a member of our network.

You can buy any one of our products and you essentially license our core technology, and have access to our new front end interface and we count you as a subscriber. And so, it’s no longer just the talent platforms with these new outcomes apps [ph] like DNA, they can bring in that new subscribers.

KnowledgeQ which we have our first contract on can bring in new subscribers. Any one of the components of our talent platform which would be the learning system, the accounting [ph] system, performance system, the checklist system, all of those can bring in subscribers.

We can bring in any of those products into the vertical of long-term care which we are seeing some growth there, we’ve added to the sales team a bit more, and so that can bring in subscribers. So there’s a lot of ways to become a member of our network for at least one product.

And we did highlight CECenter as one driver of ARIS maybe not of net new subscribers because a lot of those are already on the platform. We have really good reach with the $4.5 million already. But it is a nice balanced mix across the way we’re acquiring these subscribers..

Okay. And I was wondering if you could go into the nursing product that you mentioned at the beginning and you mentioned Stanford, is that co-branded with Stanford similar to the Duke? You brought Duke up as well.

So just trying to get a feel, whether those are I guess co-branded products that you’re hitting the market with?.

So, the Duke one is absolutely co-branded. It was with the medical and nursing schools and we’re nearing and getting closer to launch that product. The nurse residency program is a HealthStream branded product, but there is a component of that product that was actually built with Stanford, and it’s the confidence measuring instrument.

But there are about a half a dozen tools that are involved in the residency program that kind of takes advantage of our full platform including things like our checklist management, our community capability, our learning system. The residency program is one we’re very excited about.

We have our first paid pilots on our HealthStream nurse residency program and the program has, it leverages our control center technology we built with, Juice. So it really kind of brings everything that we have together and helps bring new nurses into the workforce.

It blends curriculum from across our catalogue, from over half a dozen different content partners. And so, it’s really, it’s a subscription. Its kind of line CECenter except it’s a much higher value proposition, and it’s for the focused purpose of bringing a new nurse into the workforce. So we call it the nurse residency program.

And again we have our first paid pilot on it, so maybe the second half of this year we’ll see some contribution out of the nurse residency program..

My final question is just, maybe longer term in nature, I know you don’t provide guidance beyond the current year. But as you sit here today and evaluate your market position, how do you view the current market conditions, the purchasing environment with hospitals.

Just overall the opportunity that maybe lies ahead for HealthStream over the next two to three years?.

Yes, I think that’s probably some -- that’s a great question. I probably should have addressed it in my general comments, because I’ve seen a shift even in the last say 60 days.

You may have noticed, many of our customers have come under extreme -- the publicly traded ones have come under extreme pressure lately and we definitely want to be a part of helping them remain strong and remain growing organizations. But our customers have come under pressure.

And if there’s one thing that could put pressure on the rate of sales kind of across the Board it’s that environment.

We’re hopeful and expectant that our products are part of the solution meaning, that the more they can consolidate from five vendors down to one, the more that instruments like ours provide insight into how to manage costs like our KnowledgeQ product or meet a federal requirement with a lower cost then maybe they could do without our product.

We still think we’re part of the solution. But it is fair to say that overall there’s more pressure on our historical customers, the acute care organizations. Even though we’re seeing growth in the homecare and other areas, they’re all under I would say more financial pressure than in prior years.

So, I think that’s a good overall thing to be aware of, kind of that is a form of a headwind that could result in the pipelines slowing down a bit. But across the Board, obviously we projected strong pipelines, good demand.

And the reason for that is because we believe that our products actually make a difference in a specific outcome -- clinical outcome or business outcome that lowers the cost of doing something that’s already required of hospitals.

And so, we’re still optimistic that would play a role in helping them be stronger and more financially fit even though it requires buying our products. We think our products save money and save lives.

But again, their balance sheets -- they’re under pressure, and I think that’s a fair and a good observation and one that we should be able to [indiscernible]..

Well I guess, that’s what I was getting at, that you guys, obviously your products potentially solve problems with respect to labor costs and attrition, retention, issues like that, and that maybe you would see your pipeline potentially grow as a result of maybe some of the issues facing the hospitals currently?.

Well, so fundamentally that is what it should be. But when you’re under pressure and you have to sign a contract and spend any money, even if you think it has an IRR, sometimes the environment makes it more difficult. So I would say the net effect is probably a little bit more of a headwind, than a tailwind.

But relative to other types of organizations selling into this environment, I think our solutions are more targeted to helping save money and consolidate vendors and reduce cost. And so, I think we’ve got as good or better shot as anybody at gaining in this environment.

But overall you drop this in front of the CFO, the CFO is under pressure and they have to sign a contract and the contract requires a payment. Even if you believe the payment has an IRR, some of them are under such pressure that, that’s still a hard decision. So, I would say the net effect of the environment is probably a bit of a headwind..

Okay, great. Thanks, congratulations..

Thank you. [Operator Instructions] Our next question comes from the line of Claire Mencke with Sidoti. Your line is open..

Yes, great quarter by the way. Just in regard to that last remark, some of your publicly traded customers seem like they’re doing pretty well, and have increased their capital plan. So, I didn’t want to let that one get away particularly..

That is true and hopefully they tend to be consolidators as well which would bring more business to us if they end up being acquirers or consolidators in this environment. So it’s just kind of a net negative that the industry is under pressure. But you’re right; they’re definitely those that are also strong in this environment.

We want to be part of helping all of them be strong and both save lives and save money. So we’re kind of pulling through all of them, and think we play a role in that outcome..

Okay.

Also when were your previous buyback, just what years if you recall?.

Oh, goodness, they were a while ago. We’ve been conservative in the use of instruments of probably back 2009. Yes, it’s been a while. But it’s one more tool in the toolkit, and I just wanted to point out that we have used it effectively in the past. So we’re optimistic we’ll be able to do that again..

Okay.

And then you said earlier that there were about six other products that had attracted some of the previous ICD-10 subscribers, and I wondered if you could just talk a little bit about what they were, and if any of them were surprises to you, if there might be more that the ICD-10 customers were interested in?.

Hold on one second..

Sure..

You are asking what other products attracted overall subscribers or attracted ….

The ICD-10 customers. You said there were probably about six of them that they had been subscribing to, one year contracts..

I may have miss-communicated that. I don’t -- let me see, I think the ICD-10 products were really the preparedness product that we’ve been talking about. That was really -- the demand for that product was driven by a federal requirement, a specific deadline.

The DNA products which are the replacement products which include a little bit on revenue cycle, a little bit on coding, those are being driven by the need, the ongoing need to certify and train the coding workforce. And so, the good news about the new product is it has a bit more of a perpetual type of need build into it than a point in time need..

Right. .

And I want to open up -- I did mention four or five other products.

So if you’re referencing those, they each have their own specific drivers and I’m glad to run those, if that’s what you’re asking about?.

No.

I thought that there were -- there were a group of products in -- that were more useful for the ICD-10, preparedness?.

Yes, so as a category we have now the DNA products, and along side of that is, is a new case management product that’s targeted towards kind of the revenue component case management. We have new products from HFMA, the Financial Management Association, which are in this category.

So we have two or three products in that category, and then there’s the clinician case manager. Yes and so there’s another clinician case manager as well which might be sold to the CNO or in the revenue cycle. So, we have a small family of products not just a single product. When we started we had a single product, the preparedness product..

Right. Okay. Thank you very much..

Thank you. And I’m showing no further questions at this time. I’d like to hand the call back to Mr. Frist for closing remarks..

Thank you for listening. We look forward to reporting the next quarter which comes up faster this time around. Thank you to all of our employees. Again we have cross the 1000 employee milestone, and we’re excited about that. Our employees are a big part of who we are and where we’re going. And together we all feel like we’re making a difference.

So thank you to all of our employees listening in. Shareholders as well, just know that I’m right along side you as a common shareholder and doing everything we can to grow even facing the headwinds that we face. Thank you, and I look forward to reporting next quarter..

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