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

Matt Hewitt - Craig Hallum Capital Rob Munnings - William Blair Peter Heckmann - Avondale Partners Nicholas Jansen - Raymond James Matthew Gillmor - Robert Baird Richard Close - Canaccord Genuity Frank Sparacino - First Analysis Peter Levine - Needham & Company Vincent Colicchio - Barrington Research.

Good day ladies and gentlemen and welcome to the HealthStream Fourth Quarter and Full Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mollie Condra, Vice President, Investor Relations and Communications. Please begin..

Thank you, and good morning. Thank you for joining us today to discuss our fourth quarter and full year 2016 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 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 risk 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 now turn the call over to Bobby Frist..

Thank you, Mollie. Good morning everyone. Welcome to our fourth quarter and full year 2016 earnings conference call. We will start today with a few highlights and turn it over to Gerry for some financial details. So, unfortunately as the fourth quarter results, as many of us already noted were not quite as expected.

Fortunately, the quarter is behind us and we are already looking forward to delivering the full year revenue growth of 10% to 14% and returning to leverage operating income growth in 2017.

We entered 2016 knowing not to show any growth whatsoever, we would have to overcome an $18 million in decrease in top line revenue, due to the decline of our ICD-10 readiness product revenues. We accomplished that, in fact, compared to the prior year 2016 top line revenues increased 8% to $226 million.

After 3-plus years of talking to you, all the investors and shareholders about the impact of ICD-10 readiness, 2017 should be the final year of those discussions. As it will be the last year that the ICD-10 impacts us, the readiness library.

For 2017, we expect an $8 million decline in ICD-10 revenue and a $4 million decline in ICD-10 related operating income. Even with those sizable ICD-10 declines the company overall anticipates 2017 top line revenues to grow 10% to 14% and operating income to increase 50% to 65% over 2016.

Of course another highlight for 2016 was the three acquisitions completed in the second half of the year. We acquired Morrisey Associates in August, which was preceded by smaller acquisitions of say Performance Management Services and Nurse Competency.

Even with those acquisitions we ended the year with a strong balance sheet of $103 billion in cash and marketable securities along with a $50 million untapped line of credit and no long term debt.

The strong capital position allows us to utilize multiple strategies for creating shareholder value, constantly developing and launching new products, and pursuing an active M&A pipeline.

Before I turn it over to Gerry Hayden, I would like to go through a few numbers in detail and maybe look at some of the segments, will characterize some of the key headlines and some of the tailwinds impacting each of the three business segments.

Our workforce development segment for example, clearly bore the entire brunt of the decline of ICD-10 revenues. And even with that, that segment still achieved top line revenue growth of 4.2% for 2016.

This growth was driven by the continued outperformance of our resuscitation portfolio, which grew revenue by 26% for the year, and our clinical solutions portfolio, which is in this segment, which grew revenue by 24% for the year.

So the resuscitation and clinical solutions portfolios were about to overcome the headwind created by the decline in ICD-10 readiness, which was also clearly in this segment.

This is a positive, but at the same time we should not that the resuscitation portfolio carries lower margins than we received from ICD-10 readiness or the rest of the portfolio for that matter. So the top performing product has a lower margin profile.

Let’s look at the patient experience segment, revenue didn't grow like we had planned over the year which was a disappointment and clearly a headwind for that group. That said the segment was able to make a meaningful conversion towards the online survey modality, away from the phone survey modality.

The online surveys carried the challenge of having a low price point in the phone surveys. They are also bolstered by the tailwinds of being more profitable higher margin product.

We think that the trend for how today's patients want to receive feedback is through mail and text messaging, so we think our shifting to this new modality is in alignment with how today's patients want to provide their feedback.

Moving into the newest business segment, the provider solution segment, most significant development in the year was the acquisition of Morrisey Associates. We closed that deal in August along with the former acquisitions at HealthLine and SyMed. Morrisey helped us establish a meaningful presence in the credentialing and privileging space.

A space that hospitals often refer to as their single source of truth for information on physicians and other caregivers. We think the assembly of credentialing and privileging companies will create tailwinds for 2017 and for years to come.

Still, as we told you during our last earnings call, the implementation integration backlog for these businesses combined with the deferred revenue write-down accounting convention had a negative impact on operating income in 2016.

We will continue to feel some of that headwind for the first few quarters in 2017, before it shifts to a tailwind in the later part of the year. So, as you can see many of the tailwinds and the headwinds in each segment are closely interrelated with one another.

And I think importantly, we look at, we believe the interplay is now set up to balance in our favor over the course of 2017, and this is most clearly demonstrated by our forward-looking guidance of growing operating income by 50% to 65% in 2017.

With those general characterization of the three business units and addressing some of the things supporting our growth and some of the challenges we face entering into 2017, let’s turn it over to Gerry Hayden look at a more detailed look at the segment numbers..

Consolidated revenues were up 5% in the fourth quarter versus the same period last year. We achieved this 5% revenue growth by overcoming the $5.5 million decline in ICD-10 readiness revenues from last year's fourth quarter.

Our pro forma consolidated revenue growth rate, excluding the ICD-10 to Morrisey revenues and the impact of the HealthLine deferred revenue write-down was 11% in the fourth quarter.

The workforce solutions segment, is comprised of applications and content solutions, which are primarily subscription-based is targeted at improving the healthcare workforce. Revenues from workforce solution segment increased by $700,000, while overcoming, once again the $5.5 million decline year-over-year in ICD-10 revenues in the fourth quarter.

The workforce fourth quarter growth rate, excluding ICD-10 revenues was 17%. HealthStream’s patient experience solutions provide valuable insight to healthcare providers to meet key cash requirements, improve the patient experience, engage their workforce, and enhance this alignment.

During the quarter, the trend continued towards greater adoption of lower price online patients surveys, which are higher margin products for us. In fact, for the full year in 2016, the volume of home-based patient surveys declined 9%, while online patients surveys increased by 64%.

We are taking steps to adjust our operations to better align with this trend. Service survey products those conducted on either annual, biannual cycle’s revenue for the fourth quarter was less than prior year, due to the timing of one of those survey projects were completed.

The provider solution segment provides a software used to validate the professional credentials of existing and potential employees. In the fourth quarter of 2016, revenues from our provider solution segment increased by approximately $2.8 million with the Morrisey Associates acquisition representing approximately $1.7 million of that increase.

During the quarter, management of the business segment took steps to improve customer implementations, which are expected to reduce the backlog of booked business, which was highlighted last quarter, which Bob mentioned a few minutes ago. Now our gross margins. The gross margin was 55% this quarter versus 57% in last year's fourth quarter.

The fourth quarter impact of the Morrisey deferred revenue write-down of approximately $1.1 million is the primary reason for the lower gross margin. Our operating expenses for the quarter were up 9%, over the fourth quarter of 2015.

Product development was relatively flat over the prior year, while sales and marketing increased primarily due to investments in the sales force and the cost of submit.

Depreciation and amortization also in increased 29% over last year's fourth quarter, reflecting increased levels of capitalized software development implementation and the implementation of acquired intangible assets from the Morrisey acquisition.

G&A expenses in the fourth quarter of 2016 were relatively flat, but improved as a percent of revenue to 14.1%, which compares to 15.1% in the fourth quarter of 2015. Operating income, our operating loss was $520,000 in the fourth quarter of 2016, compared to $1.9 million of operating income in the fourth quarter last year.

This quarter's results were primarily impacted by the $2.75 million margin loss from the decline of ICD-10 revenues, the $600,000 net cost of Summit and the products were $1.1 million, our deferred revenue write-down related to the Morrisey Associates acquisition.

These declines were partially offset by the margins on a revenue growth over the fourth quarter of 2015. Our balance sheet, our cash position and overall balance sheet remains strong.

As Bobby mentioned just a few minutes ago, our cash balance of December 31 was approximately $103 million, a reflection of improvement since September 30 when the cash balances were $101 million. We have no outstanding debt and our floor of $50 million line of credit capacity remains available to us.

We believe our overall capital position is likely to support our organic and inorganic growth opportunities and set forth other capital structure of optimization and shareholder value maximization strategies as maybe appropriate. Yesterday's earnings release contains guidance for the 2017 full-year.

We anticipate that the consolidated revenues will grow between 10% and 14% as compared to 2016. And the growth ranges in our three operating segments will be as follows. Workforce solutions 3% to 7%, patient experience 5% to 8%, provider solutions 66% to 72%.

In the workforce segment, we anticipate revenues from ICD-10 readiness to be approximately $1 million in 2017 versus $9 million in 2016, representing an $8 million decline during 2017. We anticipate our full-year 2017 operating income will increase 50% to 65% over 2016.

We anticipate that our capital expenditures will be between $15 million and $17 million and our effective tax rate will be between 39% and 41% for 2017. And finally, this guidance does not include the impact of any other acquisitions that we may complete during 2017. Thank you for your time. And now I’ll turn the call back to Bobby..

Thank you, Gerry. Let’s reiterate and talk about talk a little bit of all three themes we touched upon in last quarter's conference call and would have an ongoing impact on business, now that our guidance in front of you, we can talk about the impact of those three trends.

The first being the high growth the low margin story of our resuscitation portfolio. This portfolio includes new products such as RQI and the new edition of NRP. We expect a strong, but lower growth rate from this portfolio in 2017.

The lower growth rate is probably attributable to the adoption of new standards in 2015 and it kind of had a surge effect on the new products, so we think it will normalize a little bit more as we enter into 2017.

And this will cause - this continued outperformance of this product category will cause continued pressure on overall margins, obviously being one of our lower margin products. So that trend continues into 2017 as incorporated of course into our guidance. Second trend that we discuss is related to our patient experience business.

As we discussed a few times now on the call, we continue to convert customers to the lower price point higher margin mortality of online surveys. This trend will continue to pressure segment revenue growth, but we expect to provide expanding margins of the second half of the year.

Finally, we identified a trend in our provider solutions segment and that was the backlog issues and I think that that trend will work itself out over the next few quarters as we begin to normalize the backlog, I think we made the necessary investments during the fourth quarter to get implementations and a more operational state, more effective state, and it will take a few more quarters to get that to more normalized condition of backlog on implementation.

So we will hope to see that improve in the second half of the year. With those updates, I do want to turn to some of the exciting new product developments.

As we mentioned in the last several calls, we kind of expected this middle last year to middle this year to be a period of many new product introductions and that has in fact turned out to be the case.

I’d like to run through a few of those very quickly, most of these products will be, they are brand-new, each of the ones I'm about to mention have initial sales on them, so they are out of our R&D and they are in the marketplace, and we’re being to sell them.

I think that they will all be small contributors, very small contributors to grow in 2017, but nonetheless they are new, represent some exciting new areas of result for the company and they are in the market and again each of these I’ll list have initial sales or success with customers.

The first is our new leadership development program, it’s called talent tracks, it is really exciting product that uses assessments on the front-end of content and does a recommended development program for leadership, based on the assessments.

It is a curetted library of over 140 courses and it’s sold in a model similar to the way we did the success with our CE Centre module, we called our Netflix-like model, we bundled library together and attached it to assessments on the front end.

Our new OB risk curriculum is very exciting, has developed over the period of the year with our strategic partner MedStar Health and SiTEL, one of their operating units.

The MedStar SiTEL partnership is very exciting, multiyear partnership and we are beginning to put new products out from that partnership, the OB risk curriculum focuses on reducing risks by providing staff with knowledge and skill to identify early warning signs of maternal and infant distress, and so it focuses on a high-risk area in the operations and service lines of hospitals.

We have dozens of contracts already on the OB risk curriculum and the EFM monitoring or module that was in the first part of that launched late last year.

Our new patient experience curriculum, we call Develop Rx, it is a 60 course library of evidence base learning, it was based on the acquired intellectual property of Baxter's leadership group, so we are very excited to have Develop Rx in the market, it links survey questions to best practices and training content.

And so this 60 course library is mapped to the caps line of surveys and it is the first products based on the acquired IP of [indiscernible] leadership group. Again it is in the market, has its first customers, we are very excited about Develop Rx.

Our new award-winning nurse residency pathway, exciting new product focused on bringing new nurses into the marketplace, it is a structure, get flexible blended learning program, it’s designed specifically for new nurse graduates as they make the transition into professional practice.

We just finished a one-year pilot and the first cohort graduated from our nurse residency program of one of four major health systems. We already have five different hospitals now that are adopting our new nurse residency pathway for their newly hired nurses.

A new action planning solution is called Engage Rx, it equips leaders with database intervention tools to drive engagement.

Engage Rx is based on technologies co-develop with Juice Analytics and you may recall, we have a minority investment in Juice Analytics and so we are excited to see the technologies coming out of Juice powering up more and more products.

In fact, I think we have over five products in the market based on what we call our control center technology, which is derived from our minority investment in Juice Analytics. And we have mentioned some of those earlier; KnowledgeQ as one, and the D&A product with precise is another.

And finally, the last one I want to mention is the privileging library that we acquired from Morrisey, through our Morrisey acquisition, it is called the PCCB library.

It enables health organization to tailor their privileging criteria in order to meet their own unique privileging needs and the power of this is that the PCCB library has now been technologically enabled to be cross sold to the echo customers, and in fact we already have three cross sales of that product from what was essentially Morrisey customers into the echo customers.

So as you can see, it’s been an exciting period of new product introductions. Again the distinction of all those that I just went through is that they are in the market and have existing contracts in place. We do expect them to be minor contributors this year, but we're hopeful some of them will deliver growth in the future years.

So, we are excited to be announcing that list of new products that were brought to the market in the last, I would say eight months. To conclude, I would like to thank our customers, partners, employees who held a wonderful customer summit here in Nashville.

The summit set an exciting tone as we head into 2017 and we were pleased to host over 800 clients, customers, and employees in downtown Nashville over the course of several days and celebrate and introduce some of these new products, celebrate our successes and enter the New Year with great energy.

At this time, I like to turn it over for questions from the investor community, I’m sure there will be many and we stand ready to answer your questions..

Thank you. [Operator Instructions] Your first question is from Matt Hewitt of Craig Hallum Capital. Your line is open. .

Good morning. Thanks for the update and for taking our questions..

Sure, glad to take..

I have got to couple.

First off, on the patient experience, specifically the patient insights conversion to e-surveys where are you, do you think in that conversion process and I mean is it 60% of converted 40% of converted and where do you think, so I would imagine some customers will want to stay with the phone-based surveys, but where do you think that will finally level off?.

Yes, I think we are early and we don't have exactly the conversion rate established yet, where we think we're headed, a couple of major customers have moved and shifted and gone to a blended mortality of using phone for the base survey and then email for the additional data collection.

We see them collecting more data at lower cost, which is something they are excited about given the cost pressure on of the day environment. And so I would say that we are early and haven't quantified the trend and rate just yet.

We of course had to make some assumptions which we think are reflected in our guidance about that, but I’d say in the next few quarters we should get to a place where we can talk about and answer your question more directly.

So, I’d say we're only, but the good news is that a couple of the bigger customers have adopted it and are pleased with the process..

Okay that's helpful thank you.

Following up on your gross margin comments, obviously you have got the resuscitation program that weighs on gross margins a little bit, but I'm trying to understand last quarter you had some deferred revenue write-down yet you still put up 57% gross margin, this quarter you had the similar maybe a little bit more from deferred revenue write-down, but you also had the benefit of the summit, which if I'm not mistaken carries a much higher gross margin and some of the ICD-10 revenues that were fell off, again those carry a lower gross margin, just trying to understand the puts and takes and where things may normalize on a gross margin level?.

Yes, I think in this quarter there are two probably two additional contributors to the compression and gross margin.

The additional deferred revenue write-down from the Morrisey acquisition was about 1.1 million, I believe in the quarter, obviously what happens that is you get the cost of running that business and the deferred revenue write down writes down the top line, the revenue and affects the gross margin as well.

So, I think that additional pile on having the costs of Morrisey, while not really getting the revenue from it, a fact of which deferred revenue write-down was about $1.1 million pressure on deferred revenue.

In addition, you may recall that we talked about an implementation backlog issue in more of a business units, provider solutions, we empowered leadership team of that group to do what it took to quickly reorganize, higher a couple of key positions, change the way that historically had been implemented.

We call the process the surge, and the team there did a great job of re-organizing around that and we try to essentially give a blank check book to make sure that we solve the problem first for the long run and didn't take a short run view and try to under resource it.

So, I think the good news there is again it had some surge related costs, a few hundred thousand dollars here and there to reengineer the implementation process of the effect out there.

It will take a few more quarters to work through that, but we went ahead and made the investments and there were some changes and roles and responsibilities, some additions of an offshore position and just re-org there to get in a better place, and I would report that we feel in a better place, it is just going to take time now to work through.

I will say those two are the primary contributors to lower gross margin in the quarter and so those should be normalized when come out in the next few quarters..

Okay great. Maybe one more and then I’ll hop back in the queue.

You know there has been a lot of questions since the election regarding the health of hospital spending, given the need and in some cases requirements for your applications and solutions what have you been seeing and how has that factored into maybe not only the Q4 performance, but what you’re expecting for early this year and as the year progresses? Thank you..

Yes, a couple of comments there. One, we have used it as an opportunity to reach out, let's say in our patient experience business, we’ve used this as an opportunity to reach out and show them a lower-cost modality where they get more data and more value.

We view the discussion to trade and lower their costs say in the quarter, we had one customer, one major customers in switch modality had a definite impact on the fourth quarter, lowering revenue from that customer and so it is a welcome thing to that customer to get more data and at a lower cost.

On the other hand, we traded it for horizon, so we re-up’d our agreement and added time to the agreement and we think it went to a five-year term and so we're very excited and comfortable that we made the right decision there.

So we are trying to respond to the pressures of our customer's by giving them some financial benefit which again had short-term pressure on the business, but if you think beyond the short-term we were able to secure a five-year extension or renewal of that account and we think in the long run that will serve us best, particularly because they are going to move to what will ultimately be a lower cost solution than higher margin for us.

So that was a bomber because it hit the fourth quarter top line in that business unit, but we were glad to use the economic environment as a motive and incentive for that customer switch mortalities, which we think will be better in the long run..

All right thank you..

Thank you. The next question is from Rob Munnings of William Blair. Your line is open..

Hi guys thanks for taking the questions. I was wondering if you could talk a little bit about key areas for investment in 2017 both from a sales and marketing perspective and product development perspective? Thanks..

As we enter each year we usually try to ramp our sales team in the December, January, February timeframe, so we’ve been doing that. We’re a little behind or we want to be in hiring in that area, but yet that will be an area of early ramp in the year, it is always - we essentially always do that.

We usually add 10 to 20 salespeople between the December and February timeframe, and we're little behind that rate right now, but still adding and planning to add, so the sales team we try to grow in Q1 effectively. In product development, a little bit more of a normalization there.

We are really large and strong development R&D capacity as you see our depreciation and amortization associated with research and development has gone up, but we kind of stabilize that for just a bit here a quarter or two, so that we can get a little more normalized there and let the revenues catch up.

We usually do make those investments throughout the year instead of early in the year and so maybe in mid-year we will readjust and see if we need to add capacity there.

So that one is a little more normalized in R&D area, and so I would say right now we're leaning towards investing in the sales organization’s earlier in the year and the tech organization depending on how things perform and as expected in the first half of this year in the middle of the year..

All right great thank you. That was very helpful. And then I guess my last...

Somewhat related to that, you know you can see in our guidance we are expecting to return to leverage operating income growth and so we are going to digest some of the acquisitions that we completed, we had a kind of rush where we did 3 and a 90 day window in the second half last year, and we have got some things that kind of work through here for a quarter, but we are really comfortable, we've already got a lot of those things under control and I think that’s why you can see in our forecast return to leveraged operating income growth and throughout 2017..

Okay great thank you. That was all very helpful. And then I guess can you talk a little bit more about capital deployment, I know you mentioned it in there a little bit, but what are you thinking about the outstanding cash balance for and what are the key priorities in 2017? Thanks..

Thank you, yes.

So just the continued investments as we mentioned although a little bit more of stabilization in the first half of the year and say R&D, so organic investments are always there, we have made some very interesting capital bets into some of these smaller projects for example, I mentioned one of our new products develop with MedStar SiTEL, we put a little capital into that in that case about a quarter of million dollars to get that product kick started and MedStar SiTEL we have dedicated teams of people to build that product.

The really cool thing about that product is we are going to go on all the IP at the end of that time frame and so it will be a blended technology platform and content product that will have a lot more control over the IP with our partner at the conclusion of that, unlike our history where we would just distribute other people's content.

Here we’ve made a little bit of a capital outlay to own and control more of the IP that. So, I’m excited about that. We will probably do a few more deals like that and then of course we maintain an active M&A pipeline.

We’ve got concepts for growth that are in organic in each of our business segments, but like I said in the fourth quarter and first quarter we have a little bit of focus on working through the ones we just completed, but I would say we plan for an M&A to be an important part of our growth story as we look forward in the next couple of years.

So, we look forward to continued capital deployment into M&A..

All right, great, thank you very much. That's all from me..

Thank you. The next question is from Peter Heckmann of Avondale Partners. Your line is open..

Good morning everyone.

I wanted to follow-up on the plans to drive the implementations on the provider side, your guidance actually indicates just real significant growth there, so I would assume when we look at your guidance for 2017 where we are assuming that you will get your implementation backlog under control, but could you quantify that and then could you talk about, are you relying on subcontractors or third parties to help you on this convergence temporarily or are you building those capabilities in-house assuming that this is a multi-year effort?.

Yes, we are building the capabilities in-house. As I mentioned, there are some new appointments, new hire restructuring to better align with the new more standardized protocols and procedures. So, I really feel like we made some investments there, we may have a few more to make, but we generally feel like we've got that process under control.

It will play out over the next several quarters now. That unit is showing the real growth as a lot of that is deferred revenue write-down kind of coming back in and cycles out the helpline and the acquisition. So remember this model is under a bit of a transition from an installed product base to a SaaS base.

So, we have got some transition work to go and if you have seen other companies go through that these product lines, it challenges revenue. For example, if you have an install base on a lower maintenance stream you convert them to a SaaS, or you stop selling licensed software, which we did over a year ago.

We sell very little licensed software, now we sell SaaS software or SaaS software subscription base. And those trade-offs aren't great in the short run and so you have to remember there is kind of two things going on in that business unit.

The primary growth right now is probably attributable to the deferred revenue write-down coming back in as we cycle through the receivables.

The baseline growth is pressured by the two things I mentioned, the implementation backlog, which we feel like we have got a really good process on and the - what was the other - what did I cover of first - the transition from the install base to the SaaS base subscription. So, that tends out like I said to the top line revenue.

Again so it is more accounting treatment right now, it is showing growth, but I also reiterate that we built a really strong sales organization and they continue to bring the SaaS business, and so the subscriptions are coming in, but as you know when you do a two and three-year contract the revenue gets spread and takes longer to build.

So the selling organization was built early on and that created some of the backlog issues. We are working through the backlog, we work through deferred revenue and I think in the next 24 months you will really see that business start to kick off the growth..

Okay great and then Gerry could you quantify, I mean will you say at the quantified deferred revenue write-down in 2017 that’s on the non-GAAP basis implied in your guidance?.

We did not give that in the guidance. I am happy t….

Well in the quarter it is 1.1 million just for Morrisey alone..

Right. So it was 17 full-year impact on Morrisey..

Maybe 3 million?.

Yes it is about $1.3 million in 2017..

I'm sorry 1.3?.

1.3..

Great. Thanks, I'll get back in the queue..

For the full year of 2017..

Yes got it. That's helpful..

Okay..

Thank you. The next question is from Nicholas Jansen of Raymond James. Your line is open..

Hi guys, thanks for the question, in terms of the fourth quarter I think you said if you adjusted for ICD-10 deferred revenue Morrisey you kind of had 11% or so kind of organic growth, can you help us bridge to what the organic growth assumption is for 2017 without the potential for acceleration or deceleration relative to the most recent trend? Thank you..

Yes, I think if you look at our guidance segments, you can see our overall growth rate and those don't have any adjustments, so will this reiterate the guidance growth rates as what I will call the new organic growth rates.

Now in the workforce development segment, if you want to try to do an adjusted growth rate, you could add several percentage points to that to try to accommodate the ICD-10, so it would be that your adjusted range is up several percentage point from the low and high end, but I guess that will replaces into 9% to 11% range in that segment if you took guidance and your adjusted it for ICD-10, but really I think we should stick to the all-in encompassing all factors growth rates that we have given for the three segments that Gerry just read..

Okay.

I’m just trying to get a better sense of what I think investors are trying to figure out is organic growth accelerating or decelerating relative to kind of the recent trend lines, so is there any color on what you could perhaps provide on Morrisey what that is adding in 2017 versus incrementally in 2016, so we can bridge the gap there? Thank you..

I think the main will be the workforce segment, which is decelerating slightly over the prior say fourth quarter’s delivery.

And so again if you look at the guidance that we gave for that segment and adjusted you would see that it decelerated a bit and identified some of the trends as why, we had exceptional third and fourth quarter deliveries in resuscitation portfolio and we think that will come, that will grow quite as fast as we enter into 2017.

The sales orders that we think that they will still be higher than the growth rate, the blended growth rate, but they won’t be as exceptional as they were throughout 2016. So, we see a little bit of that coming down and that was pulling the average up..

Okay, I will hop back in queue. Thanks..

Thank you. The next question is from Matthew Gillmor of Robert Baird. Your line is open..

Hi thanks for taking the question.

I wanted to ask a follow-up on the resuscitation comments you just made, are the - and you mentioned the potential for slower growth, are you seeing that already from a sales perspective that sales aren't coming in as quickly or is that just more the guidance reflection of the really tough comp and then can you also give us some details around the - you mentioned the 2015 changes to the guideline and have had that benefit of the growth, can you just sort of help us understand what those changes were?.

Sure. The first is that the American Heart Association in Laerdal put out a new product called RQI. And we had great success selling it in the fourth quarter. It represents kind of a new modality shift during resuscitation training, it’s a more frequent training interval and we were very successful selling it.

Part of that success was attributed to some - your incentives and non-price increases in 2017 and so our sales team had great success.

We are trying to figure out if we can normalize those rates, so we expect them to drop a little bit because there are some real incentive, a, there are new guidelines and new products to launch, and b, there is going to be price increases in 2017 on some of those products which should have financial benefit, but also could slow down the growth rate of that product bit.

And so we've factored into our guidance a bit of a slowdown into the resuscitation portfolio for those reasons..

Got it. Thanks. And then maybe the….

I would point out that the overall growth rate of that that portfolio continues to outside all the average growth rates across the whole company. So, it is not declining to any situation where it is below the average, it will be pulling our growth rate average up, it’s just not as exceptional in our models now as it was in Q3 and Q4 of last year..

Okay got it.

And then maybe a follow-up on the margin comments you made against the patient experience business, is that is that driven by the mix shift towards the e-surveys or are you taking some capacity off-line on the [indiscernible] services, just trying to understand the dynamics and why it is kind of back half related?.

Yes I think there is a capacity management that we have got to continue to go through as this modality shift occurs and again we are early to the process.

So, we've got to reorganize the capacity across our call centers such that supports the shift in modality and we are working to achieve that, that will be a kind of a natural process that we undertake and manage throughout the next year.

As we get a better sense of the uptake and rate of change so we have got plenty of plans in place to manage through these changing modalities and improve margins and business.

So it is giving us some confidence as we enter into this year that although revenue growth again will be pressured, there is some lot of irony in this headwinds tailwinds analysis, like in that unit the move to change in modality has a definite drag on the top line growth rate, but the business margin profile and business if we're successful changes materially and even we think early in the second half of this year..

Okay. Thanks very much..

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

Great. Thank you for the questions.

Just want to go over some of the new product and digging a little bit deeper into those, obviously you mentioned, not really contributing this year you know meaningful fashion, but as you go down that list of products maybe if you could help us out, how we should think about the gross margin profile on those products, obviously that would be more of an 2018 or 2019 impact, but just so we are thinking about that correctly..

Sure. I am just scanning down the list. And just kind of quickly, a product like contracts would be in that case secured at a library of owned IP and delivered on our own platforms. So the gross margin of that product should be at the higher end of our gross margins of products.

So, I would just for now pegged at 70% plus and so the good news there again it is a better than our current blend of gross margins. That will be risk curriculum, as I mentioned we invested that to improve the margin profile, so you have a similar situation there, I’d say [indiscernible] should be a 70% plus type of margin.

And so there you have two instances where we are making the investments required to have a shift towards higher margin products.

Develop Rx is also based on core IP that was acquired through BLG and it blends technologies built with Juice, which we, as you know have an investment in Juice and built on our learning platform and our checklist tool and constant acquired from BLG so, again I will put that at the 70% plus gross margin product.

So, in all three cases we’ve made investments into the components of those products, in order to boost the margin profile over time.

The Nurse Registry pathway is really interesting, it is a higher price point product probably the highest price point product in our history, and we think it will have a gross margin in the neighborhood of our current blended gross margin, it is really interesting because it is essentially a pathway through best of breed content from multiple partners.

And then specialized tools like a Juice-based control center we call it that will help people track their progress through that curriculum. So we call that a pathway. It should support our current gross margin models at a much higher price point and it is kind of a cohort base learning tool for these new nurse graduates coming into the workforce.

And so I will put that in our current average gross margin profile for now. But the thing that’s unique about again it’s kind of a new way to navigate, think of it as a curetted content library with the best of breed content in the curetted pathway for developing nurses.

And some of the others Engage Rx is a tool that’s wrapped around our owned surveys, again built on the Juice Analytics framework we call control centers. So it should have a high margin profile and hopefully contribute to the selling price of our engagement surveys.

And the PCCB library is also an owned library, it is a content library to the acquisition of Morrisey. It has maintenance cost, but it should be 70 plus margin on the PCCB library as well, probably much higher, but for now I will just say conservative and could demonstrate that it is owned IP and should have a strong gross margin contribution.

So in all cases, each of these that was mentioned as a better gross margin profile than our current blended gross margin profile for the company..

Okay. That's extremely helpful. Thank you for that information. Then I was wondering if you could just give us an update with respect to post acute and may be how we think should think about subscribers on a go forward basis.

Overall for the company, obviously the post acute you have been in that for two or three years now, essentially increase the total addressable market, I guess about 50% or so 3 million and potential employers out there, so just give us an update on how you are attacking that market and maybe how successful you have been over the next couple of years?.

Sure. It is actually one of the contributors to growth. As you know in our queue space we acquired a lot of subscribers through the ICD-10 readiness library and they have been coming off and so they’ve had a negative pressure on subscriber growth as we kind of had to deal with throughout the year.

So, a good business subscriber growth is coming from new subscribers in the post Q settings. We are adding in Q, but it been largely offset by the loss of the ICD-10 only where we call ICD-10 only subscribers which are, as you know a $90 million decline, these are a lot of subscribers came off the platform.

And so I would say that the majority or not a majority, I don't have the percentage in front of me, but a significant portion of the growth in subscriber count was truly incremental to our net work came from the post-acute settings..

And then as we think about the annual revenue per subscriber, I would assume on the post acute side, it is a lower because it is a new sub segment to your offering that may be that comes in at a much, much lower annual revenue subscriber?.

That is correct, almost all these initial bundle that we sell is below our average achievement in our network for revenue per subscriber meaning they pick one or two core products doing an initial subscription and it comes in below the average, so it is dilutive to the errors when you acquire, usually when brand-new subscribers come in, they come in below the errors.

Now there is some products like gross pathways residency pathway they could change that where they are coming in at multiples and multiples of the current base, but for now the new subscribers coming in, and this is apparently acute space as well, below the average price, it requires the up selling to move them up to the 30 plus, 35 plus per revenue per person per year..

Okay. And then my final question is on provider solutions, I mean we’ve talked about it a lot on this call, or you’ve helped us out a lot on provider solutions.

In terms of talking about the deferred revenue and the implementation and the switch to the software-as-a-service model, and the impact there, but you know you’ve had that business for three years, you’ve done several acquisitions, I guess I would reboot on focusing on growth with a eco and rebranding is there, but just if you could give us more higher level how you see that I guess division and the growth potential going forward are you satisfied with the offering or where you are at and the outlook for it, just a little bit more, maybe longer term thought on that division?.

Sure, sure. Actually really excited about that. Here are some of the reasons. First, as you know we have had this massive surge in ICD-10 business and a 50% gross margin and now it is on the back side that occurred over the last year.

We effectively took our capital, deployed it into - effectively take that entire contribution and back that with more recurring revenue, more software base, higher blended gross margin product set.

And while we are dealing with stage deferred revenue write-down a few wrinkles that we have to iron out and implementations, at the end of the day those credential aps are very sticky applications, they are very deep in the organization.

They are important systems to the hospitals that manage the core credential set of their revenue stream, their actual positions and providers and they are often a source of truth on those people so they are kind of the gateway both to quality ultimately, but also the gateway to access the other systems.

So, we often hear for example that the providers have to be fully credential, obviously before they allowed to practice they didn't have to be privileged, credentials and privilege, but also before they get access to other credential systems like the HER and the EMR platforms, usually required that there are already credentials.

So, I think what we have done is we’ve moved into a segment that is more the core of healthcare, it is recurring revenue nature, it’s moving to assess model and we believe a very sticky higher margin software type of product and effectively use our capital to back fill 25 million revenue business in ICD-10, which is falling off with a - when all this deferred revenue is done a $40 million business with higher gross margin and stickier applications.

So, and finally we think that is a strong relationship over time between that segment and our other segments.

So we think data mobility between like our learning platforms and credentials and certificates we issue in the learning network can find a competitive advantage by being transferred into the credentialing systems, cutting the work and cost that hospitals incur to properly credential the workforce.

So, we actually think there is also synergies and data mobility benefits of being in the family of HealthStream products.

So not only is a good stand-alone business, with good long-term prospects, but there are competitive advantages, we can lend that business unit because it’s in the HealthStream family by linking down their lead data feeds across the record, and across our platform.

And so for all of those reasons I’m excited, I know it is hard to see right now, because based with the backdrop the deferred revenue write-down looks like flat growth, but I mean you just have to see past that the sales are coming in on subscription products and as you know they are taking time to build and accumulate, but the margins are higher and the team is getting stronger and so obviously have great optimism for this unit.

Now my optimism, I am also a long time thinker, so if they spread my enthusiasm over a three-year period. You can't take it from next quarter's earnings, if you think about it as where I am thinking we will be in say three and four years. And I think effectively as a really good deployment of capital at this point.

I’m still pleased with those investments, which is over $100 million of invested capital. So, we need to get good returns on it and right now I feel like we're going to get there in spite of a few hiccups..

Great. Thanks..

Thank you. The next question is from Frank Sparacino of First Analysis. Your line is open..

Hi guys, just one from me, Bobby I think you started to talk about this a little bit on the post acute side of subscriber growth, but overall subscriber growth in the quarter was very strong, the strongest quarter of the year, is there anything that you would call out notably within that and also in terms of the ICD-10 fall-off roughly how many more subscribers are left that would be a headwind in 2017?.

So there wasn't as much falloff in Q4, a lot of those contracts have got in extended at the end of the - when the regulations were made official, extended through the end of this year - end of 2016 and so I think the final fall-off starts occurring now in Q1 and Q2, the total contribution in that product in the year I think is about - is less than a million or next year for 2017, 1 million, and so the falloff in subscribers to answer your question really begins occurring in this quarter and next quarter.

It stabilized a bit between Q3 and Q4 of last year. We are seeing additions in the post acute space. We have got some nice bundles there and we see, we always state this goal of net new subscribers a quarter, net of attrition loss in turn and we have been exceeding that again in the fourth quarter.

We've tried to model conservatively, but hope to exceed that range throughout the year this year, 20,000 to 50,000 and so that kind of characterizes our expectations around subscriber growth..

Thank you. And the next question is from Scott Berg of Needham & Company. Your line is open..

Hi great thanks. This is actually Peter Levine in for Scott, most of my questions have been answered, so just one quick one.

I would like to, I guess just to follow-up on the Morrisey acquisition, how is the product performing and internally reps on the product because I know you talked about keeping the echo lines separate, I mean are there any changes to your strategy in the foreseeable future of kind of creating a one integrated solution and going to market with one product? Thank you..

Thank you. So I think we will need to give a little time to [indiscernible] to take and announced this full strategy for all those product sets. You can see already the integration of core Morrisey asset to the entire platform that was the PCCB library, it is a privileging library.

So you have already see a moment towards integration across what was pre-acquisitions now have one product family.

We have to give time for over time branding strategies and product integration strategies and technological roadmaps for each of those sub systems, but it is important to note that say you take a key asset like the privileging library of Morrisey and the efforts to make it work across effectively the echo platform and echo customers has already been done.

So without getting too far ahead of the President of that group I would say you are seeing evidence that they are working to achieve leverage across the three acquired businesses and in fact another example will be the original entry into this market was the acquisition of SyMed years ago, and the SyMed capabilities have been built into the echo platform and so we can all from standalone, as what was once called SyMed into the echo one application, which is now part of the echo platform and so you definitely see the integration technologies occur and the branding strategies work themselves out over time..

Great. Thank you..

Thank you. And the final question is from Vincent Colicchio of Barrington Research. Your line is open..

Yes Booby, it is Vincent Colicchio just one from me, has there been any changes on the competitive front that may affect some of your larger products and workforce solutions that you haven't mentioned?.

Let’s see. I think that I hadn't mentioned, I think we do really detail disclosures on all of our filings about the competitive landscape, it’s fair to say when you are building a business that is in ecology where it is dependent on 40, 50 partnerships, it is almost, the way I think about it is each of our partners has a competitor.

And when we team up with one of them, almost by definition that product set has a competitor in the marketplace. So as our ecosystem grows, the competitive landscape gross for those that are not in our ecosystem. Of course our goal is often to bring all of them someday into the ecosystem, but we can't always get there.

Some sell direct, or sell around our ecosystem, and this is an open invitation for all of them to join, all of our current competitors are welcome to join up and be part of our platform and help them sell their products into our network, but it’s kind of a strange dynamic, the larger we get and the more successful it does create a more intense competitive dynamic, as each product we offer has its own competitive landscape.

No major shifts because the same major players are focused on healthcare market training education talent management that have been listed in all of our disclosures, so no new major entrance in our already listed in all of our filings that we would talk about as a new competitor dynamics..

Okay. Thank you..

Thank you. There are no further questions in queue at this time. I will turn the call back over for closing remarks..

Thank you for everyone who has participated in this call. Thank you to our employees for delivering a strong Summit and customer action.

We know that it was a tougher quarter than we had expected, but our teams are already two months into the New Year and working on the new financial assumptions and models and already heading towards delivering stronger results that we’ve forecasted for 2017.

We look forward to updating all investors on the next earnings conference call in just a few short months, thank you and have a good day..

Thank you ladies and gentlemen. This concludes today's conference. You may now disconnect. Good day..