Good day, ladies and gentlemen. And welcome to HealthStream First Quarter 2013 Earnings Conference Call. At this time all participants are in listen-only mode. Later we’ll conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call maybe recorded. I would now like to turn the conference over to Ms. Mollie Condra, Associate Vice President, Investor Relations and Communications. Ma’am, you may begin.

Thank you. Good morning. Thank you for joining us today to discuss our first quarter 2013 results. Also in room 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. With that, I will now turn the call over to our CEO, Robert Frist.

Thank you, Mollie. We have so many business updates and financial updates we’ll just jump right in. The first quarter on financial metrics were -- many or most of those metrics were quite strong. Consolidated revenues were up 25% to $29.5 million. Operating income was up 36% to $3.2 million and net income was up 37% to $1.9 million. Our major adjusted EBITDA was up 30% to $5.4 million, all those when compared to the first quarter of 2012. So the first quarter of 2013 delivered strong core financial operating metrics. You saw in our earnings release, in addition we introduced a new metric this quarter and one that most of our analyst had been estimating on their own for quite sometime, so we're excited to introduce the new metric annualized revenue per implemented subscriber. I think everyone knows that once we implement subscribers that’s when we began revenue recognition. So we think this is a good metric to watch as, we’ve surpassed the 3 million subscriber mark and we are seeing an increased emphasis inside of our company of growing revenue per subscriber through our product and solution mix. This new metric represents the quarter's revenue from Internet-based subscription products divided by the average implemented subscribers for that quarter annualized. The purposes of introduce this new metric, we provided revenue per implement subscriber for the first quarter of 2013 along with the previous seven quarters. In the first quarter of 2013 our revenue per implemented subscriber was $28.47, which was 14% higher over the first quarter of 2012. From the second quarter of 2011 to the first quarter of 2013, we’ve seen a steady upward trajectory in this measurement and that’s indicative of our increased focus on providing more solutions on a per customer per subscriber basis. The core…

Great. Thank you, Bobby, and good morning, everyone. Once again, we had a strong quarter. Consolidated revenues were up 25% over last year and operating income increased by 36%. Net income grew by 37% and earnings per share increased from $0.05 to $0.07. Adjusted EBITDA was up 30% to $5.4 million. So while investor remains a theme for 2013, we’re investing for additional strength. Our revenue growth rates and the underlying dynamics are key indicators of our progress and momentum. Both business segments support our overall revenue growth rate of 25%. It’s important to reinforce that learning and talent management, with a 30% growth rate, remains driven largely by core growth. And the adoption of the CG-CAHPS Surveys the product that Bobby just mentioned, propel the research to double-digit growth rates over last years first quarter. Furthermore, our two acquisitions from 2012 continue to perform well. Each transaction had a slight [decline] impact on these years first quarter, because DCI closed at the end of 2012 second quarter, while Sy.Med closed in the middle of the fourth quarter of 2012. Results of our new metric continue with the sense of our important financial results is strong by about 15% year-over-year has essentially broaden and deepened customers product adoption within our talent ecosystem. Also, we’re expanding our subscriber count at double-digit growth rates. So, for example, year-over-year our growth in the subscribers is 14%. So consequently, both units in terms of subscribers and revenue per unit increases are indicative of the high quality core growth. As we look at profitability in the quarter, we need to assess the impact of Summit timing of comparative results. Specifically when the $520,000 of Q1 2012 Summit costs are added back for comparison purposes and then measured against 2013, operating income the adjusted year-over-year growth…

Great. Just a few more updates for everyone. In the first quarter of this year, SimVentures were up over the prior-year quarter but they were down slightly sequentially. We had orders for our new SimView products which began shipping in April, we’d hope would begin shipping before that dates. We had a little delay in the next generation SimView products that affected revenue in the quarter. So they were down slightly sequentially, but up over the prior-year quarter. And in April, we began fulfillment of the new SimView products, so we’re expecting a strong record and strong second quarter for SimVentures as we entered the second quarter and through April. We also announced about 60 days ago in our year-end release that we are beginning to tune our workforce and our product sets to pursue the post-acute care market. And so we made that announcement about 60 days ago. We have a few announcements. We’ve begun initially on that data, we announced we posted four positions on our website. We have filled three of those four positions. So we’re getting the initial team together to begin that but again that whole initiative will play itself out over the course of this year. We would expect more impact from these initiatives next year but we’re beginning to assemble a team and have a deliberate entry strategy to that market, which we’ve estimated adds market opportunity of another several million subscribers over the base opportunity in the acute care market. And we continue to study the applicability of our core product sets to that market and believe that they’re all applicable. And we think we have a very good and thoughtful strategy to enter into the post-acute care market, again making some core steps this quarter in the last 60 days to…

(Operator Instructions) Our first question comes from Jeff Garro from William Blair.

Hi guys. Congrats on the nice quarter and thanks for taking the questions.

Glad to. Thank you.

So my first question is on renewal rates. We’ve seen that renewal rates have been trending down a little bit the last few quarters. So I want to ask what the reasons are for that, maybe it’s a small number of customers that have been up for renewal or provide a consolidation or maybe something from bundling more components of your platform over the last nine months. So just like to dig into those numbers a little bit more?

Yeah. Sure. So renewal rates, both hovering right around 90%. We think a strong renewal rates for subscription business model. And we also showed that their contracted net new subscribers even net of loss were $68,000. So overall we feel pretty good about the renewal rates. They all are slightly lower than our historical averages and I’ll attribute that to many things. One, our success is attracted to competition and the landscape is definitely more competitive. Dozens of competitors are beginning to offer account solutions into the market. And we expect to see more and more from that while we strengthen our product sets and our relationships. That said, you also did point out few things that are true about the renewal rate particularly in this quarter. One is that it was a lower than typical quarter for the number of subscribers in the denominator. So it’s a more sensitive number. About $170,000 were up for renewal and we renewed about $150,000 in the quarter. So you can see again a really strong 91% performance. But the denominator against the $3 million was fairly low. And we see some bigger renewals up later in the year. At this moment, we have a lot of confidence in. So the denominator will be bigger. It will be a less sensitive measure. When we did look in a little more detail into Q1, we saw some interesting things. For instance, we did lose one customer to a divestiture. So one of our hospital systems divested a hospital and when they divested, it goes to somewhere else, not on our platform. Lot of times, since with our market share we divest from one of our customers to another but in this case, we divested out and they were on another platform. So we lost it. We also lost one for nonpayment. So we had one meaningful customer that could not -- or was so far behind in paying their bills or could not pay them that we had to turn off the system. And we’re not sure where that will end up in the long run but we did lose one to non-payment. And we lost a few to competition. When customers were up for renewal, they may be looking for different features than we offer. We stay focused on our core sets and in both talent and learning and our core solutions. And that doesn’t always meet everyone's needs. So hopefully that’s a good enough explanation of the attribute to the market, the competitive landscape and our strengths in the position in that to address that the renewal rates.

Yeah. That’s very helpful. And you did mention competition a little bit more than maybe we’ve heard in the past. So even customers are looking for different features, is there anything that you would point to that is something you see missing from your platform that you want to develop, or do you think your strategy is ultimately superior going forward? Is there anything that’s striving change in your go-to market strategy?

Well, we are focused on building the toolsets out to facilitate these core solutions sets like, improving resuscitation outcomes, improving the on-boarding process. And there are elements and other platforms that are focused more on some of the peer HR functionality. We think ultimately that our solutions are more important because they saw specific problems in healthcare and not just the generic HR toolkit. That said, there are other solutions sets that have capabilities that we don’t currently manage, their HR functionality that some of which we have are neither building and some of which we will never build and we will stay best of class. So, I think some of the doorways we enter to like in HR, we will see more people competing. Others like the CNOs and the head of compliance and risk management or areas where we continue to be -- in the competitive landscape, we are still more focused and there are fewer competitors.

Great. That was helpful. Before I change topics a little bit I want to ask about gross margins. In the last quarter, we saw gross margins improve but this quarter they back down a little bit. I know you have discussed the impact of product mix and how that impacts gross margins really at length. So, I want to make sure that’s still the key driver and just also get some kind of NDR, the volatility we might see in this metric over the next few quarters.

Yeah. That’s a complicated metric for our company and one that while we track and we tried to point people to operating income, potentially is a better measure because product mix plays so much in the gross margin. And as you know our content solutions sets have a lower gross margin, their platform solutions. Some of our research products have lower gross margins than both of those and the relative mix or relative growth rates, they are all growing which is the good thing. But the relative growth rate determines that blended gross margin. I think it’s been fascinating from my point of view given the variability in the product and solution mix, how consistent gross margins have been. And so it’s really just the channel of easing out the relative growth rates of these different gross margin products. And again, it’s been amazing the relative consistency of gross margin. I would like to point a little more to operating income because it’s a little better indication of some of accounts receivables with lower gross margin have fairly low cost after gross margins. So they are strong contributors to cash flow and operating income. And so it’s a complicated answer but it’s just product mix, and we’ve tried to indicate that generally platform products have higher gross margin. You see the number of subscribers we added, the 68,000. As those get implemented, they will have higher gross margin. Products like the resuscitation products and ICD-10 products. We have key partnerships where we’ve had royalties of higher cost of goods. But they are strong contributors to cash flow and EBITDA and operating come. So we like to say everybody to focus a little more on operating income than gross margins.

Great. As a follow-up there just seeing the relative strengths that you’ve discussed this quarter and the drivers for the coming year. It seems like we might be able to seize in. Definitely, here the message you’ve been giving like kind of lifetime value for customer. But could we see a scenario this year where gross margins are at the level they were at this quarter or even lower, where you could still exceed your operating income targets for the year because of the dynamic you discussed?

Yeah. It really is kind of hard because I opened up by talking about the strength in the competency center and the performance center, which are peer platform products with very high gross margins and you saw the talk of utilization and new accounts coming onboard to a week and again high gross margin. And the speed of implementation will drive when that hits our financials and we talked about strength in implementing. We are right behind that though the higher cost of goods products like the HeartCode and the ICD-10 products. They definitely have the higher cost of goods, but they are also performing exceptionally strong. On a relative basis, right now the implementation and revenue recognition cycles are probably a little shorter, are shorter on the content solutions we mentioned, which would bring their revenue faster in their model maybe than the platform subscribers, which could result in a scenario that you mentioned.

Great. And one last more time housekeeping question. On the new revenues per subscriber metric, I just want to make sure we kind of understand all the nuances of this new metric. Just on quick issues like our HPC and HCC users included in this, but not double counted or maybe that depends further there. On the HLC platform or not and then this is consulting our customer course for revenue also part of the numerator and so the last small issue I had in my understanding, are acquisitions possibly impacting the metric and is that possible to quantify it all?

Yeah. So let me work back a little bit. The acquisitions, for instance, Sy.Med, those revenues are not included in the calculations in anyway, numerator or denominator. The first question I think you asked was, how are the implemented subscribers counted? And I would say those are unique subscribers to the entire platform. So if you are a customer of the HLC that would count as one. If you are a customer of the HLC and HPC that would count as one, or if you are just a subscriber of the HPC performance center that would count as one. We would not double count you if you were on multiple modules. And so you are trying to get at this concept of a unique subscriber on the platform. And then you are using all of the add-on models. So if you were on the learning center and you added the competency center, while it would not increment the denominator it would increment the revenue per subscriber, the numerator. And so as you add additional software solution and/or content solutions, those will be added to the numerator from the revenues perspective.

Great. Thanks, again for taking the questions guys.

Sure.

Thank you. And our next question comes from Matt Hewitt from Craig-Hallum Capital.

Good morning and first, thank you very much for providing the new metric related to ARPU. As you mentioned, some of us had been trying to back into an approximation, so having a number from you guys is going to be helpful going forward.

Thank you. We want to add backed out project revenue, non-recurring, non-internet revenue. We tried to clean it up. I think most analysts including you, Matt, had gone very close to the metric anyway with your great work. But we thought, we would clean it up for you little bit and take out -- clearly take out the revenue streams, it might be too hard for you to get to.

Well, that’s very much appreciated. Just a couple of questions from me. Regarding the competency performance center platforms, looking back historically and the ramp that you’ve seen in the core HLC platform over your history, how would you compare the trajectory of ramp for competency performance center versus that HLC? I mean, are you seeing -- it took half dozen years to get where you are today with the core platform, are you seeing that timeline shrink dramatically, or do you see a similar type trajectory playing out for those new platforms.

It’s interesting. We launched the competency center, which was a visionary product a few years ago. And I would say we essentially struggled to get that properly positioned. It was essentially kind of a visionary way of thinking about performance reviews. And sometimes when you sell a vision, it takes a little while than you expected. It wasn’t until we had the breakthrough of understanding how to properly segment the functionality and about a year ago and release the performance center that the curve of adoption for both of them has started to takeoff. And so it’s almost like it took us little more to figure out how to properly position and build out the functionality in a way that would get to the curve that we are seeing now, but we've finally gotten there. So in some ways the first couple of years are little more frustrating, but in the last 12 months and particularly you can see a lot of energy and excitement that I think we are figuring it out and we are seeing adoption curves that I would call similar to the important adoption curves at our learning centre earlier in its trajectory.

Okay. Regarding -- it sounds like there was a little bit of a delay with the updated SimView, will that or does that account for the pop in deferred revenues that we saw here in the first quarter or were there more customers paying for the full year or for the contract in advance? Help me understand that metric a little bit.

Well we've been selling the older version of that SimView product for quite some time and as you get closer to shipping the new product and this product is a shipping product that has software components but also some physical components fulfilled by our partner Laerdal. The delay -- we continue to take in orders but not be able to fulfill and generate the revenue recognition, so we have a nice little backlog of orders on the newer SimView product that we began -- we did mention that we started shipping and fulfilling in April. So just a timing issue and it did result in the sequential decline in revenues for SimVentures on the whole, but again overall SimVentures was up over the prior year quarter and we are expecting a really strong Q2 as we catch up on fulfillment around SimView.

Okay. May be one more for me and then I’ll hop back in the queue. Regarding the ICD-10 platform adoption with your partner Precise, you know it seems that was in my opinion the number one topic of discussion that the conference was preparing and getting ready for ICD-10. We've seen a number of different studies and surveys that have indicated that hospitals are behind the curve not only in getting the systems in place for the actual quoted and billing, but also on that training. It sounds like you had pretty strong quarter -- actually couple quarters now of adoption of your products, are you seeing customers adopt or trying to get their employees trained even if they don’t have computer assisted quoting or some of the other software needed to complete the billing process, but they want to get the employees trained in advance to that October 1 deadline or may be just talk a little bit about the landscape regarding ICD-10.

Yes sure. There is a couple of things here. One, everyone has to be ready for the change even if you don’t use -- so there are kind of two forms of training. There is training about the change in educating on the new models for quoting and how that will occur and there is a training on the software that is used to do the quoting and the Precise library is more of the former than the latter and so it fits in that category of training that we believe everyone needs between now and October of 14. So I think we think we have the right partner and the right -- the right relationship and therefore the right solution offering that is the most broadly needed and will be in the most consistent demand for the next I would call it 20 months. We are very excited that this product will drive -- we think will continue to drive growth between now and that big push in October. We are more trying to plan for the aftermath of that two years hence when there might be some sense of dropping off in the utilization of those products after one makes the migration. Although our experience is even today with ICD-9, which happened quite some time ago, there is still a lot of demand for training in that quoting system. So we think it’s a strong growth catalyst for us for the next 20-24 months and it’s all about developing a competent, knowledgeable workforce on this massive change in how payments will be. Illnesses will be quoted and payments will be made and we think we have the very best product and partner you know that's -- and this is the only integrated and exclusive product to our platform. So we've entered into exclusivity for what we believe is the market leading product with Precise.

Okay. Great. Thank you. I'll jump back in the queue.

Thank you. Our next question comes from Richard Close from Avondale Partners.

Great. Thank you. Congratulations and a good start to the year. Gerry, I was wondering if you could talk a little bit about the sales and marketing, I guess the expense came in quite a bit lower than what we were looking for and then on a year-over-year basis, if you take out the user conference I guess from last year percentage of revenue its quite a bit lower, if you could just talk in and around that? And then was the $520,000 I think the number that you said for the user conference last year, is that all in sales and marketing?

Yes, more predominantly in sales and marketing. So I think together the sales the growth rate and the revenue, the 25% you see the hiring in the sales area. So our plans are I think I mentioned to continue to add people, the folks we had in the first quarter that have not been on for a full quarter yet. So over time, I think you will see that line pick up as we hit our hiring plans and it’s a little bit of a -- it’s a little bit of a, I made a nice consequence of some ways of our rapid growth in revenue, that that's the desire behind it.

Okay. And then with respect to the performance centre, competency centre or the talent management side of the business, I believe you might have said earlier probably that are you still signing about two hospital claims per week on those in line with what was occurring in the fourth quarter? Was -- did I hear that right?

That's correct. So we kind of went from zero, essentially from launch of that first 90 days where we got our first couple of initials, then we went to about one a week and the next quarter and then two a week and then we maintained that velocity in this quarter about two week.

Okay. Great. And then I guess just final question for me and you hit on this a little bit in terms of talking about the ICD-10 and you are really now trying to plan for the aftermath of that product, when you look inside your business development or product development horizon looking out, do you feel more comfortable that you are going to able to fill some of these holes once successfully take advantage of ICD-10 successfully take advantage of the talent management and some of these other areas like you said I think it was the neonatal resuscitation, you pretty much got all that last year and so that creates a little bit harder the growth year-over-year comparison, do you feel good about what the outlook is in terms of additional product add-ons and may be platform add-ons going out over the next several years?

I do. We've got an exciting mix. The challenges in healthcare are never ending. The solutions that we need to emerge and we have many that are different stages of development. So SimVentures I think is one of those that's a 36-month journey from where are today that I am hopeful that in 36 months, that will be highlights of the calls whereas today its ICD-10 and then we'll have steady performers like the resuscitation products. I think that product is just going to keep on going until we get the kind of market share that we've been able to establish in other core products like the learning centre. So yes, it’s an interesting portfolio kind of question and the good news is that there are several accelerants now that carry us not just for one or two quarters, but in the case of ICD-10, six to eight quarters and so it does push that perpetual growth challenge down and out a good bit. It is a blend issue and we have a lot of projects and short, medium and long-term investments going on to try to continue to have the right portfolio mix. ICD-10 is maybe surprisingly strong, we expect its strength, but surprisingly strong which makes a challenge in 24 to 30 months bigger. But we have, we are working with Precyse now to redefine that product set even post the go live in a new way that we think adds more incremental value to even ICD-10 journey. This idea of maintenance of confidence of the work forces post the ICD-10 period, I think even once people are oriented is really the concept of having a work force that relative to other work force is, is more confident in those topics. So I think, overall, I feel really good about it, I think, I enjoy and I like our subscription model which gives us time to use R&D and product development to balance out the portfolio. And we feel like we’ve got enough runway on the core -- the current products balanced to deliver solid growth for the next several quarters.

Okay. And then final question for me would be on Sy.Med, if you could give us a little bit of an update in terms of how their integration has gone track so far and what you ultimately see is the market opportunity for that product, for that offering?

Yeah. Right now the team at Sy.Med is performing exceptionally well. They are delivering growth in their core applications, in their own market channel which is both hospitals and physician practices. So from an integration standpoint I would say they are performing very well and some of the core functions of HR and payroll have been integrated. On the technical front not a lot of integration has begun, we have more pieces to assemble around this the core concepts of credentialing, identity, work force identity, verified credential sets and we have a kind of long range vision there that requires a more, more pieces to be added to it before we purse it. So, right now, it’s operating fairly independently, we've done the core the basics of integration that you’d expect to get the initial leverage. We’ve allowed them to begin hiring additional sales people and they are doing really strong and growing their core business. And I would say, I’m going to have to have you wait for four, five quarter to see our vision around where we want to go with credentialing, privileging and work force data management. There is kind of more to that story book ahead of us than behind us.

Okay. Great. Thank you very much. Oh, I guess, one final question would be Gerry on the tax rate, any thoughts on that as we continue to go through 2013?

Yeah. The historic guidance remains unchanged, what your question maybe evolved about the first quarter tax rate…

Yeah.

… that around 40% or so.

Yeah.

And the reason for that is the stock option excises that took place in the first quarter, create both a, let’s call booking income tax benefit, and so therefore, because they are discrete item, they are required by GAAP some of the calculation to the first quarters tax rate and therefore that, that’s why its low of this one quarter, but we still maintain the trend overtime.

Okay. Great. Thank you, guys.

(Operator instructions) Our next question comes from Frank Sparacino from First Analysis.

Hi, guys. Just curious on two things, one is, with respect to hiring, where are you at right now relative to your 2013 plan, that’s why, I look on the websites, look likes there is fairly large number of job postings out there, I don’t know, how you progress throughout Q1? And then, second would be, Gerry, maybe you just comment on the CapEx for the year, maybe I had this wrong, but I had, originally had nine to 10 it look likes it jumped up 11 to 12, I’m just curious what the incremental spend is tied too?

CapEx first, that would be just try to make more room for all of our investment projects, little more room for cap less software development primarily to cover both talent management and research.

On the hiring front, I would say we made steady progress but not as good progress we like during Q1. We took several actions towards the end of the quarter, in fact on our website you might enjoy going to the job postings area, there is a new video that explains more about our culture, and our company to help attract talent, we’ve reposition explain our awards and recognitions better and generally made it more exciting, and interestingly it has resulted in and turnaround in that rate of hiring just in the last 45 days. So I believe we extended about 11 offers in the last five business days that were expected or we had 11 new candidates come on Board and in the prior week as well. So I think we’re on track now. We have made, we’ve done a little better, learn from some prior lessons and have more acceleration in hiring and that’s one of the reasons we expect to working hard to catch up with planned hiring that we had. So I would say in Q1 we were still lagging and that had a financial impact that -- was definitely than we wanted, we want to have the people in and incur the expenses so result in little higher operating income then maybe planned. As we enter the second quarter though, we are doing, making every effort, recruiters, better promotional pieces to explain the company that we are. And again, I think, you should take a look at that, you might find an interesting, it’s a great three minute video about our culture and our company and where we are going, and small things like that have made a different system last three weeks.

Great. Thank you, guys.

Thank you. I’m showing no one else in queue at this time.

Great. Thank you. If there are no further questions, we’ll assume we've done a pretty good job trying to answer various questions and we look forward to reporting our next quarter, on the next quarterly conference call. Thank you all for your attendance and participation and congratulations to all HealthStream employees to delivering an outstanding first quarter to 2013.

Ladies and gentlemen, thank you for participation in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.