Good day ladies and gentlemen, and thank you for standing by. Welcome to the HealthStream Incorporated First Quarter 2017 Earnings conference call. At this time, all participants are in a listen-only mode to prevent background noise. If anyone needs assistance during the conference, just press star and zero. Later, we will have a question and answer session, and instructions will be given at that time. As a reminder, this conference is being recorded. Now I would like to welcome and turn the call over to Ms. Mollie Condra, Vice President of Investor Relations and Communications. Ma’am, please begin.

Thank you, and good morning. Thank you for joining us today to discuss our first quarter 2017 results. Also on the conference call with me today are Robert A. Frist Jr., CEO and Chairman of HealthStream, and Gerry Hayden, Senior Vice President and CFO. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company’s filings with the SEC, including Forms 10-K and 10-Q. With that, we’ll begin. I’ll turn the call over now to Bobby Frist.

Thank you, Mollie. Good morning everyone. Welcome to our first quarter 2017 earnings conference call. We’re going to, as always, hit a few highlights and go into details on some of the numbers. Our first quarter performance, we felt good about our first quarter performance. It sets us on track to deliver full-year revenue growth of 10 to 14% and return to leveraged operating income growth in 2017. We were excited to see several operational developments and financial metrics that showed strength in the quarter and throughout the quarter, and if you think about it, the sequential improvement was a positive movement. Compared to the prior quarter, for example, revenues were up to a record high. Operating income and adjusted EBITDA improved sequentially. DSO was down, which helped contribute to the cash balance being up. Subscriber count improved, and finally our ARIS - our annualized revenue per implemented subscriber was up. During the quarter, we made significant progress on two items that we brought up in the last quarter. The first was restructuring our provider solutions teams to improve workflows, thereby reducing the implementation backlogs. We also made important progress on the consolidation of our patient interview center operations in a move to Nashville from Laurel. Both of these developments we feel and have kind of modeled out with contribute to improved financial results in the second half of the year as we’re still midstream in them, but making good progress throughout the first quarter. In our last call, several new products were introduced as well, and I’m pleased to update on the report that all six of these new products - they are Talent Tracks, OB Risk Curriculum, Develop Rx, Nurse Residency Pathway, Engage Rx, and our PCCB library, they all had new sales and revenue recognized in the first quarter. Now as I mentioned, these products will be immaterial contributors to growth in 2017, but we are excited to have them in the market, continue selling them, and see them be adopted by customers. I’d like to turn it over to Gerry Hayden for a more detailed look at the financial metrics and then we’ll circle back around with business segment updates from me.

Thank you, Bobby, and good morning everyone. I’ll provide some additional information about our financial results, including certain items that impacted the quarter. For the first quarter, consolidated revenues were up 11% to $59.9 million, operating income of $1.8 million versus operating income of $2.5 million in last year’s first quarter, net income of $1.3 million and earnings per share of $0.04 versus net income of $1.5 million and $0.05 per share in the first quarter of 2016. Adjusted EBITDA was up 7% to $8.7 million from $8.1 million in last year’s first quarter. During the quarter, the Morrisey Associates acquisition, which closed in August of 2016, contributed approximately $2.3 million of revenue and incurred an operating loss of $700,000 primarily due to deferred revenue write-down accounting conventions. Now [indiscernible] to the income statement, segment revenues, gross margin, operating expenses and operating income. Revenues in our workforce solutions segment increased by $2.4 million while overcoming a $3.4 million year-over-year decline in ICD-10 readiness revenues in the first quarter. Now let’s take a quick look at the workforce ARIS. For the first quarter of 2017, HealthStream’s workforce ARIS was $37.68, which is up when compared to last year’s first quarter of $36.27 and last year’s fourth quarter of $37.28, so we grew ARIS both quarter over quarter and sequentially. ARIS as discussed in previous quarters is also subject to movements that may seem counterintuitive; for example, adding a highly desirable number of subscribers can actually drive the ARIS down if the amount sold to each subscriber does not initially equal or exceed the previous quarter’s ARIS. Similarly, weekly subscribers who pay less within the previous quarter’s ARIS can drive ARIS up. It’s also important to keep in mind that ARIS does not include a complete look at our business, as two…

Thank you, Gerry. That was precise and concise, and you must have been channeling a famous historical figure who once said, broadly speaking, short words are best and old words when short are best of all. Let’s see who can pick up the quote. Gerry, thanks for the comments. Let’s head into my follow-up on the segments. I’d like to talk first about the workforce solutions segment. Our workforce solutions segment showed continued growth in first quarter. In this segment, we offer a complete suite of talent and management applications. One of them, the HealthStream Performance Center, or the HPC as we call it, saw strong revenue and sales growth when compared to the same quarter last year. But that’s not the only reason we’re excited about that product. We’re on our way to completing a successful enterprise roll-out of an enhanced, mobile-ready response and design version of this product. In fact, over 70,000 subscribers to the HPC are already enjoying this enhanced version, and we’re getting into the move where we’re going to move the bulk of the customers over. In the next month, a quarter of a million more subscribers will be moved to the new more responsive HPC, and in the following month from that, hundreds of thousands more will follow in migrating to the new enhanced mobile response and design HealthStream Performance Center. Our sales team is expressing renewed confidence in the competitive advantages this product now offers. In fact, a medium-sized health system in Ohio, for example, recently chose to add the Performance Center to their renewal contract, which is exciting because it of course drives ARIS up at that facility but also with the new capabilities, they commented on the improved features, the fewer clicks, the enhanced workflows, and they talked about its overall…

[Operator instructions] Our first question is from the line of Matt Hewitt with Craig Hallum Capital. Please go ahead, your line is open.

Hi, this is Charlie on for Matt. Thanks for taking my questions.

Hey Charlie, sure.

First, related to ICD-10, what was the number of subscribers in terms of headwind that you faced in Q1?

What was the--what? Can you say that again?

The number of subs that you--in terms of related headwind for ICD-10 that you faced in Q1.

Well, we haven’t disclosed the exact number. I don’t have it in front of me, but it was in the tens of thousands for ICD-10 only subscribers, if that’s what you’re asking, that rolled off the platform.

Yes, that’s what I’m asking. Second, we saw that you’re moving your headquarters. Is there going to be any incremental capex associated with that move, or maybe some lease termination expenses?

Not in this year, and not in next year. Maybe some in next year as we prepare for the move. There will be some capital outlays, but nothing for your model this year at all. We don’t assume the property for almost another full two years.

Okay, that’s helpful. Then lastly related to the implementation time and the switch to SaaS revenues, can you kind of talk a little bit more about what you were saying related to the SaaS contracts maybe lowering your revenue outlook in ’17? I think I missed that part.

Yes, we had--when we entered the year and created our budget process, we had modeled that we would have a certain amount of installed software and of course a certain amount of SaaS software being sold out of our provider solutions segment. After we finished the first quarter, we realized that we really sold very little and in some cases, for example out of the Morrisey acquisition sold no installed software, which in the short run--you know, you recognize revenue must faster on installed software, so in the short run it’s a bit of a hit to our revenue growth plan, but in the long run it’s a stronger move towards a subscription model. So I guess the good part of the report, although we did lower guidance for the segment a bit on our top line revenue growth, is that it results in more long-term stability and fewer accounts to openly migrate to the SaaS platforms.

Okay, great. Congrats on the great quarter.

Thank you much.

Thank you, and our next question comes from the line of Ryan Daniels with William Blair. Your line is now open.

Good morning, guys. Thanks for taking the questions. I wanted to ask a few follow-ups on the patient experience surveys. The first one, I know you’ve talked about the margin profile on a percentage basis being stronger, but I’m curious if the dollar gross margins in that business will actually improve as you do the e-survey conversion, or if it’s just the percentage margin.

Well, I guess it will ultimately depend on the volume commitments from each customer whether we are able to offset the dollar value of the margins. But the margin percent would go up, and right now it’s also up on the dollar value.

Okay. Have you looked into--I know one of your larger competitors had some success not just converting to e-surveys but driving more volume, kind of doing census-based surveying where you go above and beyond mandated standards to get a bigger picture of the patient base and experience. Are your customers also willing to accept that type of initiative, or have you just focused on more converting to the regulatory standard levels?

I think that’s an ambition for us, but right now we’re focused on the conversion to get the margin shift, so we have moved in the Patient Insights business to a full census-based model. It would be a great opportunity for us as a secondary process of improving performance of that business unit. Right now, we’re focused on the conversion to e-survey for the parts that will convert.

Then if we think of the guidance, I guess I appreciate the conversion to SaaS and the e-survey conversion are negatively impacting those lines a little bit, but what is the key in driving the uptick in the core workforce guidance for growth? Is that really just the HPC that you talked about, or is it better traction in the six novel programs that you highlighted last quarter and said were selling this quarter?

Right, so a couple things there. The six new programs announced are very, very small, immaterial to the year, and we just note them because we’re excited we have some initial sales, so we launched the products and customers purchased them. But for modeling purposes, you almost don’t want to include those in your model. The HPC is performing well. It’s certainly up. It’s in the clinical solutions group, which is a subset of the workforce, so in workforce there are kind of two or three primary driver areas. Of course, the resuscitation business we talk about continues to perform well. The clinical business, which contains the HPC or--I’m sorry, the talent business which contains the HPC is doing well. Clinical is up overall - there’s some good products in there, for example CE Center, and then of course compliance, our core business, is one of our top performers this quarter. Our new product called Knowledge Q, which is a high margin product which is--I don’t know, I guess I’d call it a third generation compliance toolset for OSHA mandatory training, it is kind of leading the pack right now as the top performer, high margin contributor. So there’s at least one or two products performing in each of resuscitation, clinical, compliance and talent that are all bundled into workforce. Now of course, they’re climbing through and offsetting, but there’s a strong offset still on ICD-10 revenues, and so we’re having to climb through that this quarter. I’ll add a little more color to that, because if you recall last year, if you look at ICD-10 on a quarter basis, we got approximately $4 million in Q1, $2 million in Q2, $1 million in Q3 and $1 million in Q4, so $8 million, $8.5 million of ICD-10 revenue which this year in totality will be $1 million across four quarters. So first quarter showed the biggest change down, second quarter will be the second largest, and by third and fourth quarters it will be almost completely out of the system. So one or two key products in each of four areas that make up our workforce are performing well and driving growth, variable growth rates on them. Clinical systems, what we call our clinical systems development platform was up about 24%, and we talked about the HealthStream Performance Center, it was also up, I believe almost--do you have that number? Was that about a--it was on here. The clinical stack on there overall was up about 13.2%, compliance up about 26% overall, so there’s some really nice drivers that were offsetting the ICD-10 drop.

Okay, appreciate all the color. Thank you.

Thank you, and our next question is from the line of Richard Close with Canaccord. Your line is now open.

Great, thank you. I wanted to hit on provider solutions. You talked about software-as-a-service versus software license, I guess, for the revenue adjustment. Can you talk a little bit with respect to you get--you were able to maintain your operating income guidance for the year. I would have thought that, albeit the numbers are not huge, but I would have thought if software license would be higher margin than the software-as-a-service and maybe there would be an adjustment to operating income.

Well not--there will be less margin overall because there’s a little less revenue, and it is higher margin revenue but the comparable margin, gross margin on the two is not that different, it’s just that revenue comes in slower and over a longer period of time for the SaaS business. We were able to manage the entire workflows across all three business segments, even with this change of expected performance in installed software, which again I view as a positive overall. We were able to manage the expenses and other areas across the business to deliver and have confidence in the operating income leverage that we’ve guided to.

Okay. Then also the strength in some of the workforce services, that’s higher margin business and that partially probably offset that as well?

Yes, I would say that the HealthStream Performance Center, which we wanted to highlight because there’s a new version out, and while the new version isn’t necessarily--there’s no upgrade cost for existing customers, so there’s not immediate growth in revenue, it is reenergizing our competitiveness in that area, so we feel good about the product. It is a high margin SaaS platform application, so we did want to call it out because we’re in the middle, literally, of a 90-day window here of migrating customers, and as I mentioned, we’ve already migrated over 70,000 users to the new one and we’re getting very positive feedback. By the way, that update we used to also update the HealthStream Competency Center, and it is also part of this rollout as we’re migrating customers. Those two together probably move hundreds and hundreds of thousands of users on them in the next 90 days, and the sales team is excited because they’re--we very specifically redesigned those applications to have fewer clicks, better workflows, to be responsive design on mobile devices so they can work on iPhones and it makes the whole workforce more mobile. So just overall, we see an improvement. And then don’t forget, in patient experience Gerry did call out a very specific movement in the gross margin enhancement on patient experience, so that also has given us some confidence for full year, about 500 basis points movement already. And remember, that’s even while we’re carrying the cost of the Laurel operation, which will wind down throughout this quarter. So those moves altogether are what has given us the confidence to reiterate our operating income guidance range.

Okay. On the provider solutions, just staying on that for a second maybe, with respect to the improvement in the backlog and, I guess, the process or restructuring of the teams there and process, focusing on the process to improve backlog conversion, can you comment at all on whether there was any negative impact over the last several quarters to the pipeline of new business because you had the backlog logjam, and whether now that you’re seeing improvements, whether the pipeline of potential new business is improving?

Yes, that’s probably worth a little historical review there. As you know, we acquired these two companies in the last two years or so. We ramped up investments in product development and particularly in sales. The sales of the SaaS platforms obviously, even per our discussions a few moments ago, were doing very, very well. The backlog problem kind of--as we imbalanced sales with implementation operation execution did cause some consternation to the pipeline, and we had brought in a lot of new sales. We in fact had won business from competitors and we felt good about it. Along that journey and several months ago, or maybe even a quarter and a half ago, we did lose a couple of accounts out of the pipeline that were frustrated with the backlog situation. In the last full quarter, which is this quarter, we feel strength again in the pipeline. The sales team has new energy and kick, and so we think that the cost in terms of pipeline is behind us of those challenges. But there were a few direct costs and maybe one or two accounts of a very robust pipeline that did--we kind of brought them and lost their attention. We’ll fight to get them back, of course, in the next renewal cycle, but there were some direct costs to the lag. They didn’t show up, they were just lost opportunity, to be clear, not lost revenue out of our model. We’ll fight to get them back because the new products that are coming in that segment are really compelling and will be introduced throughout the year and early next year. But it is fair to say that the backlog did cost a little bit of opportunity cost. I will also repeat that throughout the entirety of the first quarter, we feel back on our game and back in customers’ good graces, and as I mentioned, there’s probably about half a dozen material go-lives that are all committed to firm dates over the next two months to go live on the applications that we sold them. So we feel, again, good about the progress.

Okay. My last question would be any commentary around renewals or how those are trending, and outlook there in terms of renewals, and then just how uncertainty in healthcare related around Repeal and Replace, did you see any impact in terms of new business or renewals associated with that uncertainty.

So kind of a backwards there. At the macro level, our sales throughout the end of the year last year performed well. In Q1, as we had sat with our board just in a meeting a few days ago, we felt really good about what we call our new order value pipeline, so we felt that we were kind of--we were ahead of schedule as of the end of Q1 on our new order value, which is a reflection of our sales progress. So the mix of products is maybe a little different than was expected as we did talk about install versus SaaS selling, but at the macro level we continue to perform to expectations and haven’t directly seen or imputed any change from the macro policy uncertainties. That said, I do think they exist and don’t know when they’ll manifest. In general, there’s increased pressure on our customers, continues to be increased concern for their margins. We’ve probably seen a--we’ve definitely seen a very small uptake and a very immaterial and small number of bankruptcies, so we have seen one or two of those that maybe a little higher, a slightly higher rate than we saw in the prior year, so that has had, again, an immaterial, a very small default rate, but we did see a small uptick in that, so that’s probably maybe factored into the macro conditions. Again, so not affecting the sales pipeline but maybe some existing customers falling under pressure. Let’s see - what was outside of the macro conditions? The renewal rates? Yes, so the renewal rates through Q1 broadly across all platforms were performing and good, so no material changes to renewal rates to report. We had some--a little bit of churn as we’ve gotten bigger in the core workforce base. I can recount one medium account that non-renewed and went and consolidated to another platform, which happens often in M&A scenarios. Sometimes it consolidates our way, sometimes it consolidates the other way. In one case, we had a medium sized account that consolidated the other way, but overall given the scale of the subscriber base, renewal rates remain strong on subscription products.

Thank you.

Thank you, and our next question comes from the line of Matthew Gillmor with Robert Baird. Your line is now open.

Hey, thanks for taking the question. I wanted to ask about the consolidation of the phone operations on the Px side. Can you help us understand the financial implications from that? I know you’ve given some directional indicators, but will there be some severance and lease termination charges over the next couple quarters to think about, that aren’t included in guidance, and if so, can you quantify it? Then second, how much do you expect you’ll save from a cost perspective after this has been completed?

Matthew, this is Gerry. So first of all, the severance separation costs were in the original guidance. This quarter, we incurred about $155,000 of separation costs, and if you [indiscernible] the piece in Q2, so final wave of people go off the payroll and make the final move to Nashville. In terms of the overall impact, it’s baked in our overall guidance going forward into the year, so I’d say it’s all baked in. We have improvements showing - there’s less rent, for example, because the last expires June 30, the people, the headcount, obviously no operations as well. So--but that’s the--it’s in the guidance, $155,000 or so in the first quarter.

Okay, great. Then as a follow-up, I wanted to ask about the resuscitation product, and I had two questions around this. First, on the last call Bobby mentioned that sales for the product could slow a little from the really strong trend you’ve seen, in part because you’re expecting a pull forward of sales ahead of some planned price increases in ’17. Can you maybe just update us on the activity there and if the price increases have been pushed through? Then secondarily, can you update us on how hospital are responding to the more frequent CPR training under the new RQI guidelines, and if the product is priced any differently under the new more frequent training?

Sure. So it is true that on a relative basis in our portfolio, the performance in Q1 was strong but not as strong as some of the other areas, so--and relative to its prior performance had slowed down. In some ways, that’s favorable from a gross margin mix standpoint, obviously, to see something like HealthStream Performance Center, which is a much higher gross margin product, probably 90%-plus to be doing on a relative basis, performing well is a good thing for gross margins that will show up in later quarters. The price increases have been pushed through broadly across the platform, so I think we’ve been able to convince customers of the return on investment for those price increases. I don’t think there’s a direct correlation to the slowdown, although--again, so it’s relatively--it’s performing well, but relative to prior quarters where it was our number one lead product, it has slowed down a bit, but it continues to perform well. The customers, we’re finding the vanguard customers that want to move to the more frequent training are very receptive to the model and getting good results, and of course the science shows that even though the cost to the hospital is effectively doubled because it moves to essentially an annual subscription from a biannual, that it’s shown to be clinically effective to have an ROI and therefore the value proposition is high on an ROI basis. But on an absolute dollar basis, it is a more expensive program to operate across the healthcare organization. Those customers who are early adopters are in for the quality and find value in the outcome, and are willing to invest even though the price is a higher price point. We’ll see as we get into the bulk of the adoption, the acceptance. It requires a significant change management process at the hospital, and we’ll see the customer rate of adoption as it gets into the middle of the adoption curve, whether the longer implementation cycles and the more change management required to implement such a program is a hindrance to sales. But we would say right now, we’re finding a lot of excitement for the program and all the organizations focused on quality are willing to invest in such a program.

Then I had one quick follow-up on the provider solution commentary around moving to the SaaS model. I know that’s part of the longer term segment plan, but would you characterize that decision as a decision made by HealthStream to more aggressively move to the SaaS-based pricing because you’re having a good performance in some of your other segments in sales, or was that just a demand factor in terms of how clients wanted to consume that product?

Well, a couple things there. One, I think our sales team is really showing the features of discussing and selling subscription software over installed software as a preference, and so we essentially missed the relative velocity of both in our planning and so we’ve accommodated for that in our revised guidance for that segment. But it has been the preference for many, many quarters now to demonstrate SaaS products. We think it’s also customer preference, so we think it’s a combination of both, and so we prefer to sell on the subscription-based models.

Great, thank you very much.

Thank you, and our next question is from the line of Scott Berg with Needham & Company. Your line is now open.

Hi, great. This is Peter Levine in for Scott. Most of my questions have been answered, so just one quick one here. If you can talk about your sales investments for the year - I know it’s four months into the year, but are there any changes being made to the sales teams based on current demand trends, product adoption, or anything with the macro environment? Thank you.

I think if you look on our website, you can see there’s quite a number of sales positions that are open. We’ve had some challenges in filling them. They’re a little complicated to find, people with sales experience and clinical background, to get the right mix. So we’ve been a little slower to fill some of the open sales positions, but we do plan to make those investments throughout the year and continue to grow the size, the absolute size of the sales organization at a rate that we can successfully hire and onboard them. So there are probably about a dozen or so posted and open positions that we’re seeking to fill this year. Those are of course factored into our budget and we’ll bring them in as we can throughout the year, so really they’re planned investments that will show up throughout the year. Sometimes in the past we would surge the hiring and use a lot of recruiting to try to fill them earlier in the year. This year, they’re probably going to fill out a little slower throughout the first half and maybe even into the third quarter.

Scott, does that answer your question?

Yes, thank you very much.

Ladies and gentlemen, as a reminder, to ask a question just press star and the number one. Our next question is from the line of Vincent Colicchio with Barrington Research. Your line is now open.

Yes Bobby, most of mine were asked as well. I’m just curious - the subscriber growth sequentially, how did that break between hospitals and ancillary facilities?

I don’t have the exact breakdown, Vince, but as we’ve looked in the last few quarters, we’ve been winning a good number of subs from the post-acute settings and the secondary settings, and so it’s become an important part of the growth of the new subs model. Then we have, of course, the normal churn of hospitals, the vesting of hospitals, hospitals acquiring hospitals, and we’ve seen some interesting new announcements in some of our larger customers. Interestingly, one of our larger customers is divesting hospitals, another one announced a potential target of a health system down in Georgia, I believe, that would be nice growth for us. So there’s kind of that going along with the sales dynamic that is positive, but a meaningful number, maybe not quite a majority is coming from those post-acute settings though in the new subscriber counts.

Okay, thank you. Nice quarter.

Thank you.

Thank you. Our next question is from the line of Frank Sparacino with First Analysis. Your line is now open.

Hi guys. Just following up on the last question, of the 4.6 million subscribers you have to date, can you tell us roughly what percentage of that is outside of the hospital setting?

No, I don’t have that number directly in front of me. Sometimes we have a little difficulty counting, and here’s why. If we land a large health system and historically they put all their employees on the platform, we didn’t go in and parse out how many of them were in their home health division necessarily, their surgery center division. So we land a pure play post-acute setting customer, and we have dozens of those - in fact, we think we have the market leading brand in there, it’s very clear and easy to calculate. When we go backwards in time, customers we’ve had for a decade that put their entire census on our platform, they’ve been acquiring home health, physician practices, surgery centers, and we don’t always have the exact breakdown or even go back and catalog them all. So it’s a little bit difficult, but we do occasionally list our customer base that’s growing in post-acute, and it is a blue chip customer base, a couple dozen really blue chip names that we’ve mentioned in the past.

Thanks Bobby, and then just one more, maybe for Gerry. The capitalized software this quarter was up $3 million, which is higher than it has been historically. What should we expect and model going forward, Gerry?

I think the run rate for the first quarter is kind of what we do as the teams that are onboard on an ongoing basis.

Great, thanks. That’s it for me, guys.

Thank you. I’m not showing any further questions in the queue. I would like to turn the call back to Robert A Frist for final remarks.

Well, thank you. I’d like to remind you of the shareholder meeting, again--what’s the date of that, Mollie? May 25 here in Nashville, 2:00 pm at Cummins Station for all shareholders. We welcome any and all shareholders to attend the meeting. And then finally to circle back around and make sure I do a proper attribution, the quote, broadly speaking short words are best, and the old words when short are best of all, is of course Winston Churchill, so Gerry channeling Winston Churchill today in our conference call. Thank you for everyone visiting and listening in on this call. We look forward to reporting to you next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.