Good day, ladies and gentlemen. And welcome to the HealthStream's Fourth Quarter and Full Year 2017 Earnings Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions]. And as a reminder, this conference is being recorded. I would now like to turn the conference over to Vice President of Investor Relations and Communications, Mollie Condra. Please go ahead.

Thank you, and good morning. And thank you for joining us today to discuss our fourth quarter and full year 2017 results. Also on the conference call with me are Robert A. Frist Jr, CEO and Chairman of HealthStream and Gerry Hayden, Senior Vice President and Chief Financial Officer. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in 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 start, I will now turn the call over to Bobby Frist.

Thank you, Mollie. Good morning, everyone. Welcome to our fourth quarter and 2017 yearend earnings call. Reflecting back, those of you with good memory may recall last year's fourth quarter yearend earnings call. At the time I characterized that quarter as challenging from an operating income and EBITDA standpoint. Later really in the team call, I told that our [indiscernible] and really our entire company was committed to return to operating leverage in 2017 financial results and a year later we've done just that. We were able to go from 2016 operating income of $5.6 million to 2017 operating income of $9.8 million, a 76% increase. I want to discuss the actions we took during the course of the year in each of our segments to achieve that result. After Gerry's detailed financial discussions I'll address some of the ways we plan to continue delivering operating leverage into 2018 and really beyond that as well. First, let's look at our Workforce development segment. Where we focused on higher margin products and creating more open market place for our customers. We co-invested in solutions throughout the year with some of our new partners. We purchased some content outright to improve margins and establish interoperability between our platform and our partners offerings. We also implemented innovative connectivity models allowing our new partners to reach our customers through our platform in ways not previously possible. All of these shifts resulted in better margins and more potential for steady growth in operating income and EBITDA. Next let's take a look at and discuss provider solutions. Here, we work through a tough backlog some of which we inherited from the 2015, 2016 acquisitions. We also made strong progress towards integrating the three companies that we acquired that were SynMed [ph], HealthLine and Morrisey Associates into a single entity under one leadership team. In doing so, we achieved some synergy and operating efficiency throughout the integration process. Furthermore, we did began cross-selling some of the higher margin Morrisey product into HealthLine and SynMed [ph] customers and vice versa. I also want to discuss quickly our Patient Experience business even though we divested the segment nine days ago, 2017 saw improved margins by closing our energy centers in Laurel, Maryland and converting many clients to lower cost but higher margin survey modalities. Generally, for our customers this meant shifting from a telephone base to an email or SMS text-based survey methodology. These actions that we took for our Patient Experience business improved operating income and EBITDA during the second half of the year. After Gerry goes through detailed review of the financials and he'll end with the guidance in his section. I look forward to diving into guidance in some of these longer term actions we're taking to improve operating income and EBITDA.

Thank you, Bobby. Good morning, everyone. I'll apologize in the call in advance. Here's a summary of our fourth quarter results which include Patient Experience. Consolidated revenues were up 7% to $62.8 million, operating income of $1.1 million was up 317% versus operating loss of $500,000 in last year's fourth quarter. Net income was $3.9 million and earnings per share were $0.12 versus a net loss of $300,000 and a $0.01 loss per share in the fourth quarter of 2016. Adjusted EBITDA was up 37% to $8.4 million to $6.1 million in last year's fourth quarter. Our usual investor call begins with the review of our income statement, where we touch and highlight from each business segment. As most of you know, we now [indiscernible] Patient Experience segment on February 12. So our fourth quarter results still include the Patient Experience segment but we will focus on the Workforce and Provider Solutions because these will be our key operations in the future. Beginning of first quarter 2018, we will report what was the Patient Experience segment as discontinued operations and that quarter will also include the gain later that transaction. In press release, we also discontinued the ARIS metric. As we mentioned in previous con calls, ARIS did not include a complete look in our business as two of our three business segments Patient Experience and Provider Solutions were not included in ARIS at all. At the same time, the Patient Experience divestiture also creates an opportunity to develop a unifying metric between our Workforce and Provider segments. Now our revenues; revenues from the Workforce Solution segment increased $1.9 million in the fourth quarter of 2017 overcoming $1.1 million decline in ICD-10 readiness revenues from the fourth quarter, 2016. In the fourth quarter, 2017 revenues Provider Solution segment increased by…

Thank you, Gerry. Glad you got through that with cough, [indiscernible] all the way through. So I would like to highlight three strategic initiatives that have an impact on the 2018 guidance that Gerry just provided. This initiatives will also have a long run, they enhance our long run objective, enhancing operating income and EBITDA. The first initiative we're undertaking is the transformation of our resuscitation product suit. As a reminder at the end of June 2017, we announced that our current agreements with Laerdal Medical for the HeartCode, and RQI products will expire on December 31, 2018. HealthStream retains the rights to and expects to continue selling HeartCode and RQI for the next 10 months. And we will provide uninterrupted service to our customers for the duration of their contracts which can be extended through December 31, 2020. HeartCode and RQI generated approximately $44.6 million of revenue during 2017. At the end of this year, we will stop selling those products and expect the revenue from them to decline in 2019 and run out over the course of 2020. In an effort to build marketplace for our customers that presents more choices and lower prices for resuscitation training, we're committed to delivering a new suite of products to the market on January 1, 2019. On the last earnings call, we announced two long-term partnership agreements to develop a new higher quality, low price suite of products. We're pleased to report the HealthStream and our new partners are tracking to launch this exciting new suite of products beginning in January, 2019. This new product suite will carry significantly higher margin than our existing resuscitation products. In prior years, our HeartCode and RQI products were some of our highest growth and lowest margin products in our company's portfolio growing over 20%…

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

[Indiscernible] the sale of Patient Experience solutions.

Thank you.

Question on that segment and in particular with the Press Ganey relationship that you announced. Seven-year agreement, how quickly will some of those product start ramping within your platform and maybe what have you kind of factored in from a contribution standpoint into your 2018 guidance?

Sure, so the agreement does call from some licensing of our infrastructure and so we've factored in those known numbers into our guidance and our thinking, so that's already in there. Press Ganey has a limited amount of content initially. In fact, some of their content is the acquired content that we have just released that will be rebuilt and rebranded and repositioned under the Press Ganey moniker and so we'll be able to get some content to market quickly under the Press Ganey brand and take that to customers, of course they'll continue to enhance that content and build new content. And so, I'd say that we'll begin to see some impact which is factored into our guidance already immediately because of the agreement and then it will take time to figure out what it's - the real upside potential is. But as you know, the Patient Experience topic is a very important topic. It effects reimbursement. We've always believed in the link between improving those caps, scores and in general, the Patient Experience being an important driver of quality outcomes in healthcare and to have two industry leaders be able to partner to focus on getting an outcome for our customers. HealthStream through employee development and Press Ganey through data analysis, education training development and all that they do, is a wonderful opportunity for both the companies and the industry. So I believe it will have some impact again already factored into guidance. It's in the base agreement and we'll be exploring together the total opportunity overtime.

That's great. Thank you and then, maybe a separate question. You had a significant jump in subscribers both fully implemented and contracted here in fourth quarter, highest in almost three years. Was that a single customer coming on board, was there something different in the sales process, maybe what drove that increase? Thank you.

Sure. It was an exceptional pairing, so we do want to note that as you think about on a go forward basis, we historically guided to think about 20,000 to 50,000 net new subscribers per quarter. Also given our scale at $4.7 million it is getting a little more difficult to add, that the rates particularly in the fourth quarter that we added. That said, the fourth quarter was broad based and strong and not a single customer. In fact, there was dozens of renewals where those customers expanded their base including some big system early renewals where they added new users, it was new systems. We added a big health system it had over 30,000 subscribers. It was brand new to the platform and then a lot of base hits and post-acute setting markets as well. So it really was a nice broad based spread including renewals, early renewals, new market penetration and new share. That said, as we think about guidance we've kind of lowered our internal [ph] expectations given the size of our customer base and general market conditions. We've lowered our expectations and would kind of have everyone thinking in idea of 20,000 to 50,000 net new subscribers' quarters we move forward. In addition as you know, the competitive landscape is amped up. In some of our product categories and so we've anticipated a little bit more in our guidance competitive landscape wins and losses and so we factored all that in, when we considered our growth for the next year.

Great. Thank you very much.

Thank you. Our next question comes from Ryan Daniels with William Blair. Your line is now open.

Let me start with a quick one, just to make sure I have the housekeeping on the guidance correct. If we think about the pro forma revenues that also includes some survey and workforce engagement business, so do you have the actual 2017 revenue number that you were using to grow the 6% to 8% off of? We're thinking it's around $248 million, but I want to be clear with that.

Ryan, this is Gerry. So do you mean cross-sell [indiscernible] from PX?

No I'm just I know there is another piece of the survey business that's workforce engagement etc. which I don't believe also, so you gave us the [indiscernible] workforce the 37 Provider Solutions which is 215 but I know there is another element of revenue, not just the 215 we need to grow to 6% to 8%.

I mean the employee engagement surveys?

Yes, so what's the 2017 pro forma revenue?

Brian the entire segment was sold, all the assets and revenues from all of our historical quarterly reporting the entire segment was sold.

Including the workforce segment?

All the assets and contracts, employee, position and cap survey instruments and contents that was in that segment was sold. So it was a complete divestiture of the segment.

Got it. Okay, so we should be growing $215 million by 6% to 8% that's your aggregate revenue guidance.

That's correct.

Okay, no that's helpful clarity and then as my follow-up. You talked a lot about HeartCode and preparing for that end of the relationship. I'm curious if you have the opportunity or you've spoken with your sales force about, what the market reaction has been i.e. do they feel that the value of HeartCode is so strong they want to stick with it or they decided about having broader perhaps less expensive opportunities to develop novel resuscitation. Thank you.

Yes, so our sales organization is completely focused on selling the current product set and in fact is, uneducated and unaware of the new products other than to know, that they're being built. And so we're in full mode to continue selling the current products, position them well customers and do our best to sign contract expense through 2020. And so the entire client basing organization is 100% devoted to getting those products in the market successfully. Those products have been market leaders for years. They continue to have great brand recognition and they're effective and high quality products, so our customers are pleased with them. That said, we know from history and other partnerships that customers value the level of innovation and integration that HealthStream can deliver when partners are fully integrated and signed up our ecosystem as full on ecosystem partners and so we've seen plenty of market feedback from other product sets when we switched our focus to new more integrated and more co-developed products that there was tremendous benefit to that for our large customer base. So I feel expect and after seeing our progress on the development of our new products, they'll be received very well. But that said, you can underestimate the history here. We just spent nearly a decade taking these products to market and the existing products to market as the best in the planet and have the most clinical outcomes and impact. And we can't begin that shift until January 1, 2019 and so there is no understanding besides the challenge, but also commensurate with the large challenge usually a large opportunity, so we're up for it and excited about it.

All right, great. Thank you.

Thank you. [Operator Instructions] our next question comes from Matthew Gillmor with Robert W. Baird. Your line is now open.

I wanted to ask, first how the Workforce growth in 2018? You talked about the slower growth rate that you're expecting, it sounds like that's driven by expectations that resuscitation will create a drag. Can you provide some details in terms of how large you think that drag would be for resuscitation and maybe what the underlying growth rate would be excluding resuscitation?

Sure. I'll give some detail on that. The historically the products I think as I mentioned grew in excess as 20% and some of it is as high as 27%, 25%. For the purposes of and as you know, it's one of our larger product suites within workforce. So there are two dynamics there and I also mentioned it's one of our lowest margin products, but nonetheless from a growth rate perspective it was one of our highest year-over-year growers and in the mid-to-high, mid 20s and for purposes as modeling on a forward basis, we're looking at an actual sales decline in the contract order value this year and the result of that should have the revenue growing from that product in 6% range. So materially lower growth rate year-over-year in one of the largest products in the category. If there is such a thing as silver lining, all that growth wasn't necessarily translating into profitability and so you know the margins on that growth were some of the lowest in our entire portfolio of products.

Got it, that's helpful and then maybe one more on this topic. I was just curious about the Laerdal relationship and is there any chance in your mind that you all come to terms and you have a dialog around renewing it or are we still sort of in the same place as last year where there is not any ongoing discussions.

Unfortunately at this, the discussions are really on concluding and wrapping up in a professional way to support all of our customers, all the current products. And I think as we get close to finalizing in terms of the wind down of our entire relationship. It will see what opportunities present for reopening dialog, maybe not necessarily with Laerdal, but maybe some of the direct content providers in the segment so, but right now all of our focus and until such time as we achieve I guess what we're calling our wind down agreement and absolute clarity on how everything will be handled from customers to customer relationships through 2020. We've kind of put any attention toward any form of recovering those relationships. Some day obviously in an optimistic sense it would be wonderful thing, if our marketplace contained the products of all of these partners to bring the ultimate in choice, in selection. But right now from an energy standpoint it's all going into assuring the current agreement of a proper wind down and of course all of my energy is going into the new product development cycles and the new partnerships are forming to build the competing product suite.

Okay, thanks very much.

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

I just wanted to dig a little bit deeper into the ex-Laerdal revenue growth that you saw in 2017. Excluding ICD-10, we're calculating something like high single-digit type core HealthStream revenue growth. And just want to kind of get your thoughts on, does that accelerated all with these new products in the near term or is that more of a still 2019 and 2020 even, where some of the product development efforts that you've secured over the last three years really translated to meaningful revenue growth. Thanks.

I think we've given the guidance by segment and even carved out the highest - the declining growth rate of the largest product. Noted a little bit as a challenges on adding subscribers organically, although again except for fourth quarter we thought it tampered expectations a bit there. So I don't know what to do other than to repeat the guidance range as we just given, as our best reflection of our thinking. The new product categories they're all fundamentally part of what's going to drive growth at higher rates in the future, but they're not of the scale or magnitude of say the declines that we'll expect and then model in for the resuscitation suite.

Okay, that's helpful and then thinking about the corporate infrastructure of the organization as you carve out Patient Experience, is there any sort of kind of trap cost that we may be thinking about or how do we think about the underlying, you're delivering good profit growth year-over-year in 2018 over 2017, but just wanted to kind of get your thoughts on kind of underlying infrastructure pro forma. Thanks.

Yes, I think if you back out all the cost and look at operating income ex-patient experience business is been around, is it $9 million?

Yes.

About $9 million and if you look at 20%, 30% growth on that, you can pick your modeling point on that. Some of that operating leverage growth is reflected and some of the synergies we're going to get from the divestiture as well as all the focus that I told about each of the remaining segments to generate higher margin, so it is a blended impact that's going to help us grow that operating income 20%, 30% over the prior year. We noted some of the pre-conference calls that, we haven't provided clarity about the operating income sans Patient Experience and that segment of $9 million it shows that the operating income growth 20%, 30% is over the $9 million number.

Thanks. I'll hop back in the queue.

Thank you. [Operator Instructions] we have a follow-up from Matt Hewitt with Craig-Hallum.

Just a couple additional questions. Just for clarification, the ASC 606 change it doesn't sound like that's going to have a material impact on the revenue. So when you're talking about these growth rates that's - those are two growth rates versus some software companies where we're seeing there is a pretty dramatic hit at least in the first year. Am I thinking about that correctly?

Well we might have a hit, so to speak. But - we all the growth rates on a comparable basis without 606 and so we're effectively comparing 605, 2017 to 605, 2018. And so I think everyone is going have some kind of hit. But most consistent way to do comparisons it looks like coming several quarters is to do with the way we've done it and apply the 605 on a comparable basis.

So when you reported - when you - go ahead.

Will have an impact. Will have an impact, if you did a 605 with a 606 comparison. Yes, we're still working our way through all that.

Okay, so are we talking several million dollars because how are we supposed to model our income statement based up the 605, but then I would think your Q's are going to be based off 606, so there could be a material delta between the two correct?

Yes we'll be reporting both, but on a comparable basis. But the best way to know to help you calculate actual numbers that you could use with 605 or 606.

Okay and then one more question on shift from Laerdal. And I think you've been asked this a couple of times, so I apologize the last couple of quarters anyway. The American Heart Association card have you gotten any more information from your customers on how critical that piece of it is or whether or not, as long as they're getting the right offering that's providing the right training and education, that's what they're concerned about. Thank you.

Yes I would say historically that card has been importantly. It's essentially the only credential that existed at least in the minds of hospitals as it relates to that credential, that type of training. That said, both across the globe and even within the US, in other segments that's not the only or accepted way or achieving skill certification and competency and resuscitation. So it's kind of in my mind a market and policy level issue that doesn't need to underestimate its cost in the market and so. Again - the partners we've signed and we've expect to sign additional partners beyond the two we've already announced but not named will bring other, we think viable credentials to the market.

Understood. Thank you.

That's unproven and that is kind of the best that we all have, that HealthStream is going to find a way to power through that and it will not be without the challenges.

Got it.

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

Just one from me, on the Provider side of things. The growth outlook there is strong Bobby, Gerry and I'm just curious, that's a market that's highly competitive with some different players bundling in those capabilities in different solution set. So seeing it Bobby from a competitive standpoint, how you think you're fairing, why do you think you're winning? Just any color around that business would be great. Thanks.

Sure, as we roll out. The platform is very exciting because the value proposition and what distinguishes is increasingly clear. By combining credentialing, privileging and enrollment as three areas of strength and having a full area suite to manage those workforce processes. We've also done things like overlay the Juice Analytics platform so that we can see more benchmarking on cycle times. We've had this focus not just platform but also the content and by that I mean things like privileging library that goes with our privileging system. We've also focused on interoperability and so things like credentials earned in the HealthStream Learning Center are being auto populated into our credentialing platform reducing the work of the health systems. It's actually due to the validation and vice versa. We're beginning to use the data validation services of Verity in our running platform customers as well. So I would say the completeness of the suite, our focus on thinking of it as platform and content and data and analytics and not just platform, there's a nice differentiator and then integration with existing platforms where credentials are stored and earned like our HealthStream Learning Center are all beginning to help with the differentiation. Our focus has been on the medical practices where we have over 1,000 medical practice on the platform and the acute care, healthcare settings where we're market leader. There are some areas for expansion in growth, in the product suite itself and we're beginning to see that emerge out of our product development suite, but we're most excited the fast Verity platform is now announcing and it's - beginning to be made available to customers that integrates all the connectivity, integration, data, pre-populated data fields, pre-populated content such as privileges all in the platform. So we think as far as the needs in acute care system to manage people through the almost the revenue cycle process of onboarding, a new physician all the way till revenue generation getting them enrolled with their insurance providers. We believe the most complete suite of products that needs to workflow needs, the acute care health systems in. We think that's beginning to show in our win rates.

Thank you. Our next question comes from Vincent Colicchio with Barrington. Your line is now open.

Bobby, I'm curious on the Workforce side. The growth in the ancillary market, is that been less than what you had expected and if so, is there something you could do better?

Well I'm maybe referring the post-acute segment, it's compared to the acute care segments. I'm not sure.

Yes, the post-acute segment, yes.

Yes, actually that's helping growth. If you look at the fourth quarter we always kind of set to expect 50,000 when we beat that, it's usually because we have a nice mix of new customers in from all the settings. The new settings which is kind of newer market opportunity for us. So the acute care settings being a regular contributor but now the post-acute settings are helping us keep the subscriber growth rate up. As you know, we've described in our filings that our target audience for kind of the maximum subscriber audience that we've currently defined our market opportunities around $8 million and you can see from this release, $4.7 million. A lot of that expansion opportunity it's a nice balance from those other post-acute pre-acute settings. And so I would say, they're kind of steady integrated opportunity in the way we think of our market opportunity.

Then on acquisitions. Are you getting close to anything and what will be your top of list in terms of priorities?

Well I know you know that I can't comment on that, but I will say this that now that this divestiture is complete, which obviously took many, many cycles, lots of planning and along with the alliance and the dividend it was actually a fairly complex transaction, it took a lot of cycles out of management. With that behind us, we can turn our attention back to supplemental deployments of capital and juice up the pipeline and start to work on exciting opportunities. For example, the minority investment concepts. The investments in content partnerships has started to pay dividends in margin expansion in just the last reported year, but we see even more opportunity with that almost Aka Netflix like if you will. We're seeing opportunities for targeted investments that can boost margins in certain areas. In additions to the M&A pipeline outright, which we've always been part of our growth story. We do expect and plan on and work towards achieving, deploying our capital into full blown acquisitions. So without commenting on specific opportunities I'll say they do exist and we'll have more time to actually work on them now with the divestiture complete.

That's it from me. Thank you.

Thank you. We do have a follow-up from Brian Hoffman with Canaccord. Your line is open.

First one on Laerdal. With respect to the existing book of business, do you have any visibility and maybe it's too early to tell. But any visibility into what percentage of that business would be coming up for renewal in 2019?

Yes, those contracts are typically two to three years and right now, we can't sign any contracts have extended beyond the last day of 2020. And so, these way of think of it, that maybe historical average length of those contracts was a little more than 2.5 years and that will be shortening as we get closer to where we're limited by agreement, we can't sell beyond those dates.

Great, thank you. And then last one on bookings. Looking back over the past couple quarter, did you talked about bookings being below expectations in 2Q and then bounce back in 3Q. Can you talk a bit about how bookings trended in 4Q? I would assume that it might be safe to assume that generally considering you talked about paying higher commissions in several markets [technical difficulty] quarter that bookings would have been strong, but if you can talk about that a bit.

Yes, sure. The first half we definitely were a little nervous. I think the Q2 call you're talking about, we were all nervous as we were little off track for our year end objectives. We also reported as you just recalled a kind of recovery, gets back on track in Q3. And then Q4 was strong and you've noted the exact reason so I'll repeat them, but you picked up the commissions were higher that is somewhat related to beginning of the implementation of the growing backlog and the new sales that came in the quarter were strong, some early renewals that boosted subscriber counts along with new sales. So overall the sales team set some really nice records in the fourth quarter for the company and really got us back to goal and back on track. That said, we've been more cautious as we think about this coming year. Given the - we're now down to just 10 months of selling on the existing products. It's going to get a little harder to sell those products. Given our market share and the competitive landscape for some of the segment we offer, we kind of lowered expectations for some of the organic growth and sales rate as we entered this year. That said, all of the moves we've been making should improve cash flow and cash in operations and EBITDA and we think we're making right moves to make it a fundamentally, financially stronger business in the coming months and years.

Great. Thank you.

Thank you. I show no further questions in queue. So I'd like to turn the call back over to Mr. Frist for closing remarks.

Thank you. Thank you to our employees for wrapping another strong year. Thank you to Jeff Doster for his ongoing contributions and historical contributions to our growth. Thank you to our investors for following our story. I look forward to reporting next earnings call as it's made available.

Thank you. Ladies and gentlemen that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.