Good day, ladies and gentlemen, and welcome to the HealthStream Incorporated Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Ms. Mollie Condra, Vice President of Investor Relations and Communications. Ma’am, you may begin.

Thank you and good morning. Thank you for joining us today to discuss our second quarter 2018 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 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 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 introduction, I will turn the call over to Bobby Frist.

Thank you, Mollie. Good morning, everyone. Welcome to our second quarter 2018 earnings call. Let’s jump right in, our second quarter performance was positive on the financial metrics. Our revenues were generally in line with our expectations and we did deliver solid operating income growth, that income growth will enable us to increase our investment in the second half of this year in preparation for the launch of exciting new higher margin products early next year. Improving gross margins continues to be a theme for the company over the next several years. As we announced in February, HealthStream divested of its Patient Experience business which is our business segment with the lowest gross margins given its labor intensive call center operations. In the second quarter which was the first full quarter without the PX business, we did see an increase of 200 basis points in our overall gross margins over the prior year. And then, if we think about our Provider Solutions segment, we launched our new Saas-based platform called Verity last quarter. Over the next several years, we expect that existing helpline and Morrisey legacy platform customers those are through acquisitions will choose to upgrade and migrate to this new Verity Saas-based platform. Once those migrations are complete and the legacy platforms have been retired, we expect another positive impact on gross margins, but that will be a kind of several year processes but again, with this focus on enhancing gross margins, the move to the Saas platform will see yet boost overtime, after migrations and after platforms have been retired. In our Workforce Development segment, we’re investing in products like our OB risk curriculum and our new resuscitation solutions which carry higher gross margins and legacy products that they will replace. In fact, as we’ve said in previously…

Thank you, Bobby and good morning, everyone. Before reviewing our second quarter results, I’d like to note that one; our results are from continuing operations only. For example, 2017 and 2018 results exclude the gain on the sale of our recently divested Patient Experience business segment and results of operations of that segment prior to the divestiture. And two; 2018 results are presented in accordance with new the Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606), whereas results for 2017 are presented in accordance with ASC 605. Here are some highlights from our second quarter. Consolidated revenues were up 8% to $57 million. Operating income was $4.3 million in the second quarter of 2018 up from $2.8 million in the same quarter last year. With $339,000 positive impact in the second quarter of 2018 from the application of ASC 606 of the new standard. Net income from continuing operations were $3.7 million in the second quarter of 2018 up from $2.2 million in the second quarter of 2017 with a $256,000 positive impact in the second quarter from the application of ASC 606. Earnings per share or EPS from continuing operations was $0.11 per share fully diluted in the second quarter of this year compared to EPS from continuing operations of $0.07 per share through diluted in second quarter of 2017 last year. Adjusted EBITDA from continuing operations was $10.7 million in the second quarter of 2018 up from $9.2 million in the same quarter last year with a $339,000 positive impact in the second quarter of 2018 from applying to the new standard ASC 606. So our 2018 financial reporting includes two developments that originated in the first quarter and continue to be reflective in our operating results the second quarter and remain with this year.…

Thank you Gerry. So to wrap up this section, I’ve two quick product updates. I’d like to give insights of the few products in the company and then information about our new initiative to share as well. And so let’s dive right in, with our Workforce Solutions segment, we continue to see steady adoption of our KnowledgeQ solution. KnowledgeQ represents HealthStream’s third generation solution that is utilized by hospitals to manage their annual mandatory training program. KnowledgeQ is a data-driven solution that includes curriculum and games, benchmarking and analytics and software. In fact KnowledgeQ’s benchmark and analytics components were created in collaboration with Juice Analytics as a reminder, we invested in Juice Analytics about three years ago to build out our data visualization tool sets. Since its first sales in early 2016 over two million subscribers have contracted to KnowledgeQ. They’ve kind of upgraded from the second and first gen products to this third gen product which has the data analytics, curriculum and some games built into it. So really excited about progress with KnowledgeQ and its continued adoption in the market. It’s definitely a leading product in our Workforce Solutions segment. At the start of the year, we also announced the launch of our new Nurse Residency Pathway which is an innovative comprehensive approach to improve nurse onboarding. Thereby reducing nurse turnover, it’s a 12-month blended learning program that closes the academic to practice gap for nurses while improving their confidence to practice. In our last call we shared with you the success and early adopter, our large health system with having in their pilot. I’m pleased to report that on the second quarter, that health system contacted to expand Nurse Residency program enterprise-wide across all hospital in their health system. So we’re excited in – enterprise-wide multi-year agreement…

[Operator Instructions] and our first question comes from the line of Ryan Daniels from William Blair. Your line is now open.

Maybe I’ll start with one on the uptick in investments in the back half of the year, ahead of the new resuscitation products. Can you speak a little bit outside of R&D to where those dollars will be dedicated? I’m curious if it’s a ramp up in the salesforce, if you’ll have kind of new sales people exclusively focused on that etc., so just any color there would be helpful.

Sure. most definitely in R&D, we’re little behind in our hiring expectations in a few areas, so it’s little over performance until those areas by having lower expenses and we’re going to try to catch up, maybe use some recruiters to backfill some technology positions or maybe more aggressive in backfilling, things we’ve kind of hope to hire a little earlier in the year. But you’re exactly right, we just came out of series of internal meetings authorizing the increase in the size of our sales organization with particular focus in resuscitation products. We probably won’t hire lot of those folks until the fourth quarter and then train them and get them ready for January. We think these new products will be appropriate in multiple channels and so we plan to add the sales. In addition we set aside some additional budget for launch in marketing and so we’ll have increased marketing expenses and align with the planned launch, not all of it but geared the increased investments are geared to just launch of the new resuscitation products. We’re also increasing investments in our platforms, the new HSTREAM technology I just announced, are well underway and we’re adding capabilities and people to build out those connectivity services.

Okay, great. and you discussed some of the new products being ready in early 2019, is that a January 1st, are you still on track to kind of launch those 1/1/19 or some of the development you’re going to lead you into the first quarter or so?

No we do expect at this time, that everything is targeted towards a January 1 launch where we can begin selling the products into the market on January 1?

Okay and then I don’t know how much detail, last question here on HSTREAM you want to provide, but anymore color on kind of the revenue model for that offering and if it’s available for clients today, does it kind of move over to that, is that an upsell opportunity? Or is it – is HSTREAM something that you’re kind of introducing but not ready to launch actively till wait around [ph]?

Ryan I think, maybe the most constructive way to think about this time, there are several things going on here, one; it is enabling set of technologies, more platform than service type of technologies that will allow new products to be built based on the capabilities of that technology, new partnerships to connect to us in different ways and so I think the best way to talk about HSTREAM is that, over the second half of this year you can watch for new product announcements, some of which may be given to customers as enhancements that are driven by our investments in HSTREAM some of which may be sold because it represents new product powered by HSTREAM and some will create new revenue stream opportunities or provide premium services to lead gen for our other subscription products. So – the most constructive way to think about it right now is kind of emerging out of R&D as a package of new capabilities that will power new products and new functions and features, some of which will be free, some of which will drive increased adoption and some of which will be sold into the marketplace. So we just wanted to put it out on the table that, it kind of represents some of the great progress by our new CTO, Jeff Cunningham. He’s been with us about a year, approximately the anniversary of his arrival and these new technologies are emerging in our toolkit for growth in the future. We do expect to have announcements, new product and capabilities that will be contextualized by they’re being powered by this new R&D and this new technology staff that we’re building.

Okay, thank you for the color.

One other thing about that Ryan since – is that – the foundational technology and we do expect over the coming years, everyone to benefit from it. It might create an opportunity to create a new measurement metric, in other words. It is a unifying technology across Verity and HealthStream and it may represent the opportunity we’ve been looking for a new metric that shows our trajectory and adoption kind of core set of technologies. We have a hard time communicating the subscriber counts because a dozen products at our subscriber counts, we’ve had our KnowledgeQ count at two million and lot of our products. I think last quarter we gave an update on our checklist product with hundreds and hundreds of thousand, I think 600,000 or maybe more and the HLC is a platform of a lot of subscribers as well. We’re hopeful that as we raw [ph] in HSTREAM it may create an opportunity for a unifying metric that will show the broad penetration of our core technologies. I think Ryan went ahead and signed off and so I just led with that. We can go to the next question.

Our next question comes from the line of Scott Berg from Needham. Your line is now open.

I guess first question is for Gerry. Gerry, if you look at your deferred revenue it’s been down on year-over-year basis for the last several quarters. Can you help us kind of reconcile that with revenue growth? I know it’s never been a perfect proxy to kind of look at your sales, but usually have some variances that will go up and go down, but it’s kind of been on downward trend, consistently.

Yes, I guess more billing cycles and timing – going so on and there’s no real, outside real territory your recognized revenue and the real change of deferred revenue. We have people who go on annual billing cycles, come off that to monthly, that can affect the deferred revenue balance and so on, but I don’t draw a whole – I [indiscernible] draw a lot of correlation between deferred revenue balance in the my measurement of the revenue on our P&L.

Great in my last follow-up question I don’t know Bobby or Gerry wants to take it, but Bobby you spoke a lot about some initiatives that are currently undertaking and will be undertaken over the next couple of years in terms of raising the gross margin profile of the business. if you look at an intermediate term or a long-term model, what do you think gross margins look like as more of these top first solutions develop and now Patient Experience is now completely in the rear view mirror?

One thing I can clearly articulate is a change in gross margin with a divestiture of PX, 200 basis points seems like the minimum improvement we’re going to get. But there are still a lot of migrations happening in the company that affect gross margin because it is looking more and more like a recurring revenue subscription software company and less and less having services components that obfuscate the gross margin opportunity. So we talked about the two big things happening. It would be the rate of the decline and the resuscitation products, the rate of growth and the higher margin resuscitation products that will have visible impact on gross margins and I’d say that what you intermediate term, couple years. The move to the total Saas platform for Verity, that would transpire over kind of – I’d say three to four years, but have a positive pressure on gross margin. So it’s really is little bit hard to project, of course we have three to five years models, but we don’t guide out that far. We’re trying to explain that we think that those two have kind of overlapping positive dynamics and we think we can pick up a few points here and there and the gross margins in the coming years.

Great. Thanks for taking my questions.

And our next question comes from the line of Matt Hewitt from Craig-Hallum. Your line is now open. Q –Matt Hewitt: Couple questions, first what type of feedback have you been garnering from your customers regarding the anticipated switch on a resuscitation side? Obviously you can’t talk about the new products that you’re rolling out, but as you have the discussions to at least give them heads up with those changes are coming, what questions are you getting from them, what kind of conversations are you having? And you anticipate a pretty smooth transition.

Well now or so, it’s a tricky situation. We’re able to say the facts which are, we won’t be offering the current products in use and we’ll have a new one. But beyond that there really can be no dialog, there really – especially with customers there is, I mean we’re in development mode – working with development partners, but there is no dialog with customers. So it is challenging, but I would say our teams are laser focused on selling HeartCode and RQI products. We have quite a lot of work to do in the next five months, we expect to sell millions and millions of dollars HeartCode and RQI products. And I would say the sales teams are fully focused on selling those products 100% and topping off customers. What they’re really working on doing now is getting those contracts extended through 2020, which would give us the longest runway to introduce new products and so right now, there really is no dialog with customers. We’ll get questions that we literally differ and say, look we can talk about that in January right now, what you need to do is, to secure the excellent service you’ve gotten of the fully integrated product through 2020, you need to top off your order and that is the extent of our dialog with customers. I think they’re taking at, they understand there’s change coming. A lot of them want stability of the collective service, they do have a hard kind of visioning, how they’ll get service beyond that, so that’s encourage them to buy the service out through 2020 because if it’s not fully integrated which is the current where we stand, it will be more difficult for them to use those products. But everyone’s asking right now – is focused on renewal, topping off the existing contracts and extending through 2020. Q –Matt Hewitt: Okay and I think you may have just touched on my follow-up to that was, with ICD 10 there was a period six months out from that kind of coming to a head, where there was significant extensions of contracts and it sounds like you’re seeing some of that right now, with the resuscitation just to give the customers a little bit more time to maybe see what your products look like, figure out how they can get them integrated and all that, so you’re seeing that right now, correct?

We’re seeing a little of that, I think the next five months are critical. Their final decisions and behaviours were kind of due and there’s only five months to make them. So I think third quarter will learn a lot more here and then of course there’s always big orders even last week of the year and so it seems to be playing out that way right now, but the second half of this year is weighted much more extensively than the first half to determine what their ultimate decisions will be. Q –Matt Hewitt: Okay. And then --.

Well really don’t know, but the current trend is that, that is does look like people are buying out through 2020. They’re the ones that we [indiscernible]. Q –Matt Hewitt: Good. Okay. Shifting gears real quick and then I’ll hop back in the queue. It sounds like at the end of your prepared remarks you were talking about maybe with HSTREAM being able to provide a more fully encompassing metric regarding active users, would there also be an opportunity with that type of metric to I guess reinstate or provide some type of an ARPU metric, it was one that you had previously provided and obviously given the growth and the breadth of your products and it had become a little more complicated, but do you envision being able to provide something along those lines. Thank you.

Sure. We don’t know yet, but here’s what we’re thinking though. The HSTREAM technology stack as it become enabled, will be – we hope as we work it in the contracts and renewals and every product in the company will connect to it, it will represent kind of new age [ph] technology that everyone needs access to power their solutions, whatever the solutions they buy, of course it’s taking time to connect everything to it and decide what value is, in it. And so we do think it will be the unifying technology that we can measure, how people have access to components of HSTREAM versus reporting subscriber counts on specific products, that have different levels of penetration in the market. And so if you look at our long history reported subscriber counts around a product, that learning center and it has more ins and outs, ups and down now, but there are dozen other products that have subscribers, some of which are growing faster, it have more significant wins in front of them and behind them, then that older metric. So I think over the next two to three quarters we’ll work to better define, we’ll launch a few product that leverage HSTREAM and you’ll start to see that it can be a more common metric. Of course [indiscernible] driven from would be, revenue per subscriber of HSTREAM and that may become possible as it’s a lot of work that we are working on, that we’re building. I think we wanted to put a stake in the sand today, that kind of represents launch of these new enabling technologies and you will see in the second half of this year, new products that rely on that new technology stack. Q –Matt Hewitt: That’s great. Thank you.

And our next question comes from the line of Brian Hoffman from Canaccord. Your line is now open. Q –Richard Close: Richard Close. Question on the $48 million and trailing 12-month HeartCode revenue. Have you guys done any analysis in terms of how the step down occurs? How you think about the step down occurring in 2019 and 2020 I guess by first quarter 2021, you expect no revenue. But it sounds like if you’re pushing on the extension that there is really not, maybe not that much of a step down in 2019?

Well we have analyses [ph] and detailed on contract at the time, crossed [ph] hundreds of contracts and have full spreadsheets still, we know the existing run out for the existing contracts and we know the shape of that curve. However, tremendous shape of that curve will be largely shaped by the next five months and so there is just too much open variable to say how 2019 looks. I mean we know the beginning and endpoint, right the beginning point is, when revenue peaks right now probably will be in Q1 based on our graph’s on next year and then it will be zero in Q1 of 2021, but the shape of that curve, we think is highly dependent on the next five month of sales and maybe even particularly December where every major system will face kind of the last opportunity device a fully integrated product and some may not buy that product and may just take what they’ve got and see how it plays out in the marketplace, some may through 2020. So there’s just too many unknowns as I said, the second half sales to the shape of that curve are the most heavily weighted. To say this definitely it still has straight line and then will update every quarter. But between beginning and endpoint, we’ll update every quarter about more of the shape of that curve. Q –Richard Close: Okay and then as we think about the new products that will launch, what’s the like of timing of revenue on the new products or duration of those contracts? What will those look like and then how quickly if someone buys the product, does it get implemented and they start using it? You start recognizing revenue.

Well I mean it’s obviously future stakes, a lot of unknowns there. We have a lot of experience implementing, so I don’t expect that will be issue. I think given at the first, the customer will see the product is January of next year. It will be hard to imagine purchase decisions being made very quickly. I mean you’re going to have a ramp up time of exposure and demonstration and budget cycles and so, I think the ramp is going take some time, but the gate probably won’t be implementation and it will be just adoption and acceptance, market education to a different product and so but again it’s unknown, we’re beginning to build our forecast and we’re getting excited about it, but it definitely won’t be a Q1 of next year, if that helps any. Q –Richard Close: And do you know whether Laerdal has entered into any additional partnerships, so like when your partnership ends they have someone else to step in or they’re doing that themselves?

We don’t, they have announcements pending later this week, that will be watching announcing how they’re reforming their strategies and we’ll follow that along as close as we can and so but right now, no we don’t know their ultimate strategies. Q –Richard Close: Okay and my final question, with maybe under Provider Solutions, what do you think the sustainable growth rate is in that business? Definitely appreciate the comments on the Verity platform and higher margin there. But how do you think with respect to the sustainable growth rate Provider Solution?

If you look at the growth rate this last quarter about half was [indiscernible] acquisition half so organic growth rate and we reported 15% growth rate with those two together. We hope to improve on that and but right now that’s where the growth rate stand, we’ll provide guidance next year in February. Q –Richard Close: Okay, thank you.

And our next question comes from the line of Vincent Colicchio from Barrington Research. Your line is now open. Q –Vincent Colicchio: Bobby, I’m curious, has there been other significant efforts in the market of note to compete with Laerdal in recent years?

There really are none that I know of, I would characterize as significant effort. There is really – again it’s a great product, we spent nearly a decade selling in tech [ph] market. It is the American Heart Association product with Laerdal together and it’s a really good product and for the longest time, there just simply weren’t strong alternatives particularly for our market. There have been alternatives in sub-markets but really no major push to have competition in my view in the markets the HealthStream’s currently and that we’re aware of. Q –Vincent Colicchio: And then sort of a macro question, are you seeing any impact from consolidation in hospital market?

Yes some positive and negative, in any given quarter now. Generally given our share on several of our platforms consolidation favors HealthStream. Occasionally, if someone consolidates our company health systems that’s not in our network, it can cost us subscribers and so we have seen the ins and outs, let’s say in this quarter, no material impact, but the landscape as it shifts does results in wins and losses that are not directly right to sales, that is shipping with the market consolidation. Some of our bigger customers have been actively growing and acquiring. We’ve had some divestiture that result in loss business. Well so I wouldn’t say it is a factor, but hard to quantify. Q –Vincent Colicchio: Okay, nice job in the quarter. Thanks guys.

Thank you.

[Operator Instructions] and I’m showing no further questions at this time.

Thank you very much. We’ll conclude our comments and look forward to reporting our next quarter. Thank you.