Good morning, ladies and gentlemen, and welcome to the HealthStream First Quarter 2019 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 call will be recorded. I would now like to introduce your host for today’s conference Ms. Mollie Condra, Vice President, Investor Relations and Communications.

Thank you, and good morning. Thank you for joining us today to discuss our first quarter 2019 results. Also on the conference call with me are Robert A Frist Junior, CEO and Chairman of HealthStream; and Scottie Roberts, Interim CFO and Vice President of Accounting and Finance. 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'll turn the call over to Bobby Frist.

Thank you, Mollie. Good morning and welcome to our first quarter 2019 earnings call. Across all of our core financial metrics, we ended the first quarter of 2019 strong. Compared to the same quarter last year revenues were up 19%. Operating income was up 44% and adjusted EBITDA was up 22%. We ended the first quarter with a cash balance of a $147 million. Supporting these strong financial results in the first quarter, we reiterated our revenue guidance and raised operating income guidance. However, I want to share with you three important factors to be taken into consideration as you contemplate the rest of the year. First, we now believe that quarterly revenue from sales of legacy resuscitation products peaked towards the end of the first quarter 2019. We expect a sequential decline in revenue from legacy resuscitation products beginning in the second quarter and continuing throughout 2019 and 2020 and declining to zero in the first quarter of 2021. As a result of these revenues peaking in the first quarter, we necessarily wouldn’t expect the same year-over-year growth rate through the remaining quarters of 2019. Second, as we discussed in our last quarterly call, we are moving our corporate location to a new office in Nashville, Tennessee. This will necessitate an increase of approximately $2 million for the remainder of 2019 in operating expenses, which is already factored into our 2019 guidance. This incremental operating expense increase reflects the current Nashville market conditions, but it is still less expensive than it would have been to stay in our previous locations. Third, we expect to increase expenses throughout 2019 in product development, sales and marketing. Our new hStream technology platform and resuscitation solutions are two areas among several where we are actively investing in innovative new products and services for…

Thanks, Bobby and good morning. Today I’ll discuss our first quarter financial results and provide some updates on our 2019 guidance. As a reminder, the discussion of our results will be for continuing operations only as last year’s first quarter included the divestiture of the patient experience business. I’ll begin with our highlights for the first quarter. Our revenues were up 19% to $65.2 million, operating income was up 44% to $5.4 million, income from continuing operations was up 32% to $4.8 million, our earnings per share from continuing operations were $0.15 per diluted share, compared to $0.11 per diluted share in the prior year first quarter and adjusted EBITDA from continuing operations was up 22% to $12.5 million. Revenues from our Workforce Solution segment were $54.3 million and grew by 21% over the prior year. Several factors contributed to the growth in workforce revenues. First, revenues from our legacy resuscitation products increased by 41% to $17.3 million in the first quarter, compared to $12.3 million in the prior year. Strong sales of each products in the fourth quarter of last year contributed to the year-over-year increase. We expect revenues from the legacy resuscitation products to approximate $59 million to $60 million in 2019 with approximately 56% of the revenue expected in the first half of the year and 44% in the second half of the year. Revenues from these products for each remaining quarter of 2019 are expected to decline sequentially compared to the first quarter and are also expected to be flat in aggregate compared to the same period in the prior year. As Bobby just mentioned, we made our first sales with the New American Red Cross resuscitation suite products in the first quarter and we expect some modest contributions to revenue later in 2019 which is…

Thank you, Scottie. As we wrap up the kind of two more topical areas I’d like to fit. So let’s go to an update on Verity, our Provider Solutions business and a discussion and an update on our strategy for hStream, our platform-as-a-service technology. First, let’s take Verity. In the first quarter of 2018, we announced the launch of Verity, our new SaaS-based platform for managing credentialing and privileging the health organizations. As we’ve previously discussed, the migration of HealthLine and Morrisey customers from a hybrid SaaS platform to the new Verity SaaS platform will extend over several years. As of the end of the first quarter 2019, 70 customers have contacted for the new Verity platform and our first customers have been fully implemented on Verity. This is a very exciting inflection point and I am proud to announce these successful migrations and 70 new contracts for the Verity platform. As the company has extensive experience and expertise in making such platform migrations, we anticipate continued progress in this effort as customers enjoy the benefits of the new Verity platform. Across our Provider Solutions products new business sales were strong in the first quarter of 2019 and included several takeaways from competitors. Some of the larger agreements signed in the first quarter were from, for example, Stanford Health, SCL Health, - Medical Center and Joint Township District Memorial Hospital. So it’s exciting to see this new exciting platform make progress in the marketplace and through actual implementations and live customers. What an exciting time for the Verity team? Let’s turn our attention to hStream for just a moment. hStream’s SaaS-based platform has long been – well, HealthStream’s SaaS-based platform has long been one of the most adopted workforce development platforms in healthcare. To facilitate innovation and growth of our…

[Operator Instructions] And our first question comes from Ryan Daniels with William Blair. Your line is open.

Good morning and thanks for taking the questions. Bobby, one for you. You talked a little bit more about your novel resuscitation products and kind of the successful early launch with new clients. I am curious if you can talk a little bit more about what exactly is resonating with those clients with the new product? Is it pricing? Is it capability? Functionality? And just what is driving the interest there to give us a better feel for potential sales outlook for that product?

Definitely, our capability, one of the things we are most excited about is that, the courses are adaptive and they are truly adaptive which means that the time and course is important because through the pre-assessment process, the future delivered content is targeted to that individual. So, in prior versions, you may have taken a test and then the course didn’t change but it helped guiding through the material. And this, in the new platform, the pretest and the pre-assessments actually changed the material that’s delivered to you and is more targeted to where you start. And then – so, we say it’s kind of meets where you are. And that resulted in a compressed timeframe and a more targeted delivery of content. Also the physical products we think is exciting as well. The Manichaean partner that we have chosen to launch with and again we are open architecture and connecting the multiple Manichaean partners that have continued to drive innovation. But the first launch partner is Innosonian America. And they had some very innovative and unique features built into their hardware as well. In addition to being Bluetooth and iPad based feedbacks, and providing feedbacks on our lower-end pods comparable to the very highest end products in the marketplace, the Manichaean provide unique and patented feedback – visual feedback to the users which we think adds a tremendous value to the learning experience. And also not only we adapted the program at the individual level, to optimize their time to program, we’ve built a series of tools allows for optimization at the institutional level. We call this feature the interval dial and it allows organizations to set and adjust the practice intervals for the people participate in the program. We think this flexibility is greatly appreciated by the customers…

Okay. That’s super helpful color. And then, my last one. I’ll hop off into the queue. The Providigm integration, are there any other major milestones or changes that you anticipate? I know you talked about an earlier access for the survey business, maybe it allows you to integrate the core business, cross-sell that a little more actively. So just any updates on what’s there? And then, has it led to any cross-sales of the core workforce product into the client base as well? Thanks.

Sure. We are just getting started with the Providigm and its opportunity. It’s really exciting and several announcements pending in that area. One of the things driving the business, first is just to get it organized and be a SaaS application company and the exit of the survey business gets us really far along that journey and essentially it’s going to be a nice high gross margin SaaS business now and we are excited about that. Secondly, there is a deadline on the November that’s going to create more formal requirements around the linkage between the quality programs that abaqis system supports and the education training has been intervention initiative for the workforce. So, as you can imagine, the Providigm teams are working diligently to launch new software that will meet these needs better. And then right behind that, we hope to announce better integrations with the educational platforms and technology with HealthStream to provide that more automated remediation development capabilities that we are all hopeful to work in the industry. So, it’s an exciting time at Providigm. We are adding some resources in customer support. We are narrowing its focus down to its SaaS applications and we are gearing up for the launch in November to meet these new government requirements, enhanced software to meet those requirements.

Okay. Great. Thank you.

Thank you. And our next question comes from Matt Hewitt with Craig-Hallum. Your line is open.

Good morning. Thank you for taking the questions.

Sure. Glad, Matt.

Sure. I guess, following on some of the resuscitation question. First, with the competitive conversions, that the takeaways, one of the things that was talked about last year was that the American Heart Association card, have you found a work ground for that? Maybe walk through the process and some of the opportunities to take more customers from the prior relationship.

Well, first, there is a great Greenfield opportunity. There is a lot – there is a lot of health organizations that still do traditional training and education in this area. So, there is a lot of opportunity for everyone in the open space to really bring people to more modern methods of training and education. And so, we are excited about that opportunity. From a card standpoint, the great news here is that, the American Red Cross brand is a global brand that’s associated with high quality. As you probably know the American Red Cross is one of the top providers of blood supply in the U.S. health system and there is really no more rigorous quality assurance programs that can be made to protect our blood supply. The American Red Cross is known for managing a significant portion of America’s blood supply. So, it’s a very credible, of course, global international brand and they are putting their best effort and science in addition to participating in the international process for setting the standards on resuscitation training. They are putting their best efforts into this product development and their brand. So, we will be issuing an American Red Cross certificate and we feel that it is an eminently credible brand stands for high quality and excellent outcomes. So, we’re very excited to be bringing that message to the market. It’s also important to note that both organizations have high quality programs that are based on the same size. That’s an international global public domain science. So, as long as programs are built at those standards, while it will take time to educate the market, because ironically, a lot of the U.S. market really doesn’t understand or appreciate how these global standards are set. We’ve been busy educating the market about those standards for quite some time and we are getting receptivity as they have greater understanding that both programs in the market that are market-leading are mapped to and created common derived from the same high quality international standard and science.

That’s great. And then, I guess, shifting gears here a little bit, under the old metrics that you provided regarding learning center, implemented versus fully contracted and now you are providing these hStream metrics, a big jump, 1.51 million to 1.84 million in the quarter. That realizes early days, but under the old metrics it was 25,000 to 50,000 a quarter was kind of the expected range. What are your expectations for hStream or is it still too early to even know? Thank you.

Sure. It’s a little too early, but I can tell you a few kind of characterizations. The first is that, as we are renewing contracts and our typical contracts are two, three and four years. So if you took it on whole and bottom, maybe a three year contract averages. It means about a third of our base is up for renewal each year. We are so far very successful incorporating the features and benefits of this hStream platform integration technology. In fact, there is a whole set of upgrades to existing software that customers get when they include the hStream subscription in their contracts. So, so far, we’ve had a very seamless migration as these contracts come up for renewal that add the language in the contract represents a subscription to hStream and then providing some of the benefits that come with it. For example, the old HealthStream learning center, there is a package of new updates through the learning platform that come when you subscribe to hStream. The hStream subscription also helps you have access to some free content libraries which is very exciting. And so, there are plenty of benefits associated with upgrading to hStream and so we haven’t met really any resistance in that process so far. So, our hope is that as we continue to go through the renewal process, we will continue to include the hStream platform and activate the benefit that customers received from that subscription.

Well, fantastic. All right. Thank you very much.

Thank you. And our next comes from Richard Close with Canaccord. Your line is open.

Great. Thank you. Congratulations. I guess, a couple housekeeping in terms of just a clarification. The heart code, I just want to be sure I have this right, was 17.3 million in the first quarter. That’s what you said?

That’s correct.

Okay, great. And then, just a comment on the operating income and for the remainder of the year, obviously not expected to be at the level of first quarter. Can you talk a little bit, maybe about the cadence in terms of second quarter through the fourth quarter? Is it like a step down – do you expect a step down in each of the quarters? Or is it evenly distributed through the remainder of the year?

Yes, so, it – there is definitely be a sequential decline. We talked about operating declining versus first quarter and some of the drivers of that, the legacy resuscitation product just started to fall-off. Beginning in the second quarter, we should expect a sequential decline in the revenues for that and actually they’ll be flat compared to the second, third, and fourth quarters of last year. So, most of the increase we expected for the year has already occurred in that product category that have 5 million of growth year-over-year and that’s …

Hello, hello.

Please standby.

Hopefully, you can hear. Richard, are you still there? Can you hear us? We have to switch lines?

Pardon me, Richard. [Operator Instructions] Richard, your line is open.

Okay. Great. Thanks. Hopefully, that wasn’t on my side. So, thanks for the operating income answer. What are the questions I had? Bobby, you mentioned a $3 million in investments that you made in the quarter with respect to, I guess, some of the hStream partners. Can you talk a little bit about the strategy with respect to making the investments in these companies? Is there something we should think about in terms of like, most hStream partners might have some sort of investment in them by you guys? And what do you get out of that essentially? Is there any type of revenue share or a benefit for you?

Sure, sure. Let’s talk about that. I mean, a great question. So it is a new model and so, we have this - these new forms of connectivity that will allow applications that we like. Historically, we sold a platform like a learning platform and it drove consumption of content and that’s been a nice virtuous cycle. We sell the credentialing system and it drives consumption of things like Privilege Libraries and other form of content assets. In this case, what we are finding is that we can find companies that have really nice applications that may meet a need inside of our customers and help accelerate their growth as a business by better connectivity to our network of customers. And so, early on, as we learn how these connectivities work, we help these customers have access to our customers – these partners have access to our customer base and we integrate the technologies. They are kind of – it’s early stages, our first few. We wanted a little more control on those integration processes. A little more control over security. We wanted to have a little more, say, in the direction of – a little more of a voice in the direction of the companies and its growth strategies as it relates to our customer base and our market which is, as you know very large. And so, and a few of these early ones we have taken an equity position, but we only take the equity position to support some of that strong connectivity and early steering. I do not expect – we have other partners that are integrating with hStream where there is no equity involved. And in all cases, we expect the revenue share for helping connect these partners to our customers in helping them have…

Yes, that does. So, just I know you made a investment in Juice Analytics several years ago. And so, this seems different than that previous type of investment that you had made?

It’s a little different. Although what we’ve done with Juice is built some of our own house branded. So they are infrastructure level technology and in turn, we’ve built, for example, our KnowledgeQ product uses the Juice platform. So, in essence, they are one of the first applications to be integrated with our network, but this has pre-dated the formation of these platform-as-a-service capabilities. And so, Juice is a good example of really the earliest form of integration of a software application to our network. And really is the foundation for the concepts of hStream and platform-as-a-service for us.

Okay. Great. Thank you.

Thank you.

[Operator Instructions] And we have a question from Frank Sparacino with First Analysis. Your line is open.

Hi guys. Just one for me, Bobby. If you look at workforce, and then we strip away the legacy resuscitation business the remaining business roughly $37 million in this quarter. Can you give us a sense to what would be some of the larger product lines in there? And then, what is driving that growth year-over-year which was pretty healthy in Q1?

Yes. It’s – so there is several subsets of product families inside the workforce development. The first is clinical and we have a great clinical leader and Trisha Coady recently promoted to our C-suite and she runs a very robust portfolio of clinical development and clinical education and clinical competency products. One of which is the American Red Cross resuscitation suite. But also in that family of products, is our brand new CE Path which is, you can remember us talk about our CE Center and so it’s kind of the second generation of CE Center. It’s a more intelligent continuing education platform for the broader clinical work staff and it’s really a fantastic product. It’s a enhancement to the old CE Center product which was an aggregated educational library for the nurse professionals for example. So, CE Path is one of the new products there. We are really excited about it. It has more intelligence in how it recommends the courses and has very large library. I think about 2000 courses in CE Path and it’s a subscription content service. So, fantastic product. We have also software tools like Checklist that continued to perform very well. It’s as basic as it sounds, but a lot of quality processes and educational processes are - Checklist is used to manage those processes and our Checklist is of course fully integrated with our overall platform. It allows for a preceptor to sign-off on a preceptor. It allows for someone to sign-off on a process that’s got all these functions built into it in this Checklist product has hundreds of thousand – I think, over 800,000 subscribers now. And so, that’s an exciting product that’s continuing to grow. So, and then, finally in the clinical area, we have just Jane, which is our…

Thank you, Bobby.

Thank you. And our next question comes from Vincent Colicchio with Barrington Research. Your line is open.

Yes, Bobby. Most of mine were asked. I just have one. So, could you provide an update on cross-selling activity within the Providigm solution segment in terms of how it’s performing versus your expectations and maybe some of the things you can do to make it accelerate that?

Yes, I think, what’s exciting there is it’s kind of all of the assets from the acquisitions have a place in the new Verity platform. And really the key now is to migrate customers to that platform. Then they have access to purchase all the assets that were kind of derivatives from where they were acquired. And so, the key is, those 70 contracts for Verity and growing and the migrations that allows them to buy from a broader menu of services solutions, date of elevation. And so a lot of our energy for the next 36 months will be on both winning new customers through this new exciting platform and migrating. That puts us in the best position to upsell. So, some of the early Verity wins include a broader spectrum of purchasing across that what used to be kind of a desperate set of services through this integrated SaaS platform. And again, if I had to say the focus of that business for the next probably 36 months is going to be these migrations and then upsell ones that are on the platform.

Okay. So, basically, things are progressing in line with your expectation. It’s a matter of transitioning to the Verity platform?

Yes, I feel that, we’ve been through several challenges with those three businesses in three locations, three different platforms all the while building the new platform and finally launching it and so to see the first successful migrations and wins. The feature set of the new platform is incredibly thoughtful. It includes capabilities from all the prior platforms and acquisitions that customers love the most. So we think it is a highly competitive and very well positioned new platform. And that all of our focus will be on getting people on it and they can avail themselves with they buy ups that features that they would have bought separately from the prior companies.

Okay. Thank you.

Thank you. And we have a follow-up from Richard Close with Canaccord. Your line is open.

Great. And just a follow-up on that last question, Bobby. What do you think the long-term growth rate is on the Provider Solutions for you guys?

Well, Richard, because of all of these transitions, you know that migration to Red Cross, because the transitions to new SaaS application Verity, and the wholly new types of opportunities like the cohort of companies we went through that are not producing revenue yet, our long-term growth rates are really hard to see and as you know we’ve narrowed our guidance down to annual growth rates. Our ambition is to be high growth, high margin, SaaS and Path software application network. But currently, obviously, with all of these downward pressures, i.e. the resuscitation product decline, that’s going to be hard to show optically to the market for quite some time. So what we are going to do is try to pick some of the higher growth products and talk about their growth rates. Highlight the movement to hStream. Highlight the movement to Verity to get people confidence that there are elements growing within, because again, as we’ve talked about, the challenges in the next three quarters are to avoid modeling them after the first quarter. The first quarter in many ways represents kind of a culmination of some of the old product lines and the old performance. And so, I think we really want to spend our time focused here on managing expectations as we get through all these migrations, in particular these next three quarters, where we are going to see these sequential declines resulting from the fall-off now after peaking in the resuscitation revenue. So that said, growth rate, we provided our guidance for the year and you can already tell that although revenues were up 19% in the first quarter of the prior year. We expect sequential declines from here forward and a lower overall blended rate for the year. So, we are trying to manage growth rate expectations down into the low-single – into the single-digits, not the low-single-digits, into the single-digits.

Okay. And then, just a clarity on Frank’s question in terms of on the workforce. Providigm, that 1.5 million, that was included in the first quarter workforce revenue. Correct? Where that resides?

Yes, it’s the workforce solutions product category.

Okay.

That was in workforce.

Okay. Just wanted to make sure I was looking at that right. Thanks. Congratulations again.

Thank you. Yes, it was a good quarter. But want to speak to all of our investors and analysts and those that were heading into some headwinds here. But we are obviously very excited about all the new products coming to market, new developments and the new offers that’s going to bring us all together and the new energy that goes with that. There are many, many things to be excited about. We also want to be cautious and have people be thoughtful about how they think about of the intermediate and short run future, because there will be plenty of financial challenges presented by these declining revenue streams. I am very excited and confident. We will work our way through those as we always have and come out stronger on the backside, but it’s going to be quite some headwinds that we head into for the next several quarters. The good news is, some of these migrations are well underway. We have early success in all of the key areas that I considered challenges in the movements of the new Verity platform. We have early success there. We have early contracts on our new American Red Cross program which is very exciting. So, the early indicators are that we have a good strategy to rebuild from what would be a declining and important product line historically to us. Thank you all for your time. I guess, I’ll see if there are remaining questions.

There are no further questions on the phone line.

Well, thank you. Congratulations to our employees for delivering a strong quarter and we all know we are going to have to continue to bear down and focus on customer needs for the next several quarters and to fight through all these opportunities and challenges. I look forward to seeing all of you to come visit the new operations in Nashville bring us all together again spread out all over middle Tennessee. So it’s going to be fun to be back together. Thank you to our investors for listening and following our story and look forward to reporting the next quarterly earnings report.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.