HealthStream, Inc.
Q4 2013 Earnings Call Transcript

Published: 19 Feb 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to the HealthStream, Inc. Fourth Quarter and Year End 2013 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 call is being recorded. I would now like to introduce your host for today’s conference, Gerry Hayden, Senior Vice President and Chief Financial Officer. Sir, you may begin.

[Gerry Hayden:]

Thank you, and good morning, everyone. And welcome to today’s fourth quarter and full year 2013 results call for Healthstream. With me today in the room is Bobby Frist, our CEO and Chairman; and of course, me -- myself, Gerry Hayden, CFO. I wanted to remind you this phone call -- this conference call may contain forward-looking statements regarding future events and future performance of HealthStream that involve risk and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause 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. And with that, I’ll turn the call over to Bobby.

[Bobby Frist:]

Thank you, Gerry. Good morning. We have a lot cover the year end update. We’ll have business line updates in about four, five areas, of course, financial highlights with Gerry. So we’ve got a lot to cover ever. A bit of cough this morning, so I may turn over to Gerry few points in the script, but we will get started here. So, as many, I want to go back a little bit because we have adjusted our nomenclature and how we describe some of our business lines today as we go forward. And so, as many of you know, our earlier solution for healthcare organizations was our compliance solution. Just before we went public in 2000 we began offering hospitals a better way to meet their joint commission in OSHA training requirements, where we blended our learning platform and it was bundled with online regulatory courses. Our hospital customers use our joint commission OSHA solution to maintain compliance with mandated safety training for their employees. They generally deploy the system enterprise-wide. Today, we believe that our joint commission OSHA solution is the most adopted in the industry. We build our network of customers for this solution and overtime, we began offering more and more courseware products to meet a wider range of their training needs. So the model has been established. Along the way we established over 130 content partnerships and hundreds and hundreds of content products. In the same timeframe, we added multiple applications to our platform, so that now today we have Learning Center, the Performance Center, the Competency Center, SimManager, Authoring Center, HealthStream Video are all features of the -- and applications of the core technology offerings from HealthStream. So for HealthStream solution is the combination of products and/or services where we provide health organizations a blended platform and content solution to achieve a specific business or clinical outcome. And today we offer market-leading solutions in compliance which we just talked about our foundational product, for such occasion ICD-10 training, our three core areas where HealthStream has offered market-leading solutions. Consequently, we've updated our nomenclature to better reflect our business as it is today. Our Learning and Talent Management segment, we now refer to as -- in a broader sense as our workforce development solutions as we’ve just talk. The segment, we believe more accurately encompasses the broader scope of the solutions and our research segment is now referred to as our research/patient experience solutions segment. You can see a little more focus within was defined as a research segment has now focused on improving patient experience through patient solutions. So these two re-brandings are largely consistent with our historical segment reporting. But we think are more reflective of the product sets and solutions sets that are now broader than they were many years ago when we identify the segments as Learning and Research. You saw in earnings release that we -- we are also updating our subscriber count metric. We are now reporting the total number of individual end-users of HealthStream subscription-based solutions, which we refer to as total subscribers, each individual end-user utilizes at least one HealthStream subscription-based solution will be counted as one subscriber, regardless of the number of subscriptions contracted by or for that end-user. For example, if one of the hospital clients purchases for each of its 1,000 nurses a subscription to Healthstream Learning Center, HealthStream Competency Center, resuscitation solution and ICD-10 training solutions. Those 1,000 nurses will count as 1,000 total subscribers, despite the fact that each of them is contracted for four HealthStream subscriptions. At December 31, 2013, HealthStream had approximately 3.39 million total subscribers implemented to use it subscription-based solutions. Approximately 3.71 million total subscribers have contracted to use one or more subscription-based solutions from Healthstream as of December 31, 2013. Overall, in the year, we contracted over 600,000 new subscribers to our platform in 2013, which is a 73% increase in new subscribers over the prior year. In the fourth quarter alone, we contracted approximately 289,000 new subscribers, which obviously far exceed the quarterly range we historically targeted of adding 20,000 to 50,000 new subscribers per quarter. So our historical target range which we continuously communicate we think is a good run rate to be consistently targeting to grow our network but obviously we have an exceptional fourth quarter with 289,000 new subscribers. Among the 289,000 new subscribers and they were contracted during the fourth quarter was the addition of one of the top five largest health systems in the nation, who entered into a long-term, multi-year enterprise-wide contract for our based HLC system and again it’s a multi-year agreements. So we are very excited. Again exceptional quarter but really in the last month of the quarter we saw really some incredible sales of one very, very large health system, obviously, skews the number in the positive way, but add subscriptions under multi, multi-year agreement. We are very excited to extend our network in this way. As you may recall we introduced a new metrics in our first quarter 2013 earnings release that provide additional measure of our progress in growing the value of our customer base. That new metric is our annualized revenue per implemented subscriber. It represents the quarter's revenue from subscription-based products divided by the average implemented subscribers for that quarter annualized. In the fourth quarter of 2013 our revenue per implemented subscriber was $32.41 -- $32.41 which is 20% higher over the fourth quarter of 2012. The last eight quarters we’ve seen a steady upward trajectory which we believe is indicative of our progress, selling more and more solutions to the existing customer base. Given the update on our nomenclature and introduction of our performance metric of total subscribers, we’re retiring our HLC renewal metrics for our public reporting in 2014. Since our total subscribers’ metric encompasses the entire scope of our workforce development solutions, it provides a more comprehensive view of our business than the HLC renewal rate, HealthStream Learning Center renewal rate, which is by definition limited solely to HLC subscriptions. So the new renewal rate, the new subscriber rate has been adjusted. It’s largely similar to the old one because most, all of our customers have at least the base HLC subscription. And so as we add new subscribers, they have revenue per subscriber but not new subscribers. So we added in unique subscribers for some of the other platform pieces but again most customers as you’ll see already subscribed to the base subscription. To round out the year with consistent metrics, however, we’re going off of the metric here for the last time. The trailing four quarters ended December 31, 2013, customers representing approximately 97% of subscribers that were up for renewal did renew. While renewal rate based on the annual contract value was approximately was also 97% for the fourth quarter of 2013. I’m sorry, that’s the prior year. For the fourth quarter of 2013, 101% of subscribers that were up for renewal did renew while renewal rate based on the annual contract value was approximately 98%. That must have been in the prior-year quarter. So this quarter's renewal rates based on the old calculation were 97% for subscribers and 101% for value. So very strong, very strong numbers. Furthermore, two of our largest health system clients that were up in 2014, so as we’ve entered the New Year, two of our largest health system customers that are also in the class of accounting in our top 10 largest customers for HealthStream that were coming up for renewal 2014 have already renewed in four plus year contracts. So again since we’re dropping the metric, we though we give a little bit of clarity on ‘13 wrapped out -- wrapped up and then in ‘14 looking ahead, just a little comfort that as we sit here today, the two largest customers that were up for renewal in ‘14 have already renewed. And in fact, they are also among our top 10 largest customers too. So that’s kind of an exciting way to be here in February. Let me hit a few financial highlights for the quarter then turn it over to Gerry for some detailed financials. Consolidated all the following quarterly numbers show our results in the fourth quarter of ‘13 compared to the fourth quarter of ‘12 and a full-year number show results for 2013 compared to ‘12. So here are some of the comparisons. Consolidated revenues were up 33% to $37.1 million for the fourth quarter while they were up 28% to $103.7 million for the year. Operating income was up 5% to $3.5 million in the fourth quarter while it increased 9% to $14.7 million for the year. Net income was $1.8 million in both the fourth quarter of 2013 and 2012 while increased 10% to $8.4 million for the year. Adjusted EBITDA was up 7% to $5.9 million in the fourth quarter while it increased 13% to $23.9 million for the year. So strong performance on revenues, operating income, net income and adjusted EBITDA, all up over the prior year comparable periods. I’ll turn it over to Gerry for more detailed discussion of our financials.

[Gerry Hayden:]

Thank you Bobby. Once again, good morning everyone. Bobby has laid out quarter’s highlights. I’ll take a few minutes to add color to our financial results. First, I’ll comment on four areas of the income statement, revenue growth, gross margin, operating expenses and income taxes. The foundation to our financial performance was organic revenue growth. We have seen there are overall growth rates of 33% for the fourth quarter and 28% over 2012 full year. The score is, of course, our year end and good time to draw some perspective on our progress. The year 2013 marked the third consecutive year that we produced 20+ percent revenue growth driven in large part by once again the organic growth. Workforce development solutions segment has benefited from both an increase in the number of total subscribers as well as greater courseware consumption across that same subscriber base. Our renewal metric total event subscriber count has grown by 15% during 2013 and the contract to total subscribers have grown by 90% over the same time last year over 2012. And once again as Bobby mentioned, we added 600,000 subscribers to that base over the course of 2013. In similar manners we did in Q3, our fourth quarter release includes information about our ICD-10 product. It specifically recalls out the ICD-10 product contributed about $5 million, the fourth quarter revenues were about $3.7 million more than last year’s fourth quarter. This product has been a strong performer for us but we also want to point out that fourth quarter 2013 grew by 21% if you exclude ICD-10 results. So In addition to the ICD-10 revenue growth, we tend to see positive results in other key product areas, once again such as HeartCode and other categories. The end result of these dynamics is growth in the revenue per event subscriber metric which as Bobby mentioned show the 20% increase year-over-year growing from $27.04 at the same time last year to $32.41 in the fourth quarter of 2013. In sum, our workforce development solutions business has experienced double-digit expansion in both total subscribers and also the key metric revenue per subscriber. The research/patient experience solution segment has also shown progress. The most notable metric is the 11% growth rate in patient insights -- in the patient insights category, which includes both HCAHPS and also the CG-CAHPS product, which we introduced during 2013. As you already know, the fourth quarter also includes the results of our September 2013 acquisition of Baptist Leadership Group or BLG. Overall the research patient experience segment grew by 20% in the fourth quarter and BLG was a contributor to that performance. While higher gross margin platform products performed well during 2013 as evidenced by the 600,000 subscriber additions. Lower gross margin courseware products grew even faster which is less than a gross margin decrease from 59.8% in 2012 to 58% this year. We are pleased to deliver 9% operating income growth over the last year which works through the high end of our guidance range for 2013. Pardon me -- and as you’ve read our 2014 guidance calls for higher operating income growth in the 10% to 15% range. This year’s fourth quarter comparisons are influenced by the timing of our summit which occurred in this year’s fourth quarter as opposed to 2012 when it took place in the first quarter. Summit was well attended this year and well received by the folks who did come. We did manage to stage a great event for $100,000 less than the summit in 2012. For the full year 2013, we incurred higher operating expenses in a variety of categories, royalties, personnel additions and contract labor, sales commissions, depreciation and amortization, business taxes, merger and acquisition program costs and other general expenses. For example, for product development category, our income statement was up 36% for the year ended December 31st 2012, in fact, in the investments to increase our development capacity necessary to pursue our expanding product roadmaps. During the year, we added product managers, application developers, project managers, business analysts and contract labor across all of our development teams. Our effective book tax rate declined slightly between 2013 and 2012. The rate in 2013 was 43.3% and was -- it was 43.7% for 2012. The Q4 ‘13 effective tax rate was higher than the full year rate owing to a variety of factors including special things as the reconciliation of work estimates with filed tax returns, the timing to amount a stock option exercises and other normal year end adjustments. It’s also important to reiterate, however, these effective tax income tax rates are for GAAP accounting purposes only. We have limited federal cash income tax liability because it tends to utilize our net operating loss carry forwards that remain available to us. Our balance sheet remains strong and we are well positioned to support development activities. As of December 31, 2013, our cash balances were $108 million and that’s up from $93 million at the end of December 2012. And as you already know, we have no long-term debt. One last financial metric to call to your attention is cash flow from operations, which was a link between our balance sheet and our operating results. Cash flow from operations has grown by 17% for the full year of 2013 over 2012, increasing from $22.5 million to $26.3 million in 2013. With our core business growing and a strong balance sheet, Michael Collier, our Vice President of Business Development and I are running an active business development program. We continue to review and evaluate a variety of acquisitions for business opportunities while maintaining our discipline in terms of strategic fit and valuation. Finally, in our release, you saw the guidance for 2013, we anticipate that our revenue to grow between 22% and 26% on a consolidated basis. We expect Workforce Development Solutions revenues to increase in the 22% to 27% range with research patient experience revenues to grow by approximately 18% to 22%, part of which include -- part of which growth includes revenues from our BLG acquisition, which once again closed at September of 2013. We anticipate operating income will grow between 10% and 15% over full year 2013 and capital expenditures will be between $9 million to $12 million and our effective income tax rate for book accounting to be between 42% and 44%. So, thank you for your time and now, I will turn the call back to Bobby.

[Bobby Frist:]

Good. Good. Thank you, Gerry. One highlight back in my financial highlights was vital and part of my script and I want to write correct. The consolidated revenues were up 33% to $37.1 million in the fourth quarter over the prior year fourth quarter and they were up 28% to $132.3 million for the full year, incorrectly I said $103.7 million. So, I want to make that small correction. Now, I will probably go into operating updates and maybe a quick look at competitive landscape before we go into kind of product lines, business updates. So the workforce development space or the talent management space has can be known is an exciting and dynamic environment, that includes talent management platform companies, HR service companies and content publishers. And our success focused on the healthcare vertical is attracting increased competition into the healthcare vertical. We are focused on building core solution sets for key challenges facing healthcare organizations like the need to meet joint commission and OSHA training requirements, or the need to improve resuscitation rates or help an organization prepare for transition for the new ICD-10 coding system. Many of our competitors instead of using workforce development nomenclature use the talent management’s nomenclature and they are focused exclusively on software functionality. In contrast, we believe that the outcomes that we need to achieve are achieved through the workforce, not a piece of software. But our solutions incorporate software infrastructure SaaS delivered content into our solution areas. So our approach assumes a more complete definition of a solution, which we conceptualize including a combination of products and services that together are used by the workforce to achieve specific business and critical outcomes. And of course we've chosen to focus on the massive challenge of our massive healthcare industry. Our sales approach reflects the scribble differences well. Our competitors tend to sell exclusively to the HR Group and we tend to sell to Heads of Compliance, the Head of Clinical Quality, the Head of Revenue Cycle and Finance, the Head of Nursing’s, the CNO, the CMO and also to Head of the HR Department. So with that as a landscape, I thought I would take a look at some of how our platform and solutions are performing. The HealthStream Performance Center and HealthStream Competency Center, which again are very similar products but tweaked to do slightly different things, our two of our workforce development applications, approximately 310,000 subscribers -- subscriptions have been sold cumulatively for either the HPC, or the HCC or both. Approximately, 60,000 of those subscriptions were contracted in the fourth quarter. The vast majority of the new subscriptions to those two products were sold to existing subscribers, which include organizations like Salem Hospital, University of Louisville Medical Center, HCA Midwest Healthcare System, [Evidence] Health. So we are seeing strong uptick within our customer base of the HPC, HCC solution and we're seeing strong utilization of the solution as well, which is exciting. Of course, getting it sold is important, getting it implemented is equally important and then having the customer benefit from the application is the ultimate measure of success. And for the full year of 2013, over $5.8 million competency ratings were completed through the platform. Turning our attention a bit to our research and patient experience solutions. The business performed well in the fourth quarter with our patient insights surveys, which were the survey research products that generate recurring revenues. The patient survey revenues increased 11% over the fourth quarter of 2012. For the full year 2013, approximately $1.5 million patient surveys were completed, fulfilling our customers’ HCAHPS requirements supporting CG-CAHPS initiatives and providing important patient experience feedback across other care settings. Overall, our research patient experienced business increased revenues by $1.4 million or 20% over the fourth quarter of 2012. Included in this fourth quarter financial results are the revenues of approximately $1 million from the Baptist Leadership Group, which we acquired in September of 2013, so obviously a significant contributor to the year-over-year growth through the acquisition of BLG but also nice double-digit growth on the patient survey, revenues up 11%. The integration of BLG progressed well during the fourth quarter, which includes the operations and functions of finance, HR and marketing as well as addition of the BLG sales team and our patient experience solutions sales team. So our sales team has expanded through the acquisition. During the fourth quarter, the research patient experience team collaborate to published the inaugural issue of our newsletter, the PX Advisor, advised or urged to shareholders to get a downloads of ads on our website. It’s a PDF, it’s a beautiful 45 page hardcopy thought leading document on various important critical topics in healthcare and you can get a little bit of thought of where we are headed as a company and where our customers expect us to be by reading through the PX Advisor. Again, it's a quick download from our corporate website. It is a highly visible channel for thought leadership and regarding the important goal of proving patient experience, which is the theme of each quarter. We plan to publish it accordingly. On January 28 and the 29th, we launch the Healthstream Patient Experience Symposium. It’s an exciting new development, a National Conference Series which provide attendees with knowledge resources and tools designed to improve patient experience. And we are already off to a great start with over 75 participants attending the first couple of events, representing on 31 healthcare organizations across 14 states. So it’s a great opportunity to have a dialogue about the patient experience and outreach and throughout the year, we will be hosting many of these events. I think the next event is on March 4th and it’s in Orlando, Florida, so very excited about this new series that comes through our relationship and acquisition of BLG and (inaudible) group. Let’s turn our attention to post-acute care opportunity. This is an example of an area where we share with investors the journey. We believe in clicking the flywheel incrementally, and we share with investors the incremental investments we make as we make them and our plan for how to execute in the market. We believe this is a medium-term plan. It’s going to span multiple years and we began that journey in January of last year. We announced that we would focus on that space. And after announcing focus, we’re able to bring in two large customers, which also partners in the development of our opportunity Brookdale Senior Living and Almost Family. By the implementations of our solutions at those organizations are going well and they are up and using them, so it’s very exciting to see our anchor tenants up and running in ’13. And then throughout the year, we focused on acquiring new content partnerships to build out our product and solution offering. And in fact, just a few weeks ago announced three new exclusive partners to help us focus on the post-acute care opportunity. Professional Care Education, QueTech and Mather LifeWays are three new exclusive partnerships, bringing over 900 courses to our library, allowing us to better position in the post-acute care opportunity. But it still hasn’t taken a flywheel, it’s another step towards an opportunity that will develop over time and we are excited to continue to add both employees and strength to our efforts there and we will share the journey as it unfolds with shareholders, but we are excited about our strengthening presence and toolkit and product set for the post-acute market. We believe that over time it will develop into the steady contributor to top line growth and expand opportunity for core products, like our HeartCode products or ICD-10 products into new channel. But again far from hyping the channel, we are working very hard to build that incrementally and share the journey of our investments, so you can understand where our capital investments and hiring is directed over this year and next year. We are working hard to develop the opportunity, but it will span multiyear as we develop that opportunity. ICD-10 is kind of the opposite of that. It’s an effort that through thoughtful planning a few years ago were able to cash a huge opportunity to help America’s healthcare workforce prepare for ICD-10. And I think we were both progressive in our adoption and understanding this would be a major issue. I think we took exactly the right partner in Precyse as award winning products in this area. And I think we’ve delivered it in a timely way proving the value of our distribution network. We believe that at the current state with 1.2 million subscribers to these product sets that we’re clearly now -- and with our partner Precyse, we’re the market leaders and helping America’s hospitals ready for this opportunity. We’ve talked about this opportunity, it’s both bit of a blessing and a curse when it comes so far and it’s built around a mandate. It creates an opportunity that it can’t refuse, but also a challenge for us in the future to backfill the revenues with innovations and continuous work to build innovations and new products in these product sets, so there will be an ongoing revenue stream. The CMS mandated deadline for healthcare organization to transition to the ICD and coding system goes into effect in October of this year and we believe that that deadline along with our market leading product will continue to drive sales for ICD-10 training solution up through and through the deadline and little beyond as well. Since 2011 approximately 1.2 million healthcare professionals have contracted for ICD-10 solution through their respective organizations without the 100 new contracts entered into during the fourth quarter of 2013. And just I will update January of this quarter was also strong, and that’s exciting because any new sales from this point forward onto your contracts helps with the back end of this adoption curve in 2015. So we are excited that sales continued strong in January. Revenues from ICD-10 and Training were approximately $5 million in the fourth quarter of 2013 and approximately $13.9 million for the full year of 2013. We have a 50

[Operator:]

Thank you, sir. (Operator Instructions) Our first question comes from Richard Close of Avondale Partners. Your line is now opened.

[Richard Close:]

Yeah, thanks. Just curious if you guys could elaborate in terms of how much revenue did Sy.Med contribute in the fourth quarter? I know you gave the growth number but just what was that contribution?

[Bobby Frist:]

Yes. So we don’t do a product line disclosures of revenues, only occasionally on a new acquisition. But it is meeting expectations and it’s falling into our workforce development solution segment. And so, Richard, we haven’t provided that level of detail for that group. The group continues to perform well and it’s operating under earnout and continuing to hit goals, so we’re excited about that. But we haven’t disclose product line level details on Sy.Med.

[Richard Close:]

Okay

[Bobby Frist:]

And, Richard, we have some exciting plans for that product set as it moves forward into the year. So we’re excited about their continued steady performance.

[Gerry Hayden:]

As long as we keep our positioned ICD-10 marketing as well.

[Bobby Frist:]

Yeah, we begun to offer the ICD-10 products through their sales organization to that channel and we’re getting a little bit of initial traction. We don't know yet how to play out, but we’re excited that the sales team has integrated offering, some cross-selling of products.

[Richard Close:]

And then just a follow-up on the subscriber numbers, I just want to make sure I have those correctly. Can you just go over, I mean, obviously those numbers don't compare to the previous learning subscribers that you gave I think in the past. So can you just make -- so we’re all on the same page in terms of what the subscriber numbers were this quarter versus a year ago?

[Bobby Frist:]

Sure. And just let me explain that. First of all, the way it was defined earlier and the way it’s defined now result in, as of right now which is why it’s a good time for transition in a very similar outcome from a calculation standpoint and here's why. Most customers are subscribers to the base HLC, and so most were already counted in that metric. We were getting to have few product lines like the Competency Center, where the few customers subscribe to that and nothing else with the company and they were not in the prior metrics. It is very few, but again most customers have bought HLC, as you can see from this last quarter. Over 90% of the people that bought were already on HLC, so they don't count as new subscribers. If you look at our press release, for example, ICD-10, 93% of customers that bought ICD-10 are customers of other products of HealthStream. So you can see from that metric as well that again while it added additional revenue per subscriber, it didn't add many net new subscribers ICD-10 counted in the new way. And so the metrics are at this inflection point, which is good news I think, are largely similar although definitionally different to the prior years. Again, because if everyone of the prior numbers we reported on HLC for each of these new products are the buyers of the additional products, then they don’t even add new subscriber. So you can fairly, confidently look at the past year’s numbers. And with small adjustments here and there, for example, we added several thousand new subscribers in this new calculation from a few hospitals that were bought just the HCC but work on the HLC. And so -- you can obviously see that about 7% of ICD-10 subscribers would now be counted as new subscribers. But, 93% of ICD-10, the 1.2 million subscribers were already in the number. So, I hope that helps because again, we are at this inflection point where the way we calculate in the past is largely similar although there’s, new ins and outs to it. As a way, we’re going to calculate in the future and that is largely because we’ve done such a really good job of up-selling existing customers’ other products. Does that make sense or does that help?

[Richard Close:]

Yeah. But, Gerry gave the numbers. I just want him to go over that again real quick.

[Gerry Hayden:]

And which numbers, Richard?

[Richard Close:]

I thought you gave like a 600,000 number or -- I’m sorry.

[Gerry Hayden:]

Yeah. I will give you -- do you have the page there?

[Richard Close:]

Yeah, 600,000 subscribers, those are the new additions during 2013.

[Gerry Hayden:]

And of the 600,000, 289,000 were added in the fourth quarter alone. So that half of the years adds of new subscribers came in the fourth quarter.

[Richard Close:]

Okay. And just to be clear, is that contracted? That’s the contracted number, not the implemented number, correct?

[Gerry Hayden:]

That’s correct. That’s correct.

[Richard Close:]

I just wanted to make sure on that. My final question and thanks for being patient here. But with respect to renaming the two division of research to research and patient experience and then the workforce name change, is this foreshadowing that you guys are maybe looking at a more, I guess, wide area or wider area of potential acquisition targets as you discussed your business development operations? Are you looking at, maybe things more on the workforce side, labor management, that type of stuff and then on the patient engagement side, is it foreshadowing anything in terms of -- ?

[Bobby Frist:]

Yeah, we’ll talk about it. It might be a little bit because definitionally, here is what we believe. We believe that talent management has become firmly associated with the concept of buying just software. And when people talk about talent management vendors, they talk about modules of software. And by definition, we believe that the way we go to market and the way we position with our customers, the way we sell our value proposition includes more than just software. Software is an underpinning of our ecosystem. It’s an underpinning of every solution. But really as we thought about what we’re becoming, it is how software content and data blend to help a hospital fix something, get a clinical business outcome that they're striving for. And so as -- we thought that it might help better understand the way we sell our value proposition, how we position and the different buyers for our solutions. If we said that, look, our vision statement, which has been the same for nine years to improve the quality of care by developing and assessing the people with deliver care. We thought that workforce development -- basically, we help achieve outcomes through developing the workforce, which touch is broader than just selling software to HR. Although that's a critical and an important component. So you could think of it as foreshadowing is a bit of widening of the definition or more encompassing or more description, a better description of the way we think about our value proposition and the way we think about how we sell as oppose to just people viewing just as a software sale.

[Richard Close:]

And then patient experience?

[Bobby Frist:]

Yeah. Similar thing there, if you think about, as we enter the research market, it was really a data collection business and then it turn to the data collection and analysis. And now its data collection and analysis, but we blended some learning elements, we have curriculum, we have some consulting through BLG. And the idea of patient experience solution is to have actually move the needle on an HCAHPS score, not just collect the data and report the data. So we think by redefining that area slightly here is a first step that it's a more complete thought to say that, yes, we collect HCAHPS data. We are certified CMS vendor and yes, we report that data, we help customers to understand it. But then we deploy educational resources consultants to be an allied to hospital in moving the needle on their patient experience outcome. And so, again, we think it is better captures instead of HCAHPS survey business or just pure research, we think it's more of a patient experience solution. So, again, it talks to the completeness of the way we think about going to market and our differentiation and how we provide value to our customers.

[Richard Close:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Matt Hewitt of Craig-Hallum. Your line is now open.

[Matt Hewitt:]

Good morning and congratulations on a great 2013.

[Gerry Hayden:]

Thank you.

[Bobby Frist:]

Thank you, Matt.

[Matt Hewitt:]

Quick question on ICD-10, obviously, you commented on some of the challenges and given the deadline in the mandate and how it forces rapid adoption could create some issues on the backend. I'm curious some of the initial contracts that you signed in Q4 of ’12, Q1 of ’13, have you had an opportunity to go back to those customers and maybe get an indication from them what their intensions are, when those contracts come up for renewal?

[Bobby Frist:]

We have had just a few renewals. Remember the deadline has moved a few times. So again, there is a lot of uncertainty in all this. We believe for example that the deadline is not going to change because in the current environment there is now a cost of changing it almost as much as not, the risk of people not being ready. But the whole -- there is a lot of uncertainty around ICD-10 for hospitals that have -- the current research shows that many of them are not prepared. So we've only had a few renewals because some people signed a couple of years ago before the deadline move and they had come up for renewal and for those we've had good renewal, because there is still the deadline got pushed and they renewed. But that's very few. I mean, most people are centered now on the current deadline for this year and really that's all they are focused on. So as we -- we just don't know. As we learned more each quarter what we can important now is that we're on the positive side of this curve and sales continue to be strong and people are not quite as ready as they would -- they hope to be and so we feel we've got a good pipeline through the deadline and maybe a little bit beyond that. So there is -- on the challenges side there is just a lot of unknown that we try to be very clear about as we learned more and more each year, we've been talking about this now for over a year. And the first thing we noted to everyone about a year ago is just a nature of this because of the deadline as a different field. That said, in dialogue yesterday with some of our executives, and there clearly isn’t ongoing demand for products in this category. We don't know yet what that level demand will be, we don't believe it will be the same level of demand, we do believe it will dropoff and we do believe we will have to reconstitute the products to meet what I call the ongoing training needs of a smaller percentage to the workface. Contrary to that is the fact that for that workforce it’s a higher value proposition than their orientation packages that we currently sell through a broader audience. So Matt, it's a computing time we're trying to be a direct as we can about the opportunity because it's an incredible business opportunity and driving growth through this year at least. And then we're working hard with Precyse to build new products and understand the go-forward challenges and actually introduced some new products throughout the year new channels. But we don’t know until we know. I'd say the fourth quarter of this year is when we will see the first material renewals come up and we do expect that they won’t be for the entire enterprise, they will be for a smaller number of people.

[Matt Hewitt:]

I guess, kind of what I was getting at is have you had a chance, not so much renewing for ICD-10, but have you talk to some of those initial customers and said, okay, you have been buying ICD-10 platform for 800 of your employees, upon renewal it's going to be less, I think everyone to acknowledge that, but are they intending to then reduce the spend with HealthStream or just reallocate those dollars with other customers, I am sorry, with other applications and products?

[Bobby Frist:]

It is hard to say and I think there will be a mix of some renewals, when I say our enterprises fully oriented, I mean this is such a core issue that we may see some renewals for the enterprise, they may -- I just can't imagine but it will be fully prepared and when they just trained only at that point the coders, but I guess that is a possible scenario. And now we just don't have those indications, I think everybody is a bit of scrambled now to just to obtain the orientation phase and again, I think it will be several quarters before we get more better answers to what the go forward is on these product set.

[Matt Hewitt:]

All right. Shifting gears a little bit, you've had a couple of acquisitions over the last couple of years. Maybe update us on the cross-selling successes that you have had and how quickly you're able to penetrate those new customers that came in either with BLG and Sy.Med and cross-sell into those installed basis?

[Bobby Frist:]

Yeah. Great. We just had our Board recently, just before earnings and we give a scorecard to the board on some of those acquisitions where we track those things. And I was generally very pleased with the scorecard. So one of our acquisitions was a group decision critical and the first mission was to transfer those customers on a different platform to be part of our ecosystem into our platform and we have -- majority of those accounts have moved and then majority of those accounts have bought additional up sale, bought additional products from our portfolio. So if we think back to the decision critical, right now we have a green light on scorecard of cross-selling. We've move the economic materiality of the customers they had we're able to moved to our platform than cross-sell and upsell additional products. We feel really good of that. BLG is a little bit early, but we're encouraged with that and the new thought leading, the news letters and new national seminars that it’s given new life to our patient experience solutions and energizing our dedicated sales team in that area and giving them some new tools to go to market with. So it's a little early to tell how BLG cross-selling is going, but generally I think it's a very good sign that, I mean we didn't have four, five national or regional conferences and we've already had one with another in a month attracting customers for us to show our capabilities too. So we feel very good about that investment. We've made a few minority investments, little company called Nurse Competency. Again very small minority investment but they have testing for a knowledge test that are delivered to clinical experts and we're excited about the potential of that product. Investments in SimVentures are providing a steady, I would call it linear growth and we think is a part of the future, but still contributing cash flow and EBITDA. What else let’s see. So in most cases, we feel really good about and then in Sy.Med we've just recently seen some initial cross-selling of the ICD-10 products through that sales organization. So we feel like that sales organizations beginning to try to test other products in the channel and have some early success. So generally I think the way our sales organization is structured, it is very conducive to account management and cross-selling.

[Matt Hewitt:]

Okay. Great. Thanks. I will hop back in the queue.

[Bobby Frist:]

Thank you.

[Operator:]

Thank you. Our next question comes from Scott Berg of Northland Capital. Your line is now open.

[Unidentified Analyst:]

Hi, guys. This is (inaudible) for Scott Berg. First off, congratulations on the great quarter and great 2013. I was just wondering if you could give a little color on the adoption of the Performance Center product lines.

[Bobby Frist:]

Sure. So we tried to give a few numbers on that and the way we count now is not subscribers but subscriptions sold. And the way to think of it is in the fourth quarter -- I believe last quarter we announced that about 250,000 subscriptions sold to those two products and we added 60,000 subscriptions in the quarter. So, that’s a person subscribing to one or other, the either of those two or to both. And so, it’s a really nice growth. And I guess that’s about 20% growth in the quarter. And so, we’re very pleased with how that products going in. And also, we believe that product ultimately will drive additional content sales, because as you conduct performance reviews, you identify knowledge deficits and deficiencies, and you want remediation strategy. So we think that in the long run that continued growth of that product set. And now you can see it’s getting to be a good number, 300,000 of our 3.5 million plus subscribers are now also using that center performance or competency. And we think it has a good opportunity. The Competency Center in particular tends to be bought for clinical reviews. And it’s interesting because we think clinical reviews are kind of performance reviews on steroids. And clinical review requires the ongoing assessment of competency in a different way than performance review. So we feel that product is well positioned for CNOs to acquire, to assess the clinical skills and do clinical development programs for their nurses, which is a good differentiator than a typical performance management system sold to HR to do annual reviews. And so, we have both and we are excited to have both because we think the Competency Center is a bit of a differentiator. So, 60,000 new subscriptions sold in the quarter.

[Unidentified Analyst:]

Fantastic. Thank you very much. And just a quick little follow-up. Did you mention how many seats there were for the post-acute sector?

[Bobby Frist:]

We did not. It’s now of course blended in with the total subscriber count we have now. So any subscriber we add for the first time to any of our products will increment that new subscriber metric regardless of the market segment they are in. So the post-acute adds are in that number.

[Unidentified Analyst:]

Okay. Fair enough. All right, I will let you to do and I will jump back in the queue. Congrats again on a good quarter.

[Bobby Frist:]

Thank you.

[Operator:]

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

[Ryan Daniels:]

Yes, guys. Thanks for taking the question. Bobby, let me start with one for you. In your prepared comments, you talked about one of the larger health systems in the U.S. signing on in the fourth quarter. Can you give us a little bit more color on what drove that, and if that was a competitive win or if they were doing it via in-house system and decided to turn that over to you?

[Bobby Frist:]

They were not using in-house system. They were using an out of house system. I think we better met their future needs as they looked at clinical development compliance topics. They kind of examined the solution set and thought that we had a better handle on how to develop their work force in those areas. So we are excited to see that win. They replaced a lighter weight solution that was internal to their organization, but really I don’t think it is about the software as much about the comprehensive approach and the partnering approach that we have demonstrated with other large health systems that let them understand that we’re the best partner for developing their workforce.

[Ryan Daniels:]

Okay, perfect color. And then on the VA contract, you mentioned at the end of the year you signed them for HeartCode, was that an existing HLC customer or are they tapping into the system just for HeartCode at this point?

[Bobby Frist:]

They are tapping into the system for HeartCode. They use part of our technology infrastructure. So they will add subscribers over time as they are implemented. A little slower implementation ramp through the government but nonetheless being implemented, and they were not existing subscribers to the HLC, but they will be using components of the HLC, the Learning Center and to deliver and measure and target this content to their employees. So it’s a very existing additional add.

[Ryan Daniels:]

Okay, perfect. And then with the caveat that I know you are always interesting in obtaining more content for your subscribers, can you talk a little bit about the post-acute care market a big development a week ago with three partners and 900 courses, but does that get you with your existing content and at post-acute specific, pretty close to a nice portfolio to go sell in the market or is there still a lot of things you need to add to that to cover the whole gamut of the challenges in post-acute.

[Bobby Frist:]

Yeah, I think our experience would say there is still more to add. Generally association brands are very strong and these independent branch we think are market leading brands with high quality content, but that’s definitely took us what 10 years to build out the power of the ecosystem we have in acute and it will take us as long as post-acute, but it takes time to assemble the right network. But what we are seeing is a faster build of the content, these three exclusive partnerships and we really excited about them. And what we find is that good content partners attract other good content partners. And so and the one other things I think we like to see progressing in the next 18 months would be identifying some of the key association brand that have a more recognition with the professionals in the market. So there is definitely work to be done, but we have a solid portfolio now and a go-to-market strategy. We’ve hired some of the folks on the marketing, a product management, a few sales people of content acquisitions. So we are beginning to kind of the quick to flywheel as I said of this market opportunity.

[Ryan Daniels:]

Okay, perfect. And last one for me. Just on ICD-10, obviously it was, I think, a record fourth quarter and it sounds like a good start to the year. So two questions there, quickly one. I think you said this, but are those still two-year contract, such that this revenue is going to spill into all of ’14, all of ’15 and may be even the start of ’16 now, so a little bit longer tail. And number two, anything unique with those 100 wins, are you starting to see more in the ambulatory market? I know you’ve got some new partnerships like Athena, but any deviation who is purchasing it today versus a quarter or two ago?

[Bobby Frist:]

Yes. So first, that is a correct observation. The contracts are still right now holding a two-year contract. So from here forward, every two-year contract adds kind of think of it as a 11 months in ’14 and full 12 months in ’15, which helps with some of the issue. And also some of them are actually pushing into Q1 now of ’16. So basically every sale from here forward helps with some of the challenges we spoke about. So I think that’s a positive dynamic. If we can have a really strong Q2, obviously that would do a lot and go a long way towards the 2015 challenge, but we are not there yet. So we are glad to see sales holds up. And then secondarily, what was the second part of that the…?

[Ryan Daniels:]

Just in regards to the kind of the mix of whose is buying it now?

[Bobby Frist:]

Oh, mix, yes, I am sorry. Yes, it’s coming through largely right now still acute care. So we still see acute care, but we are also seeing some non-existing customers. So we are getting to see more penetration into non-HLC or non-existing customers, so that will add new subscribers and hopefully will get to cross sell them over the next 24 months. So we feel good about that, we’ve gotten great penetration and 93% of our sales in the current base, but we are seeing more and more that weren’t customers. And generally, we think they should have been customers because they would have been more prepared, but we are seeing more first time customers. And we think that’s good because they will start to see the value we think of our total ecology or total ecosystem.

[Ryan Daniels:]

Okay, perfect. Thanks. And I will add my congrats to the great end of the year.

[Bobby Frist:]

Thank you, Ryan.

[Operator:]

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

[Bobby Frist:]

Hi, Frank. Hello?

[Frank Sparacino:]

Directionally what you expect from a gross margin standpoint, as well as a key operating expense lines?

[Bobby Frist:]

Yeah. Thanks, Frank. I think part of that was cutoff, but I think you are asking about gross margin. I think one of the interesting challenges of our model in ecosystem, so it includes applications sold standalone as high margin, it includes solution that are blended with content and royalties at a lower margin. And so the way the gross margin moves is probably a challenge for people what to follow when you have a pure model and just have one type of product or gross margin. And so here what we see is that, both categories of higher margin, lower margin products are growing, but the relative rate of the some of the lower gross margin products are, obviously like ICD-10 are really doing well. And so right now, obviously, the pressure is downward a point on gross margins, but we see things like Competency Center. We saw the sales uptick in Q4 on Competency Center, which is a higher margin product. And so, overtime, I think, our focus is on operating cash flow, what flows down into every content sell, while doesn’t have a high cost of goods, a lot of that can fall downward because it doesn’t have a lot of cost to service and deliver given that into that model. So, you don’t have the high royalty potentially, but can flow as cash flow, because not a high cost to service or tax supported. On the expense and investments, obviously, as we’ve noted this, our vision continues to expand and we are seeing an incredible strength in balance sheet and we are trying to balance growth and profits with our desire to execute and build new capabilities and features for our ecosystem, new applications, bought new content partners. And so, as we enter the year, we usually hire another full development team or too, we ramp up our sales organization, which I believe, is now over 90 strong and we did that in November, December and January, we did a quick ramp and added over a dozen sales people. So we began and we do that typically every year right in that season we try to determine the budget and start to bring them, also they can be here for our national sales meeting in mid January. So we kind of invest what we think is relatively balanced approach to try to balance a little bit of profit growth with continued opportunity investment. We are building SimVentures. We are building long-term care. Those takes steady stream of investments and take time to build and we are not asking for a pass on them, we are just explaining to investors that, good companies are build over longer periods of time with steady investment and real opportunities and that’s what we do each year as we exit our budget, strategic planning. And so this year you see a little more workers in post-acute, a little more on SimVentures and clearly adding the sales team to go new channels and adding to the tech team to build new products and there is no shortage of vision for the product sets to build that can generate new high margin revenue. So, it’s really a question of how to deploy that 108 million without disrupting too much earnings. And clearly, some of our competitors choose to just hire hundreds and hundreds of sales people and tech people and that’s a -- that could be a good decision for them. We tend to try about and discipline and deliver a little bit of operating income while we are also investing.

[Frank Sparacino:]

Thanks, Bobby. And just maybe to follow-up, but I guess, I was just trying to get a sense of we are seeing some modest margin compression again next year and I just wanted to know if that was going to be focus in any one particular area, doesn’t sound like that’s a case, it sounds like it’s going to be fairly spread across the Board?

[Bobby Frist:]

Yeah. At the gross margin level it’s clearly, it’s depends on relative continued success of these different products as we have talked about. But it is from an investment standpoint it is across the Board we added to R&D, we added to sales, we increased our marketing budget, we tend to work often common size income statements and determine what our profitability target should be and but we can still deliver growth with our investments. We are beginning to invest in new product development with, around our Precyse products and we think we have got an exciting roadmap for the second half of the year, some other new ideas we are working on as well on our R&D group. So it’s kind of across the Board and fairly well-balanced.

[Frank Sparacino:]

Great. Thank you, guys.

[Bobby Frist:]

Thank you.

[Operator:]

Thank you. Our next question comes from Terry Lally of Spotlight Funds. Your line is now open.

[Terry Lally:]

Hi. And good morning. Gerry for the guidance for 2014, are you seeing 2013 GAAP or non-GAAP as the base for the revenue and operating income growth?

[Gerry Hayden:]

It’s all based on GAAP measurements.

[Terry Lally:]

Okay. So if it’s based on GAAP and you start with the $14.6 million growth at 10% to 15%, at an interest come tax effect and a share dilution is not that bad. That suggests, you’re talking $0.33 to $0.36?

[Gerry Hayden:]

That’s a basic math. Yeah.

[Terry Lally:]

Okay. So $0.33 and $0.36. A year ago at this time, the analyst expected you to do $0.50 in 2014. When you cut 2013 numbers on the call, the sell side took numbers on the $0.39, their estimates stripped up to $0.42 and now you are expecting $0.33 to $0.36. Why let expectations get so far ahead of themselves so they had to be slashed again?

[Bobby Frist:]

Yeah. That’s fair enough. I think a little bit is how we provide annual guidance when we look forward. And I think our analyst tend to wait for this call to make those adjustments and rebuild their models based on this highly detailed call. So we don’t guide two years out and I guess that’s part of the challenge and I think that’s part of the reason is because we’re relatively high growth company that is a small company with a lot of uncertainties. That’s just the nature of high growth small company and we try to acknowledge that. So we provide what we think is a highly detailed visibility into the next 12 months and then we up that each year in this call. And so we don’t provide and we never have provided three and five-year targets for any of these because there are so many moving parts largely driven by what we view as opportunities and we kind of reserve the right to change these things, the mix of gross margin and the mix of rate of investment. We tried to have a 15-year discipline of incrementally improving EBITDA and cash flow from operations while investing. But we reserve the right to change that. I mean, some of our competitors have decided to not even target profits and just hire sales organizations to ramp sales. So just the nature of the way we provide guidance there. We look out -- we give detailed looks at one year and that may leave some of our analysts a bit where they can only adjust once a year and that’s just the nature of how we guide. We don't give three and five-year targets yet because we’re so many moving parts and we’re growing. And so I hope that helps understand the nature of the issue.

[Terry Lally:]

It does. And there is obviously number of things, particularly the mix shit, right, ICD-10 with such a strong growth driver, that impacts the mix. But I know you don't give two-year guidance, but if I look out to 2015, industry just started north of $0.50 again which was where they started last year. And it looks like the assumptions are for significant margin improvement driven by gross margins. Can you comment on to ‘15, I mean, is a 50% expected earnings growth in the forecast next year and is there significant margin leverage expected. Can you talk a little bit about to ‘15 and what leverage point would be, is it that ICD-10 is rolling off and that impact in gross margins would be less of a hit?

[Bobby Frist:]

Yeah. So clearly, we’re only providing our guidance. I can’t talk about ‘15, the parts of ‘15 we started to talk about is the sum of our what we call the challenges associated with the nature of ICD-10 products and just kind of -- it is what it is and there is a lot of uncertainties, which we will do our best to fight our way through. So the only area where we’ve kind of gone beyond, talking about ’14 is by explaining the nature of these two-year contracts from ICD-10. We thought it was important enough to articulate. But we really can't comment and don’t and have intentionally just provided the year. The analysts allowed to make their own decisions about -- I mean, one of our perpetual challenges, Terry, is we have $108 million in cash and see lots of places we can deploy that. I mean, we've never done it but conceptually, we can hire another hundred sales people and go after new niches and trade profits, long-term opportunity for short-term costs. And so I think all of our analysts have generally tried to understand that, but also looked at our historical patterns last five years, where we’ve done our best to show up discipline investment. I will say one other thing, Terry, is that as we enter this year to, we are going to continue to probably deploy the $108 million and we are continuously branching off and trying to find a good value propositions in our M&A for that, given the way accounting works with this deferred revenue write-downs and all. If our M&A pipeline gets more active, it can also change the bottom line earnings trajectory. But all this would be done in the spirit of adding around three to five year potential as a company and trying our best to deploy this $108 million in responsible way. And in fact, I think we've always done these acquisitions that we thought were very manageable and we could fit inside of our framework in way that we could scale. So, I hope that helps you understand. We do one-year guidance only and probably that’s just the nature, but we try to give a steady hand by looking back in our patterns and so far that’s worked for our analysts.

[Terry Lally:]

Okay. So it sounds like they’ve reached the $0.50 and into ’15, it would be more by buying your way to it versus it being the gross margin improvement.

[Bobby Frist:]

Well, Terry, I mean, we are going to comment on ‘15, but there is inherently a lot of -- it depends on what the business objectives are of management and we’re not trying to strive to hit that particular number that you keep putting out there, because analysts have written it. We are trying to make decisions each year to our strategic retreat about where to make investments and sometimes those investments deleverage earnings and sometimes those investments leverage earnings. I mean, clearly, with the gross margin on the platform and adding 300,000 and almost 289,000 really high-margin subscribers is clearly a away to move earnings materially and it will materialize in either direction. And you can see because over the last few years, the way we’ve chosen to move in and with our current guidance, we are choosing to target the 10% to 15%. And I’ll say choice, because of such high visibility into our 3 to 5-year contracts that that it’s a choice what kind of profit and margins we deliver in the next 24 months.

[Terry Lally:]

Okay. So two years in a row, hopefully next year, we won’t have a similar ratcheting down the guidance. Thank you.

[Bobby Frist:]

Thank you.

[Operator:]

Thank you. And our next question comes from Vincent Colicchio of Noble Financial. Your line is now opened.

[Vincent Colicchio:]

Yeah. Bobby, in recent quarters, you had mentioned increased competition in the healthcare vertical. I’m just curios, so what does that look like, are you seeing larger players out of vertical or these mostly small companies getting involved?

[Bobby Frist:]

So, it’s a little of both and everybody wants to be in the talent management business including big guys like Oracle and SAP. And they are real and they have that strong software and big R&D budgets. That said, they tend to sell software and leave the problems to the health systems and what we're trying to do clearly like in this fifth largest health system in the country in the fourth quarter, we are able to show them that when you are trying to develop your workforce that software isn’t the only part of being successful there but it is true. And they will be successful and it will get more competitive and we will have wins and losses as we move forward. It’s just the nature of competition being successful in our vertical to attract attention. And so we're trying to make sure that that over time our customers understand our total value proposition and not just what the new competitors bring in. We also see smaller innovative competitors coming in and offering new models for training and we try to incorporate those into our business through -- we made some small minority investments and partnerships that help us continue on innovation curves. So, I would say, as with most businesses that are showing some signs of success, competition comes from all directions and realistically, any growing business will take its loss. And a good management team will find its way through and continue to innovate and add new product sets and improve the value proposition. The competitive landscape is definitely harder than it was three years ago. And somewhere along this journey no one has a perfect record. Eventually you take a lump and then you push on through it and innovate a new product and keep going. So it’s fair to say competition comes from all sides and scales and angles now.

[Vincent Colicchio:]

Thanks for that perspective. Well, it pushes a rash. Thanks.

[Bobby Frist:]

Thank you.

[Operator:]

Thank you. And our next question is a follow-up from Matt Hewitt of Craig-Hallum. Your line is now open.

[Matt Hewitt:]

Thanks for taking the follow-ups. I just want to circle back on the gross margin and without getting to ’15, I think Bobby and Gerry, I think both trying to hit at that. One of the challenges you face is ICD-10 in particular is one of your lower gross margin applications. As that growth decelerates as this year progresses and likely flips over in 2015, is it safe to assume that your gross margin should uptick as this year progresses, as some of the higher margin products gain momentum, like the Competency Center and Performance Center? Is that a safe assumption?

[Bobby Frist:]

Well, obviously, the answer is it depends. So our HeartCode products, which has three partners is also a low gross margin business and it is doing very well, it’s a very steady performer. We think its best in the market, we continue to add subscribers and we think as potential on other verticals. And you see Competency Centers do well. So that’s why we -- gross margin is obviously very important, but our model is different and it’s a blended ecosystem where different products deliver differently to bottom line. Apple sells a lot of content through stores, they pay royalties and they also sell high margin software and their scale I guess all blends out, but in our scale things can move. And so we are more of an ecosystem business than any one product line. So it is a little hard to say because it’s about the relative success of those products over time. What I would say is that our solution approach blends platform and content in a way that would have a little lower margin than a peer software business, but we also think it’s a better business. It solves a real problem for a customer and delivers more value to just platform alone. So we think it’s more sustainable over time because it gets at the heart of the business or clinical issue and not just paperwork automation or the thing the software can do alone. So that’s a bit of our perspective on how we think about it.

[Matt Hewitt:]

All right. And then, may be just a couple more house planning type things at least for our models. Have you said indeed to do you intend to hold the user Summit in 2014?

[Bobby Frist:]

No, we actually have announced that Summit will be in the first or second quarter of ’15, so we are going to take a little 18 months hiatus. We are going to run this 4 or 5 symposiums we mentioned earlier and do a few small regional conferences, but we need a little more time to plan such a big event and we are going to take -- we are going to have about 18 months between Summit this year instead of 12 and we have done in the past by the way. We get better tenants and people kept cycle. People started coming every other year. And although tenants is growing each year, we think it’s better to give a little pause here and let our teams regroup and we are going to do it. I think it’s scheduled for March or April 15. So there won’t be any Summit in ’14. There will be other expenses in marketing though, so we will redeploy those marketing dollars at the other marketing efforts. As I mentioned, the marketing budget has grown, not gone down, even with Summit.

[Matt Hewitt:]

Okay. So maybe instead of that one big event taking the incremental revenues and expenses that we would have had, for example in Q4 and spread that over these three to four symposiums, is that a better way to approach that?

[Bobby Frist:]

I think, I think you looked at our total marketing spend including the cost that somewhat assume that’s its growing a little bit, kind of proportional to our growth, that we’ll be spending in investing more marketing in different ways. But we will grow the marketing budget and it’s quite better to think of that more spread and have at a point in time in the quarter.

[Matt Hewitt:]

Okay, all right. And then lastly here, the guidance for CapEx for 2014 implies a pretty big step-up. Is some of that tied to the earnouts on Sy.Med or is there something else that’s kind of quipped into the mix?

[Gerry Hayden:]

Matt, this is Gerry, that does not tied to Sy.Med earnout, just purely -- mostly, capitalized software development, tried to expand our teams and do additional work in that area.

[Matt Hewitt:]

Okay. All right.

[Gerry Hayden:]

It’s about $8.5 million for the full year ‘13 so probably ramped that up a little bit.

[Matt Hewitt:]

Okay, all right. Fair enough. Thank you and congratulations again. You guys are performing extremely well on taken advantage of the opportunities as they present themselves.

[Gerry Hayden:]

Thank you, Matt.

[Operator:]

Thank you. And our next question comes from Ryan Daniels of William Blair. Your line is now open.

[Ryan Daniels:]

Yeah, guys, thanks for the follow-up. I will keep it quick as I know we’re running long. But I'm curious if you have any data that shows the lifetime value of a customer new product versus the development cost or customer acquisition cost. And Bobby, the reason I ask in many regards, I would think this is the type of business model with your retention in market share where you should be investing more, you despite the impact on profit to elongate the revenue growth curve and maximize our lifetime customer value. So kind of the opposite end of the spectrum in my view, how do you think about that?

[Bobby Frist:]

We have articulated in the past of some examples of the way we think about growing the value to customers. And we’ve shown some slides, where we show the growth in revenue per subscriber at specific large accounts and in fact in some of our larger strategic accounts where we’ve -- we began with an entry point at $10 per person per year and in many cases, it moved them up to $80 or $90 per person per year. I think, our examples is one is $70 and one is like $87. And that’s about the mix of products, so we definitely do think of the lifetime value of the subscriber and trying to move its annual value up per year. A lot of our sales organization is thinking that way. Our product management fact when they design and build a new product, have to decide what their contributions can be if they achieve penetration. So the way I think, each product can achieve a certain market share inside of our networks. So if we have 3.7 million subscribers, you might have a product appropriate for 10 people in each hospital which would be 5000 hospitals x10. And that’s your market potential and so our product management is trying to think if they get full market potential at the full price for their product in launching, will all that add to revenue per subscriber. So there’s a lot of focus on growing the lifetime value of a customer by the product mix that they’re receiving. We also have an account management model that where we have solutions specific sales teams that are brought into account through account management model and they’re focused on that as well. So I have seen everyone of our account has an account management salesperson. And then we have a 5, 6, 7 solution teams that come in and meet with their revenue cycle or the head of risk or the CMO and they show the products as relevant to that buyer. So a whole lot of our focus is getting deeper within the accounts and growing the revenue per subscriber lifetime of that subscriber. As far as cost, obviously we have our total infrastructure costs and look at that. And we study our acquisition cost, sales and marketing cost to the cost of adding a subscriber, we feel that’s a very good return on that. But we haven’t published those numbers but we feel like they’re all, they’re well in mind, like our acquisition cost per dollar of NOV or per new subscriber we think is very reasonable compared to our competitors.

[Ryan Daniels:]

Okay, very helpful color. Thank you Bobby.

[Operator:]

Thank you. And our final question comes from Richard Close of Avondale Partners. Your line is now open.

[Richard Close:]

Yeah, just really two quick ones. In the past, you’ve given us the SimVentures revenue and as I wonder if you could do that for the fourth quarter?

[Bobby Frist:]

I don’t have it in front of me. But it did, it improved linearly over the last quarter to little over half millions.

[Gerry Hayden:]

Roughly $0.5 million, that’s about $0.5 million.

[Richard Close:]

So it’s down from 565,000 in the third quarter?

[Bobby Frist:]

It’s all flat. It’s flat-to-down a little bit.

[Richard Close:]

Okay. An then just a final question on the exclusive arrangements for the post acute content that you announced a couple of weeks ago. Should we think about that as a similar type of gross margin as some thing like Precyse or HeartCode?

[Bobby Frist:]

They’re going to be different and few of those would be higher. And so they’ll be different. I think generally there will be a little higher gross margin than the Precyse which is more of a venture together.

[Richard Close:]

Okay, thank you

[Bobby Frist:]

Thanks

[Operator:]

Thank you. And at this time, I’m not showing any further questions. I would like to turn the call back to management for any closing comments.

[Bobby Frist:]

Thank you. I’d like to do one thing here at the end because there are some discussions around the earning, the EPS numbers. And I want to reiterate our guidance of operating income of 10% to 15%. I think when Terry asked the question, he had some ins and outs of the number and we haven’t had time to validate those and extrapolate that into an earnings range which management is not providing a sense earning range, it providing a percentage growth of our prior year. And I will need to verify how that translates into EPS. I think generally is on target but he rounded off a list of items that were ins and outs to EPS that we need to confirm. The ranges are confirming therefore, its 10% to 15% expressed in percentages over prior year EPS is our actual guidance. We don’t guide in terms of cents. So -- and thereby may translate that slightly differently and how they calculate. So again, thank you to all employees. Thank you to everyone for listing. We’re trying to provide -- continue to provide steady and continuous guidance on all these issues and opportunities facing the company. We look forward to reporting our Q1 report year in a couple of months. Thank you.

[Operator:]

Thank you, sir. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.