HealthStream - Earnings Call - Q3 2018
October 23, 2018
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the HealthStream Third Quarter twenty eighteen 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. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms.
Molly Condra, Vice President, Investor Relations and Communications. Ma'am, you may begin.
Speaker 1
Thank you, and good morning. Thank you for joining us today to discuss our third quarter twenty eighteen results. Also in the conference call with me are Robert A. Frist, Jr, CEO and Chairman of HealthStream and Gerry Hayden, Senior Vice President and CFO. I would also like to remind you that this conference call may contain forward looking statements regarding future events and 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 ks and 10 Q. So with that start, I'll turn the call over to Bobby Frist.
Speaker 2
Thank you. Good morning, and welcome to our third quarter twenty eighteen earnings call. We have a lot of news to cover as we dive into the numbers and look at the accomplishments of the quarter. But before we do that, I'd like to recognize one item one thing that occurred in the quarter that I'd like to discuss. In our earnings release issued yesterday, we announced that our CFO, Gerry Hayden, has tendered his resignation from the company.
He will remain in his position as CFO through the filing of our Form 10 ks for the full year 2018, which we expect to occur in March 2019. The Board of Directors will oversee a process to fill the CFO position, working with me and the rest of management. Following Jerry's departure as CFO, Scotty Roberts, our Vice President of Finance and Accounting, will serve as Interim CFO. Scotty is a CPA who joined the company sixteen years ago after working at Ernst and Young. As Jerry's protege, Scotty has broad experience in financial reporting and financial operations, making him an ideal Interim CFO and a candidate to fill the position permanently.
All of us at HealthStream want to thank Jerry for his tremendous service to the company for over a decade as our CFO. And then actually, he served for two years prior to that period on our Board of Directors, we're grateful for that service as well. His leadership and financial expertise have played an important role in our growth as he has successfully navigated the company through many opportunities. He has built and led an outstanding accounting and finance department and team, and he's mentored a strong bench of financial talent that will serve the company well for many years to come.
Speaker 3
Thank you, Bobby. It's been
Speaker 2
an honor to serve
Speaker 3
the company as CFO over the last decade and work with everyone here at HealthStream. I look forward to wrapping up the year, including my tenure at HealthStream with getting our 10 ks filed, as Bob mentioned, next March. After that time, I'm working as a Senior Executive Advisor, working closely with Scottie Roberts to ensure a very smooth transition. He's very capable and well qualified to step into the CFO role here at HealthStream.
Speaker 2
All of us at HealthStream wish Jerry much success whenever future endeavors he chooses to pursue, and I'm sure we'll have some more questions about that in the open dialogue at the end. Let's dive into the quarter and the numbers and the details. Compared to the third quarter of last year, quarterly revenues were up 9%, operating income was up 71%, income from continuing operations was up 75% and adjusted EBITDA was up 22%. By almost all accounts and all core measures, the metrics were solid. However, we didn't end the quarter exactly where we expected to with regard to filling open staff positions.
So expenses were a bit lower than expected in the quarter. And as we look to the fourth quarter, we expect to begin to ramp some more of that hiring, particularly in the preparation for the launch of new products early next year. In addition, we benefited from a few nonrecurring revenues in the quarter, which Jerry will further elaborate on in just a moment. Overall, our third quarter results give us confidence in achieving the updated guidance we provided yesterday. We intend to continue as planned with increased investment and accelerated hiring in preparation for the launch of exciting new higher margin products early next year.
As we discussed in our call last quarter, we are investing in products like our new resuscitation solutions, which will carry higher gross margins than the legacy products that they replace. In fact, the new resuscitation solutions will carry approximately double our existing resuscitation product margins. As these products and solutions are adopted by customers, we expect to see a positive impact on gross margins in the years to come. As a reminder, at the June 2017, we announced that our current agreements with Laredo Medical for the hard code and RQI products will expire on December 3138. HealthStream retains the right to and expects to continue selling HeartCode and RQI for the remainder of this year.
And we will provide uninterrupted service to our customers for the duration of their contracts, which can extend through 12/31/2020. HeartCode and RQI generated approximately $51,300,000 of trailing twelve months revenue. At the end of this year, in approximately seventy days, we will stop selling those products and expect the revenue from them to decline in 2019 and run out over the course of 2020. To be clear, we expect revenue from these two products to be zero in the 2021. We are committed to creating a marketplace that brings more choice and selection selection to our customers for a wide range of clinical solutions, including resuscitation.
In fact, we're on track to launch new resuscitation solutions in January 2019, just seventy days away. The new resuscitation solutions will feature multiple new strategic partners, each with individual areas of expertise and focus like science, credentialing, curriculum, simulation and hardware and software technologies. As we previously shared with you, we've already signed three seven year plus partnership agreements to develop new innovative high quality resuscitation solutions. We are pleased to announce that in the third quarter, we signed our fourth seven year partnership agreement. HealthStream and our four new partners are excited about the progress we're making to be ready for launch of the new resuscitation solutions in January 2019.
Of course, as we prepare these new products and solutions to go to market, our expenses and capital investments will increase throughout the remainder of this year and on into early next year. At this time, Gerry Hayden will provide a more detailed discussion of the financial metrics for the third quarter results.
Speaker 3
Thank you, Bobby, and once again, good morning, everyone. Before reviewing our third quarter results, I'd like to note that, one, all results are from continuing operations only. So for example, 2017 and 2018 results exclude the gain on the sale of previously divested Patient Experience business segment, the results of operations of that segment prior to the divestiture. And '2, 2018 results are presented in accordance with the new Accounting Standards Classification six zero six, learning from the contact with customers also known as ASC six zero six, where results in 2017 are presented in accordance with ASC six zero five. Here are some highlights from the third quarter.
Consolidated revenues were up 9% to $59,900,000 Operating income was $4,700,000 in the 2018, up from $2,700,000 in the 2017 with a $1,100,000 positive impact in the 2018 in the application of ASC six zero six, the new accounting standard. Income from continuing operations was $3,000,000 in the 2018, up from $1,700,000 in the third quarter of last year with $819,000 positive impact in the 2018 from the application of ASC six zero six. Earnings per share or EPS from continuing operations was $0.09 per share diluted in the 2018 compared to EPS from continuing operations of $06 per share diluted in the third quarter of last year. Adjusted EBITDA from continuing operations was $11,100,000 in the 2018, up from $9,100,000 in the 2017 with a $1,100,000 positive impact in the third quarter of this year in the application of ASC six zero six. Our 2018 financial reporting includes two developments that originated in the first quarter of this year and continue to be reflected in the presentation of our operating results in the third quarter and remainder of this year.
One is the divestiture of the Patient Experience business segment, and the other is the mandatory adoption of ASC six zero six, which is the new GAAP standard for reporting revenue. As you already know, the divestiture of the Patient Experience business segment occurred on February 1238. Our income statement continues to segregate the gain in sale and the income or loss from discontinued operations. Our conference is focused on the continuing operations which consists of our Workforce Development and Provider Solutions business segments. The second potential for development is the implementation of ASC six zero six into our GAAP reporting.
There are two areas affected by our ASC six zero six reporting, recognizing revenue and commissions accounting. In the 2018, reported revenue in accordance with ASC six zero six was similar to historical ASC six zero five method for the same period last year. The most significant difference with regard to our financial results is that commissions are accounted for as capitalized costs and amortized under ASC six zero six, while the same costs would have been expensed under the ASC six zero five method. The utilization of capitalized commissions recognized in the 2018 was lower than what would have been recognized as commission expense in the same period under ASC six zero five. Now let's review a third year's worth of our income statement, where we touch on the highlights from each of the two business statements.
Revenues from our Workforce Solutions segment increased by $4,500,000 in the 2018. A variety of subscription products contributed to the increase in this quarter's workforce revenues, including higher revenues from our station and compliance products. Overall, we benefited from higher revenues from the HARCode and RQI products, in particular, a fellow government customer of HeartCode, which is also one of our largest customers for this product, switched from our standard subscription model to a consumption based model based on government contracting requirements. The consumptions in the third quarter helped contribute to our overall revenue growth at a higher rate than last year's third quarter. Because a consumption revenue model is a bit less predictable to the extent this customer's consumption levels fluctuate, our revenues may also be impacted.
In the 2018, revenues from our Provider Solutions segment increased by approximately $700,000 This revenue growth net of deferred revenue write downs was primarily a result of professional services revenues from Mostly Associates Inc, which we acquired in August 2016. Revenues benefited from some acquired deferred revenue from Morrissey in the third quarter. Such balances are now almost fully recognized. We don't expect any significant recognition from the acquired deferred revenue balances going forward. As I just discussed, we had a couple of onetime revenue plans in the third quarter totaling approximately $1,600,000 This included the shift to its contestant based accounting for the government contract and the recognized deferred revenue at Morrissey.
Now gross margins. Our gross margin was 58.1% this quarter and 58.9% for the same quarter last year, primarily due to increased revenues from existing lower margin resuscitation products, hard code R2I for example. In addition, cost of revenues also reflects a strategic decision to migrate to cloud based processing infrastructure for both workforce and provider solutions. Accordingly, there will be some overlapping expenses for this migration period and our overall hosting and this quarter overall hosting costs increased about 38% between this year and last year's third quarter. Operating expenses.
Operating expenses for the 2018 were up 2.2% over the same period last year of 2017. The combination of capitalized software investments and product development expenses increased 11% between this quarter and last year's third quarter. Software development remains a priority if we maintain our development capacity. We also plan to increase our rates of R and D investments for the remainder of this year. Sales and marketing expenses are down by approximately $586,000 from last year's third quarter due to lower sales commissions from the adoption of ASC six zero six and some lower marketing costs.
We do expect to increase sales and marketing investments for the remainder of 2018 with last quarter. Depreciation and amortization were flat with last year's third quarter. This is primarily due to the full inclusion of amortization of acquired intangible assets from the Morrissey acquisition in both the 2017 and 2018. It's important to note that depreciation and amortization still reflects increased levels of capitalized software development amortization. G and A expenses in the 2018 increased approximately 7.5% over the 2017 and about 15% of revenues compared to 15.3% of revenues in 2017.
The growth in G and A expense category is primarily related to increases in software expenses. Operating income. Operating income was $4,700,000 in the 2018 compared to $2,700,000 in the third quarter of last year. The increase in operating income reflects revenue growth and leverage on our product development and sales and marketing expense categories. Other income or loss.
Over the past several years, we've established a small portfolio of minority investments that we believe are strategic. For example, back in 2016, we successfully acquired full ownership of a minority investment we held in Nurse Competency, which has now become a major part of our clinical staff solution group. We're confident in investments under either the equity method or the cost method depending on factors such as our percentage of ownership and or our ability to exercise influence over the investee. In 2018, we adopted a new GAAP rule that requires us to adjust the carrying value of cost method investments when evidence indicates that fair value has changed either positively or negatively. Fair value adjustments can create potential volatility in our earnings when they occur, which was the case during this quarter.
We currently have three investments in three companies totaling $3,400,000 in carrying value as of September 30 after giving effect to a $1,300,000 non cash charge led to the decline in fair value of one of these treatment oriented investments. This charge was triggered by a capital raise by the investee at a valuation below our original investment basis. Now let's look at our balance sheet. Our cash position and overall balance sheet remains strong. Our cash balance as of September 30 was approximately $174,000,000 a $43,000,000 increase since 12/31/2017.
The $43,000,000 increase reflects the net cash proceeds from the Patient Experience divestiture in February, improved cash collections on accounts receivable and is offset by the special $1 per share dividend, which was paid on 04/03/2018. Since December 3137, accounts receivable have decreased by approximately $6,600,000 resulting in days sales and accounts receivable of 46 at the end of this third quarter. The forty six days represents the lowest level of DSO since 02/2002. We have no outstanding debt and our full $50,000,000 line of credit capacity is available to us. We believe our overall capital position is likely to support our organic and inorganic growth opportunities and support other capital structure optimization and shareholder maximization strategies as
Speaker 2
may be
Speaker 3
appropriate. Yesterday's earnings included updated guidance and consistent with our second quarter earnings release issued July 2338, we are presenting our updated 2018 financial outlook utilizing ASC six zero six with respect to our anticipated 2018 results. For 2018, we continue to anticipate that consolidated revenues will increase 6% to 8% as compared to 2017. We anticipate revenue growth in our Workforce Solutions segment will be in the four to 6% range and our Provider Solutions segment to grow 10% to 20% when compared to 2017. We anticipate operating income for 2018 to increase between 4560% as compared to last year 2017.
We expect the capital expenditures will be approximately $19,000,000 during 2018. We expect the annual effective income tax rate to range between 2022% for this year. This guidance does not include the impact of any acquisitions or strategic investments that we may complete during the remainder of this year. Thanks for your time. I'll turn the call back to Logan.
Speaker 2
Thanks, Jerry. I've got a few more topics to cover before we turn it over to questions. And so I want to provide an update on an initiative we introduced last conference call. As we discussed before, the HealthStream network is now made up of approximately 4,900,000 users and over 75 partnerships. In our second quarter, we introduced a new and improved way for customers and partners to access and participate in our network.
We call it hStream. Our new hStream technologies represent enhancements to our platform and the beginning of our new platform as a service capabilities. We released hStream on April 30, and it currently has approximately 587,000 subscriptions under contract as of Q3. For each existing customer contract that comes up for renewal, along with any new customer contracts, we are including a subscription to hStream. A subscription to hStream enables many exciting new features and benefits for customers.
Stay tuned. In the coming months, we'll provide more details regarding the new products enabled by hStream, the new partnerships that leverage hStream and the new services that are powered by hStream. Importantly, hStream also serves as a bridge between our workforce development and Provider Solutions business segments. In the third quarter, for example, Verint began including hStream subscriptions in contracts for its new SaaS platform. Because of this, we believe that hStream subscriptions will soon be the most representative metric for measuring the progress of our business.
In fact, we intend for our twenty eighteen year end earnings release to be the last time we provide our legacy subscriber metrics, which focus on a narrow representation of our learning applications. Instead, we intend to replace those metrics by reporting the number of subscriptions. We look forward to reporting the progress of hStream both in terms of subscriptions and the value it brings to our customers and partners. One last note, in the 2019, we are scheduled to move into a new Nashville office, which was prompted by the end of our current long term lease and interest in consolidating multiple offices in Middle Tennessee. In absolute terms, our operating expenses associated with occupying the new location will increase by approximately $2,000,000 in 2019.
This increase is less expensive than the alternative renewing and remaining in our current location and continuing to occupy multiple locations in Middle Tennessee. We're excited to move into the new office. It is an area known as Capital View, which is part of the thriving tech community near Downtown Nashville. We think this new location will be provide great energy and excitement to our culture and also assist with recruiting new tech workers to our business. At this time, I'd like to turn it over for questions from the investor community.
Speaker 0
And And our first question comes from Matt Hewitt with Craig Hallum. Your line is now open.
Speaker 4
Good morning and congratulations on the strong quarter.
Speaker 2
Thank you, Matt.
Speaker 4
A couple of questions about the resuscitation and then I've got a different follow-up question. Regarding the resuscitation, what percentage of your customers today are under contract through 2020?
Speaker 2
I don't have that number in front of me here. So that's probably a little there's so much still open about the current products, meaning the last eight weeks of selling are so critical to our future forecast that we're going to probably need to take your questions now, write them all down and come back in February when we provide guidance and answer them all. So I don't have that number in front of me right now, but we will provide it in the February earnings call. So if you have other questions related to that, by then we'll have a more perfect view of the two year trajectory and wind down of those businesses. We'll know the shape of the revenue curve essentially.
Right now, it's at $51,000,000 It will probably peak in Q1 of next year and then begin its decline to zero by the 2021. So if you have any more detailed questions, we'll write them down and consider them all for our February release, where at that time, we have wrapped the full year of sales. We'll know pretty much the almost the exact revenue curve and be able to answer related questions like the percent of customers that you just asked.
Speaker 4
That's very helpful. And
Speaker 2
if you have any other related questions, go ahead and lay them out.
Speaker 4
Okay. And then one other question regarding that product. Resuscitation card that the American Heart Association provides, that was a potential sticking point with some customers. Have you figured out, as you talk to some of those customers that have been up for renewal, where they sit on that? I mean, is there going to be are you going to be able to work around that card?
Speaker 2
No. We're obviously, our new partnerships are signed and developing, and they include new partners for all the dimensions I spoke of, including a new credential that's based on international science that we think is globally accepted. But we're not in a dialogue with any customers about their acceptance of our new products. In fact, they remain unannounced, and we won't launch or begin discussing with our customers those new products until January.
Speaker 4
Okay. Fair enough. I'll shift away from that. During your prepared remarks, you had mentioned that there was some higher cloud hosting costs. Is there any way for you to mitigate some of that going forward?
Or is that just going to be a stepped up expense going forward?
Speaker 2
Well, we've always done managed hosting because we're a SaaS application. So we have our own managed hosting costs where we provide our multi tenant SaaS applications in a managed hosted environment. So we have those costs. As we move those services, which are already web based to Amazon Web and Azure and other fully managed hosted services, outsourced services, we'll probably see some more overlapping of those costs, particularly into the next year. Of course, ultimately, I would say, within eighteen months, our capital outlays for acquiring hardware that goes into our managed hosting facilities will decline, and we'll start to see a benefit of the move to Amazon and Azure, the two primary hosting services we selected.
So we will have some overlapping expenses probably into the next year. And but then ultimately, again, as we look beyond that, we'll start to see true financial benefit to those moves.
Speaker 4
Okay, great. And then one last one for me regarding hStream. Thanks for the heads up that you're going to be switching the metrics that you provide. How quickly do you anticipate I think you said approximately 580,000 subscriptions now. How quickly do you anticipate that catching up to the 4,900,000 fully implemented subscriber number that you provided this quarter?
Sure.
Speaker 2
Well, we think it should go pretty fast because so far since April, we have met no resistance at including it into the contracts. In fact, met with some enthusiasm because, as we mentioned, customers get some immediate technical benefits and upgrades to their products when they include it. And so if you think of our renewal cycles on our platforms and the fact now that the hStream subscription is included with most all of and hopefully by Q1, all HealthStream products will include a subscription. We think it should move rather quickly. I would say, you think of our average contract length spanning two to four years, let's pick three as maybe a midpoint, within thirty six months, we should have the whole network migrated and maybe faster if renewals come in faster.
There are reasons for early renew for customers to get access to the benefits of hStream, of which there are numerous benefits already.
Speaker 4
Okay, great.
Speaker 2
Let's Thank say thirty six months is probably a good target.
Speaker 4
Okay.
Speaker 0
Our next question comes from Scott Berg with Needham. Your line is now open.
Speaker 5
Hi, everyone. Congrats on a good quarter and thanks for taking my questions as well. Bobby, was hoping you could help us explain why is the new EightStream seats the right metric to use going forward? Trying to understand what maybe the direct revenue opportunities or general economics of that platform are and why maybe that's the right meaningful number to value or at least get a view on how the business is growing?
Speaker 2
Well, sure, Scott. So one quick moment, as you know, we've moved from having almost a singular application, our learning application, to a set of applications. And now with hStream, we have an infrastructure that supports all applications at HealthStream. And so at first look, hStream is a more fundamental included set of architecture with every piece of technology that we sell. And so in effect, from a business standpoint, it's like our iOS, it's like our operating system.
And secondarily, it's common across all of our business units. So we started a long time ago measuring the penetration and adoption of our learning platform. And as we expanded the learning platform to tools like our checklist tool, our competency center, the singular metric of measuring subscriber to learning system was an important metric, but it wasn't encompassing growth in other areas. And so over the last two last quarter and this quarter and next quarter, we're beginning everyone the migration to this measure that we think will represent a more fundamental core metric that is inclusive of all of our business units across all of our segments. And then secondarily, it does represent new functionality.
And so it is platform as a service capability and the host of capabilities allow us to build both new features, new products, share revenue with partners in new ways and sign new forms of partnership agreements to have access to and leverage the network that's in place. And so again, it represents a bit of a move from a software as a service application suite to a platform as a service. It is more fundamental to all the business segments. All the new products like Verity include subscriptions to hStream. And so we think it is more global and more representative of our future direction as a company.
And as you can tell, just since April, we put about 580,000 subscribers on hStream. So it's going to move fairly quickly as well because it's so powerful. The other thing to think about hStream and it may help everyone is that a little a good analog might also be from an economic standpoint, think of it a little bit like Amazon Prime. We're beginning to bundle value into hStream. Some of the value we bundle into it allows us to upcharge, creates more financial opportunity.
Some are freemium services that give trial access to new technologies that can turn into subscriptions. And some are disruptive to existing applications in the market from competitors that should shift help shift market share to our Platform as a Service. And so for all those reasons, we think that as we think about the next four years, that metric is a more fundamental metric than measuring the market penetration of a singular application like the learning center, which is approximately what that $4,900,000 number represents. And it's been exciting to watch that grow, obviously, 20,000 to 50,000 subscribers net new each quarter, including this quarter. So that has been fun, there are half a dozen other products now that have market share, and all of them are relatable back to this new metric now.
Speaker 5
Got it. Very helpful. And then one follow-up maybe for Jerry. Sad to see you leave. Congrats on whatever the next adventure leads you to, hopefully some R and R.
But on the one time fees in the quarter, especially the contract with the shift to consumption, how much volatility does that create in the model or variance I guess going forward? Because my guess is that those additional revenues are probably pulled forward from future periods since they were consumed in the quarter versus future quarters. And just trying to understand if that's maybe going to create a I don't know what the right number is $05,000,000 to $1,000,000 variance maybe between two quarters. And then maybe what's your visibility into those, at least on a short term basis?
Speaker 3
Yes. So maybe a couple of overriding comments. Very few in context is a consumption base, most all subscription base is kind of an anomaly because large customer, but still an anomaly. Second, the revenue spread, think the way to look at that is maybe just take the variance this quarter and spread it over two quarters. So it's probably the right run rate to try to normalize that, if that helps.
Speaker 5
It helps very much. Thank you very much for taking my question.
Speaker 3
Thanks, Scott.
Speaker 0
Our next question comes from Steve Halper with Cantor Fitzgerald. Your line is now open.
Speaker 6
Hi. Last quarter you talked about you mentioned some cautiousness about the launch of the new resuscitation products. How do you feel about that three months later as we are approaching that launch?
Speaker 2
Well, of course, it's daunting. It's a new product against an incumbent that has a strong product that we've represented well for a long time. But it is also very exciting. There is new energy in the market and with our partners to see that there's more than one way to achieve an outcome and, in fact, maybe improve on outcomes. And so I think that our partners, we have a lot of energy.
I think watching the development process internally, there's a lot of excitement. But the caution is that it's new and it launches in January and it's going to take cycles to get it into the market and see its acceptance. So the energy inside the company and within our partners is high and as is the excitement for the future. But it is not a small task to create choice and selection where previously there has been none.
Speaker 6
Great. So do you feel better about it than you did three months ago?
Speaker 2
I do, yes. But that doesn't mean that in the first quarter, we're going to be able to fill the holes of a very strong and large product that's historically grown. And so I absolutely feel better, but you have to think my caveat is more about the horizon. We're trying to explain this as a long term opportunity and issue. It's not a Q1 fix having a new product for what has been a long dominant and positive experience with the prior products.
Speaker 6
Got it. Thank you.
Speaker 0
Our next question comes from Brian Hoffman with Canaccord Genuity. Your line is now open.
Speaker 7
Yes, it's Richard Close. Thanks for the questions. Just trying to understand this HealthHStream a little better. I know you tried to explain it to me last quarter, but just so let's say I'm a learning customer and that's all I want is the learning platform. Why do I need this hStream and how is it included in the product?
I'm just trying to better understand why an existing customer gets the new platform or is the learning platform integrated And just is there an upside to revenue associated with resigning with hStream? Just can you walk try to walk me through all that?
Speaker 2
Yes, sure. Yes, I can. And we've identified about six or seven value propositions that will play out over the next two years. But that's I'll take the first one that you hit on, which is why would a customer of the current learning platform be excited to renew their contract and add hStream to it? And what does that mean economically?
So the net economic impact will be a small slight positive. If you had take a prior contract and you're on the learning center and you upgrade, we've effectively broken the application, which is the learning center, from hStream, which is this platform as a service architecture. And so in your purchase of the learning center, you would see the bill kind of effectively split. And just for simplicity, let's say, it's split in half. But it would be split in half and then a slight upcharge for hStream because of the value that it's going to bring.
And let me give you some example of the value. So the HealthStream learning center connected to the old architecture had certain capabilities. They're wonderful. They got us a lot of the market share we enjoy today. But there are new capabilities immediately available to customer of the old learning system connected to the new hStream platform.
One of the first is a new set of capabilities we call MyTeam. And MyTeam is a new set of management tools for managers to better manage learning of the direct reports to them. And so there's a new set of features that our sales team is very excited about that are only enabled by connecting to hStream. And so upon renewal, we can go back to the HLC, the learning customer, and show them the new features they'll get if they include the hStream subscription in their contract. And then again, there'd be a slight net upcharge on that renewal for the hStream capability.
So that is an example. To start out, there is actually a new set of features that are powered only by hStream. One other example, and this is instead of an upcharge here, this is an opportunity. But hStream is the technology that powers what we call individual transcript portability. And so what it does, it creates a unique identification model for each person in our network and allows those persons to track and move their longitudinal educational history with them along their lifetime and not just be pegged just to their educational institution.
And so the concept of individual the individual being at the center of the universe and being able to have access to their records beyond their employment at the organization is a new fundamental tenet of the Platform as a Service and the hStream capability. We're finding hospitals excited about ePortfolio. I think our latest number of subscribers on ePortfolio is which is that portable transcript is up to about 1,700,000. And that capability has new possibilities when connected to hStream. And so there are many more value propositions.
We are in pilot right now with an additional service. Again, think of it Amazon Prime where you bundle value into it. Again, at a slight upcharge for hStream, there'll be some bundled valued services that currently we believe our hospital customers pay other vendors for. And so we are electing in a pilot now with a couple of hospitals to provide free and included. When we say free, it's included in hStream and hStream has a small upcharge, but this is a value added service of doing some federally required sanction screening inclusive of your membership in hStream.
So every one of our customers that upgrades to hStream will essentially, for a small upcharge, get access to a free service that they're likely paying another vendor for on sanction screening. And so essentially, we'll be continuously helping validate and check against federal sanction databases anybody in the hStream network. So there's three examples, our enhanced application capability, the portable transcript connected to the ePortfolio concept we've talked about over the years is now here. And this idea of bundled value, again, like the concept of free music and shipping at Amazon, we continue to pack value into that hStream subscription. And of course, then every application connects to hStream and gets some of
Speaker 3
those
Speaker 2
advantages to the capabilities within each application, hopefully making each application more valuable as well. I hope that helps. There's much more to come on this, probably through individual announcements of these bundled value and where the customer gets value out of the hStream subscription.
Speaker 7
Okay. That is helpful. As a, I guess, follow-up to that, let's say I am that learning customer, I come up for renewal and I balk at the upcharge to hStream, I decide not to upgrade to the hStream, do I essentially walk away from you?
Speaker 4
Or do
Speaker 2
It I renew hasn't happened yet. And so it hasn't happened yet since April. I guess it could happen, and it might create a bit of a conundrum. What we'd probably do is elect to leave them on the older architecture if we wanted to retain them. But right now, we're batting 100% right now.
I'm sure across 4,000 customers, we'll find one that doesn't want the incremental value for a small incremental cost. And we're trying to make the value so overwhelming like Amazon Prime that it's really it's a no brainer. For example, we've also moved 300 free industry courses almost like the Amazon video, we have 300 free industry courses included with your hStream subscription. And so it's just our concept is like Amazon Prime, overwhelming value and then little debate involved in the renewal. And so far, we're battening 100%.
Speaker 7
Okay. And based on your comments here, with respect to this $1,700,000 in ePortfolio, that's with the specific individual. So are you saying, let's say, I move from hospital A to a wholly different entity, hospital B, I'm able to take my essentially my education records and certifications, that portfolio with me?
Speaker 2
That is correct. And so it's incredibly powerful. It changes the opportunity of relationship with those individuals in our network. And it's a place where they can carry forward their resume and some of their accomplishments. And what's happening is the institutions are agreeing to release some of the institutional recordkeeping to the individual, which if you think about it, they kind of do that anyway.
If the individual earns education while working at a hospital, they go down to the records department and ask for a copy of the CE credits they've already earned. And then it's just administrative burden to get them those records for their individual life portfolio. Essentially, what we've done is just made that process more seamless and allow the individuals to begin to carry those records with them, which are already their records.
Speaker 7
Now is that free to the individual or do they pay a nominal fee, subscription fee or anything?
Speaker 2
It is free.
Speaker 7
Okay, Great. With respect to my final question here, Gerry, on the move to a consumption contract with that federal or government entity, Do you see this as any type of trend going forward where other customers might be shifting to that type of format?
Speaker 2
No, not really.
Speaker 3
This is kind of an anomaly, this federal contract. If you look back over the course of the hardcore product, the subscription based model roughly tracks consumption for most customers anyway. So they're very much in sync with each other. This is one of a large customer, this is one anomaly.
Speaker 7
Okay. Thank you.
Speaker 3
Thank you. Thank you, Richard.
Speaker 0
Our next question comes from Frank Sparacino with First Analysis. Your line is now open.
Speaker 8
Hi, guys. On the compliance side of things, I'm curious, Bobby, is there any particular sort of macro theme that continues to drive the growth in the compliance side of the business?
Speaker 2
We see some emerging opportunities, but we haven't seen them yet. They're in development. We're talking to new partners around the opioid crisis, which we think could turn into an opportunity and an area where much help is needed and much education is needed. But just the core compliance functionality of things like HIPAA and OSHA and remains and corporate integrity agreements, they all remain in place. For better or for worse, for our industry, there's a lot of government oversight and a lot of continuing requirements in those areas.
So there have been a few new smaller areas, but and we're evaluating what's happening around opioid epidemic as an opportunity and an important need for industry. But there's nothing immediately. Would just say it's just the base drivers that have always driven that part of the business. We do have some more innovative new products, in the market now, the KnowledgeQ product we talked about and in development. And one of the things that's interesting about those products is that they leverage a little bit more of the power of our network by using data and benchmarking services.
So we think we're adding more value to our compliance products now than we did in previous generations of the products themselves.
Speaker 8
And just one follow-up for me. I know you don't want to get into 2019 guidance, but just as I look at the commentary around obviously the transition to ASC six zero six has been a benefit this year, but being behind in hiring this year, ramping up the sales in terms of getting ready for the new transition on the resuscitation side. It seems that it's unlikely we're going to see the margin expansion we've seen this year. Is it more reasonable to assume a very modest increase next year? Or any comments there?
Speaker 2
Well, we as you point out, we don't provide guidance until we're through our full budget cycle. We finished our retreat in our five year planning process. We just wrapped that up a month ago, and now we're in detailed budget work. And that results in annual guidance in February. That said, we have provided, I think, a couple of important hints that you need to be thinking about in your modeling already.
One related to our office move, which we just disclosed here at the end of the call of essentially the cost of office space is going up tremendously in Nashville. And in spite of a move to a more economical location and renewing where we are, our cost per rent will go up, we believe, about $2,000,000 or our all in occupancy costs. So that's just something to be aware of that there's another driver there. And then secondarily, of course, the biggest factor is the rate of decline in the resuscitation business that will pressure us on a lot of fronts. Now the only the hidden silver lining of that is it is one of our lowest gross margin products.
So as it actually begins its descent, gross margins will enhance. And to the extent that the new product gets sold at all, gross margins can move up. So the long run profitability and leverage for the company's gross margin level, I think, should start to show through at that level middle of next year. But overall, you're exactly right. We're launching new products.
We're moving to a new office. And our need to increase the sales efforts, the marketing efforts, the product development efforts are all continuous. So so that's the limit of the guidance I can provide now, but there's clearly two factors that have downward pressure on at least next year. We're trying to explain, though, the power of the shifts that we're making in each of our businesses from the divestiture of the low margin PX to the launch of the double margin resuscitation product to the move to a SaaS platform at Verity and the sunsetting the eventual sunsetting of the installed products at Verity, all of those moves, if you think years two and three and four, start to have overall impact on the profitability and leverage of the company. But I would characterize 2019 and maybe in the part of 2020 as relatively tougher to show gains than we had.
We've obviously delivered on all of our promises this year, exceeding and in this case, raising guidance. And so we're really trying to reset the bar to look at two and three year horizons for everybody and appreciate the moves we're making today and the impact they'll have, say, and twenty four and thirty six months out. Thank you, Bobby.
Speaker 3
Thank you.
Speaker 0
Our next question comes from Jared Hayes with William Blair. Your line is now open.
Speaker 9
Hey, thank you and congrats on the quarter again. Just real quick here, I wanted to if there was an update on the transition from the Healthline and Morrissey legacy platform clients over to the new Verity platform. I guess I'm wondering what has been the initial uptake and any early feedback that you may have on that new platform?
Speaker 2
Yes. There's a lot of excitement around the platform. We think it's a market leading platform. We are intentionally slow walking a bit. There actually is more demand to implement than we're currently letting through the gate as we learn to implement the new solution.
We're seeing a bit of a lag and uptake, some of that intentional as we work out the newness of the system and get it where we want it. And so I would say, overall, we think we have a market leading product. The early reception is good. The demand to implement is high, but we are experiencing some slowdowns in getting it implemented in Q2 and in Q3. Hope to have all that resolved and have all those models perfected as we enter into Q1 of next year.
But currently, I would say we're behind our plans on getting it activated. I don't think it's a product issue. The product is being incredibly well received. We just attended a national conference, And the energy, enthusiasm and excitement for its capabilities, we believe, are market changing.
Speaker 9
Okay, great. That's very helpful. And then just one other thing I wanted to touch on. Going back to the cash balance. I'm wondering if you could provide a little bit more color on potential uses of that cash.
I know you kind of mentioned potential organic or inorganic growth opportunities. And then more specifically, M and A is something that you're looking at, any color that you can provide on the marketplace as far as valuation multiples or things of that nature that you're seeing in the market right now?
Speaker 2
Yes. So we have an active M and A program. I think all of last year and through March was kind of consumed with that divestiture. It turned out to be a little more complicated, but very successful. And as you know, it resulted in both improvement in our cash balance and the ability to distribute a dividend.
So but that did take and distract our acquisition pipeline. But since its conclusion, we're rebuilding the pipeline. We have a lot of active dialogue, and we do expect to deploy capital end to end activity over the coming months and years. We don't quantify or discuss deals really until they're closed. But if you ask me, do we have active intent to deploy capital into M and A, the answer is yes.
We're trying to be our normal thoughtful organization on how we proceed with that. But M and A, we do believe will contribute to our overall growth story in the next really next year and thereafter.
Speaker 9
Great. Thank you.
Speaker 0
Our next question comes from Vincent Colicchio with Barrington Research. Your line is now open.
Speaker 10
Filling some open staff positions. Could you give us more color on what positions you're referring to? And if this is an issue that may linger given the tight labor market?
Speaker 2
Yes. I think it's a combination of many things. The shifting nature of development in our company is Platform as a Service. We're recruiting new types of people. The focus on data and data assets in our network, looking at hiring people with data expertise, data visualization expertise.
So there's a bit of we're looking for new types of people to join the company. And so that creates challenges. The labor market is tight in across the country, but in Nashville, in particular. And so that's creating a little bit of slowness. So yes, I think it will be a persistent and ongoing challenge for all tech companies, and we think we're up for the challenge.
In other ways, too, some of this has been intentional meeting in like the sales organization for the new resuscitation product. We didn't want to ramp up all that hiring in the middle of the year. So it will be a full court press to add sales positions between now and January to strengthen and get that organization where we want it by launch in mid January. So some of it's a bit intentional and some of it's market based.
Speaker 10
And then in terms of the competitive landscape, have there been any new product introductions by meaningful competitors in some of your more successful workforce solution product areas?
Speaker 2
Haven't seen anything any revolutionary changes that's changing any material market share. There's a large group of competitors for almost everything that we do. And but I haven't seen anybody bring an equivalent of an iPhone to market that has soaked up all the attention. And I think in some ways, our new hStream launch and the bundled energy around our new resuscitation products, I think we've got some great things in the not too distant future.
Speaker 10
Okay. That's it for me. Thank you.
Speaker 0
And we have a follow-up question from Brian Hoffman with Canaccord Genuity. Your line is now open.
Speaker 7
Yes. This is Richard again. Just a clarification on the new office. The $2,000,000 in extra costs, is that $2,000,000 should we think about that when you move in? And maybe just what's the target date?
I think you said spring, if I'm not mistaken. So is that when the $2,000,000 incremental $2,000,000 starts to accrue, I guess? And then, Jerry, maybe how do we think about that facility cost in terms of is that all in G and A or is that spread out in different buckets on the P and L?
Speaker 3
Yes. So Richard, first question, the $2,000,000 would start to kick in Q2 forward roughly. So take the last March 2019 as opposed to the full calendar year. The second your second question, some part of the expense will be in depreciation and amortization. One of the things we did to be very efficient and save money on the project was we're going to finance the leasehold improvements ourselves, which is a much, much lower cost of capital, which saves a lot of money over the lease term.
So we have amortization to be one part of that expense, but the actual cash occupancy cost rent will be in G and A.
Speaker 7
Okay. And then, Bobby, just to clarify some of your comments on the facility costs. You said something I thought that longer term it would be better for you. Is that but then you also said you have these higher costs. So I was just trying to clarify, maybe I misunderstood.
Speaker 2
Yes. So the comments on the cultural contributions of having everybody in one place from right now, we're spread across 20 miles apart in Brentwood and Nashville. So that will be a positive. I think the recruiting value of the new office will be good for the millennial workforce, which is over half our workforce now. The teams that are the people are choosing to live downtown.
So the location is really excellent. And overall, relative to seven or eight other offices we looked at, including staying here, the cost we're getting a better deal than had we just stayed in place and renewed. But I know there's a phantom relative gain. It's just that we felt we were really good to look at about eight or nine locations and picked the best cost value to our company, which would be much lower than had we just even stayed and negotiated a renewal in the current business we're in, which is in the Central Business District. So we moved out just a little bit, more benefits to employees.
We think a vibrant new community and what was called Capital View will help with recruiting.
Speaker 3
And so I was speaking to
Speaker 2
the intangibles and benefits, but in a pure financial sense, it will cost us more to be there.
Speaker 7
Okay. Thank you.
Speaker 0
At this time, I'm showing no further questions. I'd like to turn the call back over to the CEO for closing remarks.
Speaker 2
Thank you, everyone, for listening. Thank you to our employees for their delivery an incredible and outstanding quarter resulted in raised guidance. I want to thank Jerry Hayden for his contributions over the years and also his dedication to work with us for several more months to get through the 10 ks filing. And even after, as our senior adviser to our company, he'll be facilitating onboarding our Interim CFO, Scotty Roberts, who will probably introduce also on that next call, obviously. So we're proud of Jerry's contributions, excited for him as he thinks of new opportunities and appreciative of all he's done for the company over twelve years.
So thank you all for listening. I look forward to reporting in the next quarter.
Speaker 0
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.