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Healthstream Inc  (NASDAQ:HSTM)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the HealthStream Incorporated Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Ms. Mollie Condra, Vice President, Investor Relations and Communications.

Ma'am, please begin.

Mollie Condra -- Vice President, Investor Relations and Communications

Thank you and good morning. Thank you for joining us today to discuss our fourth quarter and full year 2018 results. Also on the conference call with me are Robert A. Frist, Jr., CEO and Chairman of HealthStream; and Gerry Hayden, Senior Vice President and CFO; and Scotty Roberts Vice President of Accounting and Finance, who -- last quarter will soon serve as Interim CFO. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that could 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 the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K and 10-Q.

So with that start, I'll now turn the call over to Bobby Frist.

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Thank you Mollie. Good morning everyone. Welcome to our fourth quarter and full year 2018 earnings call. As we began the year, I thought of three things that I wanted to highlight here at the open, a few examples and we'll do our detailed financial review and look forward to your questions.

Three things are clear. First, we finished 2018 financially strong. For the full year of 2018, revenues were up 8%; operating income was up 65% and adjusted EBITDA was up 18% to $41.5 million. Second, sale of legacy resuscitation products outperformed our expectations in the fourth quarter. They were so strong, in fact, that we now expect revenue from legacy resuscitation products to modestly increase from the $55 million of revenue recorded in 2018. Revenue from legacy resuscitation products is expected to peak near the middle of 2019 and decline to zero, by the first quarter, or in the first quarter of 2021.

Strong fourth quarter sales results have positively impacted revenue expectations for legacy resuscitation products for 2019. Third, 2019 is off to a fast start. We kicked off the year by acquiring a company, expanding our addressable market, launching a new resuscitation product, and adding to our leadership team. It's exciting to kind of go on the offenses.

Last month, for example, we announced our acquisition of Providigm, representing an investment in our continuum of care offerings and expanding our footprint in this market. This acquisition is a natural fit because the workforce development requirements in skilled nursing facilities overlap those of acute care hospitals. It's exciting to deploy our capital into an adjacent market, adjacent growth opportunity early in the year. Providigm is a Denver-based company focused on quality assurance and performance improvement in skilled nursing facilities. Its primary product is known as abaqis, which is the leading SaaS-based quality-improvement program. It has been adopted by over 2000 US-based, skilled nursing facilities and nursing homes. And related to that acquisition are some regulations that are emerging.

In 2016, CMS published revised requirements of participation in Medicare and Medicaid for skilled nursing facilities, which introduced a competency-based staffing approach. Beginning in November of 2019, so later this year, CMS will require all the skilled nursing facilities to have programs in place to assess competencies, provide competency based education and document the effectiveness of those programs. We've already begun to invest in curriculum and content development in for the skilled nursing market, that will serve as a bridge between the quality improvement program of abaqis and the competency requirements coming into place through CMS.

This year, and third, we have expanded our addressable market from 8.5 million healthcare professionals to 10.5 million healthcare professionals. It's kind of a definitional change, so I'll walk you through it.

Our addressable market, now includes, 5.2 million employees in the acute care space and a more broadly defined continuum of care market, totaling 5.3 million healthcare professionals. We now define the continuum of care as ambulatory services, including physician offices, health and human services, including behavioral healthcare facilities and post-acute care, including skilled nursing facilities. You can see some of the additions to our definition in what I've just expanded upon. So, this expanded market definition comes with a greater growth opportunity, as it will expand our sales organizations to take our new products and services into this broader defined market. At this time, Gerry Hayden and Scotty Roberts will provide a more detailed discussion of the financial metrics for the fourth quarter, full year 2018 results and provide a financial outlook for 2019.

I'll turn it over to Gerry.

Gerard M. Hayden -- Senior Vice President and Chief Financial Officer

Thank you. Bobby, and good morning everyone. Before reviewing our fourth quarter results, I'd like to note that all results are from continuing operations only and that 2018 results are presented in accordance with ASC 606, which we adopted at the beginning of 2018 whereas results for 2017 are presented in accordance of ASC 605. Here are some highlights from our fourth quarter; revenues were up 8% to $59.8 million, operating income was $2.8 million, up from $1.5 million in the prior year, with $897,000 positive impact from the applications of ASC 606.

Income from continuing operations was $2.9 million, down from $3.2 million in the prior year with $897,000 positive impact from the application of ASC 606. Earnings per share, EPS from continuing operations of $0.09 diluted, compared to EPS of $0.10 diluted in the prior year. Adjusted EBITDA from continuing operations of $9.5 million, up from $8.2 million in the prior year with an $897,000 positive impact with the application is ASC 606.

Now, let's look at our income statement. Revenues from our Workforce Solutions segment were $49.1 million and grew by 8% over the prior year.

Revenues from our Provider Solutions segment were $10.7 million, and they grew by 10% over the prior year, while new sales and renewals contributed to the year-over-year growth in both of our business segments. Now, our gross margins, our gross margin was 57.5% this quarter and 59.6% in the same quarter of last year. This decline is primarily due to higher revenues from our lower margin, legacy resuscitation products. Let's turn to our operating expenses; operating expenses were up less than 1% over the prior year, as declines in sales and marketing and the application of ASC 606, mostly offset increased expenses in other categories.

During 2018, we continue to make the investments on project developments, which resulted in a 6% increase and (inaudible) expenses over the prior year. Sales and marketing were down $1.7 million due to lower sales commissions from the adoption of ASC 606 and those commissions are now capitalized, rather being expensed upfront, as we were under ASC 605.

However, sales production in the fourth quarter remained strong. G&A expenses increased $1.5 million or about 68.2% (ph) of revenues compared to 14.9% of revenues in the prior year.

The growth in G&A expenses, is attributable to increases in software expenses to support our business operations, due diligence costs related to the Providigm acquisition we closed in January 2019, and also higher contract labor costs. Operating income and adjusted EBITDA, our operating income was $2.8 million, up 88% from $1.5 million in the prior year. The operating income margin improved to 4.7% compared to 2.7% in last year's fourth quarter. Adjusted EBITDA improved by 68% (ph) growing in $9.5 million from $8.2 million in the prior year.

For the full year 2018, operating income of $58.5 million, up 65% from $9.4 million in 2017 and full-year adjusted EBITDA improved by 18% to $41.5 million to $35.2 million in the 2017 full year. Now, our balance sheet; our cash position and working capital remains strong. Our cash and investment balances at year-end 2018 were a positive $168.8 million and working capital was approximately $126.4 million. Day sales outstanding were 51-days for the fourth quarter compared to 46-days for the third quarter. We continue to show progress in our receivables management, for example, the fourth quarter 2018 DSO of 51-days compared favorably with the 59-days in the fourth quarter, 2017.

In addition, 2018, bad debt expense has increased by over $500,000 over the full year of 2017. We renewed a lot of credit from the fourth quarter on a similar term while extending the maturity date out to November 2020. We have no outstanding debt and maintained our full $50 million borrowing capacity. We believe our overall capital position is likely to support our organic and inorganic growth opportunities and support other capital structure optimization and shareholder value maximization strategies that maybe appropriate.

At this point, I'll introduce Scotty Roberts, who will give us some background on financial outlook.

Scotty Roberts -- Vice President of Accounting & Finance

Thank you Gerry and good morning everyone. Before we discuss our 2019 guidance, I'll provide some background and context on two topics affecting guidance. The first is our acquisition of Providigm, which we expect to contribute approximately $8 million of revenues from its existing product offerings in 2019. We expect that the combination of additional investments, the amortization of acquired intangibles and the impact of deferred revenue writedowns related to Providigm will result in a reduction in our consolidated operating income of approximately $2 million during 2019.

The second topic is the move to our new corporate location in Nashville, Tennessee, in the spring of 2019. This move consolidates most of our Middle Tennessee operations. In the third quarter conference call, we discussed our operating expense increases of approximately $2 million in 2019 associated with the relocation, which is also factored into our 2019 guidance. This incremental operating expense increase reflects current Nashville market conditions, but still less expensive than renewing the lease in our current location.

Now, I will discuss our financial expectations for 2019. Yesterday's earnings release include the financial guidance for 2019, which also improves the recent acquisition of the Providigm, which we consummated on January 10, 2019 and is included in our Workforce Solutions segment. We anticipate the consolidated revenues will range between $251 million and $258 million for 2019 with revenues from the Workforce Solutions segment ranging between $207 million and $213 million and revenues from the Provider Solutions segment, ranging between $44 million and $45 million.

We anticipate operating income to range between $10 million and $12.4 million for 2019. We anticipate higher levels of operating expenses associated with our new corporate office, additional investments in product development and sales for our new resuscitation products as well as investments to support the growth and expanded market position of solutions we attained through the acquisition of Providigm.

We anticipate that capital expenditures will be approximately $35 million, which includes approximately $15 million associated with our new corporate office, which are going to consolidate to operations in offices to a central location in Nashville. We expect the annual effective income tax rate to range between 26% and 28%. This consolidated guidance does not include the impact of any other acquisitions that we may complete during 2019.

Thank you for your time. I look forward to working with you and my capacity as the Interim CFO.

I will now turn the call back to Bobby.

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Thank you Scotty and Gerry, I'd like to start with a quick update on our partners with our Verity business as we do this concluding section. We started the year of 2018 with the announcement of the new unified brand name for our Provider Solutions business, Verity a HealthStream Company. The unified name signifies the combining of the HealthLine and Morrisey businesses along with the launch of our new SaaS-based platform for this business, also called, Verity.

As we have previously discussed, the migration of HealthLine and Morrisey customers from a hybrid SaaS platform to the new Verity SaaS platform will extend over several years. We've done this kind of migration in our past, when we acquired learning management systems and had to migrate them to our new SaaS application. I think we're well positioned to know how to migrate Morrisey and HealthLine customers to our new Verity SaaS platform.

As well as the year-end 2018, 36 customers have contracted for the new Verity platform and our first customer has been fully implemented on the new Verity platform. As our company has extensive experience and expertise in making such migrations, we anticipate continued and steady progress in this migration effort as customers enjoy the benefits of the new Verity platform throughout 2019. We need to spend some time talking about the resuscitation business. I think it will be helpful to divide that conversation into three parts.

The first part will address our brand new suite resuscitation solutions with the American Red Cross. We're really excited about those new product offerings. The second part, will address the legacy American Heart Association and Laerdal products that we sold through the end of last year, which I mentioned during the opening of this call. And finally, in the third part, I'd like to discuss our new network connectivity agreement with RQI Partners, which is a joint venture between Laerdal and the AHA.

So, let's take the first part. On January 17, we announced the launch of the American Red Cross Resuscitation Suite, which effectively marks the beginning date of our seven-year collaboration. The American Red Cross is one of the most trusted and recognizable organization in the world. Their new resuscitation suite designed for healthcare -- specifically for healthcare professionals, doctors, and nurses combines cutting-edge technology with the latest science to offer a new standard of quality and competency development in resuscitation skills.

We are excited to bring this innovative new curriculum and choice to the market. The new Red Cross Resuscitation Suite is comprised of BLS, ALS and PALS. Competency development curricula, it brings updated highly adaptive competency based development solutions to healthcare professionals. It offers certification to healthcare professionals, successfully demonstrating proficiency of lifesaving resuscitation knowledge and skills.

HealthStream has designed the capabilities that makes it easy to set and manage the frequency of practice with the flexibility to set practice intervals; immersive, real-time videos and personalized, adaptive learning plan, clinical staff have all the tools they need to develop and maintain resuscitation competency, and improve patient outcomes. This curriculum is simply unprecedented in its flexibility and capability.

Launched 33 days ago, initial receptivity to the Red Cross Resuscitation Suite is positive. Although sales activity has begun now, we have not forecasted material revenue from the new resuscitation suite in 2019. Really for two reasons; one, because it will take time to progress through the customer view, budget cycles and implementation; and two, because we've sold so much of the legacy platform into our existing base that allow the market -- that is committed to that product for some time period.

We look forward to updating you on this exciting new curriculum over the course of the year. Okay, for the second part of the discussion, is about AHA legacy products, which are known as HeartCode and RQI. As a reminder, at the end of June, 2017, we announced that our reseller agreements for HeartCode and RQI will expire on December 31, 2018. These agreements did, in fact, expire as expected and will not be renewed.

As you know, through December 31, 2018, we have the right to sell up to two year subscriptions to these products and sell them, we did. It seems that pretty much everyone that wanted to purchase HeartCode and RQI to use over our network in learning platform for the next two years, did so. Many topped off their existing orders to make sure they enjoy the benefits of the integrated service, through the end of 2020.

As a reminder, at the end HeartCode and RQI generated approximately $55 million of revenue in 2018. In 2019, we expect revenues from these legacy products to modestly exceed the $55 million achieved in 2018. We expect 2019 revenue from legacy products to peak near mid year and decline sequentially thereafter. To be clear, we expect revenue from these two products to be zero during the first quarter of 2021.

That brings to our final resuscitation topic, which we originally announced on the December 6. At that time, we told you about our new agreement with RQI Partners. It's a joint venture between where Laerdal and AHA. It is important not to confuse this agreement as an extension or renewal of our expired reseller agreement with Laerdal. Under this new agreement, HealthStream will not be marketing, selling or contracting for HeartCode or RQI. To be clear, we will be marketing and selling the new American Red Cross resuscitation solutions.

Our agreement with RQI Partners provides for continuity of service for customers that desire to purchase HeartCode and RQI from RQI Partners in the future, and have it delivered via HealthStream's Learning Center. This is in line with the older marketplace concept, we have discussed on previous calls. RQI Partners will omit the fee to us, when sales of new HeartCode and RQI are delivered over the HealthStream Learning Center.

Given the success, we have selling legacy products through the end of last year. We do not believe that this fee will be material in 2019 as majority of our customers who use HeartCode and RQI have already purchased them through us and have contracts to receive them through 2019, and in many cases, through 2020.

I'd like to turn our attention to our new platform-as-a-service strategy and our new platform-as-a-service platform that we call hStream. Let's turn our attention to hStream and describe it first. With over 4.9 million healthcare professional subscribers, HealthStream's SaaS-based platform has long been, one of the most adopted workforce development platforms in healthcare. To facilitate innovation and growth of our ecosystem, HealthStream's new platform technology hStream was launched nine months ago. Already healthcare organizations representing 1.51 million subscriptions have contracted for hStream.

I think, our last disclosed number was just a month or so ago, where it was about 1 million. So, this is a material update from where we ended the year-end at about 1 million to about 1.51 million. The HealthStream platform as-a-service capabilities are facilitating new types of application and media partnerships to deliver valuable services, impactful content to our healthcare organization customers. hStream, importantly also serves as a bridge between our workforce development and Provider Solutions business segments.

In the third quarter, Verity began introducing hStream subscriptions in contracts for its new SaaS-platform. Because of this, we believe that hStream subscription is an increasingly important metric for measuring progress across our business initiatives. In fact, in the year-end earnings release issued yesterday, will be the last time we will provide our legacy subscriber metrics, which focused on a narrow representation of our learning applications. We look forward to reporting the progress of hStream, both in terms of subscriptions to it and the value it brings to customers and partners in the coming year.

Now, we've invested in many areas as we wrapped up the year and we plan to continue those investments as we enter the new year. To support the many exciting developments we've just discussed, touch forward (ph) on our momentum, we have recently invested in new senior leadership by expanding our executive team, we have added Scott McQuigg, who will lead our hStream Solutions business and Trisha Coady, who will lead our Clinical Solutions business for our executive team.

As Senior Vice President of hStream Solutions, Scott McQuigg will identify, grow and develop new the hStream content, hStream application, and hStream partnerships. Scott's career include the co-founding of HealthLeaders, an award-winning, leading healthcare media and research business; and his role as CEO and Co-Founder of GoNoodle which developed a popular kids media and tech platform, which went viral and is now played by 14 million kids each month.

As a healthcare, media and technology veteran Scott brings valuable expertise to HealthStream and the execution of our hStream strategies. In her new role of Senior Vice President and General Manager of Clinical Solutions, Trisha Coady is responsible for all of the company's clinical products and solutions, including those in the areas of clinical staff development and resuscitation. With her deep clinical knowledge, experience as an entrepreneur, five year success growing our Clinical Solutions business and strong leadership skills make her well-suited to lead this, important area of our workforce development segment.I'd like to welcome Trisha and Scott to our Senior Executive Team.

In our third quarter earnings release, we announced that Gerry had tendered his resignation from the company as CFO, who will remain in his position as CFO through the filing of our Form 10-K for the full year 2018, which we expect to occur later this month. While stepping down from his position as CFO at that time, Gerry will remain employed as a Senior Advisor through the end of the first quarter of 2019. To ensure a smooth transition, following Gerry's departure as CFO; Scotty Roberts, who just presented our 2019 financial outlook and serves as our Vice President of Accounting and Finance, will assume the position of Interim CFO.

Scotty, who is a Certified Public Accountant joined HealthStream 17 years ago after working at Ernst & Young. His broad experience in public financial reporting and deep knowledge of financial operations, both in general and company-specific terms, makes him particularly qualified to serve as Interim CFO and as a candidate to steal the CFO position permanently. As Gerry Hayden completes his last earnings conference call, I want to thank him for his tremendous service to HealthStream for over a decade as our CFO and also the two years he served, previously, on our Board of Directors.

His leadership and financial expertise have played an important role in our growth and he has successfully navigated the company through many growth opportunities. Gerry, is leaving a great legacy in many ways including his mentorship of Scotty, sitting here to his right. I wish, Gerry, all the best in his future endeavors.

At this time, I'd like to turn it over for questions from the investor community.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Ryan Daniels of William Blair. Your line is now open.

Ryan Daniels -- William Blair -- Analyst

Yeah, good morning, thanks for the information and taking the question. Bobby, maybe one for you first on the new hStream metric. Can you talk a little bit more about how we should view that? How that correlates with revenue for the organization? I know, we used to have subscribers in the ARPU metric, which we can use to back into some of the revenue growth. So talk a little bit more about how you view that metric and how that drives revenue growth?

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Yes. For a little while it's -- probably the next several quarters, it's very important to watch its progression. So, the first thing to drive the future of the company is to try to get all of our customers, across all our platforms connected to hStream, so we can drive benefit. The new platform, what we're doing now is, hopefully by the middle of the year, every contract, for every product will include our connectivity or an insertion of the hStream membership and connectivity to that platform.

And so what -- first of all, this serves as a unifying metric. And so, we are beginning to -- when we sell a learning center, it requires subscription to the hStream platform. When we sell the Verity platform, it requires a subscription to the Verity for hStream extension. And so, the first and most important concept is it's a unifying metric. And you know, Ryan because we've worked for years at this, we were trying to create a unifying metric that would kind of be a foundational metric as we go forward, for many years, but as we have the PX business, we couldn't figure out a way to measure everything. That's the first thing.

Second thing is, the old metrics were a measure of really the penetration of a few of the key products to the workforce segment. And so, it's kind of the inverse of the unifying metric in that -- the old metric was less dimensional in what it measures. So, we think the important to that metric for this year is to make sure it is rapidly adopted, as we included -- as renewals come up we're inserting the language and the subscription to the hStream platform and to each contract. And you can tell from the movement already, I think we announced it nine months ago it's at zero and we're at 1.5 million now. So, progress will be measured quarterly, and we need to move all customers to this new platform in 36 months and you can see we're well on our way.

Now, as it relates to revenue, for a little while, it won't be as directly correlated to revenue, because the opportunities are derived once it's in place. Most of our platforms, the hStream subscription will have an increased value proposition and increased price, it allows for new bundling strategies, of content and platform that allows connectivity to new applications and partnerships and all of those things will drive new type of network fees to HealthStream and our network.

So, I think most importantly it's a unifying metric and over time, it will be more correlated directly to revenue, but as analysts, I think what we need to measure is the rate of adoption. We got to get it in place, so there are new strategies can take hold.

Ryan Daniels -- William Blair -- Analyst

Okay, that's very helpful color. And then, as my follow-up and I'll hop off. The new CMS Nurse Competency requirements, obviously that's a nice kind of macro tailwind for you, it's going to be a requirement to put in place. Do you have all the solutions that meet what your partners will need for that? Or is there more partnerships/product development on the horizon to get you to a full set of what's needed to hit those requirements?

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Well, we have a lot of what's needed, especially with the acquisition of Providigm, but we are, as I mentioned in the call are already investing in rounding out the content, because you need to map activities from the quality and the audit process to remediation and development strategies for employees. And we're building those mapping and now we're working with the leadership of Providigm to determine the holes in our education strategies and education libraries, and we're already under way scoping and building those new curriculum components.

And so we have some investment to do here, to get it where we want it and also enhance the Providigm products up to where we like them to be for HealthStream, also connect them to the hStream platform over the course of this year. And so, there is some work to at Providigm. I think we mentioned that, in addition to those investments I mentioned that the Providigm right now and others that Providigm is going have a negative drag on our operating income of about $2 million in 2019.

Ryan Daniels -- William Blair -- Analyst

Okay, great. Thank you, and Gerry, I wish you all the best. Thanks for everything over the years.

Gerard M. Hayden -- Senior Vice President and Chief Financial Officer

Thank you Ryan. Thank you.

Operator

And our next question comes from the line of Matt Hewitt of Craig-Hallum Capital. Your line is now open.

Matt Hewitt -- Craig-Hallum -- Analyst

Good morning and thank you for taking your questions.

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Thank you Matt.

Matt Hewitt -- Craig-Hallum -- Analyst

First one for me, what has been the initial feedback, now that all the partners are in place regarding new resuscitation suite? I realize, it's going to take time to see contribution from a revenue perspective, but what has been the feedback from your customers so far?

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Well, we're 33 days now and just probably closer to 25 business days, if you take out the weekends. And our full sales team trained during the month of late December and January, so they're fully equipped now to tell the story, and they're fully booking up their schedules to get out there and do the demos. Our feedback is very, very positive. The learning paradigm and the learning methodology is just -- it's (inaudible) in this 28 years is better than the existing models. The momentum of the product is going to take a little time to build as we said, we did quite a lot of selling of the legacy products in the fourth quarter, but also neutralizing some of the competitive advantages in other products, for example, our products includes the flexibility to train more frequently, without charging the customer more for that training.

And so, we really do plan to be competitive, not just to have better technology, better product, better learning methodology, but also a considerably lower price point for an equivalent science-based program. And so, I think the sensitivities around costs and the need for new methodology learning that we're very optimistic at 33 days in that we've got a winning product to take to market.

And so, I think also the customers seem receptive to choice. I think after doing something one way for over a decade, and frankly the market not seeing much, if any, change in actual outcomes as measured by clinical outcomes. I think that there is receptivity to trying something new. And, of course, this will play out over the next several years and we'll see -- but we're entering the year with a lot of confidence. And by the way, there's a lot more to come. And so, there are many, many more elements for the program unannounced that are leading development now, and we're excited to announce both new partnerships and new technologies that are as of yet unannounced.

So, for example, one of our innovations, is to make the new resuscitation suite agnostic to the Manikin technology, and so we've signed with a company called Innosonian and they're our launch partner, we've signed with a company called Ambu, both are international providers both are international providers of high-tech training manikins and both have agreed to be hStream certified to the hStream platform. We expect additional announcements in this area, more interoperability and compatibility announcements with our Red Cross Resuscitation Suite program, and so there are innovations embedded like that, that mean that they are forthcoming, there are more announcements to come.

Matt Hewitt -- Craig-Hallum -- Analyst

Great thanks. Will look forward to future updates on that. Maybe a couple of follow-up questions for Gerry and or Scotty depending upon who wants to chime in, but regarding Providigm, how should we be thinking about the margins for that suite -- gross margin I guess might be easiest in 2019 and then maybe, going forward, once you're through some of the extra heavy lifting from expense and deferred revenue writedown contribution?

Gerard M. Hayden -- Senior Vice President and Chief Financial Officer

Yeah, it will be (inaudible) workforce segment as a total. One thing we could describe it qualitatively. It is a SaaS type platform, SaaS type technology model. And so, we would expect the margins, once we get past investment and some proficiencies and growth to be more in line with what you expect from a SaaS-type business.

Matt Hewitt -- Craig-Hallum -- Analyst

Okay. And then last one from me. Just for modeling purposes. The $2 million of extra OpEx for the headquarter move in the first half. Is that -- will there be any tail to that into the second half or should we model most of that $2 million here in Q1 and Q2? Thank you.

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, let me take that one. I'll take that one but -- so we are in our Downtown office building for over -- about 20 years and enjoyed really, really below market rates for our 70,000 square-foot operations here in Downtown Nashville and we came up for renewal, and those rates were going to go up tremendously. So, we went shopping and looked at seven or eight locations, all around the middle of Downtown. And as you can imagine, and Nashville has become extremely popular for corporate locations, Amazon, AllianceBernstein, E&Y all moving in and building new buildings in Downtown. Rent rates in Nashville have soared.

What we did though, we found the least expensive of about six options, including renewing here. And the least expensive option will result in an ongoing revenue rent increase of $2 million per year. And so, it is an ongoing increase in our cost to occupy and consolidate our operations in Middle Tennessee and remain in the -- near the central business district of Downtown Nashville.

So, it's not a one-time expense; it's an ongoing increase in our cost of lease expense to remain and keep our workforce centralized in Middle Tennessee. And it's actually a little higher than that, but that $2 million represents about three quarters of the year. We don't move in to the new headquarters for another 45-days or so, or 60-days.

Matt Hewitt -- Craig-Hallum -- Analyst

Got it. All right, thank you.

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

So, right we're getting good operating leverage, rent goes up on us, but it was absolutely the right thing to do. And again, it was the lowest cost alternative of six options, including just renewing and staying put, where we are. And so, we're actually really excited to have a fresh point of view, we think it will prove to be an economic or a good decision, given the rate of growth of Nashville, and we're excited to get everybody back together because we're spread over two or three office locations in Middle Tennessee.

Operator

Thank you. And our next question comes from the line of Richard Close of Canaccord Genuity, your line is now open.

Richard Close -- Canaccord Genuity -- Analyst

Great, thank you. I was wondering if you could just go over the acquisition revenue that's included? I just want to make sure I have that correctly. And then on the $2 million in expenses associated with, I guess the acquired intangibles, the deferred revenue write down and the investment. If you can sort of give us maybe the composition of that $2 million in those buckets that would be great.

Gerard M. Hayden -- Senior Vice President and Chief Financial Officer

Yeah. So Richard, this is Gerry. We discussed about $8 million of revenue in 2019 for the Providigm acquisition and once again that's in the workforce segment. And then three categories all kind of lumped into one set of expenses, but investments in product developments, other sales and marketing, intangible assets, amortization from the acquisition and also will be, as with most of our acquisitions, a writedown of deferred revenue in the balance sheet at closing.

Richard Close -- Canaccord Genuity -- Analyst

Okay. So, I guess I'm just trying to gauge what the deferred revenue writedown is. So, as we think about our models for 2020 that coming back in...

Gerard M. Hayden -- Senior Vice President and Chief Financial Officer

It's 250,000 to 300,000

Richard Close -- Canaccord Genuity -- Analyst

Okay, great. Thank you. And then, since we're moving on from the subscriber number. I did notice that there was a decrease in the implemented subscribers, I think, it was only 4,000 from the third quarter, if I'm not mistaken. Just curious if there was something to call out on that?

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, there was -- one of the larger health systems took their non-employed physicians and non-employed I guess volunteers, and just generally their non-employed population off the platform, and so we saw a reduction from that, that resulted in that net decrease. The contract subscribers as you probably also noted went up about 80,000. So, it's strong. I was kind of hoping to get over 5 million before we retire the metric, but we didn't quite get there at 4.933 million.

Richard Close -- Canaccord Genuity -- Analyst

Okay. And then, as we think about the new, I mean -- I guess, calling out the skilled nursing side of things. I know in the past, you've talked about the post or non-acute. And I guess, it was all lumped together, have you had any exposure on the post-acute side in the past? And how should we think about maybe the uptake in that marketplace? Are you displacing someone potentially, and just what are the, I guess market trends for the services that you guys provide in that area?

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Yes, I think, first of all, it is an important part of our plans, as you can tell, to kind of reconstitute our definition of those verticals we're going after that you would lump into what we now call the continuum of care., which is all the post-acute and ambulatory, and skilled nursing is all and physician office, we now put all in that, what we call continuum. And so, by reconstituting that definition, we bumped up those that we're marketing to and selling -- actively selling through to about 10.5 million. So -- and that growth from 8.5 to 10.5 largely comes from more broad -- pursuit of those post-acute and ambulatory and physician office opportunities. So, that's the first thing.

The second things is, a good number of our new subscribers, in the last several quarters have been coming from those verticals. So, those are the growth markets right now. Home health markets are growing, whereas in the hospital market, you see more consolidation and acquisitions and the other verticals you see growth adding more employees in those segments. So, it will be an important ongoing business pursuit of ours to expand.

One -- another good thing is we think the Red Cross brand will resonate well in the post-acute market settings, potentially a stronger brand than the prior brands in the market. So, we're excited to get into those markets and those are less -- have less penetration, as you could imagine, the products we saw -- the legacy products. We got pretty good adoption and penetration. So, I think some of our early wins for our resuscitation products will probably come from those post-acute and continuum, as we call it segments.

So, the second point is that in the past, say four, five quarters (inaudible) subscribers, a nice number of them did come from those settings that were non-acute settings. And so, Providigm represents a nice new anchor point, SaaS business application, linking quality to development, and the training and we'll keep looking for things to strengthen that business to pursue program -- representing kind of -- hopefully, the first target of capabilities and content and services into those markets. So, we do plan to strengthen -- continued strength our investment in the pursuit of those markets.

Richard Close -- Canaccord Genuity -- Analyst

Okay, thank you.

Operator

And our next question comes from the line of Frank Sparacino of First Analysis. Your line is now open.

Frank Sparacino -- First Analysis Securities Corporation -- Analyst

Hi guys. First question for me is on the Verity side of things as you look at 2019, the guidance you gave I'm just curious kind of what's -- what are the positives and negatives in terms of the growth that you gave? And I would have thought the growth would have been a little bit higher in that segment of the business. Maybe, it's been impacted by the migration that you alluded to Bobby, but just any thoughts there in terms of how quickly that market's growing and how you're faring?

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I think we probably would hope for a little faster growth overall and a little faster adoption of the SaaS. But, it took time to built the right product, and I would say what we're hearing is the receptive to new product is very high, but we did want to kind of benchmark in this call, where we are to migrate. So, as you can tell from the numbers we disclosed a few minutes ago that we're really -- this kind of first solid quarter end to the migration and so we wanted to kind of set expectations for where we're starting and provide updates throughout the year.

So, there's about 36 contracts on the those brand-new platform and I do think that the market for (inaudible) platform is going to be very strong. It's just -- it's several years of development and it is just flat out better than the products we had before, and the products we're competing with in the market. So, we feel better about our competitive position. That said, migrating a couple of thousand legacy customers to the new platform is going to be a multi-year journey as we've articulated.

And so, we just want to caveat that and so we've lowered our growth expectations a little bit. It is important also that it is a hybrid SaaS and a SaaS model, so the gross margins are good, it generates solid EBITDA performance and contributes to cash flows, and so while adding to its sales and product development and growing the senior executive team leading is also generating cash and so it's effectively profitable growth.

Yes. We've been (inaudible) our topline growth rate, but I do feel that business unit is well positioned for 2019 and beyond.

Frank Sparacino -- First Analysis Securities Corporation -- Analyst

Great. And just one follow-up from me. Bobby, as it relates to the RQI, JV partnership. I'm trying to think of and this maybe -- or not the right way to look at it, but it would seem to me that for HealthStream there is modest benefit in that agreement, there is a lot more benefit being had on the other side, I don't know they have a replacement in terms of an underlying platform to deliver, but am I looking at that the right way or no?

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

I think, it definitely will make their products stickier and we've spent a decade selling those products and they're good products and the customers obviously benefited from them and deployed them, and as told -- you can tell from our sales in the fourth quarter, they really wanted the joint service model that we delivered -- they could have easily just say, what does (inaudible) buy from RQI partners but they really all topped off to make sure they got the integrated service, and then of course we announced that we were providing continuous support.

But, I think the ease in contract withdraws and the proven delivery model resulted in quite a lot of sales in the fourth quarter.

So, it may have benefited than more, but it also represents a milestone in the change from a single provider to the market to seriously bringing two potential providers to the market, and so, in order to hit that inflection point and bring the American Red Cross fully to the table competitively; it's the right way to service customers, but also create choice and competition where there has never any in the marketplace.

So, I think on balance, they may benefit a little bit more by making their products sticky. We obviously benefited because we have a longer runway to introduce new products now, as you can tell we had made the earlier expected revenue to decline in 2019; the declines will be steeper and harder in 2020 and 2021 but we essentially deferred the decline in that area of the business for a whole year. It buys a lot more time to get the message out of the new products and strengthen our overall product portfolio and continue to deploy capital.

So, I think all parties will benefit. Ultimately, the customers will have the best benefit investment because they will have choice and HealthStream is the one, bringing that choice. I think that will also be respected and appreciated by our customers, but it was kind of an essential move for both parties. We -- remember, our entire organization is solely focused on sales and marketing of the American Red Cross program now, and as they sell their product they can promise compatibility, but we're out now presenting the new options in the market and very excited about it.

Frank Sparacino -- First Analysis Securities Corporation -- Analyst

Thank you Bobby. That's very helpful.

Operator

And our next question comes from the line of Vincent Colicchio of Barrington Research. Your line is now open.

Vince Colicchio -- Barrington Research -- Analyst

Yeah Bobby. Could you remind us of the mechanics of the revenue recognition with the Laerdal products. I was a little surprised at the size of the revenue running to Q2?

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Well, let's see. So we'll go into two buckets here. So, the legacy agreements, we would sell on subscription or a utilization basis. And so, if you think of a customer, who, say buy a two-year top off, we would recognize revenue ratably over the period, based on consumption patterns or license consumption. And so, we sold a lot, but I don't think the consumption pattern changed a lot, but we did renew a lot of those contracts. So we -- and you can tell, we expect it be slightly more than 55 million in revenues from the legacy products, which is up from 2018 actually, so there's a lot of ironing to that.

We expect the second quarter, somewhere around the middle of the year, second quarter, or early third quarter to be the peak in those revenues and then it'll will begin to decline and that decline will continue quarter-over-quarter all the way to zero, sometime in the middle of the first quarter 2021, of those two products. And so, we think it should be fairly easy for you to model and estimate the model in the four quarters of 2019 now because you it'd be a little better than 55, spread across four quarters with a peak in Q2, so hopefully that's fairly easy to model for 2019.

Vince Colicchio -- Barrington Research -- Analyst

That's helpful. Thank you. And then could you frame your capital allocation priorities for 2019.

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Yeah. So, obviously a big piece of capital is going to go into our new building. We turned to self-finance -- the build out and everything, because our cost of capital is lower than we're going to end the rent allowance and so a big chunk of capital is going to go into building out that new consolidation -- the new office building and getting everybody moved over there, but that's not the priority, that's just the fact. The priorities are, of course, software development, R&D launching the new resuscitation products will be OpEx, but we're going to grow our investments in sales and marketing.

And then on capital standpoint, content development for the first time is going to make a more material debut into our business model, a little Netflix like, but we have quite a large audience now nearly 5 million. I wish, I could round up to that, but I guess it's 4.933 million. And so, we're going to invest in targeted areas of content development and so you'll see a little bit more of that in our capital plans, everything else, capitalized software development and all will go up a little bit, each year.

Vince Colicchio -- Barrington Research -- Analyst

Thank you for that. Thanks for answering my questions.

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Thank you.

Operator

And we have a follow-up question from Richard Close of Canaccord Genuity, your line is now open.

Richard Close -- Canaccord Genuity -- Analyst

Yeah, just two quick follow-ups, just on the headquarter. I guess this call, you're saying it's $2 million in annual expenses higher than previously. I think on the last quarter you mentioned that it was going to be $2 million in 2019 in terms of higher expenses. I could have that wrong. So, just want a clarification on that front.

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, we probably, I think that is accurate. I think both, ironically are accurate. So it is $2 million more in 2019 and on a run rate basis, I guess for the first time, as I indicated it will be -- it's a rent increase. So, it'll be annually $2 million more in the model.

Richard Close -- Canaccord Genuity -- Analyst

Okay. And then my last question would be on the RQI, can you go through that in terms of the -- maybe the margin profile on that versus HeartCode and then maybe the margin profile on that versus the Red Cross?

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Yeah. Well, probably not in great detail, but I can say that the margin on that, because it's a fee to connector network, we don't have any real sales costs, any marketing costs. We don't have -- we have de minimis support cost, just to support and make sure the customers are happy with the integration. We don't have any product development costs. So, it really is a fairly high -- it's a lower fee and lower revenue, but it is a large contribution margin, because it really is pay to connect, pay to ensure smooth operation of their product. And so, they'll paper the contracts, they'll recognize the revenue from a top line standpoint and payouts to a connectivity fee. That connectivity fee and integration fee will -- it will be nice piece for (inaudible) completely offset the prior margin that we enjoyed, but it's a really nice high-contribution margin fee coming from that relationship.

Now again, we don't expect to see much of those fees in 2019 because there's really not many coming up for renewal. And so, when that kicks into play, is when a customer, on our platform, comes up for renewal. They say, yes, we want to keep receiving that product, they license or purchase the product from RQI Partners. RQI Partners will then bill them and send us the fee. And so, it requires a whole cycle of renewals to come out before we start generating those, again rather, high margin fees. And so, hope that this general characterization helps you some.

On the American Red Cross program, we're not going to give a lot of detail on that, but we have said in the past that it is materially higher gross margin for us. That said, the sales and marketing costs and launch costs in the new products are fairly high, and we don't want to under invest in those. And so, blended contribution early is probably fairly low.

In fact, in the call, we said that its absolute contribution, even though the top line is going to be fairly low because of one of the reasons we said earlier that we had such successful fourth quarter, selling the prior product. So, I hope those characterisations help, but we're probably not going to do any more product-by-product gross margin analysis across our portfolio.

Richard Close -- Canaccord Genuity -- Analyst

Okay, great. Thanks.

Operator

And I'm showing no further questions at this time, I would now like to turn the call back to Robert Frist for closing remarks.

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Thank you. We look forward to the leadership of Gerry for another month, and I really appreciate his 12-years of service to the organization. We're looking forward to Scotty Roberts stepping up as the interim CFO. Welcome to the new leadership team and thank you to all HealthStreamers for your contribution, a great year in 2018 and a lot of hard work going into launching these new products and services in 2019. I'm looking forward to speaking to all of us on our next earnings conference call. Thank you.

Operator

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

Duration: 59 minutes

Call participants:

Mollie Condra -- Vice President, Investor Relations and Communications

Robert A. Frist -- Chief Executive Officer and Chairman of the Board of Directors

Gerard M. Hayden -- Senior Vice President and Chief Financial Officer

Scotty Roberts -- Vice President of Accounting & Finance

Ryan Daniels -- William Blair -- Analyst

Matt Hewitt -- Craig-Hallum -- Analyst

Richard Close -- Canaccord Genuity -- Analyst

Frank Sparacino -- First Analysis Securities Corporation -- Analyst

Vince Colicchio -- Barrington Research -- Analyst

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