Q4 2019 Earnings Call
Time, all participants are in listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star one on your telephone.
Please be advised the todays conference is being recorded.
Your acquire any further assistance please press star zero.
Now I'd like to hand, the conference over to Vice President Investor Relations and Communications Mollie Condra.
Thank you and good morning, Thank you for joining us today to discuss our fourth quarter and full year 2019 result.
Oh, so when the conference call with me here, Robert A., Frist Junior CEO, and chairman of Healthstream and starting Robert CFO in senior Vice President.
I would also like to remind you that this conference call may contain forward looking statements regarding future events and.
No stream that involve risks and uncertainties that could cause <unk> actual results to differ materially from those projected in the forward looking statement.
Information concerning these risks and other factors that could cause results to differ materially from those forward looking statements are contained in the company's filings with the FCC, including forms 10-K and 10-Q.
At this time I'll turn the call over to Bobby Frist.
Thank you Molly good morning, everyone welcome to our fourth quarter 2019 earnings call.
It's a great color because we reflect back on the prior years performance and set the stage for 2020 as well. So I was 2020 kicks off.
Stream and all of our employees remain focused on delivering innovative solutions that developed the people of health care, the caregivers and a confident competent and credentialed professionals and fill that vision and direction. We've had many exciting developments in 2019 that I think set us up really well as we enter into 2000.
20.
In 2019 for example, we added two members to our executive team Scott Mcquigg, a new senior Vice President heading up our age stream solutions and Scotty Roberts joined as our Chief Financial Officer, we moved into new corporate office.
Location in downtown Nashville, consolidating multiple offices and bringing nearly 400 ploys together into a single site and location, which is a really powerful from a coordination and and operation standpoint, we launched a new corporate social responsibility program, which we're really excited about lead coined it streaming good and all of our employees are engaged in streaming.
Good back into our customers into our communities, where we work.
We updated our logo and published a new constitution that guides, our actions and behaviors in 2019. So all this was a great refreshing of our culture and our strength as an organization.
Additionally, welcome over 90, new Healthstream restart range, so we're adding across the country into all areas of our operations are targeting growth, including our sales organizations. We started the year with the acquisition of probing on and we ended up with the acquisition of credential My dog really pleased to welcome the new employees from program and credential Murdoch into the Healthstream fan.
Really excited about the contributions but their products bring to our customers.
We started the year off by launching a new American Red Cross Sweet program, and a new skills validation program using technology enabled mannequins and importantly, we ended the year with over 38.8 million in contract order value for these two exciting solutions.
These updates at this stage for an exciting and productive 2020.
So just a few financial highlights we ended 2019 with strong financial results for the full year 2019 revenues were a record 254.1 million and adjusted EBITDA was an all time high of 46.9 million. We ended the year, where the cash balance of 172.9 million.
And Scotty in a few minutes will dive into more details about our financial performance at the end of year and also importantly, our guidance in 2020.
I want to provide an update and this framework we started a few quarters ago. The three business transitions there in front of us they present challenges and opportunities.
Attorneys are to enhance gross margins and strengthen our overall ecosystem and the challenges of course associated with one of the transitions are the loss of <unk> product revenue stream, that's been important to the company in the past all three transitions are designed to move us towards being a higher margin more profitable company in the coming years in fact last quarter, we set a goal.
All crossing through the 60% gross margin by the third quarter 2020, and already in the fourth quarter of 29 team we pass through the 60% gross margin.
So in the first transition we have transitioned our sales and marketing efforts from the legacy resuscitation products to our new recertification offering as a reminder, the new Red Cross Resuscitation suite program is comprised of BLS Ayloush and P.L.S. confidence he development curricula. It brings an updated hi.
Finally, adaptive competency based development solution to health care professionals, it's really a world class program and we're excited to represent the Red Cross program to our customer base.
Offer certification health care professionals successfully demonstrating proficiency or the life saving resuscitation knowledge and skills necessary to be consummate professionals.
The program is now live for multiple accounts and we're seeing a growing number of health care professionals achieves certification through this exciting new program.
And a little more color on on on the progress and really in some ways. We surprised ourselves I think when we entered the year, it's a new product a new market.
A new brand new credential, even some new technology supporting it and we entered the year fairly conservatively shedding our budgeted expectations around a 10 million in sales order value and obviously with the 38.8 million we've greatly exceeded that in fact, if you look at how transpired over the course of the year.
The sales momentum grew throughout the year, our newer substation offering we landed six new accounts in our launch quarter at the start of the year that'd be really the March really during March 1st quarter 15, New accounts in the second quarter 48, new accounts for the third quarter and 39, new accounts in the fourth quarter.
Together for the full year of 29 team. These hundred eight accounts and when we say the full year 2018, we launched really in February. So it's really around 10 months of selling these 108 accounts totaled over 38.8 million and contract value for the new resuscitation offerings, which includes the skills component on the technology enabled mannequins and the Red Cross type.
Back that can certificate part as well.
These new contracts or from a mix of over 3000 hospitals and health care facilities from across the continuum of care, including new and transitioning customers. So we saw acceptance in new markets. This Red Cross resuscitation suite program at the end of Sony and skills Validations program, we saw acceptance of that in the acute.
Market as well as in the pre and post acute markets, we call the continuum of care.
Well, we began the journey there are three questions. There are many questions about whether or not the market would even except another solution. It's clear that the market not only views are newer such patients solutions growing solution set as viable alternatives, but also they've embraced them as evidenced by the 38.8 million in contracted order values.
The second transitioned to cover involves the adoption migration to our new Verity stream platform.
This has been in progress many years, we've acquired many platforms and thousands of customers in the Credentialing privileging and enrollment phase for providers.
And now through this consolidation effort towards the new Verity stream platform, we're making great progress in the first quarter 2018, we announced the launch a verity stream, our new platform for managing Credentialing and privileging in health care organizations in the fourth quarter 2019, we updated our name of this business severity stream, which we believe better.
Conveys our unique vision of providing customers subscription to continuous stream of platform enhancements evidenced based content and curated data.
At the end of 2019, new customer accounts for the various Treme platform grew to over 200 contracted customers.
This exceeded even our stretch goals internally and a lot of this is new customer acquisition.
On average therefore over for new customers per week for contracted during the fourth quarter. These 200, plus customers represent a mix of new customers and existing customers, who chose to migrate from our legacy Credentialing and privileging platforms to the new Verity stream platform.
Given the high quality of the new platform and our history it successfully migrating existing customers to improve solutions.
Dissipate continued progress both in terms of new sales and migrations of legacy customers.
The migration journey is one that require several years to fully accomplishment accomplished but we're seeing a the benefits of the early adoption already for customers they get access to a broader suite of capabilities.
The third transition to touch to talk about involves our customers upgrading to the H. treme platform as a service architecture and platform.
We define that as the essential technology working behind machines that powers all activity in the Healthstream ecosystem features and functionality like a universal I'd creates the potential for mobility of information across our application services and suites.
In the fourth quarter, we added approximately 370008 stream subscriptions, bringing our cumulative total to approximately 3.15 million subscriptions, which is up from 2.78 million contracted subscriptions at the end of the third quarter 2019.
I want to remind everyone that these three business transitions all represent new multiyear journeys in fact, we kind of used to categorization or and analog to give an example of the expectations here to provide perspective last quarter. I said that we were nine months into a 36 month journey and what I meant by that.
It was each of these are migrations are transitions or can the company is undertaking and each of them was a multiyear journey none of them would be accomplished in one quarter and yet we don't expect any of them to take five years and so we set up this idea. This framework of our progress against a 36 month journey on each of the transitions at 12.
We ended the 36 month journey I can say, we're making real progress on all three transitions.
At the end of these journeys, we expect higher margin more profitable company.
At this time I'll take a break and turn it over to our CFO, Scotty Roberts, who will give more detail and end with his guidance for 2020.
Thank you Bobby and good morning.
Since the discussion of our financial results today is for continuing operations only and comparisons are against the prior year fourth quarter unless otherwise stated.
Right over the fourth quarter, though I'll briefly touch on our results for the full year of 2019.
Our revenues finished the year at an all time high at $254.1 million, which is up 10%.
Operating income was 14.7 million, which was down 5%, but included a $2.2 million charge.
Associated with the stock grants employees that was facilitated by our Ceos contribution personally own helps frame stock during the second quarter.
Earnings per share 44 cents per diluted share, which was up 7% and our adjusted EBITDA was also an all time high a 46.9 million, which was up 13%.
For the fourth quarter, our revenues were up 5% to 62.7 million.
Operating income was up 18% to three point Threemillion.
Our income from continuing operations was up 21% to 3.6 million.
Our EPS from continuing operations was 11 cents per diluted share.
Compared to nine cents per diluted share in the prior year.
Our adjusted EBITDA from continuing operations was up 18% to 11.2 million.
In addition, we completed the acquisition of credential My dock on December 16th for $9 million in cash.
Revenues from our workforce solutions segment totaled 50.9 million for the fourth quarter and are up 4% over the prior year.
The legacy resuscitation revenues decreased by 11% or one and a half million.
And were 12.6 million compared to 14.1 million in the prior year.
For the full year revenue from these products increased by 8% and totaled 58.9 million.
Paired to 54.6 million for 2018.
I will discuss our 2020 revenue outlook for these products and just a few moments.
Excluding revenues from both the legacy resuscitation products at 12.6 million and the private I'm acquisition of 1.7 million or other workforce products grew by 4% in the fourth quarter.
Revenues from the provider solutions segment for 11.8 million and grew by 10%. This growth is primarily from professional services for clinical imitations and sales of platform subscriptions.
As I previously mentioned on December 16th 2019, we acquired credential My dock fast paced Credentialing company, which will be part of our <unk> provider solutions segment.
Yeah acquisition brings approximately 300, new customers severity stream.
Merely in a continuum market.
Fourth quarter revenues from the acquisition were not material.
Our gross margins improved to 60.3 per cent compared to 57.5% in the prior year.
This improvement occurred because of the declining revenue from the low margin legacy reset for takes some products.
This is being replaced by contributions from some of our higher margin products.
Our operating expenses, excluding cost of revenues were up 9% across the following categories.
Development expenses increased by 12% and sales and marketing expenses increased by 5%.
Depreciation and amortization increased by 18% and DNA expenses increased by 6%.
Overall, our operating expenses increased about $2.9 million compared to last year.
Growth in operating expenses was primarily due to growth and staffing levels, which were up 13% since last year fourth quarter.
And in the year, we added over 90 additional employees.
Incremental operating expenses from the private I'm acquisition and higher depreciation associated with the relocation of our corporate office also contributed to the growth operating expenses.
Our operating income improved by 18% for 3.3 million in our adjusted EBITDA also grew by 18% to 11.2 million.
Oh switched our balance sheet and cash flows.
Our cash and investment balances ended the quarter at approximately 173 million and are working capital was 119 million.
Our cash flows from operations improved to a record high 65.7 million for full year 2019, compared to 44.3 million in the prior year, which is an increase of 48%.
Our dsos for the fourth quarter also a record low at 39 days compared to 51 days in the prior year.
Capital expenditures incurred in the fourth quarter were 4.7 million and our full year capital expenditures.
Committed 31, and a half million.
In 2019, we deployed $57 million of cash proceeds to fund two acquisitions to minority investment and capital expenditures.
Ending the year with a strong balance sheet with 173 million of cash and investments and access to 50 million dollar line of credit facility.
We believe we're well positioned to continue making investment throughout 2020.
To support our business development pipeline and other strategic initiatives to increase shareholder value.
Now I'll turn to our financial guidance for 2020.
For two for 2020, we anticipate the consolidated revenues will range between 247, and a half and to that 255 and a half million.
Revenues from the workforce solutions segment ranging between 197.
203 million in revenues from the provider solutions segment, ranging between 50, and a half and 52 and a half million.
When compared to the midpoint of these guidance ranges consolidated revenues are expected to be down 1% workforce is expected to be down 4%.
At the water is expected to grow by 13%.
The decline in workforce revenues is largely due to the 23 million dollar or 38% decline in legacy recession station business.
Well, we have discussed this headwind over the past two years its impact will be apparent this year.
For 2020, we expect revenues from the legacy products to approximate 36 million this quarter quarterly revenues expected to be as follows.
First quarter of approximately 11 million.
Second quarter of approximately 10 and a half million.
Third quarter of approximately eight and a half million.
In the fourth quarter of approximately 6 million approximately zero revenues thereafter.
Excluding the legacy resets station business, we anticipate workforce revenues to grow between seven and a half and 11.5% they turn our guidance ranges.
For provider solutions, we expect revenues from the recent acquisition of credential My dock.
Contribute approximately one and a half million with the remainder of the growth coming from new sales conversions and implementation of the Verity screen platform.
We are in the early stages, a verity stream customer conversions, which we're going slower than we anticipated well new sales have exceeded our expectations.
Our ability to balance new customer acquisition conversions and timely and scalable implementations, we the biggest drivers with growth in this segment over the next several years.
We anticipate that operating income will range between 12, and 14 and a half million.
This range includes a onetime favorable contractual adjustment of 3.4 million that occurred in the first quarter 2020.
This contractual adjustment resulted from the resolution of a mutual disagreement relating to various elements of the past partnership.
The amount of $3.4 million related to accrued, but unpaid royalties associated with the partnership agreement.
And the resolution of the agreement resulted in no royalties to be paid.
The favorable adjustment will be reflected doesn't reduction to cost of goods sold in the first quarter of 2020.
Even factoring out the benefit of this onetime adjustment, we still expect gross margins to exceed 60% for 2020.
Our guidance anticipates operating income will be down compared to last year.
The most significant reason being the $23 million decline in revenues from the legacy resuscitation products.
The credential my dock acquisition.
He is also expected to result in a reduction in operating income of approximately 1 million.
Primarily due to amortization of intangible assets and deferred revenue write downs.
In addition, as in past years investing back into the business as a top priority.
2020 will be focused on continued investment in our product offerings, including developing or acquiring more content assets to improve long term gross margins and expanding our sales product development and operations teams.
Anticipate growth in headcount of approximately 70, new employees over the course of 2020.
This equates to an increase of approximately 8%.
We also expect an increase in amortization expense from capitalized software and content increase between 17 and 19% as a result of our investments.
We anticipate that capital expenditures will range between 24 and 26 million.
We believe that having ownership in content assets will improve our margins over time.
And we anticipate doubling our sand from $3 million in 2019 $6 million and 2020.
Our annual effective income tax rate is expected to range between 23 and 25%.
And finally from an acquisition standpoint, we maintain an active business development pipeline, but our guidance does not include the impact of any acquisitions that we may complete during 2020.
That concludes my comments and I will turn the call never to Bobby.
Thanks, Scott Youve got a few closing remarks here animal moved questions.
As part of our vision to improve the quality of care Healthstream is helping our customers tackle the national opioid crisis by partnering with thought leaders in innovators to share knowledge and best practices with learners across the continuum of care, we've selected two partnerships to.
Be part of the solution on the opioid crisis, we partner with the national quality form a national not for profit organization.
To transform their in Kewpie playbook.
An opioid stewardship into an online learning curriculum offered exclusively by Healthstream. The opioid stewardship program will be released next quarter.
Also ascension health, an industry leader in addressing substance use and pain management population health issues is partnering with health chain to co develop responsible opioid administration solution. This program includes three Microsoft tickets geared towards clinical care providers across the continuum meeting the 2018 enhanced pain assessment of management standards.
From the joint Commission as well as a center for disease control the national quality form another industry leading authorities.
We're excited to be part of the solution for our nation's opioid crisis through partnerships with the national quality form and its Fenty Hill.
Given the ever changing nature of the healthcare industry, a lot of pressure to navigate through the challenges of increasing regulation, new competition shifting reimbursement models and new technology, often falls directly on the healthcare workforce.
Developing this workforce to be confident and confident and credentialed is necessary for healthcare organizations across the continuum of care, our vision to improve the quality of health care by developing the people who deliver care has never been more relevant to our customers alongside the transitions that we're going through we never lose sight of the big.
Picture and our purpose as such transitions are temporary while the opportunity to positively impact the industry, there's ever present, an ongoing whether through our contribution is addressing the opioid crisis or advances in learning methodology like our recently announced new virtual reality based team leader training program Healthstream is making it.
The difference broadly in the industry.
As we conclude I want to take a moment to thank our employees for their hard work and delivering a great year in 2019, and it really shutterstock well for 2020 in spite of the challenge we face with some of our legacy products.
Is there an outstanding group of vision, driven employers and individuals and I'm proud to work alongside of them as we deliver this change and improvement into the healthcare industry.
At this time I'd like to turn it over two questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Draw your question press the pound key.
Please standby well be compiled the Q and a roster.
Our first question comes from the line of Ryan Daniels with William Blair.
Hi, guys. Thanks for taking the questions Bobby one for you obviously, great momentum with the new resuscitation products.
Nearly $40 million value has been the reaction.
Drove that.
Surprise outperformance or is it better pricing is is the flexibility of the modules. The v. our expanded sales first what's really driving that significant upside for you guys.
Well you know as as we entered there's just a lot of trepidation in general because.
The market really had been defined by one player for 20 years and there's just generally you know budget cycles acceptance issues a longer sales cycles, but what I think it's happened is a new unique confluence of.
Modernization of the approach the flexibility the combination of the flexibility we've built into the Healthstream platform.
We call it the interval flexibility allows for a more flexible use of the program and the incredible.
Helpful. In modern development that went in by the Red Cross to build kind of modern adult learning methodology video base using health care professionals not actors not animations, that's really striking a chord as a progressive thoughtful and effective program.
Price has been a variable, but it hasn't been the main driver.
We think it's important NAV disruptive technology that isn't enhanced and better at a lower price, but that hasn't been the driver. It's an important part of the equation. We definitely as you noted strengthen the sales team throughout last year as we solve momentum building, we actually added to the sales team and that continued through as recent as January of this.
Here, so it's a complex with many things and.
This has been carefully in development for almost three years now and now 10 or 11 months in the market.
And I.
I think the the Red Cross had the scientific credibility the international standards and guidelines are madness development.
The the.
Sales team had growing confidence and the application I think importantly to Healthstream has been in the market. So long were a trusted advisor to our customers and when we offer up new programs our customers. It's been our experience should they at least listen and take a review of those new program. So we were conservative in our rich.
A little budgeting, because we just didnt know just flat out Didnt know how it would go and you know were have growing confidence that some of the first initial hurdles were through they'll never cease to be a challenge to continue growing it but but for many reasons we have confidence.
And related that just as far as an f. why this will be the end of reporting the quarterly.
Sales momentum of the products, we're gonna folded into the workforce is now part of our guidance overall, we think its competitively unnecessary to talk about account wins and number of accounts in order value. We've established now over 38.8 million and orders, it's a valid product scientifically valid and accepted by customers and so were.
Got to fold the results of this backend like we always have as a products, we will and Weve reported in great detail the quarterly run Alps through this year of the legacy products. So all the detail necessary for modeling for the legacy products is now in your hands as analysts and Investor community. In addition, we clarified.
That in 2021, we expect approximately zero revenue from the legacy product. So from a modeling standpoint as you look forward to 2021, you should be careful to model those declines because they're they're rather steep and continuous declines in the legacy products from here forward and again well.
Calculated so it didn't mean to jump off into legacy products, but thank you for the question I think we surprised ourselves on all fronts, but it really shouldn't be a surprise because we had teams have excellent people are working on this for over two years before the launch and a and they really delivered a great products of the market.
Yes.
Helpful detail on I guess, the follow up would be.
To the 38.8.
So feel free.
Average is going to those contracts I guess im missing pieces. The puzzles, how quickly that 38 million will roll into the revenue stream I'm assuming those.
Contracts is pretty good.
Yes sure sure. So we'll provide that color now and then again probably won't talk about it anymore, but right now we're fortunate that most of our contracts or are in on our averaging four years or more and so that will spread the revenue recognition and as you said the at the end boarding of <unk> revenue that's.
Implemented before they can be recognized of course, and then the revenue starts and the average contract length is probably north of four right now for years and so that should help you figure out how to model the inbound revenues from the initial orders and 2019.
Thank you.
Yeah.
Certainly.
Thank you next question comes from the line of Matt Hewitt with Craig Hallum.
Good morning, congratulations on a the strong year.
Thank you.
First up but regarding the VR based training, obviously, you're still in I guess beta testing, how should we be thinking about that market opportunity either from a number of subscribers or Ah I know you don't typically talk about tams, but just trying to get a sense for how big that opportunity could be and when you expect to.
Go live with that.
So what's interesting about that is that it's largely ignored paradigm in this training.
Training approach. So for example, a lot of emphasis in the legacy and existing programs is on the skills and competence of the individual.
We believe that the team dynamic the dynamic of the responding professionals their interaction the decision, making they have during a code crisis is an essential element to the outcome. In fact, it may prove overtime to be at a very essential are important or statistically relevant.
Impact and so they are what it does in general that allows for interactions of multiplan are bit individuals' realistic simulations of stress and the environment resources to be aligned.
With the experience of the environment. So at the hospital is equipped and the are in a certain way it's different than a field eclipse situation. So it allows for a different type of learning.
Now, Matt I think we're very new and what I'm. Most excited about this program that we announced has been in development for over a year.
Over a year and probably closer to two years and we did just announce it.
The hardware <unk> Power's it is evolving at such a rapid pace, it's what's making most excited is that.
As little as six months ago to effectively run of VR program required almost a dedicated room was spatial sensors in the room.
And the dedicated PC plugged into a headset.
There are new technologies emerging as we speak that everything is self contained in a sub 1000 dollar headset no PC no spatial monitors setup physically in the room and so we think that the adoption.
Soon like now can can begin to see some early uptake all that said, though it is a new modality, a new methodology and new technology and we're excited that it's now a component piece of the story.
We think you'll have a growing importance over time for not just resuscitation training, but all forms of clinical training that have a team dynamic or situational awareness and critical.
That said I would be extraordinarily conservative and not.
Put any line items down a revenue expectations for now we'll report on the progress of our pilot programs throughout this year and its impact and maybe some early adopters, but I wouldn't be modeling it.
As a financial opportunity and discount or you're going to stick with the guidance. We provided you they're small assumptions for pilots in that regard that guidance that are paid.
But I would view this is the kind of the dawn of a new new era of training and training models and we're glad to be right at the front of it.
And the parents will be available for sale as an add on module, we think it's relevant to the entire market and and whether and how fast they adopt it will require you change management adoption of new vessel methodology. So ultimately I think that this is a method of training that should be relevant.
Essentially every professional in every environment.
Okay. That's helpful and then regarding credential my dock, how should we be thinking about the cross selling opportunity for that those apps is this year progresses.
How should we think about what that so the cross selling all yesterday I think again that's us.
Small tuck in they've got a great audience. They focused on a particular niche of the market.
And so we're going to it'll take us some time to figure out the exact cross sell opportunities. The main thing. It did it was at a a really nice niche over 300 customers that become opportunities for us but for now it's I wouldn't model extreme synergies or cross selling for now give us a little time to bring it in like we've done the other three.
Okay and consider how it can be migrated to upgraded technologies or access to more of the technologies. We offer so for now again I just kind of conservatively model we gave us.
An indication of its revenue, yes, Scotty did about a million five.
Yeah, So would I kind of stick with that.
Okay, and then last one regarding each stream obviously, you've continued to make progress on converting customers to the new platform are there any large contracts that are up for renewal that we should be watching for or trying to model for this year.
Thank you.
No I don't think individually modeling that is necessarily still useful just yet.
We're still converting existing core foundations NHL. She subscribers. So a large part of these are conversions, but also of course, new additions are coming in as well.
No we have factored into the guidance. We gave you the overall financial impact of our expected renewals non renewals the challenges and opportunities we have for renewals and nonrenewals. So the guidance. We've given you financially sets you up to have an accurate we believe in accurate way to modeling.
Understood Alright, thank you very much.
I think thank you.
Next question comes from the line of Andrew Cooper with Raymond James.
Thanks for the question, we've covered a lot of kind of it the qualitative ground. So I think Alaska on numbers, one, but just as we think about gross margin. Obviously the quarter was was really strong you know is this.
I knew sort of run rate baseline to think about from here or is there any sort of noise. As we go through 2020, where there could be some some sort of lumpiness, you know up and down I'm, especially as we think about the legacy resuscitation, obviously sort of rolling out through the course of the quarters just should we be thinking about fourq you as.
The floor and continued progress or is there any any noise on that front.
Yeah, Andrew this is Scotty I'll try to answer questions.
Gross margins in Q4 or definitely impacted by the decline in the legacy business.
Yeah, we've given you guidance on revenue expectations for 2020 and in that.
The biggest driver of the gross margin improvement is going to continue to be though is that low margin.
Wells off margins will improve.
We're also introducing some of our.
New products, which have higher margins are factored into our guidance. We set a combination of low margin products rolling off and higher month margin products coming in I would also mentioned talked about in the guidance.
You know, there's a first quarter event that occurred that's going to give us a benefits Tibet operating income and to gross margin. So there was a.
3.4 million dollar benefit that we are reporting in Q1 and that will.
Create a reduction the cost of revenues, which will increase our gross margins in Q1, So I wouldn't model off of the expected Q1 margins.
Likely see but I think getting into the 60% ranges, where we're expecting to end the year.
Okay. That's helpful. And then you know as we think about that sort of further out in from a little bit more of a strategic perspective. I think you had said 65 as kind of the bogey for you know for the start of 21.
Is that.
Still sort of the longer term goal to get to once you've rolled off you know the obviously the entirety of the legacy resuscitation or you know with some of these higher margin new product is there potential for that to continue to creep higher as we think you no longer term and what Healthstream could look like from a from a margin perspective, you know at scale.
On somebody's newer products.
Yeah, I think you heard in some of our dialogue or increased investment content from three to 6 million, we believe that should help.
Have a potential impact positive impact on gross margin.
Obviously, the roll off the legacy or such patient product introduction of new products like the the VR team leader training that we helped develop where we put some development dollars then should help gross margin. So I think overall, we would stick to what we said which was we initially said 60% at the second half of 20.
20, we do think at this point, it's safe to say weve crossed over the 60% for for 2020. So couple of quarters early will reiterate that in Q1 2021, we believe it should be around 65% plus or minus a point.
And without going any further I think that's probably as far out as we want to get in front of ourselves, but I think as you think about modeling that next year, we should be in 60, 563% to 66% range for 2021.
Okay. That's helpful. I'll leave the retro follow up appreciate it.
Thank you.
Thank you.
Next question comes from the line of Vincent Colicchio with Barrington Research.
Oh, Yeah, Bobby I'm curious what portion of the resuscitation accounts.
Headed were prior uses of the little product and also another question is a has there been any competitive response from layered all from your early traction.
Yeah. So the mix is a it's a nice mix of new.
And and a and converted customers and both large and small so we had some big wins that more conversions and some big wins that were new.
For example.
Fresenius is of a global provider of dialysis services that was a huge head to head win a complete conversion of Fresenius and hundreds and hundreds of locations that was a net new account.
And CHS that we announced earlier is an example of a large scale conversion of existing account. So they really and I think those two are nice example of that it was a nice mix of newly acquired and and legacy again without disclosing the exact percentage because actually don't know it.
It wasn't really balanced selling and growing opportunity.
Yeah. The other question was or has there been any competitive response from little.
Well, there will always be competitive responses and.
No. It's there's some irony into that as well because we are as you know we have a business relationship and a enough functioning operational partnership with them to ensure that their products are available to our customers as well, we do not sell or market or distribute them, but we do have a good compatible.
Pretty agreement in place so that our customers can benefit from their products if they select them.
And so you know very competitive response is up to them and we're here to facilitate the delivery of these great programs to a very large customer base.
Okay, Thanks nice quarter.
Thank you.
Thank you.
Showing no further questions at this time I will now turn the call back over to CEO, Robert Frist for any closing remarks.
Thank you for listening anticipating this earnings call. We look forward reporting the next quarter. It comes a little faster. The next call is right around the corner, Thank you and and enjoy the rest of your day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating into May now disconnect.
[music].
[music].