Good day, ladies and gentlemen, and welcome to the HealthStream, Inc. 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. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. 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.
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 Jerry Hayden, Senior Vice President and CFO, and Scottie Roberts, Vice President of Accounting and Finance, who as of 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 risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K and 10-Q.
With that start, I'll now turn the call over to Bobby Frist.
Thank you, Mollie. Good morning, everyone. Welcome to our fourth quarter and full year 2018 earnings call. As we begin the year, I thought of three things that I wanted to kind of highlight here at the open, a few examples, then 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, sales 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 offensive. 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 with 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 Abacus, which is a leading SaaS-based quality improvement program. It has been adopted by over 2,000 U.S.-based skilled nursing facilities and nursing homes. 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 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 for the skilled nursing market that will serve as a bridge between the quality improvement program of Abacus and the competency requirements coming into place through CMS. This year, third, we've 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 just expanded upon.
This expanded market definition comes with a greater growth opportunity as we'll expand our sales organizations to take our new products and services into this broader defined market. At this time, Jerry Hayden and Scottie Roberts will provide a more detailed discussion of the financial metrics for the fourth quarter, the full year 2018 results, and provide a financial outlook for 2019. I turn it over to Jerry.
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 our 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 with ASC 605. Here's 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 an $897,000 positive impact from the application of ASC 606. Income from continued operations was $2.9 million, down from $3.2 million in the prior year, with an $897,000 positive impact the application of ASC 606. Earnings per share, EPS, from continued operations of $0.09 diluted compared to EPS of $0.10 diluted in the prior year.
Adjusted EBITDA for continued operations of $9.5 million, up from $8.2 million in the prior year, with an $897,000 positive impact the application of ASC 606. Let's look at our income statement. Revenues. 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. Both new sales and renewals contribute to the year-over-year growth in both of our business segments. Our gross margins. Our gross margin was 57.5% this quarter and 59.6% the same quarter last year. This decline is primarily due to higher revenues from our lower margin legacy association products. Let's turn our attention to operating expenses.
Operating expenses were up less than 1% over the prior year, as declines in sales and marketing from the application of ASC 606 mostly offset increased expenses in other categories. During 2018, we continued making investments in product development, which resulted in a 6% increase in product development 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 than being expensed up front as they were under ASC 605. Sales production in the fourth quarter remained strong. G&A expenses increased to $1.5 million or about 16.2% 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, which 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. The adjusted EBITDA improved by 16%, growing to $9.5 million from $8.2 million in the prior year. For the full year 2018, operating income was $15.5 million, up 65% from $9.4 million in 2017. Full year adjusted EBITDA improved by 18% to $41.5 million from $35.2 million in 2017 full year. Our balance sheet. Our cash position and working capital remain strong.
Our cash and investment balances at year-end 2018 were approximately $168.8 million, and working capital was approximately $136.4 million. Days 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 compares favorably with the 59 days in the fourth quarter of 2017. In addition, 2018 bad debt expense has decreased by over $500,000 over the full year of 2017. We renewed our line of credit during the fourth quarter on a similar term while extending the maturity date out to November 2020. We have no outstanding debt and maintain a 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 as may be appropriate. At this point, I'll introduce Scotty Roberts, who will give us some background on financial outlook.
Thank you, Jerry, and good morning, everyone. Before we discuss our 2019 guidance, I will 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 investmentThe amortization of acquired intangibles and the impact of deferred revenue write-downs 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 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 it's still less expensive than renewing the lease in our current location. Now I'll discuss our financial expectations for 2019. Yesterday's earnings release included financial guidance for 2019, which also includes the recent acquisition of Providigm, which we consummated on January 10th, 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 again, consolidates operations and offices to a central location in Nashville. We expect the annual effective income tax rate to range between 26%-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 in my capacity as the interim CFO. I will now turn the call back to Bob.
Thank you, Scotty and Jerry. I'd like to start with a quick update on our progress 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 signified 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've previously discussed, the migration of HealthLine and Morrisey customers from a hybrid SaaS platform to the new Verity SaaS platform will extend over several years. 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 of 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'll be helpful to divide that conversation into three parts. The first part will address our brand-new suite of 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.
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. Let's take the first part. On January the 17th, 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 organizations in the world. Their new Resuscitation Suite, designed 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're 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 solution to healthcare professionals.
It offers certification to healthcare professionals successfully demonstrating proficiency of life-saving resuscitation knowledge and skills. HealthStream has designed a capability 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 review, budget cycles, and implementation.
Two, because we've sold so much of the legacy platform into our existing base that a lot of the market 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, 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 would 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 had 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 or RQI to use over our network and 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 us to our final resuscitation topic, which we originally announced on December 6. At that time, we told you about our new agreement with RQI Partners.
It's a joint venture between Laerdal and the AHA. It's important not to confuse this agreement as an extension or a 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 Suite. 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 Learning Center. This is in line with the open marketplace concept we have discussed on previous calls. RQI Partners will remit a fee to us when sales of new HeartCode and RQI are delivered over the HealthStream Learning Center.
Given the success we had selling the legacy products through the end of last year, we do not believe that this fee will be material in 2019, as the 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 a million. So this is a material update from where we ended the year-end at about a 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 and impactful content to our healthcare organization customers. hStream, importantly, also serves as a bridge between our Workforce Solutions 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 subscriptions 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, press forward 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 hStream content, hStream application, and hStream partnerships.
Scott's career includes 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 in the execution of our hStream strategies. In her new role as Senior Vice President and General Manager of Clinical Solutions, Trisha Coady is responsible for all the company's clinical products and solutions, including those in the areas of clinical staff development and resuscitation. 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 Solutions segment. I'd like to welcome Trisha and Scott to our senior executive team.
In our third quarter earnings release, we announced that Jerry had tendered his resignation from the company as CFO. He 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, Jerry will remain employed as a senior advisor through the end of the first quarter of 2019. To ensure a smooth transition following Jerry'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, make him particularly qualified to serve as interim CFO and as a candidate to fill the CFO position permanently. As Jerry 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. Jerry is leaving a great legacy in many ways, including his mentorship of Scotty, sitting here to his right. I wish Jerry all the best in his future endeavors. At this time, I'd like to turn it over for questions from the investor community.
Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Ryan Daniels of William Blair. Your line is now open.
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 could use to back into some of the revenue growth. Talk a little bit more about how you view that metric and how that drives revenue growth.
Yeah. For a little while, for probably the next several quarters, it is very important to watch its progression. 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 they can drive benefit. The new platform, what we are doing now is, hopefully by middle of the year, every contract for every product will include a connectivity or an insertion of the hStream membership, and connectivity to that platform. First of all, it just serves as a unifying metric. We are beginning to, when we sell a HealthStream Learning Center, it requires a subscription to the hStream platform. When we sell the VerityStream platform, it requires a subscription to the VerityStream for hStream extension. The first and most important concept is it is a unifying metric.
You know, Ryan, because we have 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 is the first thing. Second thing is the old metrics were a measure of really the penetration of a few of the key products of the Workforce Solutions segment. It is kind of the inverse of the unifying metric in that the old metric was less dimensional in what it measured. We think the importance of that metric for this year is to make sure it is rapidly adopted. As we include it, as renewals come up, we are inserting the language and the subscription to the hStream platform into each contract.
You can tell from the movement already, I think we announced it 9 months ago, it was at zero, and we are at 1,000,005 now. Progress will be measured quarterly, and we need to move all customers to this new platform in 36 months. You can see we are 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 is in place. Most of our platforms, the hStream subscription will have an increased value proposition, an increased price. It allows for new bundling strategies of content and platform. It allows connectivity to new applications and partnerships. All of those things will drive new type of network fees to HealthStream and our network.
I think most importantly, it is 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 have got to get it in place so that our new strategies can take hold.
Okay. That's very helpful, Colin. As my follow-up, 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 are going to meet what your partners will need for that? Is there more partnership/product development on the horizon to get you to a full set of what's needed to hit those requirements?
Well, we have a lot of what's needed, especially with the acquisition of Providigm, as I mentioned in the call, we're 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. We're building those mappings now. We're working with the leadership of Providigm to determine the holes in our education strategies and education libraries, we're already underway scoping and building those new curriculum components. We have some investing 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.
There is some work to do at Providigm, and I think we mentioned that in addition to those investments, I mentioned the deferred revenue write-down and others, that Providigm's going to have a negative drag on our operating income of about $2 million in 2019.
Right. Okay, great. Thank you. Jerry, I wish you all the best. Thanks for everything over the years.
Thank you, Ryan. Thank you.
Our next question comes from the line of Matthew Hewitt of Craig-Hallum Capital. Your line is now open.
Good morning, thank you for taking our questions.
Thank you, Matthew.
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?
Well, we're 33 days in, which is probably closer to 25 business days if you take out the weekends. Our full sales team trained during the month of late December and January, They're fully equipped now to go tell the story, They're fully booking up their schedules to get out there and do the demos. Our feedback is very positive. The learning paradigm and the learning methodology is just, I've been in this 28 years, is better than the existing models. The momentum with the product's 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. We're also neutralizing some of the competitive advantages in the other products. For example, our products includes the flexibility to train more frequently without charging the customer more for that training.
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. I think, the sensitivities around costs, and the need for new methodologies of learning that we're very optimistic at 33 days in that we've got a winning product to take to market. I think also the customers seem receptive to choice. I think after doing something one way for over a decade, and frankly, in the market, not seeing much, if any, change in actual outcomes, as measured by clinical outcomes, I think that there's receptivity to trying something new. 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.
By the way, there's a lot more to come. There are many more elements to the program unannounced that are leaving development now. We're excited to announce both new partnerships, and new technologies that are as of yet unannounced. For example, one of our innovations is to make the new Resuscitation Suite agnostic to the mannequin technology. 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 of high-tech training mannequins, 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. There are innovations embedded like that mean that they are forthcoming. There are more announcements to come.
Great. Thanks. We'll look forward to future updates on that. Maybe a couple follow-up questions for Jerry and/or Scotty, depending upon who wants to chime in. 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 an expense and deferred revenue write-down contribution.
Let me just assume that the Workforce Solutions segment as a total, the one thing we could describe it qualitatively is a SaaS type platform, a SaaS type technology model. We'd expect the margins once we get past investment and some efficiencies and growth to be more in line with what you expect from a SaaS type business.
Last one from me. Just for modeling purposes, the $2 million of extra OpEx for the headquarter move in the first half, 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.
Let me take that one, or I guess anybody can take that one. We were in a downtown office building for about 20 years and enjoyed really below-market rates for our 70,000 sq ft operations here in downtown Nashville. We came up for renewal, and those rates were going to go up tremendously. We went shopping and looked at seven or eight locations all around the middle of downtown. As you can imagine, Nashville has become extremely popular for corporate locations. Amazon, AllianceBernstein, EY, all moving in, building new buildings downtown. Rent rates in Nashville have soared. What we did, though, we found the least expensive of about six options, including renewing here. The least expensive option will result in an ongoing revenue rent increase of $2 million per year.
It is an ongoing increase in our cost to occupy and consolidate our operations in Middle Tennessee and remain near the central business district of downtown Nashville. 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. The $2 million will be spent. It will actually be a little higher than that on an annual basis because that $2 million represents about three-quarters of the year. We don't move into the new headquarters for another 45 days or so, or 60 days.
Got it. All right. Thank you.
Right when we were getting good operating leverage, rent goes up on us. It was absolutely the right thing to do. Again, it was the lowest cost alternative of six options, including just renewing and staying put where we are. We're actually really excited to have a fresh point of view. We think it will prove to be a good decision given the rate of growth of Nashville. We're excited to get everybody back together because we're spread over two or three office locations in Middle Tennessee.
Thank you. Our next question comes from the line of Richard Close of Canaccord Genuity. Your line is now open.
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. 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.
Richard, this is Jerry. We discussed about $8 million of revenue in 2019 from the Providigm acquisition. Once again, that's in the Workforce segment.
Yes.
3 categories all kind of lumped into one set of expenses. Investments in product development, other sales and marketing, intangible asset amortization from the acquisition, and also there'll be, as with most of our acquisitions, a write-down of the deferred revenue from the balance sheet as of closing.
Okay. I guess I'm just trying to gauge what the deferred revenue write-down is. As we think about our models for 2020, that coming back in.
It's about 250,000 to 300,000.
Okay, great. Thank you. 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.
Yeah, there was. One of the larger health systems took their non-employed physicians and non-employed volunteers, and just generally their non-employed population off the platform. We saw a reduction from that that resulted in that net decrease. The contracted subscribers, as you probably also noted, went up about 80,000. I was kind of hoping to get over $5 million before we retired the metric, but we didn't quite get there at 4,933 million.
Okay. 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? How should we think about maybe the uptake in that marketplace? Are you displacing someone potentially? Just, what are the market trends for the services that you guys provide in that area?
I think first of all, it is an important part of our plans. As you can tell, we kind of reconstituted our definition of the 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, and physician offices. We now put all in that, what we call the continuum. By reconstituting that definition, we've bumped up those that we're marketing to and actively selling to about $10.5 million. That growth from $8.5 million to $10.5 million largely comes from more broad pursuit of those post-acute and ambulatory and physician office opportunities. That's the first thing. Second thing is, a good number of our new subscribers in the last several quarters have been coming from those verticals. Those are the growth markets right now.
Home health markets are growing, whereas in the hospital market, you see more consolidation and acquisitions. In the other verticals, you see growth, adding more employees in those segments. It will be an important ongoing business pursuit of ours to expand. 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 we marketed. We're excited to get into those markets, and those have less penetration. As you can imagine, the prior brands we sold, the legacy products, we got pretty good adoption and penetration. 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.
The second point is that in the past, say four or five quarters, of those 8,000 subscribers, a nice number of them did come from those settings that were not acute settings. Providigm represents a nice new anchor point, SaaS business application, linking quality to development and to training. We'll keep looking for things to strengthen that business pursuit, Providigm representing kind of, hopefully, the first target of capabilities and content and services into those markets. We do plan to continue to strengthen our investment in the pursuit of those markets.
Thank you.
Our next question comes from the line of Frank Sparacino of First Analysis. Your line is now open.
Hi, guys. First question for me is on the VerityStream side of things. As you look at 2019, the guidance you gave, I'm just curious, what are the positives and negatives in terms of the growth that you've given? I would've thought the growth would've been a little bit higher in that segment of the business. Maybe it's being 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?
I think we probably would've hoped for a little faster growth overall and a little faster adoption of the SaaS, but it took time to build the right product. I would say, what we're hearing is the receptivity to the new product is very high, but we did want to kind of benchmark in this call where we are in the migration. As you can tell from the numbers we disclosed a few minutes ago, that this is kind of first solid quarter into the migration. We wanted to set expectations for where we're starting and provide updates throughout the year. There's about 36 contracts on the brand new platform, I do think that the market receptivity to that platform is going to be very strong.
It's several years of development, it is just flat out better than the products we had before and the products we're competing with in the market. We feel better about its competitive position. That said, migrating a couple thousand legacy customers to the new platform is going to be a multi-year journey, as we've articulated. We just wanted to caveat that, we lowered our growth expectations a little bit. It is important to note, though, that it is a hybrid SaaS and PaaS model, so the gross margins are good. It generates solid EBITDA performance and contributes to cash flows. While adding to its sales and product development and growing the senior executive team leading it is also generating cash. It's effectively profitable growth.
Yes, it would've been nice to have a little higher top-line growth rate, but I do feel that business unit is well positioned for 2019 and beyond.
Great. Just one follow-up from me. Bobby, as it relates to the RQI JV partnership, I'm trying to think of. This may be cynical or not the right way to look at it, but it would seem to me that for HealthStream, there's modest benefit in that agreement. There's a lot more benefit being had on the other side. I don't know that they have a replacement in terms of an underlying platform to deliver, but am I looking at that the right way or no?
I think it definitely will make their products stickier. We've spent a decade selling those products, and they're good products, and the customers obviously have benefited from them and deployed them. As you can tell from our sales in the fourth quarter, they really wanted the joint service model that we delivered. They could've easily just said, "We'll just wait a quarter and buy from RQI Partners," but they really all topped off to make sure they got the integrated service. Then, of course, we announced that we were going to provide continuous support. I think the ease of contracting through us and the proven delivery model resulted in quite a lot of sales in the fourth quarter.
It may have benefited them 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. In order to hit that inflection point and bring the American Red Cross fully to the table competitively. It's the right way to serve its customers, but also create choice and competition where there has never been any in the marketplace. I think on balance, they may have benefited 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 maybe earlier expected revenue to decline in 2019. The declines will be steeper and harder in 2020 and 2021, but we've essentially deferred the decline in that area of business for a whole year.
It buys a lot more time to get the message out on the new products, strengthen our overall product portfolio and continue to deploy capital. I think all parties will benefit. Ultimately, the customers will have the best benefit 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. It was kind of an essential move for both parties. Remember, our entire organization is solely focused on sales and marketing of the American Red Cross program now. As they sell their product, they can promise compatibility. We are out now presenting the new options to the market and very excited about it.
Thank you, Bobby. That is very helpful.
Our next question comes from the line of Vincent Colicchio of Barrington Research. Your line is now open.
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 into Q2.
Well, let's see. We'll go into two buckets here. The legacy agreements, we would sell on a subscription or utilization basis. If you think of customers, say, buying a two-year top-off, we would recognize revenue ratably over the period based on consumption patterns or license consumption. We sold a lot, but I don't think the consumption pattern changed a lot, but we did renew a lot of those contracts. As you can tell, we expect to do slightly more than $55 million in revenue from the legacy products, which is up from 2018 actually, there's a lot of irony to that. We expect the second quarter, somewhere around the middle of the year, second quarter, early third quarter to be the peak in those revenues.
It'll begin the decline, and that decline will continue quarter-over-quarter all the way to zero, sometime in the middle of the first quarter of 2021, of those two products. We think it should be fairly easy for you to model and estimate the model in the four quarters of 2019 now, because you know it'll be a little better than $55 million spread across four quarters with a peak in Q2. Hopefully, that's fairly easy to model for 2019.
That's helpful. Thank you. Could you frame your capital allocation priorities for 2019?
Yeah. Obviously, a big piece of capital is going to go into our new building. We chose to self-finance the build-out and everything because our cost of capital was lower than working it into the rent allowance. 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. That's not the priority, that's just a fact. The priorities are, of course, in the software development, R&D, launching the new resuscitation products will be OpEx, but we're going to grow our investments in sales and marketing. On a 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. We're going to invest in targeted areas of content development, you'll see a little bit more of that in our capital plans. Everything else, the capitalized software development and all will go up a little bit each year.
Thank you for that. Thanks for answering my questions.
Thank you.
We have a follow-up question from Richard Close of Canaccord Genuity. Your line is now open.
Yeah, just two quick follow-ups. Just on the headquarters, 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. Just wanted clarification on that front.
Yeah. I think that is accurate. I think both takes ironically are accurate. It is $2 million more in 2019, on a run rate basis, I guess the first time we've indicated it's a rent increase, it'll be annually $2 more in the model.
Okay. My last question would be on the RQI. Can you go through that in terms of maybe the margin profile on that versus HeartCode, and then maybe the margin profile on that versus the Red Cross?
Yeah. Well, probably not in great detail, but I can say this, that the margin on that, because it's a fee to connect the network, we don't have any real sales costs, any marketing costs. We have de minimis support costs just to support and make sure the customers are happy with the integration. We don't have any product development costs. It really is a lower fee and lower revenue, but it is a large contribution margin because it really is a pay to connect and a pay to ensure a smooth operation of their product. They'll paper the contracts, they'll recognize the revenue from the top line standpoint and pay us a connectivity fee. That connectivity fee and integration fee, it'll be a nice piece for us.
It won't 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. 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. It requires a whole cycle of renewals to come out before we start generating those, again, rather high margin fees. I hope that this general characterization helps you some.
On the American Red Cross program, we're not going to give a lot of details 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 of the new product are fairly high, and we don't want to under-invest in those. Its blended contribution early is going to probably be fairly low. In fact, in the call, we said that its absolute contribution, even on top line, is going to be fairly low because of the reasons we stated earlier, that we had such a successful fourth quarter selling the prior product. I hope those characterizations help, but we're probably not going to do any more product-by-product gross margin analysis across our portfolio.
Okay, great. Thanks.
I'm showing no further questions at this time. I would now like to turn the call back to Robert Frist for closing remarks.
Thank you. We look forward to the leadership of Jerry for another month, I really appreciate his 12 years of service to the organization. We're looking forward to Scottie Roberts stepping up as the interim CFO. Welcome to new leader star team, thank you to all HealthStreamers for your contribution to a great year 2018, a lot of hard work going into launching these new products and services in 2019. Look forward to speaking to all investors on the next earnings conference call. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may all disconnect. Everyone, have a wonderful day.