HealthStream Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 7 speakers on the call.

Operator

Morning and welcome to the HealthStream Second Quarter 2023 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the company, we will open the conference up for question and answers after the presentation. I will now turn the conference over to Molly Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms.

Operator

Condra. Also, with me is Ron Heeriger, CEO and Chairman of Industry Green. And I would also like to remind you that this conference and included in the earnings release issued yesterday's prepared remarks. So with that, to start, I'll turn the call over to Chief Executive Officer, Bobby Chris.

Speaker 1

Thank you, Molly. Good morning, everyone, and welcome to our Q2 2023 earnings call. Molly, we're breaking up just a little bit. I think I heard the handoff correctly and maybe someone will text me if I'm also breaking up. But look, some quarters you move The company forward more than others, and this is one of those solid prints, as they say, or a good quarter.

Speaker 1

We're pleased to report our results to you now this morning. In the Q2, in fact, we achieved record revenue and record adjusted EBITDA. So I'd like to start by highlighting those strong financial metrics. Top line revenue reached $69,200,000 in the quarter, which was up 5% over the same period of 2022. We also delivered solid Profitability was $15,300,000 of adjusted EBITDA, which was up 17% over the same period of 2022.

Speaker 1

In just a minute, I'll describe some of the key customer wins in each of our learning, credentialing and scheduling application suites that help drive these results. All right. I need one second because I see lots of text flying in. I got to make sure I'm not breaking up. Okay.

Speaker 1

It says I sound clear. I'm going to come back here. Perfect. So before we dive into some business updates, let's take a moment to refresh everyone about our business overall, which is also helpful to anyone who is new to HealthStream. 1st and foremost, HealthStream is a healthcare technology company dedicated to developing, credentialing and scheduling the healthcare workforce through SaaS based solutions, each of which are becoming more valuable, we believe, because of the interoperability they are achieving through our hStream technology platform.

Speaker 1

We sell our solutions on a subscription basis under contracts which average 3 to 5 years in length. That means our revenues are recurring and predictable. We are profitable and we have little to no debt. We are solely focused on healthcare and more specifically the healthcare workforce. We define our addressable market as the 11,200,000 healthcare professionals working in the United States and healthcare organizations.

Speaker 1

In the second quarter, HealthStream subscriptions also achieved a new high watermark of 5,600,000 subscriptions, adding approximately 68,000 subscriptions. Even in the face of macroeconomic concerns and inflation and recession, we are confident that HealthStream will continue to provide results in line with our guidance range, which we just reiterated in our earnings release. So overall, a fine print and good results. So I'm proud of the team and what we're able to achieve. Now I want to highlight each of our 3 primary application suites of learning, credentialing and scheduling.

Speaker 1

And of course, we call them application suites because they're more than just A singular module like a learning module includes a breadth of services and capabilities in each area, a complete suite of capabilities, Learning, Credentialing and Scheduling. So let's highlight some of the wins and maybe some indicators of how we're achieving the results we achieved in the quarter. So as a reminder, our flagship application in the learning area is the HealthStream Learning Center, which is a learning management system. For credentialing, the flagship application is CredentialStream, which onboards credentials, privileges and enrolls physicians. And for scheduling, it is ShiftWizard, which is a software application that helps schedule, empower and engage the healthcare staff.

Speaker 1

We believe that each of our SaaS solutions is best in class and the wins I'm about to describe kind of reinforce that belief. HealthStream Learning Center is the most utilized learning management system in healthcare and continues to add new customers. In the second quarter, for example, A Midwestern health system with approximately 2,000 employees chose our HealthStream Learning Center over 6 LMSs, one of which was a major ERP vendor. The customer clearly recognized the value of our integrated ecosystem. The only prior purchase HealthStream was a small revenue cycle library.

Speaker 1

With the addition of the HealthStream Learning Center, they also added SafetyQ, 1 of our compliance products, several clinical content libraries, the Red Cross resuscitation suite and our Checklist application. This customer win, which included multiple competitive takeouts, illustrates the value that health organizations place on integration solutions suite that only HealthStream is bringing to market currently. With this win, revenues at this customer grew from $8 per person per year to $80 per person per employee immediately, a 10x increase. So of course, this is the kind of story we'd like to see more of. But increasingly, we're getting better at positioning our solutions together, in this case, a suite of products and services related to employee development and winning a contract kind of altogether.

Speaker 1

And in this case, as I mentioned, our partnerships of our ecosystem displaced many competitors in that takeout. Our credentialing solutions also enjoyed a successful quarter, both in terms of competitive takeouts and conversions from our legacy solutions to CredentialStream. In the Q2, we contracted 38 new customers for CredentialStream, representing approximately 50,000 new subscriptions collectively. These new customers included many highly respected health organizations like Rush Health, University of California, Davis Health System and Augusta Health. Additionally, and this is fun, HealthStream's CredentialStream application was rated as the number one credentialing software in the prestigious G2 online site.

Speaker 1

So overall, strong quarter for our credentialing suite. In the second quarter, revenues from ShiftWizard Grew 19% over the prior year quarter as customers continue to report high customer satisfaction. Among our many new customers was the Children's Hospital of Wisconsin, Other customers like the University of Florida Health System transitioned from our ANSOS product to ShiftWizard. As we continue to increase investment in ShiftWizard, it is only and we're going to become more powerful and more differentiated in the marketplace. As the power of hStream driven interoperability continues to emerge, We believe that each of our 3 discrete application suites will come together to form an enterprise suite of workforce solutions that represent a value proposition that is unique in the market today.

Speaker 1

We believe difficult to replicate, takes a long time to build, and we're Finally seeing some of the initial benefits of these integration opportunities. In the second half, after we hear from Scotty Roberts, I'm going to highlight some of the advances as it relates to our platform technology and how it's empowering some of these opportunities. I'll turn it over to Scotty Roberts to take a look at the numbers and circle back and talk about some of our platform advances. Scotty?

Speaker 2

All right. Thanks, Bobby, and good morning. Let's begin with the financial highlights for the Q2. And unless otherwise noted, the comparisons will be against the same period of last year. We delivered another solid quarter of financial results with many of our key financial metrics improving over the prior year, which resulted in new records for revenue and adjusted EBITDA, as Bobby mentioned.

Speaker 2

Our results were as follows: revenues were $69,200,000 up 5 percent operating income was $4,000,000 up 36%. Net income was $4,100,000 up 34%. EPS was $0.13 per share, which was up 30%. And finally, adjusted EBITDA was $15,300,000 and was up 17%. Our revenues for the Q2 were a record high of $69,200,000 and were up $3,600,000 or 5% compared to last year's Q2.

Speaker 2

Organic revenue growth was 4%, and the 2 acquisitions that we completed last year, CloudCME and Eaves contributed to the remainder of the growth. Revenues from subscription products accounted for 96% of total revenues and our subscription revenue came in at $66,500,000 or an increase of 6%, While revenues from professional services were $2,700,000 and they declined by 15%. Gross margin was 65.9% compared to 66.1% last year. Margins were somewhat impacted by increased royalties and cloud hosting costs, both primarily driven by revenue growth and changes in revenue mix. Operating expenses excluding cost of revenues were up $1,200,000 or 3% over last year's Q2, of which approximately half of the increase came from the 2 acquisitions that we completed last year.

Speaker 2

Sales, marketing and product development All experienced year over year increases, while G and A expenses declined compared to last year. Sales and marketing expenses increased by 4%, which most of this increase was associated with higher sales commissions, which is consistent with the growth in revenues. Our product development costs also increased by 4%, which is net of labor costs that were capitalized for software development. Capitalized labor costs increased approximately $700,000 over the prior year quarter, and these increases reflect our continued investment towards our single platform strategy and our suite of applications and content offerings. Additionally, part of the increase includes the incremental cost associated with the 2 acquisitions we made last year.

Speaker 2

G and A expenses declined by 5% due to reductions in several areas, including lower bad debt charges, outside recruiting services, professional service fees and other infrastructure related costs. Our effective tax rate for the Q2 was approximately 8% compared to 15% last year. Positively impacting the tax rate was approximately $600,000 in deferred tax benefits, resulting from the remeasurement of our deferred Tax liabilities upon the enactment of a new law in Tennessee that changes the income apportionment rules. The apportionment change is expected to reduce our future taxable income in the state as well. And finally, our adjusted EBITDA was $15,300,000 which was up 17%, and adjusted EBITDA margin was 22.2% compared to 20% last year.

Speaker 2

Now let's move over to the balance sheet metrics. We ended the quarter with cash and investment balances of 50 During the quarter, we deployed $6,200,000 for capital expenditures and returned $1,500,000 to shareholders through our dividend program. DSO increased to 50 days compared to 45 days last year. And while we've had certain customers delay payment a little longer than usual. We've generally still been successful in obtaining payments.

Speaker 2

Year to date, our cash flows from operations declined by $2,500,000 versus last year, coming in at $25,500,000 and free cash flows were $10,800,000 compared to $15,000,000 last year. Cash flows from operations and free cash flows were both impacted by higher income tax payments, which were $2,600,000 this year compared to just $400,000 last year. This increase was primarily due to changes in the federal tax In addition, our free cash flows were impacted by higher payments for capital expenditures and the increase in DSO that I just mentioned. As announced in February, our Board of Directors adopted a dividend policy under which we intend to pay a quarterly cash dividend on our common stock at a rate of $0.025 per share per quarter. We paid the first two quarterly cash dividends in April June, returning $1,500,000 back to shareholders.

Speaker 2

And yesterday, our Board of Directors declared a 3rd quarter dividend and intends to declare another cash dividend in the 4th quarter. Now for our guidance expectations, We are reaffirming the financial expectations that we previously announced in February of 2023. To recap, We expect consolidated revenues to range between $277,500,000 $283,000,000 Adjusted EBITDA is expected to range between $57,500,000 $60,500,000 and capital expenditures are expected to range between 27 and $29,000,000 While our guidance includes the acquisition of Eves, which occurred late last year, it does not include assumptions for any acquisitions

Speaker 3

and we

Speaker 2

will be conducting a few other thoughts about our expectations for the second half of the year. We anticipate quarterly revenues to grow sequentially and generally expect steady performance across most of our product offerings. Some of the products we expect to continue driving top line growth include Jane, our AI enabled clinical judgment and assessment solution CredentialStream, our market leading credentialing, privileging and enrollment solution ShiftWizard, our innovative SaaS based scheduling application and My Clinical Exchange, our solution for nursing and medical student onboarding and clinical placement. Now as for expense expectations, we anticipate certain categories to increase in the second half of the year. And one of those areas is our staffing.

Speaker 2

We currently have over 40 positions we're working to fill, thus we expect our labor costs will be higher than they were in the first half of the year. We also have several trade shows slated for the second half and that our marketing spend will increase about $1,000,000 in total over the next two quarters. That concludes my comments for this quarter's call. Thank you for your time this morning, and I'll now turn it back over to you, Bobby.

Speaker 1

Okay, Scotty. Thanks. Great financial results. Good work by all the HealthStreamers to deliver them. I'd like to dive a little bit into the future state of the company and give some insights into the developments happening related to our hStream technology and our hStream platform and our hStream positioning in the marketplace.

Speaker 1

So let's dive in. One encouraging development was the growing early momentum we saw in customers' use and adoptions of the APIs available in our developer portal, which we launched in the Q4 of 2022. The portal provides to a modern scalable secure architecture with a growing collection of shared services, platform level applications and APIs. In my view, the portal when we launched it It was kind of the symbolic beginning of a journey we've been on for many years, but the launch of the hStream platform technology and architecture. For our customers, the APIs offer meaningful extensibility of our applications.

Speaker 1

We believe the extensibility Increases the stickiness of our applications as customers begin to rely on functionality from our applications to power other applications at use in their organizations. At the end of the Q2, 40 healthcare organizations, including large health system customers, a global publishing company, A market leading EHR vendor and several health tech startups had chosen to open an account on the developer portal, where we collectively and enabled 145 developers to have access to the 8 robust APIs currently available in the developer portal. Again, the portal is essentially a window into the emerging platform capabilities and gives access to these APIs to exercise and take advantage of those capabilities. So a couple of examples of use. For large partners and customers, We saw organizations using our user student API to automatically register new staff directly from their HRS system into the HealthStream Learning Center.

Speaker 1

So here we see tighter and stronger integrations between core applications like the HealthStream Learning Center and core important systems like the HRIS system at the hospitals. One large health system that was a customer centralized their learning records from With HealthStream, by using our learning API to bring records in directly from a video system they're using to educate their staff into the HealthStream Learning Center transcript. And so here we have organizations using the APIs to add data that otherwise wasn't created in our learning center into the transcript, the educational transcript. What this does, it reinforces the HealthStream learning transcript as the single source of truth for the longitudinal history of the training and development for employees. So as they use our APIs to connect outside systems into ours, we become more authoritatively the learning transcript of record for the healthcare employees.

Speaker 1

We think these are just a couple of great examples of the APIs creating interoperability that benefits our customers and adds market differentiating value to our platform and applications. I also believe in the second half, we'll start to see some commerce directly tied to these platform level capabilities. We already see, as I mentioned, some health tech startups poking around our developer portal. We think they'll integrate some of our capabilities into their that they take to market separately. And I would expect that some of those services will be licensable services.

Speaker 1

So I believe in the second half of the year, we'll derive our first direct from platform revenue, which will be exciting. It will be very small and so I don't want to overstate it, but it will be exciting kind of a differentiated moment for our company as the platform itself begins to show some financial opportunity. Another benefit of an hStream subscription for a customer It is the customer's ability to participate in what we call a collaborative purchasing process. Through the collaborative purchasing process, Facilities within our larger health system can coordinate and pool their purchasing power in order to create a greater volume discounts on the health stream products that they want and need. The collaborative purchasing process has been around for a while and it's mostly in use in some of our larger accounts.

Speaker 1

However, in March, We launched a significantly enhanced collaborative application through the software that they use to operate the collaborative purchasing process. For the first time, participants are accessing their collaborative application using their hStream ID, which is the identity management service that exists in the h This benefits both HealthStream and the customers since we now know who the participants are and what role they play in the purchasing process. We can better match the participants with the products that are most valuable to them. In other words, as Eddie Pearson, our former President used to say, To get the right solution to the right person at the right time or something like that. Another great feature of the Collaboratives is that they use gamification to engage Purchases in the process.

Speaker 1

As facilities add their purchases together, they can see the volume discount of their purchase increase The discount level increased and therefore the product price they're going to pay decreased in real time. The automated platform interface enables this by connecting directly to our price book, which is held in our sales force infrastructure. So we've kind of gamified and organized around budget cycle, the purchase process where they can review and purchase and aggregate demand inside the health system across multiple products. So this is exciting technology. We expect to complete around 18 purchasing collaboratives this year.

Speaker 1

The last 10 of which will run on the new application, which is a significantly enhanced kind of software architecture that empowers this purchasing process. In March, In fact, the 1st collaborative that utilized the collaborative application took place. And on a dollar basis, this top 10 customer purchased 42% more in this collaborative on the new application suite than they did in the prior year. In addition, We gathered a lot of information about who is reviewing what products, who is buying what products, and so we had direct insight into the kind of the organizational purchase process and product review process that we've never had before. So really excited about this hStream collaborative capability.

Speaker 1

It's a benefit of being on the hStream platform. So when your license with HealthStream includes a subscription to hStream, which Increasingly, our products include a subscription to hStream. It includes the right to participate in collaborative purchasing. And then you get, of course, access to the collaborative software, which is the applications that I just mentioned. So we're excited about this.

Speaker 1

We hope to expand this program beyond 18 core accounts. We have in fact added a few this year. And we've moved some executive talent to lead this initiative and expect to sign more and more accounts up to use this budget aligned technology enabled Purchasing process. We're just really excited about it. So I think that's a prime example of the network effect in action.

Speaker 1

We're able to bundle products, Incentify is purchasing, do it automatically using software. It's a win win win for everybody. For the partners that are featured in the collaborative, They got more orders. And for the customer, they were able to see their discount as they place more orders Grow and their discount grow or their discount be greater as their order size increased. And of course, for HealthStream, We got to present the collective of many of our products and services, which is part of our powers, the completeness In this case, of our learning offering.

Speaker 1

So win, win, win is kind of a rare situation in business, but in this case, I believe that's what it does. It makes our ecosystem stronger from all directions. So those are my updates on our developer portal. We'll have more in the next I'm excited about how that's evolving. Not only does the power of the platform power up our own applications, as we talked about in the past, our New license verification service, for example, being incorporated into each application suite.

Speaker 1

It also enables capabilities like the collaborative purchasing process And of course, we'll be excited as small startups and large ERP vendors begin to tap into our platform directly to add capabilities to their application suites, and we hope that someday that will drive economic benefit as well as interoperability. Great. Well, a few more updates as we wrap up, and then you're going to have to stay around for the exciting conclusion of this, which is I'm going to have to read that opening disclosure statement again There's a little bit of blurred, and so you can stay for me to read through that as well. So a couple of other updates. On June 5, HealthStream announced the addition of Doctor.

Speaker 1

Alex Jahangar to our Board of Directors. Doctor. Jahangar is a nationally recognized Physician executive with extensive experience leading academic medical centers, specifically at Vanderbilt. He also is an investor, owner and founder of And he was the head of our Metropolitan Public Health Department during COVID-nineteen pandemic and was featured nationally for Our city's response to that. So, we're really pleased to add Doctor.

Speaker 1

Jahungar to our Board of Directors. He's currently the Vice President for Business Development Vice Chair of Orthopedic Surgery and Director of Orthopedic Trauma at Vanderbilt University Medical Center as well as the Executive Director of the Vanderbilt Trauma, Burn and Emergency Surgery Patient Care Center. We're pleased to have someone of Doctor. Jahangar's caliber and national visibility on our Board of Directors. We will also serve on our Nominating Governance Committee.

Speaker 1

We enthusiastically welcome Alex to our Board of Directors. As we reach the close portion here, I want to remind you about our new dividend policy. We just made the second payment out of this policy about a month ago. And just yesterday, our Board approved will be the 3rd installment of quarterly payments under the plan, which we pay on September 29. We are pleased that our strong balance sheet and our strong operational performance and puts us in a position to return value directly to shareholders through the company's 1st quarterly cash dividend program.

Speaker 1

Over the course of the year, we expect the new dividend policy to return approximately $3,000,000 to our shareholders. Halfway through the year, we are on track to meet that goal. So if you are interested in a highly recurring revenue, and we are now in a profitable SaaS path healthcare technology company that for 2023 expects to deliver steady growth as the term to share some of its profits and its gains directly to shareholders in the form of a dividend. Maybe HealthStream is a stock for you. I want to remind you of one other exciting event happening here in Tennessee, where we're headquartered on September 18 through 22nd, the city will be hosting what we're calling the Nashville Healthcare Sessions, which we believe will be one of the most dynamic healthcare conference weeks of the year.

Speaker 1

And the reason I say weeks is because over a dozen organizations are during national sessions. They'll be open for participants to register across these conferences. Again, we're calling the week the National Healthcare Sessions Week, And we're going to kick off that event with a I'll be interviewing Sam Hazen, the CEO of HCA, and we look forward to that opportunity to present Nashville's healthcare community to the world. You should all come and listen in and see where healthcare is headed by hearing from the leaders of the healthcare Industry here in Middle Tennessee. Hope you're going to join us for that.

Speaker 1

And now before I turn it over to the operator, I'm going to flip back and I am going to read the opening statements. I would like to remind you that this conference This call may contain forward looking statements regarding future events, which I certainly did, and future performance of HealthStream that involve risks and uncertainties that could cause Actual results could differ materially from those projected in the forward looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those Forward looking statements are contained in the company's filings with the SEC, including Forms 10 ks, 10 Q and our earnings release. Additionally, we may reference measures such as adjusted EBITDA, which is a non GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HealthStream is included in the earnings release that we issued yesterday and we may refer to it in this call.

Speaker 1

I'll now turn the call over to the operator for Q and A.

Operator

Thank you. At this time, we're going to start the Q and A session. And the first question that we have today is coming from Matt Hewitt of Craig Hallum. Your line is open.

Speaker 3

I don't know if Who has she called?

Speaker 1

We can hear you, Matt. You're on.

Speaker 3

Okay, great. Yes, she cut out there. Thank you. All right. Well, first off, I'm wondering if you could give us an update on the customer landscape.

Speaker 3

Obviously, a year ago, The great resignation, you had a lot of, people coming and going from your customers. I'm just curious where that sits today. And One of the things, I guess, it's an answer to that, but the wage growth that hospitals are seeing, maybe part of that helping to attract and But how does that impact your selling model?

Speaker 1

Well, Certainly, healthcare is still experiencing turnover, a lot of job shifting. And so I don't think some of the challenges for labor persist. I think some of the larger health systems have gotten a better handle on how to manage and they started to respond by the Kind of essentially the travel industry by raising benefits. And I think in some ways, there's a little fatigue in the travel industry. Nurses are getting a little tired.

Speaker 1

They surely made more money, but And there might be a little more appeal for specifically the nurses to find a home and a team they can be on. And I think that Favors positively hospitals. So not only reacting with improved benefits and they realize they have to recruit more and pay more attention to the needs of their Staff, I do think they're doing a better job recruiting and retaining talent a little bit. Costs are definitely higher. That affects their budgets.

Speaker 1

And I think they're beginning to adapt to the realities of higher wages overall and realizing that If they don't offer higher wages, they're going to pay even more for the temporary staff that comes in to fix them. So I think it's kind of a little bit of an enlightened employer. I do think that, that positions us well for some of our solutions. Our clinical pathways programs can be used to cross Train nurses to get them ready from one department to another. I think that our onboarding solutions are timely like in our credentialing We think our credentialing suite is essential in reducing the time to making doctors from a new hire to when they're productive.

Speaker 1

We think that we're the best in the market at Shortening that cycle of the steps necessary to get them ready to see patients and essentially bill for services. So the credential privilege and role process So our integrated suite is definitely a winner in the onboarding of new docs. I think overall, they're going to be gaining efficiencies and Seeking efficiencies and how they operate over time. So now the environment is still a tough selling environment. Our margins have always been historically thin at the large organizations that we sell to.

Speaker 1

So while they're more enlightened about the need to invest in workforce solutions, They're still tight. It's still it's not an easy market. It's a lower margin, high volume market and We have to respect that. I think the way we respect that is that we try to have the best solutions, for example, for a lot of mandatory requirements. We help them meet those requirements at the lowest price possible.

Speaker 1

And so I think if you have to comply with certain federal laws, The objective is to have full compliance and exceed compliance, but do it efficiently. And I think a lot of our solutions like SafetyQ and ComplyQ As a product category, for example, help them get out of the business of meeting the regulations on their own, offload that to us at an efficient low price, and it's good for our business and good for them. They can focus on the patient and we'll focus On lowering their compliance costs, but helping them achieve perfect compliance. So that's a little bit about the environment and shifts and attitudes in the workforce. I hope I got it some of the heart of your question.

Speaker 3

You did. Thank you very much. And then shifting gears a little bit, obviously congratulations on the big win with the Midwest Health System, I'm curious, it sounds like there was numerous competitive displacements there. How much of that was a function of I'm looking to have the quote unquote one throat to choke versus you coming in having the best solutions for all of those and basically simplifying their internal processes.

Speaker 1

Well, look, it's a little bit of both because there is Good amount of, say, brand loyalty. For example, if you picked a clinical education partner, maybe that's because you experienced their content when you were in nursing school and So now you want to use their brand. So to shift someone to say our partner in the ecosystem, from maybe an established part of they've used in the past is Can be some work, even if the products are equal or better or lower cost. So I think it really was in this case the aggregate value, which gave more value in more categories than many existing vendors and resulted in almost a package replacement, which Obviously, I'd love to see more of that. When you look at our investor deck from last year, we gave examples of several accounts that had built from 8 to $80 or $8 to $100 per person per year over a decade.

Speaker 1

And so what was fun about this one I talked about today was it happened in over the course of the sale process Over 60 days, essentially, I would say 4 competitive products were displaced in addition to putting our LMS infrastructure in. They like the concept of, in this case, around their developmental efforts for employees having one throat to choke, as you said, I think, or one place to go. So we did create consolidation of their purchasing model. In addition, we believe that in most categories, Our product offerings from our partnerships like the American Red Cross, in this case was one of the switches they made, is superior to the market alternatives, which ironically are also available in our marketplace. So here though they chose what we believe is a lower cost more efficient model for resuscitation training, So now it's just 1 of 3 or 4 displacement.

Speaker 1

So I think our sales teams are getting a little better at presenting the packages and showing the power of this, of what we call our HealthStream Ecology.

Speaker 3

That's great. Maybe one last one, then I'll hop back in the queue. But regarding Jane, obviously, there's a lot of excitement, a lot of Talk about AI in the press, media and elsewhere right now and you've got a platform that Has been in the market for a while. I'm just curious, are you seeing increased interest in adoption of Jain or any updates there would be appreciated? Thank you.

Speaker 1

Well, Jain is still early stages and it has components of AI and machine learning and we're enhancing it. It's beginning to make a real difference and the organization has adopted it. It is kind of a premium product and so it's a little bit more costly. It's a little bit It's foreign from, say, the minimal required education programming. This is a real investment in your workforce to invest in Jane.

Speaker 1

However, when you do, you get insights into your workforce that you would never have otherwise. We believe it's one of the very best essentially expert systems that allows an organization to differentiate the clinical thinking and the clinical reasoning and the clinical actions of their staff. And What that means is we believe these Jain scores that are beginning to be delivered really can be used to differentiate competence and quality, not just knowledge. A lot of products in the market can tell you who tests well and who knows the most, who can explain something really well scientifically, But almost none of them get to what Jane does, which is how well do they act. If an expert were in the room, the expert would do A, B, C.

Speaker 1

When your nurse is in the room, does that nurse do A, B and C or something different? And that's what Jane is really good at teasing out. So we're excited about. Again, it's a premium product. Now the other power of where we're going is that we're getting better at organizing what we call our curated our core data sets.

Speaker 1

And I think And so while we're new to AI and we're making progress with Jane and for the early adopters, they're seeing a real difference in it as an instrument to That develop and differentiate their staff skills, confidence and capabilities. Long run, I think our ability to execute on this AI mantra and will be derived from the strength of the data that we're ingesting into our network. And I think we're getting more and more insights into the workforce, More and more data about the workforce, longitudinal histories, 10 years of educational programming. And so I think we're getting better at collecting information about their skills, competencies, credentials. So I think the future is bright for us as we look and examine and having pilots more and more on how to leverage AI into the HealthStream framework.

Speaker 1

And Jane is certainly Our first foray and right now our strongest and as Scotty Roberts pointed out, it is growing nicely and has many implications for healthcare as it really differentiates confidence of the staff and not just knowledge of the staff. So we're really excited about the future of AI, our growing data sets and Jane specifically.

Speaker 3

That's really interesting. Thank you for that detail and

Operator

And our next question will be coming from Richard Close of Canaccord, your line is open.

Speaker 4

Yes, thanks. Congratulations. Can you hear me okay?

Speaker 1

We got it, Richard.

Speaker 4

Great. So, Bobby, just on the collaborative that you were talking about, You mentioned one client purchased 42% more. I'm just curious if you can put that into Steve, are you saying that client's total revenue to HealthStream will be up 42% year over year? Or is that Something different. I just don't want to misunderstand what you're saying.

Speaker 1

Sure, sure. Yes, I should have and will provide more information. So that customer is a large enterprise customer for us. They buy many things that are not in the collaborative. For example, their base contract for technologies like the HealthStream Learning Center is not in the collaborative.

Speaker 1

They didn't extend it or anything in that purchase process. So What it was, was a bundle of educational products that they didn't want to necessarily purchase centrally. They wanted to understand across, Say there are dozens of hospitals, what the demand was for say, I'd say 15 or 20 products. And so we were able to feature 15 or 20 products, some of which are only relevant for, say, a small department in each hospital, some of which are relevant for the whole organization. But essentially what allowed them to do was Add on 10 or 15 products into the collaborative, allow all of their dozens of hospital leaders and heads of departments to review them in 30 days, then place orders, then aggregate the orders into kind of a single order, so they could see the demand for that product and then purchased.

Speaker 1

So over a 90 day window, they reviewed 15 products and purchased many of them and the purchases on those products were up 42% over the prior year. It does not imply that the revenue from that account will go up 42%. It implies that for that set of products, The order value, which again, those are sometimes they're multiyear commitments. So they wouldn't even be 40% growth on those 15 products in the year. It would be, Let's say they extended 10 products, added 5 new products for 3 years, then that 40% order value would be spread over 3 years.

Speaker 1

So hope that gives some clarity, but nonetheless, it's very exciting because both they purchased products they've never purchased before and they extended products and they bought more of existing products across that library of offering and they did it in a focused 90 day way and is kind of a gamified process and orders were up 42% in total dollar value.

Speaker 4

Okay. That's helpful. And then maybe on the commerce side of hStream, obviously exciting From that perspective that you expect something possibly in the second half of this year, albeit Likely small. As you think about that going forward though, over the course of several years, How do you think that the commerce side of hStream has the potential to impact margins? And Maybe that's for Scotty, but I'm just curious on the margin impact.

Speaker 4

And then if there is license Fees associated with that in terms of, is that the revenue should we think of that revenue as one time revenue Or recurring in nature.

Speaker 1

Let me give an example of how it could become recurring and we don't Really no yet. So the first thing is, this is a future state. But let me talk

Speaker 4

it through a

Speaker 1

little bit. So we have talked about one of our platform services that I do think itself can generate revenue. It's our license verification service. And so in the platform, as we mentioned, we built a capability It allows an organization to verify that a license is current and it's driven by API, so it's easy to incorporate. So Let's say, for example, you're a small startup company and you store nurses' licenses in your application that you sell or that the market uses and you want a way to know whether the license for that nurse is current.

Speaker 1

Our future state would be, You don't have to be a customer of the HealthStream Learning Center to benefit from that service. You don't have to buy our credential stream. You could just directly pay us to check our connected hStream platform, which is connected in this case over 2,000 endpoints to check the license. And you can pay us a small fee to ping our service and get back a flag that would say current or expired license. And so the idea here would be that maybe in the future, 500 different startup companies that store licenses for nurses want to add capability to their application and they might license that service directly.

Speaker 1

So it's my hope that several of the capabilities of our platform Wind up becoming revenue generating services in the future. I do want to reemphasize this is a future state, But as I noted in our developer portal, which is the window into those services, we've already got a couple of startups that have registered their developer So look in there and see how it may be applicable to what they're doing. In addition, as I mentioned, we had a large ERP vendor, one of the largest in the world, having some of their developers in there. So maybe they may be one of our what is currently Buda's competitor would go in there and license the license service and use it to validate licenses in their HRS system or their ERP system as such. So again, This is a future state, but and currently that license service is plugged into our own learning center.

Speaker 1

Soon we'll be checking licenses before we schedule in our own scheduling system. And so we're using these functions in our own applications to enhance them. But the point is they may become Licenseable objects themselves. And so right now, we don't want to get too excited about because it's undefined, but we're beginning to see the early Signs that people might have an interest in that or organizations might and that they could generate revenue. So we'll leave it at that for now.

Speaker 1

And then in the next few quarters, I hope to be able to give examples of where that's maybe either actually starting to occur or be incorporated into the value prop of other people's platforms. That's what we mean by platform. The platform powers our own applications, the platform differentiates our own applications, and the platform may power other people's applications.

Speaker 4

Okay. That's helpful. And then just maybe going back to Matt's question, the new win on the learning System, obviously positive, but you talked about 6 Firms that you beat out, including an ERP vendor, last quarter, I think you mentioned 2 lost accounts. And I'm just curious, any updates and perspectives on Haditive environment in learning, has there been any meaningful changes?

Speaker 1

No, I don't think so. I think all the major players Have a learning architecture. There's a lot of question over how appropriate that architecture is for the learning environment and the mandatory training environment in hospitals. For example, there's a lot of initiative around self directed learning. And I think self directed learning is wonderful.

Speaker 1

However, I think targeted learning through Jane that helps you pick a career path and maybe Develop skills in another area that's more directly needed. So if you want to move from the OB to the ER department, maybe Jane is going to be better than a generic learning platform Where you kind of purchase the content library from a 3rd party. Jane is much more intelligent about identifying what you might need. So I think and then the completeness of our ecosystem. So sometimes in ERP LMS, which is I think not as and we are very encouraged by the need of healthcare at all levels, including, for example, when the joint commission walks in, our LMS Prints out a report that we know meets the needs of that Joint Commission audit.

Speaker 1

And so as opposed to but sometimes if you're the CEO, the CFO and you're just trying to aggregate vendors and you may just take the what I would consider a less capable LMS from an ERP vendor. That does happen. So we lose that occasionally. That said, I think generally when you hear like the story we just told, The power of the collective offerings of the best content brands in the industry, the capabilities like differentiating true competency as HealthStream as a partner Favors our learning architecture, our learning systems, our learning products like Jane over generic learning architectures from competing LMSs. That said, there's dozens and dozens of competitors, some even have bigger budgets and in some ways maybe more features.

Speaker 1

Now the question is, are those features relevant to our customers? The fact that it does international currency exchange may not be Our currency conversion in LMS may not be something relevant to U. S. Hospital systems. So I think our features are focused on the known needs of our customers and we feel competitive because of those reasons.

Speaker 1

And this was an example Whereas the aggregate value of our partnerships, our capabilities that resulted in kind of a wholesale switch to HealthStream.

Speaker 4

Okay. Thank you. I'll jump back in the queue.

Operator

Thank you for your question. One moment while we prepare for the next question. And our next question We'll be coming from Vincent Colicchio of Barrington. Your line is open.

Speaker 5

Yes. Bobby, gross margins were down year over year in the first half. I'm curious, What should the second half look like in terms of year over year comparisons?

Speaker 1

I'll let Scotty take that one and then I'll chime back in if needed. Sure.

Speaker 2

Hey, Vince. How are you doing? Good. I think margins, we're still aiming for that mid-sixty Yes, 65%, 66% range. We kind of teeter a few basis points quarter to quarter.

Speaker 2

As I mentioned on the call, Couple of factors that influence margins continue to be revenue mix changes, so royalties, obviously, and then Cloud hosting costs as we continue to expand our credential stream application, for example, grow that revenue stream, some of the costs Start to filter through. And then just revenue mix also, we didn't mention it on the call, but we've mentioned it on prior calls, Reductions in revenue from our legacy applications, one being the scheduling Application called ANSOS, still see some a little bit of attrition there that's pulling down revenue and obviously influencing margins a little bit. And some of that is Obviously shifting over to the ShiftWizard solution that we also spoke about, but also there's just pure attrition going on too. But I think Net net, I think we're still aiming for that 65% to 66% range.

Speaker 5

A follow-up on that. On the ANSOS, is the attrition stabilizing? What's the trend there? And do you

Speaker 1

I think as we described in the last call, it's a challenging situation. I think We're converting them as best we can. We announced 1 today, the conversion from an Anthos customer to ShiftWizard. We're developing the capabilities of ShiftWizard to meet the full needs of the large enterprises, but we have more development to do. And so, it's kind of a known quantity that we acquired a company that was a legacy platform and that we would experience some attrition.

Speaker 1

I think we continue to experience that. That said, I think we're getting better as a company at trying to move those accounts into our own application called ShiftWizard and retain them as customers. So I expect the attrition to continue and be a drag. That's why we're hitting this 4.5% growth rate. I think without that, we would be delivering better growth rates.

Speaker 1

As you heard in the call today, ShipWizard grew 17% over the prior year same quarter. The promises in the future of these new SaaS applications and I think that in general, We kind of entered the market with ANSOS with a known risk and we're experiencing that risk, but it's a known and quantifiable drag on growth that we're just going to manage through as we build out the ShiftWizard application.

Speaker 5

And one follow-up on Jane, are you seeing What does the competitive landscape look like there? Are you seeing similar products or no as of yet?

Speaker 1

Well, state the question again. So yes, I think I shared my excitement for Jane, but what was the question?

Speaker 5

Are you seeing a competitive product emerge? What does the landscape look like?

Speaker 1

I have not. So I may be missing something. I'm sure there's a startup somewhere that's building something. But we believe Jane, because of the data sets it's based on that were unique in industry when we acquired the company that had built a 20 year history of assessing confidence in this way gave us the infrastructure we needed to build a true expert system using that data to train it. And I think I just think at the time that was a unique asset in the market and we think we've turned into a unique asset in HealthStream.

Speaker 1

It is a premium product, so I think rate of adoption could go up. If price was a little lower, we're going to be working with that and thinking about it. But right now, we want to Just keep tuning the product to get it where we want it because we think it's a differentiated product.

Speaker 5

Nice quarter. Thank you.

Speaker 1

Thank you. Thank

Operator

you for your question. One moment, while we prepare for the next question. And our next question will be coming from Ryan Daniels of William Blair. Your line is open.

Speaker 6

Yes. Hi, good morning. This is Jack Melick on for Ryan. So I guess a little bit more into the weeds here. Deferred revenue Was flat year over year and looked to be down more sequentially this quarter than compared to the prior year period, which Would indicate negative billings growth if my math is right.

Speaker 6

Now I get there are plenty of nuances that impact the reliability of billings as a forward indicator, but Do you mind walking us through the details that might impact deferred revs and other related metrics and how that would or would not triangulate to visibility over the next in a few quarters. Thank you.

Speaker 2

Hey, Jack, interesting question. I'll try to give you a few thoughts. I probably Can't explain it the way you're asking, but I would say that billings for us tend to fluctuate and That's in timing and the nature of billings. And so, we have kind of a good variety of options for our customers to help kind of smooth the payments to us. And so annual billings is very prominent for us.

Speaker 2

Those tend to happen, at least for us seasonality wise in the Q1. And we also have a good mix of Monthly billings, quarterly billings and some semiannual. So how they influence deferred revenue at any given point in time Tends to also fluctuate. And so if you look back at Q1, that's where we typically see the increase. But just year over year, contracts When new contracts come in, billing terms often change as well.

Speaker 2

And so we've started to see more of a trend towards quarterly billing, which generally would have flushed through the balance sheet most likely by the end of the reporting period versus annual billings, which tend to sit on the balance sheet a little bit longer.

Speaker 6

Okay, great. I appreciate the detail there. I guess switching gears a little bit. Looking at professional services, I get that it's a small chunk of the business, But I can't help but notice that its growth has been lagging overall subscription revenue and actually negative over the last few quarters. My assumption here would be that these 2 would sort of increase in lockstep, but that doesn't seem to be the case.

Speaker 6

Is there a reason that the direction of this relationship isn't more clear? And I guess more broadly speaking, is there anything you believe is worth highlighting as it relates to this segment of professional services and its longer term outlook? Thank you.

Speaker 1

Yes, yes. Great question. It is intentionally being dropped. I am a believer that We should minimize implementation fees and pro services and build a subscription business. And so in some cases, We even intentionally decided to reduce or lower or the fees associated with the mutual implementation cycles, Try to get to implemented software as fast as possible and move on to subscription recognition.

Speaker 1

So I love that the fact that I believe Scotty our numbers About 95% of our revenues are subscription, therefore predictable. This 5% if I could find a way to eliminate it, I probably would. If I could slightly increase our And we've had a conscious effort to on the biggest, the biggest implementations, there's just a lot of People involved and so you do need to charge something. But in general, we're really trying to get it to where these services can be turned on and configured And configured remotely without travel and on-site. And so, my vision is that the Pro services would be intentionally diminished.

Speaker 1

And we'll probably get to a point like here where it's so small and not growing that It's not a material part of our financials, but we have we do not have ambition to grow pro services. In fact, it's just the opposite. I'm trying to Reduce the time, the implementation, make it simpler, get applications online by self configuration that don't require implementation services and get to the paying monthly subscriber. That's what we want. And so, I would say it actually is a positive kind of hitting it.

Speaker 1

I know it's down year over year, but in my mind, that's a Positive means that more higher percentage of our revenues are subscription based. I don't know if Scotty wants to add anything to that, but.

Speaker 2

Yes, Bobby, I think your explanation is exactly right. It's more of an intentional shift towards

Speaker 1

And like I said, I think it's Jack we're talking to. There are some so large scale that you just if you put 10 people on something for 4 months, you need to charge something for it. But And my goal is we could find a way to implement them in 2 months and have it self configured. We would do that and there would be no pro services fee. So just directionally you ask the question, is it a business we're trying to grow and the

Speaker 6

Yes, makes sense. Really appreciate the insight there.

Operator

Thank you. And one moment. We have a follow-up question. And that follow-up question will be coming from Richard Close of Canaccord. Your line is open.

Speaker 4

Yes. I'll keep it quick and save my other follow ups for later. But Bobby, just clarification on Shift Wizard, you just mentioned 17% growth. For some reason, I thought you said 19% in the prepared remarks.

Speaker 1

Scotty, can you clarify, I may have misspoke. Let's check.

Speaker 2

Yes, I think it was 19%.

Speaker 1

19%. Okay, good. Well, that's Better than 2017, but they're both solid numbers. And yes, thanks for asking, Richard. So I guess it turns out as it's 19% year over year.

Speaker 4

Okay, great. I'll follow-up with my other questions. Thanks.

Speaker 1

Okay, great. Just one kind of closing comment related to the ShiftWizard and Sauce. It's definitely one of the more challenging parts of our business. We've talked about it. We've formed it quickly over 24 months with 3 acquisitions.

Speaker 1

Some of the acquisitions had a legacy component. We know what we're getting into, kind of hot water. But that acquisition gave us a road map, some paying customers. And what we have done, which is relatively new, is that the team and the leader that helped us really get CredentialStream into the market leading position as evidenced by our G2 Our G2 recent recognition as the leading credentialing system in the industry. The team and specifically the person, Michael Hsu, that helped us get there Is now in charge of building the ShipWizard application suite, the whole scheduling area.

Speaker 1

And so We're installing those best practices and lessons learned. I think in year prior, I said we had gotten the playbook from Michael Souza and and delivered it to other executives to try to deliver on it. But now, we actually have the executives that made it happen, making it happen in scheduling as well. So We're excited about that and expect to see some gains from that experience being applied to this challenging set of opportunity set is what I guess I would say. And hopefully, the early returns will start coming in later in the year on the leadership team we put in there.

Operator

There are no more questions in the queue, so this concludes the Q and A session. I would like to turn the call back over to Bobby Frist for closing remarks. Please go ahead.

Speaker 1

Thank you all for listening in. We're looking forward to the next quarter. Don't forget to come to Nashville for the Nashville Healthcare Sessions. You'll see HealthStream participating as well. An opportunity to say hi to all the people that are changing healthcare for the better.

Speaker 1

Thank you to all the HealthStreamers that made it happen, and we look forward to the earnings call where we'll update you guys on hStream platform, portal technologies and our customer hopefully what will be a strong another strong quarter of customer wins and and great stories. We'll talk to you guys soon. Thanks.

Operator

This concludes today's conference call. Thank you all for participating and enjoy the rest of your day. You may now all disconnect.

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Key Takeaways

  • HealthStream delivered a record Q2 with revenue of $69.2 million (up 5% YoY) and adjusted EBITDA of $15.3 million (up 17% YoY).
  • Subscriptions reached a new high of 5.6 million users, adding approximately 68,000 subscriptions in the quarter and reinforcing recurring revenue.
  • A Midwestern health system win displaced six competitors and expanded spend from $8 to $80 per employee by adopting HealthStream’s integrated learning, compliance and clinical content suites.
  • The hStream developer portal now hosts 40 organizations and 145 developers leveraging eight APIs, marking growing momentum for platform‐driven interoperability and future commerce opportunities.
  • Management reaffirmed full-year guidance for revenues of $277.5–$283 million and adjusted EBITDA of $57.5–$60.5 million, with continued sequential revenue growth expected.
AI Generated. May Contain Errors.
Earnings Conference Call
HealthStream Q2 2023
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