Robert Frist - Chairman and Chief Executive Officer Scotty Roberts - Senior Vice President and Chief Financial Officer Mollie Condra - Vice President of Investor Relations and Communications

Good morning! And welcome to HealthStream’s First Quarter 2021 Earnings Conference Call. At this time I would like to inform you that this conference is being recoded 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 personation. I would now turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you, and good morning. Thank you for joining us today to discuss our first quarter 2021 results. Also in the conference call with me today are Robert A. Frist Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that could involve risk and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K, 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 may refer to in this call. So with that start, at this time I'll turn the call over to Bobby Frist.

Thank you, Mollie. Good morning and welcome to our first quarter 2021 earnings conference call. There is so much news to cover this morning, I can't wait to get started. But I think context is very important and so personal contextualize. The nation continues to move through the pandemic and there are reasons for cautious optimism, especially here in the U.S. given that over half of the adults has now had at least one vaccine dose and a third are fully vaccinated. As we celebrate this remarkable progress, there are plenty of challenges still remaining regarding the pandemic that affects us as individuals and of course our company as well. For example, figuring out our new work-from-home models and our approach to operating as a business and making them more, whatever the new norm is, the new permanent new norm is going to be, we are working on that diligently now. So, what I can tell you is absolutely certainty is that HealthStream’s mission, that's focused on the people of healthcare and improving the quality of healthcare by helping develop, retain, engage and credential those that are in healthcare remains constant. And as you listen to our call today, I hope you recognize our commitment to that mission. How we are striving to achieve it, and you're going to how we are executing on it through some of our exciting new products, many of which have been in development for years and are emerging in the market place as we speak. So I'm going to give a little more detail today, about some of these exciting new products or progress with them. So to start out though, I do want to start on our financial guidance, which we updated after a strong first quarter of necessity. The quarter included a…

Good morning everyone. I want to start with a summary of our results for the quarter. Our revenues were $63.5 million, which is up 3% over last year and included modest growth within both reporting segments. Revenues for 2021 were impacted by $1.6 million revenue reduction associated with deferred revenue write-downs, which were primarily related to acquisition that we completed during the fourth quarter of last year. Operating income was $3.3 million or down 54%. Net income was $2.3 million or down 68%, and EPS was $0.07 per diluted share down from $0.22 per diluted share in the prior year. Operating income, net income and EPS were all down, in part because last year's first quarter included a $3.4 million non-cash reduction to cost of revenues. While these GAAP based financial measures experienced declines, our non-GAAP performance measure, adjusted EBITDA improved to $13.6 million or up 14%, which is a record quarterly half for the company. Both business segments achieved revenue growth over the prior year. Workforce Solutions revenues were $51.3 million and were up 3% and revenues from provider solutions were $12.2 million and were up 4%. As we previously discussed in the past several years, we no longer sell legacy resuscitation products and revenues from these products have been declining over the past two years as subscriptions expired. We indicated that revenues would cease at the end of 2020, which essentially occurred as expected. However, with our partner’s support, we extended utilization of these products for a small group of customers, which resulted in a $1.8 million of revenues on legacy products during the first quarter. Similarly, we expect legacy product revenues in the second quarter of approximately $700,000, then to be de minimis for the remainder of the year. Revenues from the legacy products were $11.2 million…

Thank you, Scotty. Speaking of working-from-home, I was in my office. In my office there is a fireplace and on top of the fireplace I had song birds, so I guess I was competing with the song bird to share the news and I've moved the location so hopefully you can hear me better. And it’s kind of – so finally just to that, so it’s all the new working conditions. As Scotty mentioned, our President and COO is working on our return to office strategies now for our 1,000 employees and we're excited to get back together again and work together again here in the not too distant future. So a few more things to cover as we wrap up and before we go to Q&A. Our last earnings call we introduced this metaphor of a three legged stool to describe the totality of our business. The three legged stool is standing on the foundation of our pass hStream architecture, so I thought I’d just refresh you on that analog and then we'll probably drop the three legged stool analog, but know that we have these three focus areas for our business. And so you know with each of our solution group areas representing a leg of the stool, lets kind of review what they are. The first learning and development solutions, you know a longstanding core of our business is learning and development and obviously we’ve expanded and have next generation technologies about the Jane platform, working alongside of the [inaudible] some of the most adopted learning platform in healthcare. Then there is our credentialing and privileging solutions. Of course, that's the Variety hStream organization. 250 employees’ strong and gaining momentum with setting new records in the quarter. Credentialing and privileging is an area we think that we…

Thank you. [Operator Instructions] And our first question comes from Ryan Daniels from William Blair. Your line is now open.

Joe [inaudible] in for Ryan. Thanks for taking the questions and congrats on a solid quarter. I wanted to ask two questions related to the demand environment generally. So the first, you're looking at the Verity hStream product line. I know Bobby you talked about having record quarterly sales there and as well as the single largest sale in the history of that product line, so nice to see some of its success. You know I’m just curious if you could talk a little bit further on what's driving that success in the marketplace? If there's any specific tailwind or competitive advantages to call out there?

Yeah, I can comment a bit on that. I think we acquired four companies that are all in this space. We carefully sorted through the vast capabilities of those companies. For example, some had the best privileging libraries, which are kind of a data asset, some had the best work flows and when we built the CredentialStream platform, we not only incorporated the best of those into that platform. We also created a more comprehensive view of all the services and related functions around the core credentialing process. And so it's my belief that our application suite in credentialing and privileging enrollment is just simply more complete in its thoughtfulness and approach, to not just the credentialing process, but the related processes like the physician onboarding process, there are elements of that where credentialing plays a role. The privileging process which affects the time to practice, you know from the time we hire a physician to the time they can actually practice medicine on your behalf and the organization. So the vision that the team put together and as they built the new CredentialStream platform, I think is simply more robust than the competition. So what we're beginning to see is an improving win rate in the head-to-head competitions, because of the completeness of the vision of VerityStream team and the execution of the platform. That said, you know there is definitely a delight here through the middle of last year where you know organizations have stopped shopping. If they had something that was okay or functioned, they weren't really in a position to evaluate other vendors or switch platforms, even if it's a better platform. We're beginning to see a little bit more heads up from our customers and they see the benefits for a more comprehensive platform. So I'd say they are looking more and they are considering at a higher rate replacing legacy platforms that we think we believe are less effective, even sometimes in the case of our own legacy platforms that they acquire from us, they are more interested in upgrading to the newer ones. And so now there are still going to be implementation lags, just because the nature of where everybody is operational is kind of emerging from the pandemic, at least in the U.S. and there are definitely hot spots as you know in our country, where there again the health system, they're experiencing you know operations being overwhelmed again. But on the whole just a general improved buying environment and I do think we have one of the more complete application suites in the area for VerityStream, now known as CredentialStream Applications Center.

Got it. Yeah, that's super helpful. And then, yeah I wanted to circle back on some of the comments you made around… [Cross Talk]

One other thing I’d like to add, because I want people to hear it, is that we're also beginning to see this first small benefit of its connectivity to the hStream ecosystem. So for example, the ability now – if a customer is on the Red Cross Resuscitation Suite, they use our learning platform and the VerityStream customer of the CredentialStream application set. If those three conditions exists, the data flows seamlessly from the consumption of the red cross program as an earned credential in the learning platform to manifest automatically in the Credential platform. And that may sound simple, but really it's the integration of those three applications that creates a seamless workflow, reduces the burden of gathering information of that credential in the credentialing process and so at the first sign of light of the power interconnectivity between application sets when connected through hStream engineering, which we talk about you know, so it’s a concrete benefit of hStream. That's one small example and it's a unique ven diagram. Like you have to be on our learning platform or Red Cross program with our CredentialStream platform. But when those three conditions exist, you definitely have an easier workflow, automated data communication and less manual intervention to credential, that’s part of the physician’s record. So I want to give that example, because I think there’ll be dozens more over time and we're just getting the first signs of power of the HealthStream eco system.

Yeah, yeah, thanks for that. I think that all makes sense. And just to follow-up that I wanted to add, wanted to circle back to some of the comments you made on the Jane product and you know the connection is kind of one of the first AI driven in the workforce competency management products in the marketplace. I guess how you would characterize sort of the demand from a health systems, for our workforce management solutions within the context of their broader AI priorities. I think we often hear about things like your large chatbots for patient engagement or other sort of AI solutions related more to sort of the operations of patient and things like that. So just curious how you would characterize your workforce development or competency management tools within sort of the broader budget or context for your AI priorities?

It's a great question. I think you know just in general and this is a disappointment for us for our long legacy, but you know the value of high quality education and training is often hard to quantify, even though we all strive. We kind of intuitively know that the more confident the team is, the better the health outcome is. But proving it is difficult and so often times education and training is lower in the budget priorities. I think that's sad, because I think patient outcomes can be most greatly effective if they increased their willingness to invest in those areas, instead of just new equipment and technologies and you know the incremental gains of a new MRI machine are good, but they may not be nearly as much as the focused competency development on our clinical staff. That said, you asked me where it ranks? I’d say it’s lower in the priority poll. When things get tight, education tend to be cut. Investment and competency is most appreciated by the highest of quality organization. So the leading organizations investing in Jane right now are the ones that I think I've used to enlighten customers. They are the ones that see the link between competency and clinical outcomes and unfortunately some of that, they are a little bit more than intuitive. But Jane definitely makes it easier to see that link, because it more accurately quantifies, not just knowledge deficits, but competency, kind of decision making deficits and that's where the errors occur, is when clinicians make a poor decision and it's hard to judge, because you know it takes an expert to judge someone's quality of decision making and now that expert capability is built into Jane. And so I would say its early adopters. A higher…

Okay, great. Yeah, thanks for that.

Sadly it is a lowest priority though and so you know when the tough things get tough, education training and competency development, all in the week organizations gets pushed to the bottom along with things like marketing you know and that's always been a frustrating part. Wherever your educated on the planet, it’s hard to quantify and know the value invested in quality competency as well.

Thank you. And our next question comes from Matthew Hewitt from Craig-Hallum Capital Group. Your line is now open.

Hi, good morning and congratulations on a great quarter. I guess this might be a good follow-up to that question. When you think back to Q2 and Q3 last year, you had hospitals that were dealing with the pandemic, that were shifting employees from one – you know from – maybe from elective surgeries to emergency care. You’ve had some employees that were even laid off. As we’re kind of getting through that now with the vaccinations and with some pockets of pandemic easing, how are hospitals shifting their priorities and how does that play into your products quite frankly? I mean where are you seeing them prioritize Verity hStream or some of the other solution. Is that – are you seeing that in your discussions with them and how does that play out over the remainder of the year.

Well, I think – you know if you think about the last decade, there's been a big move towards the EHRs and huge growth for them, and a lot of those transitions have been down. They are still working in front of them there. The digitization of the patient record, the mobility of data, a lot of that made a lot of progress, and the patients we know it's very – it’s still kind of an immature feeling, but a lot of progress has been made there. I think there's a continued move towards focus on quality outcomes, and the organizations that are bigger and stronger that can afford to invest and achieve in quality outcomes, I think are beginning to prioritize the tool sets that can get them there. And there there's just, some – all of our – another good thing about how some of them are positioned is that, you know we help provide against the regulatory requirements, the highly regulated environment. For example, the credentialing and privileging process is not just important to ensure quality workers, quality physicians and nurses are in the staff, but it's important to keep those that aren't quality out of practicing medicine and so there is kind of gatekeeper functions on quality that are provided by the Credentialing services that are important and they need to be accurate, and the tools need to be good and so you know new products like our Workforce Validate product which looks and checks for sanctions against workers to warrant to help the organizations when there's a sanctioned employee trying to enter the workforce. I think it will be increasingly important and maybe that's a sad comment on things, but it is. And then I do think things like Jane are well positioned to kind…

Understood, thank you. And then maybe a little bit more mundane question, but as far as implementations are concerned, you spoke a little bit about the lag. Where do those sit today, maybe where were they pre-pandemic and where do you see that kind of shaking out as we exit say this year, as we get into fiscal ‘22. Thank you.

Yeah, there is definitely a period of I guess February to June of last year where really no one was even taking phone calls, much less implementing new systems. And so now everybody's putting things on the schedule, thinking about when to get them done. They're a little less urgent, everybody had to build, all the vendors had to build new deployment models because you can't, you don't go on site as much to do deployments if at all. And so there's a kind of a natural lag from both the transitioning models and implementation, and the slow recovery back to what the new normal is in operations for our customers. And so those two things together are creating a little bit of a lag in time to revenue issue. That said, I feel like everything is getting on the schedules now, and different products have different horizons for implementing. Like that multi-million dollar, multi-year contracts for credentialing, it will take you know two years to implement fully and get to full revenue or maybe more, because you're talking about taking dozens, in this case more than 50 or 60 locations and upgrading legacy installed system and SaaS systems and unifying the process. They also use it to improve the process or credentialing and privileging at the same time, so it implies operational changes. For example, we asked them to standardize on certain practices when they adopt our platform and use our taxonomies and our libraries and data to classify thing. And so it’s a big change management journey. But to your point and question I think people are putting them on the schedule and getting on with the changes they need to make the organizations better now, and that feels better to me.

Understood. Thank you.

And thank you. And our next question comes from Richard Close from Canaccord Genuity. Your line is now open.

Great. Thank you. Congratulations on a solid start to 2021. Scotty, I was wondering just on a housekeeping. Can you go over the organic and acquired growth again? I didn't catch those, didn't write fast enough, but if you can go over those again and then are all the acquisitions in the Workforce area just as reminder there?

Sure Richard. I think we characterized it as organic growth excluding the legacy resuscitation business, organic growing 8% and acquisitions contributing about 14%. So it’s a combination of both of those. It yielded about 22% growth rate once you factor out the legacy business from the prior year and current year. And then, the acquisitions that we’ve completed, we've done five since the beginning of 2020, and they're all included in the Workforce business unit.

Okay, great. And then with respect to the – I guess the third leg of the stool so to speak, can you – Bobby, can you just go over this scheduling area? How you are thinking about that, you know that’s where the acquisitions have been. And just trying to get a feel of you know do you expect a similar sort of path that you had on the credentialing side in terms of time frame on the integration of those products and then just, how do you look at that?

Richard, I think it will be a bit of a journey. The good news is, the team from the VerityStream put together over a 30 page document that tells about all that they learned, about everything from how quick to work on the branding issues, to how to select a core architecture and rebuild the platforms and how to combine the feature sets. Like it’s a really great document or road map for how to do what they've done at VerityStream. Look at the market conditions and build right out there. So we're going to repeat the playbook. We acquired, as you know NurseGrid early last year and by the way that app has continued to grow its organic user base even with minimal investments and so it still continues to be the most popular adopted nurse app that nurses use to help manage their professional life and schedule. So we are really excited NurseGrid. We acquired ShiftWizard and ANSOS assets. ShiftWizard separately and ANSOS assets from Change Healthcare and they each have capabilities that the market appreciates. It’s like the ANSOS is more enterprise capable than any of the others. With ShiftWizard it’s got market leading workflows, award winning recognition for the innovation in their application set, but it has some scale issue, and so like any set of acquisitions we’re you know 100 days in andfinding all the things we have to work on to make it better. I got a great leader over that and Scott McQuay, a 20 year veteran in healthcare technology and we've got a great road map that Michael Sousa and his team VerityStream have created for Scott, and yes we plan to repeat it again. Hopefully instead of four years of assembling all those companies, we can do it in three year or less and announce our new product strategy and vision and one that levers the best of each of NurseGrid, ANSOS and ShiftWizard, along with efforts to create smooth branding approach and catch the eye and ear and wallet of the competitive landscape. So it is a repeat playbook. You know we gained some market share, we gained some unique assets like NurseGrid. We gained the people that know a lot about and have a long history of understanding time management and scheduling for nurses in our company, over 120 employees in the business unit, the business area. It is embedded within workforce, it’s a little harder to see, but we are thinking of it as a business leader and Scott McQuay and our trajectory and a roadmap to get there. So it will be a bit of a repeat. I hope to get to it a little faster and have a fewer bumps than we had. Maybe it was VerityStream, but as you can see VerityStream I think is coming out the back end of that and I can't wait to report both the syncing and credentialing, I mean in scheduling and what we call capacity management.

And is there any you know thoughts on the margin?

Our lot of our investments, yes the margin profile should be similar, the 60%, 65% range. Actually it's a little higher than that right now. I think it's around 64% of that business. So it is a good SaaS or application set with decent software margins and so we're excited about that. There is some content dimensions to what we're building in the engagements parts of those platform and promotional efforts say around a NurseGrid that maybe lowered the gross margin a bit, but generally consistent with our goals as a unit, as an operating area and then definitely an area of investment. So for example the sales team right now across all those sets is about 10 strong. We plan to take it to 22 by the middle of the year. So just in the next three months we plan to double the sales organization on scheduling capacity management.

Great! Thank you.

Thank you. [Operator Instructions] and our next question comes from Vince Colicchio from Barrington Research. Your line is now open.

Yes Bobby, your just answered part of my question, but I’m curious if you can give us more color on what investments you will be making this year.

Yeah, a lot of investments, you know things like Jane you have to continue to invest or find those technologies and add value to that product. The VerityStream team has an incredible R&D team and they continue to evolve their application set. So in technology the visions is always grander than the ability to execute it, and you're always chasing that, and trying to decide how much money to put into R&D and talk development. But clearly, the newest area of investment will consume a material part of our growing investment rates. It will be shaping the leadership team and the technologies and roadmap for scheduling and capacity management. So I just gave you one concrete example. We plan to take the sales team from say 10 to with new leadership to your added leadership from 10 to over 20, I think 22 in the next three months. And similarly the tech teams there, like in that area we’ll take the best of the technology people from those three acquisitions. We've got a new leader over that tech group, who is kind of a CTO of the Scheduling Capacity Management business and they'll be hiring and adding to the team members there, because they have to build a unified technology road map. So you'll see R&D increase in the scheduling application sets. And of the necessity too, some of those applications needed to be updated and modernized and what you also see is work on the interconnectivity say for between NurseGrid and ANSOS, and between NurseGrid and ShiftWizard. In addition to all that we’ll be working on the branding and positioning of those products sets to create more clarity on the role of each of these technologies and that will cost money. And it isn’t all of that, don't forget. You know we didn't do rises last year. We limited the executive bonus program. We reduced travel and all of that in the second half of this year, which was in the second half last year is coming back. And so that’s why we need to be careful as we look at Q1, the sales and marketing ramp, the tech investments are beginning in new areas of our business in Q2.

And Scotty one for you, how much was the non-recurring Professional Services and software license revenue in Q1?

We didn’t quantify Vance, but it’s mainly from the ANSOS organization that we acquired in Q4 and its less than a million.

Okay. Thanks for answering my questions. Nice quarter guys.

Thank you.

And thank you. And I'm showing no further questions. I would now like to turn the call back over to Robert Frist for closing remarks.

Thank you to all the analysts who are following us. We appreciate you telling our story and we want you to be careful as you model out. We tried to explain the second half of this year, including increased investments, and we do have a really strong first quarter, but we want to be careful to look at the new guidance ranges and make your models fits within those guys range, because we making them as thoughtful as we can, as accurate as we can and we don't want you to over model or annualize Q1, because we have more investments coming out of the business in Q2, Q3, Q4. That said, we promise we are excited to raise guidance and report the continued research on the company. To our shareholders we look forward to hearing from you in our shareholder meeting and to our employees, I just want to say thank you for your continued feedback. We listened and we do it in a public forum, and we try to make our company better and stronger and more fun place to work. And now what I can say is many of you've been working for years on these products like Jane, and it's fun to see them and Workforce, Validate and others and now these new acquisitions and new employees and I want to encourage you that you're making a difference and say thank you to all of our over 1,000 employees now at HealthStream. Thank you all. Look forward to seeing you all on the next quarterly earnings and before that at the Annual Shareholder Meeting. Thank you. Bye-bye!

This concludes today's conference call. Thank you for participating and you may now disconnect.