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HealthStream, Inc. (HSTM)

Q3 2021 Earnings Call· Tue, Oct 26, 2021

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Transcript

Operator

Operator

Good morning, and welcome to HealthStream's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.

Mollie Condra

Analyst

Thank you, and good morning. Thank you for joining us today to discuss our third 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 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, 10-Q and our earnings release. Additionally, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. The 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.

Robert Frist

Analyst

Thank you, Molly. Good morning, everyone, and welcome to our third quarter 2021 earnings call. I think context is important as we start the earnings call, so I'm going to give a brief update on our perspective on coronavirus. The coronavirus pandemic in the United States appears for the moment to be in retreat, and particularly in the markets where we practice and in the business where we operate. Since the start of September, daily cases have dropped by one-third and daily hospitalizations have fallen by more than one-fourth. And according to the CDC, approximately 58% of eligible adults in the U.S. have been fully vaccinated. As of October 22, as that number - as of October 22, as that number rises, we are hopeful that progress towards beating this pandemic will continue. I shared some of those statistics to just think through the impact on businesses. And a meaningful part of the context is the long and medium and short run impact of COVID on our business behaviors and therefore, how we plan on our expenses and allocate our sales organization. So I want to speak to that for a bit. The long-run impact of COVID on all businesses is still being determined, but we can already see some of the permanent changes that are taking effect inside of our company. Like many companies, for example, we have adopted a hybrid workplace approach officially. And this is from a company that was really an in-person company for most of our existence. And now we have a full-on hybrid workplace approach. In fact, all of our offices and resource centers remain closed at this time, but we expect to open them by year-end. Offices will function as resource centers to employees, which is a little different than big of them…

Scotty Roberts

Analyst

Yes. Thanks, Bobby. I'm happy to report that we had another solid quarter of financial performance, and we're firmly on pace to achieve record annual revenues and adjusted EBITDA for the year, both while overcoming a $38 million revenue headwind as we entered into the year. On a year-to-date basis, we've been able to grow revenues by 5% and grow adjusted EBITDA by 15%. For the third quarter, revenues were $64.1 million, which is up 5% over last year and includes an $800,000 reduction associated with deferred revenue write-downs. Operating income was $1.8 million or down 43%, net income was $1.5 million, also down 43%, and EPS was $0.05 per diluted share, down from $0.08 per diluted share in the prior year. Adjusted EBITDA improved to $12.5 million, which is up 11.5%. Workforce Solutions revenues were $51.2 million and were up 4% and revenues from Provider Solutions were $12.9 million and were up 10.7%. On a consolidated basis, we grew revenues by 5%, while overcoming a $9.2 million decline from the legacy resuscitation business. Revenues from recent acquisitions and growth in our core business more than offset this decline. When you exclude revenues from the legacy resuscitation business, consolidated revenues grew by approximately 24%, which was comprised of 10.5% organic and 13.7% from acquisitions. Our gross margin performed as we expected, coming in at just under 65% for the quarter. And our operating expenses, excluding cost of revenues, were up 15% or $5.3 million over last year. And about two-thirds of this increase relates to the operating expenses from acquisitions that we completed primarily in the fourth quarter of last year. Our G&A expense during the quarter also includes a charge of about $350,000 related to closing several leased satellite offices that will expire next year. Our adjusted EBITDA was…

Robert Frist

Analyst

Thank you, Scotty. It's kind of an exciting pivot point for me now. Talked so long about transitions to all of you that have followed along our store, including our key analysts. And now we want to kind of begin the orientation process to the future and how we're going to talk about the business as we go forward. And so let's get oriented a little bit. The first is, over time, over a long period of time, we have talked a lot about a learning platform and the credentialing platform. And I think inside our company and now to the outside world, we're going to communicate differently. We're going to correctly identify all of those as software applications or application suites. And there's only going to be one platform at HealthStream, it's hStream. And so on a go-forward basis, let's think of HealthStream the company as a one platform company, hStream is the platform, and we have developed multiple sets of applications that run, and ultimately overtime will increasingly connect to and leverage the single platform. And so you'll see us correct ourselves off over the next year or two as we change from calling it the learning platform to the learning application set or the learning application suite or the learning application and the credentialing platform will become the credentialing application suite or the credentialing application and the scheduling applications. So there will be a shift, but it's important because it indicates the intent of why we're building hStream to underlie, interconnect and interrelate all of the application sets that we offer. And so we've really made enough progress now to make that decoration and begin to change our own internal language at HealthStream and therefore, the way we talk about it with you. So we'll have three…

Operator

Operator

[Operator Instructions] And our first question will come from the line of Ryan Daniels from William Blair. You may begin.

Jack Senft

Analyst

This is Jack Senft on for Ryan Daniels. First off, congrats on the quarter and thank you for taking my question. I guess maybe if you can provide just a broader update on the health of your client base. I guess we've seen some early data points from publicly traded hospitals that suggest ED volumes are coming back. And I know in your prepared remarks, you did touch on the pandemic and seeing it subside a bit and possibly translating into potential ED volume return. So just kind of curious if that's something you're seeing broadly and any other color you can share amongst the client base.

Robert Frist

Analyst

Sure. In certain areas of our client base, so it's kind of a regional impact. And I'd say their operations through the different ways of COVID have been interrupted, which kind of put - I've now referred to as air gap. So if you sold the system and you wanted to begin implementation in certain part of the company - country, they may have delayed implementation for 30, 60 days, they work through capacity issues and staffing issues and then they get it back on but it kind of put all these whole air bubbles into our business with them. That said, they keep resurging. In other words, they learned to manage the new norm fairly quickly. I see that they're more adaptable in how they've managed say this the Delta variant surge, more responsive. The good news is there are more treatments out. So I think they - exactly as I talked to that run the big health systems have a little more confidence in their ability to handle the pandemic. And maybe as you hear now the dialogue is moving towards an endemic situation for the pandemic. And that's my observation is that particularly in the bigger systems, too, they're learning to operate in a mode that will be successful. Now they do face unprecedented and I hear this over and over challenges with their workforce. We talked about the great resignation impact on HealthStream. And - but in hospitals and nursing, it's incredible. The mobility of nurses, they're reevaluating their lives. They've been through a lot of hard work there, both resigning and changing careers. And the executives I talk to talk about the need to prime ways to retain, develop. We even see some large health systems acquiring nursing schools because they know they have to get into really talent development and retention and growth. I think that does bode well for our positioning in the future. But needless to say that the current challenge is tremendous. It has both financial implications. If you're a smaller organization, how do you retain and pay competitively. And if you're a large one, how do you reduce your reliance on contingency labor pools, which are just too expensive. So I think overtime, in the 3-year window, resulted more health systems being more involved in the development of their own workforces more than they have had in the past is a positive, but in the short run, cost pressures and turnover issues on quality are all going to be real. So generally, I see recovery and with a few remaining pockets that are still dealing with issues I talked about.

Jack Senft

Analyst

Perfect. And just kind of a quick follow-up, and I know you just talked about a little bit of the burnout and staffing issues and stuff. But if you could touch on a little bit how HealthStream is kind of helping the providers deal with these issues. And if you can provide any additional labor on - or additional color on the labor market pressures, that would be really appreciated.

Robert Frist

Analyst

Sure. Well, I think the trend I just noted was it's kind of a belief that maybe a current reality. But I do see - and I've seen some of the market-leading large organizations began to address the issue of their workforce by doing things like I mentioned, like buying a nursing school. To me, that's a symbol of the willingness of the market leaders to invest in the future of their workforce. And of course, that bodes well for us because we're all about retaining, developing credentialing and support that workforce to be more successful in their role. And so I would just say that they'll need to awake into the need to the extent that they haven't already to net invest in their workforce. And it doesn't mean just education. It means all things related to the benefits, flexibility for those costs, but also in the outright training and development of their skills and development of their career path. Career paths for nurses have been fairly flat overtime. You kind of become a nurse and your nurse your whole life. It's unlike business where you become maybe a Director, Senior Director or AVP, a VP. I think the organization is going to need to find new ways of recognizing skill, promotion and differentiating quality and good decision-making by their staff. And then, that resulting in better pay models and paying the talented people more. So all of that bodes well for HealthStream as we help distinguish the high-quality nurses that are able to think on their feet and get better patient outcomes. We're able to identify gaps with our Jane technology and their skills and their thinking processes and then remediate them with intelligent AI-driven recommendations. So I think we're well positioned for the future as organizations wake up and need to invest in their workforce. And the shortages are acute. We've seen a boom in the travel nurse industry because the inability to retain and attract will keep full staff. So the staff bed counts have gone down and only the largest organizations are able to kind of keep everything running the way they want to. So there's a lot of staffing issues that they have to work through. And mainly, they're going to see price inflation for their staff in the coming year if they don't find ways to develop their own staff and retain them.

Operator

Operator

Our next question will come from the line of Matt Hewitt from Craig-Hallum. You may begin.

Matthew Hewitt

Analyst

Good morning, and thank you for the broad-based update this morning. My first question relates to your employees, some of the challenges that you've been finding, but now that you've moved to more of a hybrid model or in many cases, maybe even just a fully remote with occasional travel to meet up as a team, is that allowing you to recruit nationally? And if so, what types of barriers or challenges does that present?

Robert Frist

Analyst

Well, there's just so many things - It was a culture where we got together a lot, of course, worked out of offers almost - we are a majority focused in the office, and we spent a lot of money and time through our teams to celebrate successes, recognize peers, onboard new employees in a face-to-face setting. And of course, the last 16 or more months that we haven't done that. And so what we're kind of declaring while we've closed leases, we've gone from like 11 leases, we'll be down to like three or four years soon. We're doubling down on the big resource centers in San Diego, Boulder and Nashville and which are well positioned across the country to convene employees. But the cost of convening, let's say, each division gets their division together for a three-day retreat now annually. So we didn't do that before. But we want everybody to come in and centered around one of our resource centers have a three-day retreat where they had recognized new employees, give awards to those that hit milestones. So onboarding new employees, do a day of strategic planning and the cost for that will be higher. Like it's like a national sales meeting several times a year for each division as we think differently about convening. But I think it's essential investments like that to maintain our culture, and our culture is what's attracted the talent to our company. So we have experienced higher turnover of departures. I just think that people have been somewhere for four or five years or more, they put their head up and thought maybe they wanted a life change and they look out they try to see if they can find greener grass. Even if you're part of a great company, I…

Matthew Hewitt

Analyst

Understood. Thank you for the color. May be on other - one additional question here. And I'm not trying to nitpick. Obviously, it was overall a very good quarter. Workforce Solutions was down sequentially. Was there anything that hit in Q2 that was maybe more onetime in nature that we didn't see recur here in Q3? Or what kind of drove that albeit very small, but just normally used to seeing sequentially up - used to seeing sequentially up for workforce.

Scotty Roberts

Analyst

I'll comment on that for you. So I think in the - maybe the last call, I alluded to a couple of onetime items that were benefiting our revenues in the first half of the year. And so we saw less of that benefit in the third quarter. I think each quarter, we saw a little bit of that occur, but just less of an impact in Q3 than we had in Q1 and Q2. And mainly, that's the legacy resuscitation that continues to dwindle down. And then the second one is just some onetime software or perpetual license sales benefited from some of those in Q1, but less of that in Q3. So those are primarily the two driving forces behind the sequential decline that you saw.

Operator

Operator

Our next question will come from the line of Richard Close from Canaccord. You may begin.

Richard Close

Analyst

Scotty, can you go over the acquired and organic percentages again? And just a clarity that was total revenue that you gave it for?

Scotty Roberts

Analyst

Yes, Richard, I think I spoke about consolidated revenue growth once you back out the impact of the legacy resuscitation assets. Let me get to the number real quick, and I'll repeat it for you. I think it was, what, 10.5% on workforce - I'm sorry, 10.5% total. That was organic and then I think 13.7% from acquisitions. So roughly 24% thereabouts in total.

Richard Close

Analyst

Okay. And then schedule wins all in workforce, right, correct? Is that

Scotty Roberts

Analyst

Yes, that's where it is.

Richard Close

Analyst

Okay. Great. Thanks for the clarification there. So with Bobby, maybe with respect to turnover, could you give sort of maybe characteristics of the individuals that are leaving in terms of is it any one department like sales, product development, whatnot? And then like the experience level, are these like long tenured health streamers or have they been there a short period of time? Anything along those lines?

Robert Frist

Analyst

Sure. I would say in our group of what, I guess, I would call our AVPs, VPs and senior VPs so the top 50 employees is extremely low, like I think the one that I can identify just indicated the desire to come back to the company. So that's the good news there on the leadership front. Now maybe leaders take longer to reevaluate opportunities and decide to lease. So I don't want to say that, that's a done deal that we've kept all of our leaders. But that is the fact currently right now in the leadership group, it's very, very low. And as I mentioned, the one that I can think of that left is indicating a dialogue to come back already. So which is fascinating. And then - but stands that, so that's 50 of 1,060 employees. The other 1,000 employees, I would say it's just - it's across the board. - its turnover in the new employees that came in for a few months and want to try something different. I don't know that this may be a more mobile, younger workforce. It's some of the veterans. It's in all departments. You'll see it like if one person gets recruited away to work somewhere in a department, then maybe they - that recruiter and that team comes back in and we have a few more from that department. And sometimes it's resulted from a pay raise or a rumor that's going to be a better, more flexible job. So I think it's just kind of broad-based and it's a result of people reevaluating their work life and trying - deciding to try something new. And I can't identify any single area, but I would say it's kind of equally high in all areas from sales to operations and across all experience levels. So it will introduce a challenge, right, when you have that much change at all those levels of experience. Now what is resulting in though is a lot of internal promotions, which is exciting. So people are willing to stay with us are assuming new roles, like if there are five project managers and one of them leave and there might be a new team lead out of the four that remain and then we backfill and hire new project leads. A tremendous amount of promotion coming out of our service groups as we promote someone who's been three to five years in our customer service areas and the operations support. So there's upward mobility that's resulting in new employees coming in, but there's also that outflow, and it's balanced, Richard. I'd have to say it's hitting every operations function of the business and kind of in little weights, like a couple of salespeople lead and a couple of operations people leave. And so it's just balanced.

Richard Close

Analyst

And if I could just slip one another housekeeping just for clarification. The 47 customers on credentialing, are those totally new credentialing customers? Or does that also include the conversion of the legacy.

Robert Frist

Analyst

It's both. And I think the ratio is about half-and-half. And so it's those that are upgrading to and those that are brand new to. And I may get correct on that, I'm going to watch my text from some of my officers, who may have sent. But hopefully, you still listen, although this call is long. I think it's split across the 2/3 of 47. They're new to the credential stream platform, but some are migrating. And I may get correct on that in the next few seconds, but if not, we'll stay with that.

Operator

Operator

Our next question will come from the line of Vincent Colicchio from Barrington Research. You may begin.

Vincent Colicchio

Analyst

Yes, Bobby, a follow-up on the last question. Is the transition to the VerityStream from existing clients. Is that - that make you meet your expectations in the quarter?

Robert Frist

Analyst

Hang on, I'm texting an officer to get a better answer. So yes, they exceed expectations. I think a couple of things we've learned is that as long as the customers stay on the older platforms until they're ready to migrate, there's not a huge, huge cost benefit for the migration. So we're really happy if they stay happy and they migrate when they're ready to. So, there's no forced conversions here. These are elective when they see enough features to move. And so what I would say is we're seeing a material number of them decide that there's enough reason to move - to move, and I'm excited about that. And then, of course, the new accounts that we're winning are fantastic because they are in RFPs, and we're competing and we're winning a disproportionate share of the open bid - And so we're really excited to see that trend. And so both of those trends are encouraging. We're not forcing transitions, but we're getting them, and we're winning in the open market.

Vincent Colicchio

Analyst

And on the labor side, does the company continue to see moderate wage inflation...

Robert Frist

Analyst

Well, so far, it has not been tremendous wage inflation. In other words, we've been able to promote internally to fill a position loss so someone may get a raise because they moved from a team participant to a team lead, if a team leader leads the company. But overall, we've been able to reasonably fill the open positions at the similar salary bands previously, which is ironic - at some point, we're going to see wage inflation because people are leaving or leaving to get a promotion or market themselves into maybe a better, higher paying more job of more responsibility. And if we bring them back, they'll come back and be more expensive. But right now, on the whole, I'd say we're filling at only slight increases in the total net cost.

Vincent Colicchio

Analyst

Okay. That's it from me. Thanks.

Robert Frist

Analyst

And I think that's because of our approach to promoting from within. So as a manager leaves, we often are able to pick someone to promote into the manager position and backfill the lesser experience position with a new person. And so I think that upward mobility has helped us a lot in kind of maintaining our cost structure. What it means you have to do a lot more hiring at the entry level, and you have to rely on the entry level. And one thing that might be happening a bit is as we drain the entry-level pool, in other words, if you've been in customer service for two years and you're eligible for a motion to the manager, and we've passed all those people get harder to fill the experience level at the same cost. Does that make sense? And so our first our first wave, we've been able to maintain flat costs, but I do expect things to maybe start to creep up on us in the next year. And then a quick update on the question that Richard Close asked. 47, 31 of them were new customers and 16 were migrations. So 2/3 of the 47 were new - brand-new accounts to HealthStream on the Credentials platform, and 16 of them were migrations

Operator

Operator

Now I'll turn it over to Robert Frist for any closing remarks since we don't have any more questions in the queue.

Robert Frist

Analyst

Well, I imagine we scared off the questions by going for an hour. I appreciate anybody that's stuck it out this long. Hopefully, the detail was informative. We look forward to putting the transition behind us and speaking to the three application sets and the single platform company we're becoming, and the past architecture we're deploying couldn't be more excited, and thank you all for participating. Look forward to the next earnings call.

Operator

Operator

This will conclude today's conference call. You may now disconnect. Have a good day.