Good morning, and welcome to HealthStream's Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. I will 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 HealthStream's fourth quarter and full year 2022 results. Also in the conference call with me today is Robert A. Frist Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President of Finance and Accounting. 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. 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, I'll now turn the call over to our CEO, Bobby Frist.

Thank you, Mollie. Good morning and welcome to our fourth quarter and full year 2022 earnings call. We do have a lot of developments to cover in this morning, so we'll let's first look at a quick view of financial performance. Moving to in depth discussion of operational enhancements we've made to begin 2023. I'll turn it over to Scotty Roberts for a more detailed look at financials. And I do want to kind of reiterate the fundamentals of who we are and where we're going. So let's start with that. And then exciting news around starting the cash dividend policy to share as well. So first, the financials. Each of the financial metrics highlighted in earnings release, we did show growth in both the fourth quarter and the year when compared against the same period last year. For the full year of 2022, we delivered a record high amount of top line revenue of 266.8 million and a record adjusted EBITDA of 53.4 million. In 2023, we expect to eclipse both of these high watermarks, due in part to our streamlining of the company around our single platform strategy, where we use -- we used to be organized around two business segments, Workforce Solutions and Provider Solutions, we are now organized and managed as one operating company unify our work to enhance and leverage our hStream technology platform. We call this our one HealthStream approach or initiative. And we're going to talk a little bit more about that in the rest of the script here. Before we go further, I want to cap 2022 and start 2023 by grounding everyone in our business. First and foremost, HealthStream is a healthcare technology company dedicated to developing, credentialing and scheduling the healthcare workforce through SaaS based software solutions, each of which…

All right, thank you, Bobby, and good morning. I'll start with the financial highlights for the fourth quarter and then speak to our financial outlook for 2023 and share how the operational changes we've made will impact our financial reporting beginning in the first quarter of 2023. Unless otherwise noted, comparisons are going to be against the same period of last year. Our revenues were 68.5 million and were up 7%, operating income was 3.1 million up from an operating loss of 0.5 million. Net income was 2.5 million, up from a net loss of 0.4 million. EPS was $0.08 per share up from a loss per share of $0.01 and adjusted EBITDA was 13.6 million and was up 13%. As a quick reminder, last year's fourth quarter included 2.4 million of stock compensation expense associated with a stock grant to over 1000 employees that was facilitated through a contribution of personally owned shares from our CEO. And despite being fully funded personally by our CEO, GAAP requires this transaction to be accounted for as a compensation expense of the company. And this resulted in lower operating income and net income in last year's fourth quarter compared to this year. So now let's go back to our financial results. Our workforce solutions revenues were 55 million and were up 8% and revenues from provider solutions were 13.5 million and were up less than 1%. Revenues from provider solutions were impacted by lower professional service revenues compared to last year while subscription revenue increased by 5%. After delivering a consolidated growth rate of 2% in the first half of the year, we finished with an overall growth rate of 6% in the second half. A steady progression of revenue from new sales, particularly from our learning and development solutions, along with…

Thank you, Scott, for that detail. Got lots to pick up on operationally. So let's get started. My comments at the start of the call were about positive aspects associated with streamlining our business. According to our one HealthStream approach. I also want to pause and acknowledge the most challenging part of our realigning our business. And that is the elimination of 33 positions from our base of over 1,100 employees. With consolidation comes the need to eliminate overlapping roles. And that is driving the efficiency measures we announced to our employees yesterday afternoon. We've not take this decision lightly and we wish all of our health streamers past and present all the best moving forward. As I mentioned previously, we will continue to invest in our business and employee base and continue to channel those investments where we believe there'll be most likely to help recognize our vision of improving the quality of healthcare by developing the people who deliver care. With that, I want to quickly mention some of the successes we achieved to end 2022. For each of our learning, scheduling, credentialing, and now our platform solutions, I will highlight a win that I think characterizes where our business is heading. First, the HealthStream Learning Center is the most utilized learning management system in healthcare and continues to add new customers. And the last month of the year, art and health services purchased our HealthStream Learning Center to support that workforce enterprise wide. We recently issued a press release about our partnership with art and health, which I encourage you all to read if you haven't already. Second, we believe that our SaaS scheduling solution known as ShiftWizard, is the best-in-class solution of its kind and it will only become more valuable to customers as it begins…

[Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig Hallum.

Good morning and thank you for all the details and the update. Maybe first up, Bobby, could you describe what the sales environment is like? Obviously, the last couple years it's been pretty challenging, hospitals reluctant to maybe bring in new software, given some of the challenges they were facing with Covid. It seems that that's freeing up. Now you've got some issues on the hiring and retention side at hospitals, but maybe just a, a little bit of color on what you're seeing from the customer side.

Yeah, I think the, probably the simplest way to say it is that our products are well aligned with business needs, but the larger customer base is under a lot of financial duress. I think 2022 was probably one of the most difficult financial times for acute care hospitals in a long time. Result of the, the shift in how they operated the running out of covid support funds. I think just in general, there's several exceptions of strong operators that are generating solid growth and profits, but I'd say on the whole, the target customer base is under, still under stress, financial stress, and particularly in the second half of 2022, I kind of saw that. The good news is that I still think our solutions are both aligned with the areas they need to invest in and or are required to invest in sake of OSHA safety training. In many cases, we also are the low-cost provider of that high quality service. So we should be the selected vendor in those, when they make those choices. And I feel that our products are now getting in a position where their capabilities are market leading or, and very innovative. So I feel well positioned, but I don't want to underemphasize that, you know, the typical hospital CEO is still under a lot of pressure when investing and deploying capital cash or operating cash flow into really anything. So we are a bit cautious on our overall growth for the year. Some of it related to long implementation cycles and some of it related to the sales cycle still. I would see a much higher, I like our pipeline as they feel strong. We just have to see how well the deals close. And so we kind of, we've got this essentially four to 6% top line growth range on us for the year, as we see how this all plays out. But it's an interesting dynamic cause we're well aligned, but our customer base is under kind of stress. And, but I think we have good price points that to entice them and a great sales team and we've got a strong pipeline. We just have to see how well we can convert it. And then of course implementations for scheduling a major enterprise adoption of scheduling and credentialing are rather long implementation cycles. So the time to revenue's a bit delayed. That's why we talked a little bit about second half being a growth period.

That's really helpful. And maybe, a follow up, getting a little more specific with the ardent win, obviously congratulations there. Maybe if you could provide a little bit of detail on how long was that deal in the pipeline, you know, who were they or what were they using prior to converting over to hStream and the learning center and how long was that deal in the pipeline? How long did it take to get to close that one given some of the challenges that the customers are facing?

Well, sure. Well that one moved along fairly well over the course of a year, from initiation of discussion was that they're going to look to the market to see what was available. They were on a competing application suite. And so it was a change for them to move to us. Unfortunately, we had previously, a year prior, convinced them to move on to the Red Cross application suite and connect to that program to the hStream platform. So they already had hStream licenses in place, for a lot of their employee base and shows how the model works like we connected to them their existing platform, their existing learning architectures, to the hStream platform were able to sell the Red Cross program, they liked the program. It was approved, effective, and it also saved the money over their prior programs. And then we introduced the learning system as a better way to manage the administration of the Red Cross program. And over the course of the year, we won them over and with them already having licenses to the hStream core technology, it made it more economical to just add on the Learning Center application. So it was a bit of a process, but it's also essentially an upsell, because they have already adopted parts of our technologies, including the extreme hStream itself.

Our next question comes from the line of Richard Close with Canaccord Genuity.

Bobby, maybe just to build on some of the comments you just made to Matt's question. With respect to revenue growth in the first half, should that be somewhat flattish? And then seeing the growth, most of the growth in the second half of the year? Just curious on that.

Fair question. I don't think it's going to, we do think more in some areas of business will matriculate in the second half. But that said, like the learning platform is going live and we'll get to those revenue sooner, for example. So no, I think the year will show growth. I haven't looked at his quarterisation in the last 24 hours, I can't quite remember the ups and downs. Scotty may comment a little bit on, but the overall growth, we have at 4% to 6%. And probably a little bit more weighted to the back half based on our current dialogue. But it doesn't mean no growth in the first couple quarters. I don't think maybe Scotty could come out and clarify the quarterization a little bit better.

Richard, it'll be quite as dramatic as last year, we've had 2% first half and the 6% second half kind of growth. Growth rate, I think it'd be a little bit more balanced than that. But with expect just given some of the kind of way revenue stream flows in over time that the second half will be a little more pronounced than the first half, but probably not as big of a gap as we saw last year.

And then considering you guys just posted 6.5% growth, I guess, in the fourth quarter. So you would gauge that, for the year the 4% to 6% is baking in some conservatism, just basically because the current and environment is uncertain?

There's definitely little that but I don't know if I call conservative. It is our best estimate. Based on all the variables it really is. I don't think we're trying to be overly conservative or overly aggressive. It's just kind of when we looked at our pipelines, how they're converting, we looked at our sport quarter sales, obviously very important to have some nice big wins there to have to know how they'll roll in. I think in the sense that the macro conditions are still tough. It's hard for us to get beyond that range right now as well as what I'm thinking. So I don't characterize as conservative, I think it really is what we think is our accurate view of how things will play out in this year, of course, and without trying to over engineer it to be conservative or aggressive. I think it's a careful study, the good news is we waited to get the year-end sales numbers in and as you know, a lot of our growth for this year is based on how the contract flows were of the last two quarters of last year. So the growth numbers are largely a projection of how the sales of the fourth quarter and third quarter of last year will matriculate into this year.

And then when I think about something like the CloudCME acquisition early or mid-year, I guess, and then the EEDS here, and recently. Not huge from a revenue contribution, but how easy or hard is the process in terms of plugging that into the perhaps those offerings into the platform. And then just like cross-selling that into your significant base? Is that something where the sales process is relatively easy? Just any thoughts on that front?

Yeah, it's a great opportunity to kind of talk about the platform a little bit more and create more clarity on it. How to best think about it for the next, say, 12 months. And so the first thing to remember that the actual platform itself, the technology of the platform is growing and maturing is reflected in the actual release of our developer portal and it's our first set of publicly available licensable APIs, and the Kaiser deal we just announced. So we're really excited about that. And each time we add to that platform, the actual technology capabilities of platform, things will get faster, easier and better. That said, on a maturity curve, I would say that the platform technology is fairly, fairly new and immature. Meaning there's like so much in front of us, that's opportunity to create leverage. So a more constructive way to think about hStream, I think, for the next 12 months, is maybe the way you would think of say an Amazon Prime, it's a license, that includes access to some technologies, but also a lot of other benefits. For example, the way prime bundles in, your free audio and video, the hStream licensed double then 300 free industry sponsored courses with our learning system. And so we are selling lots of licenses to hStream when it's bundled with learning, for example. But because of the maturity level of the platform, not all of our applications are technologically leveraging the platform. And we're still in the early stages of rolling out some of the core functions of the platform, like the common ID. And so even of our own application suites, not many of them leverage the hStream ID infrastructure, which is the common infrastructure that we're now aggressively deploying. And the good…

No, that's fine. And it actually got to a couple questions I had in my back pocket here. My final question, if I can ask another one is on the digital network development business. So just if maybe you could, you know, describe that a little bit better, exactly what that is and how we should think about understanding the financial opportunity longer term there.

Scott, do you want to take that for a second?

Sure. Yeah, Richard. So this new solution group be led by Scott McQuigg, as Bobby mentioned on the call. This is kind of forming a solution group around the individuals versus the businesses that we've traditionally done, worked with over the years. And so trying to target that audience more discreetly and specifically. And so an example of applications that already have as assets are Nurse Grid and My Clinical Exchange, both from prior acquisitions, so continuing to invest in those technologies to get more of a footprint directly with the individuals, our end users in healthcare. So that will play out over time. Obviously, just kind of putting more attention to it as we head into 2023, but as time progresses, I think we'll see some more opportunities arise out of that. And I think just trying to, like I said, get more footprint in those areas, our objective for this year.

Richard, just building on that. I love, we kind of coined this internal phrase of turning subscriptions into subscribers. If you think of the 5.4 plus million subscription licenses that we sold the hStream. Scott McQuigg's new job is to try to find those individuals, as individual consumers over time. So for example, we have lots of a few visionary statements out there that again, haven't occurred, but they're in front of us under Scott McQuigg's leadership. So for example, when a doctor is going through the credentialing process, and they need some CME to finish their credential report to show that they've gotten all the seemingly required for their license maintenance. They may be short a class and in the new model, we would present them with opportunity to enter their credit card and purchase that class that they're short, because we know what it was, I'm going to be able to recommend it out of our massive library. And that would result in a direct transaction in that case with the physician that was originated, because they're in the credentialing process at a health system. So this monetization of the individuals is an opportunity, I'd say it's a long run opportunity, but we're beginning to put a little bit of emphasis on it, because it allows us to look internally at all the channels and figure out where we might be able to catch an individual as a customer as well. So we have two applications, my clinical exchanges that are already onboarding professionals as individuals, and getting them an hStream as an individual. And the other thing this implies example is a more of a lifetime journey for people when they become in health streams ecosystem. Our goal is that when they're not employed, they say you're…

Our next question comes from the line of Jared Haase with William Blair & Company.

Yeah, I guess you've talked a lot about some of the sort of product experience synergies from having the interoperability across a single platform. But, in the release, you also mentioned sort of branding and contracting, being consolidated as part of this single platform strategy as well. So maybe just a clarification, that's something you think can actually benefit the top line growth profile over time, just in terms of maybe speeding up sort of time to revenue or having a more cohesive message to the market? Or do you think of it as more of just kind of beneficial to the bottom line in terms of sort of those operational efficiencies? Thanks.

I hope it's both. We're early to making these changes obviously, and some of them were position changes, but I do think, I mean, obviously, for a while, and of necessity, we operated a separate, wholly owned company, and it has its own infrastructure and its own thought and it had to be built out in become market leading the VerityStream company, led by Michael Sousa, and in a way, it was kind of a hedge to all the other things are going on the company to separate that out, let it be focused on and get it to where it is. But, as of really yesterday, we're folding those teams in were delayering the brand, so the VerityStream brand will go away. And so customers, a lot of customers of VerityStream, the 600 new customers of VerityStream that bought the VerityStream product called credential stream, may or may not have paid attention to that it was a HealthStream product. And so now, it'll become crystal clear. It'll be part of HealthStream. All those customers will have a better appreciation as part of the HealthStream vision, part of the HealthStream company. And so I think that it should benefit both from operational side and someday from a customer retention, recognition, and hopefully cross-selling as well. So it's a little early to tell, but I would expect that operating off of a single master services contract, for example, will make it easier to buy when everything has a very similar structure legally. And so we're making that move to eliminate separate MSA is the VerityStream organization had its own master contract. It'll result in stream operations. For example, Tier 1 customer support for a lot of company will be centralized. Now, instead having separate Tier 1 data centers or support centers for scheduling and credentialing. So I think you'll get operational synergies, and in the long run, let's say, 24 months, we should see it helps in the cross-selling and brand recognition for HealthStream. And the brand appreciation, and most importantly, as the applications become more interoperable, which is we're kind of at the dawn of that period. We want them to know like, there's a reason to buy HealthStream learning and HealthStream credentialing because of how they work together. And again, we're not quite there yet, I tried to describe the maturity of where we are on that journey earlier, but we're getting closer, and it's time to declare it now. So we're going to clean up branding and contracting initially.

And then I think, maybe just a related follow-up with specific to the guidance. So you're looking at the 100 basis points of EBITDA margin expansion that's embedded in the '23 outlook. I'm curious how much of that is would you say is directly related to some of the operational efficiencies that you announced in tandem with this, you know, inflection point of the single platform, and then how much of that sort of margin expansion is reflective of the natural embedded earnings growth coming from the, you know, top line organic growth profile? So I guess in other words, trying to sort of gauge how much to read into the a hundred basis points of margin expansion as kind of normalized, you know, margin opportunity relative to maybe 2024 and beyond if we think about a longer term model.

I'll let Scotty address that. I mean, it's obviously a little bit of both contributing, and clearly when you delayer parts of your business where you have duplication of leadership, you know, it creates some, a more immediate financial leverage. So it certainly is important to the impact. But I also think just structurally, it represents the long term to vision to continue to move that, that gross margin and EBITDA margin up. And that's reflective of, you know, a lot of our new products just generally have a higher gross margin profile than in our past. And so I think it is going to be, the answer's going to be it’s the combination of both, but I'll let Scotty maybe chime in a little bit.

Yeah, Jared, I think without trying to get into specifics of quantifying it, I think that we do expect some of those synergies to flow through to improve EBITDA. But, you know, we're also planning to look for increasing investment in some areas where we need to, like in the hStream platform, and I think I mentioned our scheduling application and then this, this new area that we just mentioned on digital and network development. So we see some costs coming out of the equation, but we're planning to reintroduce some new positions in the year as well to kind of offset some of that savings. But there will be some savings that flow through. I did mention that, you know, in the first quarter we expect to have a severance charge related to the employee departures, and that's about 800,000. So there's going to be a little bit give and take throughout the course of the year. But again, you know, we do expect some margin improvement just through the organic growth of the company as well.

[Operator Instructions] Our next question comes from Vincent Colicchio with Barrington Research.

Yes, Bobby, I'm curious, will there be any meaningful changes in how the sales force is organized and operates?

Not now. And nothing is immediately planned. We've kind of built out the sales force the way we like it last year and, you know, it's broken between account management strategies. I do think they'll, well, as I say that I'm thinking through, I think that as a result of merging in Verity Stream, things like the account management teams will take on slightly new probably account assignments. We'll think of them again as, as one set of customers instead of two set of customers. So I think there'll be a little of that. But structurally, you know, we have a certain number of account managers. We have a certain number of specialists and those components and structures remain the same. We also have what we call BDRs that generate the leads and process incoming leads off of marketing. And the way our mechanisms work between marketing and sales is similar. I do think, you know, we obviously, for example though, the Verity Stream sales team was in the market with a Verity Stream brand, like, hey, we're Verity Stream, we have the credential stream product. And as you guys know, as part of our provider solutions segment, so you think about all that, like provider solutions is Verity Stream is credential stream, and now they'll be entering the market as one Health Stream sales force. And so the VerityStream teams will carry on a HealthStream business product, instead of VerityStream business product, again, providing more leverage to the brand and visibility to the company. So in that way, there'll be some changes around semantics and positioning, but structurally, BDRs for business development, processes and marketing leads, account management infrastructure is similar to the same, maybe some reassignments and the specialized sales teams that go into target buyers, like the Chief Medical Officer for credentialing or the Chief Nursing Officer for a lot of our learning products like the Red Cross assess patient program, all that remains is very similar. But the branding of positioning will I think, further the HealthStream position in the market.

And how to cross selling, how did it perform in the quarter with your expectations?

Well, I mean, I gave those four examples to show, I think how we're emerging, you saw Prime healthcare go from being just a learning customer to being a learning and now an enterprise scheduling customer. And so I think, it would be our plan to continue that journey to show that in these three application areas, we are the best of breed, and they're and to show they're increasingly interoperable, and increasingly leverageable. They improve efficiencies when you have more than one of our applications. And so I hope and expect that it'll cross over and become more a part of the story. If you look at our past, we're more individual SaaS applications and sometimes sold under different brands even and now in the present and future. It's entering the C suite as HealthStream. And showing about how these things can work together. And, again, we're early just the quarter into showing quote, how they work together. And not all of our applications are connected technologically to hStream. But this is the year for that our leadership team has been reorganized around that with the addition of Kevin O'Hara, Senior Vice President to lead in the platform as a product. We have a really great release schedule of new capabilities of the platform really every quarter from here forward. So I expect cross selling should pick up.

I'm currently shown no further questions at this time. I'd like to hand the call back over to Robert Frist for closing remarks.

Well, I was so glad to get to the part where I can kind of ad lib and answer your questions, because there was so much change in the quarter from the dividend Eddie Pearson's I guess I'll call it semi-retirement to the structural changes, and the branding changes that I was told to say on script. So you've probably got a little sense that I was reading, reading, reading. And so I kind of was, it was fun to get your questions and answer them. We're obviously excited about the future and trying to get to that as soon as we can. But our expectations are steady ship, with returning some to shareholders. And we appreciate all of you guys following our story and publishing on it. Thanks, and we look forward to reporting our next quarter earnings. And thanks to all of our employees making all these great things happen. Congratulations on the Brandon Hall Awards. We'll see you guys next quarter. Thanks, everybody.

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