Good morning, and welcome to the HealthStream's 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 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 second quarter 2023 results. [Technical Difficulty] So with that start, I'll now turn the call over to CEO, Bobby Frist.

Thank you, Mollie. Good morning, everyone, and welcome to our second quarter 2023 earnings call. Mollie, you were breaking up just a little bit, so I think I heard the hand off 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 was one of those solid prints, as they say, or a good quarter. We're pleased to report our results to you now this morning. In the second quarter, 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 $69.2 million in the quarter, which was up 5% over the same period of 2022. We also delivered solid profitability with $15.3 million of adjusted EBITDA, which was up 17% over the same period of 2022. 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. 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's new to HealthStream. First 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. We sell our solutions on a subscription basis under contracts, which average three to five years in length. That means…

All right. Thanks, Bobby, and good morning. Let's begin with the financial highlights for the second quarter. 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. Our results were as follows: Revenues were $69.2 million, up 5%; operating income was $4 million, up 36%; net income was $4.1 million, up 34%; EPS was $0.13 per share, which was up 30%; and finally, adjusted EBITDA was $15.3 million and was up 17%. Our revenues for the second quarter were a record high of $69.2 million and were up $3.6 million or 5% compared to last year's second quarter. Organic revenue growth was 4% and the two acquisitions that we completed last year, CloudCME and eeds, contributed to the remainder of the growth. Revenues from subscription products accounted for 96% of total revenues and our subscription revenue came in at $66.5 million or an increase of 6%, while revenues from professional services were $2.7 million, 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 $1.2 million or 3% over last year's second quarter, of which approximately half of the increase came from the two acquisitions that we completed last year. Sales, marketing and product development expenses all experienced year-over-year increases, while G&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…

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. 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 fourth quarter of 2022. The portal provides access 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, was kind of the symbolic beginning of a journey we've been on for many years with the launch of the hStream platform technology and architecture. For our customers, the APIs offer meaningful extensibility of our applications. We believe the extensibility increases the stickiness of our applications as customers begin to rely on functionality from our applications to power other applications that use in their organizations. At the end of the second quarter, 40 healthcare organizations, including large health system customers, a global publishing company, a market-leading EHR vendor and several health tech start-ups had chosen to open an account on the developer portal, where we collectively enabled 145 developers have access to the eight 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 HRIS system into the HealthStream Learning…

Thank you. [Operator Instructions] And the first question that we have today is coming from Matt Hewitt of Craig-Hallum. Your line is open.

I don't know if -- who she called?

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

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

Well, certainly, healthcare 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've 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. I'm sure they made more money, but hopping around place to place. There might be a little more appeal 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, 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 suite. We think our credentialing suite is essential in reducing the time to making doctors from the new hire to when they're productive. We think that we're the best in the market at shortening that cycle of the…

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 them looking to have the "one throat to choke" versus you coming in having the best solutions for all of those and basically simplifying their internal processes?

Well, look, it's a little bit of both, because there is a 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're 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 and more categories than many existing vendors and resulting 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. And so what was fun about this one I talked about today was it happened over the course of the sale process over 60 days, essentially, I would say, four competitive products were displaced in addition to putting our LMS infrastructure in. They like the concept of kind 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, for example. So -- and that was just one of three or four displacements. So I think our sales teams are getting a little better at presenting the packages and showing the power of this, what we call, our HealthStream ecology.

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 Jane? Or any update there would be appreciated. Thank you.

Well, Jane 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 in the organization that adopted. It is kind of a premium product. And so it's a little bit more costly. It's a little bit foreign from, say, the minimal required education programming. This is a real investment in your workforce to invest in Jane. 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 Jane 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, it can tell you who tests well and who knows the most, who can explain something really well, scientifically, but almost none of them get it what Jane does, which is, how well do they act? If an expert were in the room, the expert would do A, B, C. 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 it. 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. 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 as an instrument to develop and differentiate their SaaS skills conferencing capabilities, long run, I think our ability to execute on this AI mantra is -- will be derived from the strength of the data that we're ingesting into our network. I think we're getting more and more insights into the workforce, more and more data about the workforce, longitudinal history, 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 have pilots more and more on how to leverage AI into the HealthStream framework. 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 competence 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.

That's really interesting. Thank you for that detail, and congratulations on the strong quarter.

Thank you.

Thank you for your question. One moment while we prepare for the next question. And our next question will be coming from Richard Close of Canaccord. Your line is open.

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

We got it, Richard.

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 perspective. Are you saying that client's total revenue to HealthStream will be up 42% year-over-year? Or is that something different? I just...

Yes, that would be different.

...don't want to misunderstand what you're saying.

Sure. Yes, I should have and we'll 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. 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 it 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 and place orders then aggregate the orders into kind of a single order. They could see the demand for that product and then purchase. 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 five new products for three years, then that 40% order value would be spread over three years. So I 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.

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 margin impact. And then if there is license fees associated with that in terms of -- is the revenue -- should we think of that revenue as one-time revenue or recurring in nature?

Let me give an example of how it could come recurring, and we don't really know yet. So the first thing is it's a future state, but let me talk it through a 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've mentioned, we built a capability, 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 of that nurse is current. 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 CredentialStream. You could just directly pay us to check our connected hStream platform, which is connected, in this case, to over 2,000 end points to check the license, and you can pay us a small fee to paying 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 start-up companies that store licenses for nurses want to add a verification capability to their application, and they might license that service directly. So it's my hope that several of the capabilities of our platform end up becoming a revenue-generating services in the future. I do want to reemphasize as 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 start-ups…

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 six firms that you beat out, including an ERP vendor. Last quarter, I think you mentioned two lost accounts. And I'm just curious, any updates and perspectives on the competitive environment in learning? Has there been any meaningful changes?

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. However, I think targeted learning through Jane that helps you pick a career path and maybe develop skills in other area that's more directly needed. So, if you want to move from the OB to ER department, maybe Jane is going to be better than a generic learning platform where you kind of purchase a content library from a third party. Jane is much more intelligent about identifying what you might need. So, I think -- and then the completeness of our ecosystem. So, sometimes an ERP LMS, which is, I think, not as powerful as ours, or specific to the needs 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. And so, as opposed to -- but sometimes, if you're the CEO or 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, may be more features. Now the question is, are those features relevant to our customers. The fact that, that does international currency exchange may not be -- or a currency conversion in a 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, and because of those reasons. And this was an example where the aggregate value of our partnerships, our capabilities that resulted in kind of a wholesale switch to HealthStream.

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

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

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?

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

Sure. Hey, Vince, how you're doing?

Good.

I think margins, we're still aiming for that mid-60%, 65%, 66% range, we kind of teeter a few basis points quarter-to-quarter. As I mentioned on the call, a couple of factors that influence margins continue to be revenue mix changes, the royalties, obviously, and then cloud hosting costs as we continue to expand our CredentialStream 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.

And a follow-up on that. On the ANSOS, is the attrition stabilizing? What's the trend there? And do you expect it to get better going forward?

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 one today, the conversion from an ANSOS customer to ShiftWizard. We're developing the capability 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. 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%, 5% growth rate. I think without that, we would be delivering better growth rates. As you heard in the call today, ShiftWizard grew 17% over the prior year same quarter. So, the promise is 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.

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?

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

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

I have not. So I may be missing something. I'm sure there's startup somewhere that's building something. But we believe, Jane, because of the data sets it's based on that were unique in the industry when we acquired, the company that had built a 20-year history of assessing competence in this way, gave us the infrastructure we needed to build a true expert system using that data to train it. 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. So, 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.

Nice quarter. Thank you.

Thank you.

Thank 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.

Hey, 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 a negative billings growth, if my math is right. Now I get there are plenty of nuances that impact your 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 few quarters? Thank you.

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 -- both 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. Those tend to happen at least for us, seasonality-wise in the first quarter. And we also have a good mix of monthly billings, quarterly billings and some semi-annual. 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 -- renew contracts, new contracts come in, billing terms often change as well. 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 a reporting period versus annual billings, which tend to sit on the balance sheet a little bit longer.

Okay. Great. I appreciate the detail there. And I guess switching gears a little bit. Looking at professional services, I get that it's a smart 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 two would sort of increase in lockstep, but that doesn't seem to be the case. 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.

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 initial implementation cycles, try to get to implemented software as fast as possible and move on to subscription recognition. So, I love the fact that I believe Scotty, our number is 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 subscription price and eliminate implementation fees, I would do it. So, we've got a conscious effort to -- on the biggest of 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 remotely without travel and on site. And so, our -- my vision is that the pro services would be intentionally diminished. 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 an 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 hidden. I know it's down year-over-year, but in my mind, that's a positive thing, it means that more -- higher percentage of our revenues are subscription based. I don't know if Scotty wants to add anything to that, but...

Yes, Bobby, I think your explanation is exactly right. It's more of an intentional shift towards product mix and how we deliver the services.

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 four months, you need to charge something for it. But my goal is we could find a way to implement them in two months and have it self-configured, we would do that, and there would be no pro services fees. So, just directionally, you asked the question, is it a business we're trying to grow? And the answer is no.

Yes, make sense. Really appreciate the insight there.

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.

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

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

Yes, I think it was 19%.

19%? Okay. Good. Well, that's better than 17%, 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.

Okay. Great. I'll follow-up with you my other questions. Thanks.

Okay. Great. Just one kind of closing comment related to the whole ShiftWizard, ANSOS, 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 three acquisitions. Some of the acquisitions had a legacy component. We knew what we're getting into kind of hot water. But -- that acquisition gave us a roadmap and 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 recent recognition as the leading credentialing system in the industry, the team and specifically the person, Michael Sousa, that helped us get there, is now in-charge of building the ShiftWizard application suite, the whole scheduling area. And so, we're installing those best practices and lessons learned. I think in the year prior, I said we had gotten the playbook from Michael Sousa and delivered it to other executives to try to deliver on it. But now we actually have the executive 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 -- this 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.

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

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

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