Good morning, and welcome to HealthStream's Fourth Quarter and Full Year 2024 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. [Operator Instructions] I will now turn the conference over to Mollie Condra, Head of Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you. Good morning and thank you for joining us today to discuss our fourth quarter and full year 2024 results. Also on the conference call with me 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 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 CEO, Bobby Frist.

Thank you, Mollie. Good morning everyone, and welcome to our fourth quarter and full year 2024 earnings call. We definitely have lots to cover and look forward to getting to your questions at the end. I'll just start out with some financial overview. I'm pleased to report that we finished the full year 2024 with strong year-over-year increases across all of our key financial metrics. Full year revenues were up 4.5%, net income was up 30 31.5%, operating income was up 32.9% and adjusted EBITDA was up 9%. Looking forward to 2025 as we think forward, we expect HealthStream to continue to deliver growth in each of the areas where we provide financial guidance as we anticipate organic revenue between $302 million and $307 million, net income between $19.2 million and $21.4 million, and adjusted EBITDA between $70 million and $74 million. These forward looks do not include any acquisitions that we may complete during the year, though our strong cash balance is $97.2 million, and our untapped line of credit and with no long term debt position us to take advantage of M&A opportunities as they arise. And I would say that as we think about 2025, we're going to focus on rekindling our M&A. We've been a little bit quiet on that front, and I do feel that both the pipeline of opportunities and those that are good fits for our business there seems to be more available to look at and review. So I look forward to 2025 being a rekindling of our M&A program. Since our last conference call, I'm pleased to report that our HStream platform has made some excellent progress, as indicated in some of our recent press releases. Internally, we've declared 2025 as the Year of the Platform, and I know we've talked…

All right, thanks Bobby, and good morning. I look forward to discussing the financial results we achieved in 2024 and our outlook for 2025 with you today. Unless otherwise noted, the comparisons would be against the same period of last year. I'd like to start off by congratulating our teams on another successful year. The drive and dedication to building great products for our customers is paying off, as evidenced by the accomplishments that Bobby just mentioned. Now let's get into the financial Discussion. Revenues were $74.2 million, up 5.2%. Operating income was $4.7 million, up 10.2%. Net income was $4.9 million, up 6.5%. Earnings per share was $0.16 per share, up from $0.15 per share, and adjusted EBITDA was $16.2 million and was up 1.3%. Our revenues increased by $3.7 million, or 5.2%, coming in at $74.2 million, compared to $70.6 million in last year's fourth quarter. Revenues from our subscription products accounted for 96% of total revenues and were $71.2 million, increasing by $3.2 million, or 4.8%, and Professional Services revenues were $3.1 million, increasing by $0.4 million, or 15.7%. Subscription revenue growth contributors included CredentialStream with 28% growth, ShiftWizard with 17% growth, and the Competency Suite with 8% growth. Partially offsetting this growth were declines of legacy products, including the ANSOS product suite, Echo and MSOW, which are often on-premise as opposed to SaaS solutions. Taken together, the legacy products I just mentioned resulted in fourth quarter revenue declines of approximately $1 million compared to the fourth quarter of last year. Our remaining performance obligations were $621 million as of the end of the quarter compared to $541 million for the same period of last year. This improvement is due to the strong fourth quarter performance we had. We expect approximately 40% of the revenue backlog to…

Thank you, Scotty. In this back third here, I look forward to updating some highlights related to our core applications. I thought it'd be good to take a little time to focus on scheduling, credentialing and learning application suites and some of their accomplishments during the fourth quarter. First off, we'll start with scheduling ShiftWizard, which is our core product in scheduling. I think you all know we're working really hard to make ShiftWizard have what we call feature parity with our legacy ANSOS products and we expect that here in the middle of the year, so we're excited about that advance. ShiftWizard, the core product in scheduling earns Best-in-Class Award for Software and Services. And for those of you keeping score at home, that means that each of our core applications in scheduling, credentialing and learning just notched major awards victories and all those awards are based on customer feedback. Congratulations to our teams on earning these recognitions. Importantly, ShiftWizard continued to deliver strong revenue growth as well. Revenues grew 17% over the fourth quarter of last year and 25.1% over the full year 2023. In the fourth quarter, sales were both from transitions from our legacy ANSOS application like Guthrie Clinic and St. Francis Health System and from competitive take-outs like Stormont Vail Healthcare and John Muir Health, among others. Let's move to credentialing here for a minute. We're really excited again. We put a lot of time, almost 18 months of really hard effort into earning the HITRUST r2 certification for our credentialing application suite. This is the gold standard of information security and compliance assurance and we're happy to deliver that peace of mind to our CredentialStream customers. CredentialStream also had a productive fourth quarter and full year in terms of growth. Revenues grew 28% over…

Thank you, sir. [Operator Instructions] Our first question comes from Matt Hewitt of Craig-Hallum. Your line is open.

Good morning and thank you for taking the questions and for all the details. Maybe the first question is, last year you set out some kind of some mid-term targets for revenue growth, gross margins and EBITDA margins. You've now hit two of those and hopefully that continues. The third one is the revenue growth. You've kind of pointed to a 7% to 10% top-line growth. What's it going to take to achieve that type of a growth profile? It seems like the last couple of years you've kind of been in that mid-single-digits. What's going to be the lever to kind of accelerate that growth rate?

Yes, fair enough. I think, well first of all I just want to break down that number set. The 7% to 10% was composed of 5% to 7% of organic and 1% to 3% of inorganic. And as I did mention, we do hope to see and we think we're good at executing M&A and we have the resource to do it. So as far as that part, the 1% to 3% inorganic, I feel like over time we'll be able to deliver that part of the growth profile, so that leads the 5% to 7%. You know we did give that guidance I think at the end of 2022 as it wasn't guidance, it was really a set of what we call medium-term objectives and aspiration was to get our organic growth in 5% to 7% range within the three-year time. I will note that the fourth quarter was the first quarter we kind of pushed in, we did the 5.2%. But as we looked at the forward year we still see that we have this offsetting decline to the rapidly growing SaaS applications that we mentioned in some of our legacy businesses. And so, we did predict and look at another year where we have to handle that trade-off between migrating customers and some lost customers against the more rapidly growing SaaS applications. Eventually of course, we'll work through that problem and then hope to return to more natural growth rates of the newer products overall. In addition, in the meantime we're working on improving our margin profiles. I think the shift to the platform technologies enables us to be more efficient in the way we deliver the revenues. And so we do look forward to staying in the range and pushing to the top of those ranges from our medium term objectives, from measures of cash flow and particularly EBITDA, which is a measured target that we focus on. And so I think it's a little more of continue the same progress. I think if we deliver award winning products, we factor out our legacy applications over time. We need to do a little better job of converting customers instead of losing some to the market and we're going to focus on that this year. A little better conversion rate would also boost the growth rate. So there are several priorities for our team to focus on to try to bump us back up into that 5% to 7% organic growth range and we'll just keep working on them. Click of the wheel, click of the wheel. You know, we'll keep advancing the business until we figure it out and it is exciting to have great new products to take to market and see if we can outperform in those to get us into those growth ranges. That's all I know to say is that we'll keep iterating until we get it right and get it better.

No, that's incredibly helpful. And maybe just one point. The headwinds that you've been facing as you've been shifting customers from Perpetual to SaaS, is there any way to quantify what that headwind is? I think last year, if I'm not mistaken, it was like 1% to 2% which in the end would have ultimately put you in the lower end of that 7% to 10%. But as we look at 2025, is it a similar magnitude, another 1% to 2% headwind this year?

I think those are the kind of details, especially when we talk about medium term objectives. I want to leave those for a potential Investor Day. We haven't committed to the date just yet, but we're trying to get one first half of the year and I think it's appropriate to separate annual guidance and our annual forward look from our medium-term objectives which are just that, they're objectives that we drive toward. And so I think I'd leave those kinds of questions and specifically that one for an Investor Day and it's our commitment to try to get one scheduled before the first half of this year.

Got it. And then maybe one final question. I think last quarter you had kind of noted that your pipelines were incredibly strong. And in fact, I think you even noted 3x coverage. I'm just curious, your success rate in closing those, what are you hearing from customers? Was there any hesitancy at the end of the year to maybe hold off until January? Just any color along the pipeline closure rate would be helpful. Thank you.

Yes, actually I think you could see that a little bit. And we mentioned that contract backlog. It really did move up a good bit. We had some really good sales performance in the fourth quarter, multiyear contracts, of course, but the remaining performance obligations had a really nice jump. It doesn't always correlate directly to revenue growth because length of term of contract matters and all that. But it was nice to see some of that pipeline come rushing in particular, December was strong and even amazingly a meaningful percentage of our overall annual sales occurred in the last five days. So, it was an exciting to watch that pipeline. I think we still have a strong pipeline as we enter the year and so we're optimistic. January was a tiny bit slow because we did so well in December, but I've already seen February start turning around and we're expecting great things for this year and still maintain one of the strongest pipelines I've seen in our history. So we're excited and expect the sales team to deliver great results this year as well.

That's great. Thank you.

Our next question comes from John Pinney at Canaccord Genuity. Your line is open.

Hi, John Pinney on for Richard Close. Thanks for the questions. So just to start with AI, you're using it in HLX. I'm just curious, are you seeing any like efficiencies to drive efficiencies in product development or anything like that using AI internally?

It's really fascinating. We have bifurcated the problem even at the Board level and the opportunity of AI from both its internal application, how it changes how we build and perform our work, everything from experimenting with AI to help us in our sales process. We have several pilots going to use AI to help us program and develop. And so yes, there are a lot of internal initiatives to try to learn to make us more efficient, make our workforce more efficient that we're undertaking now. But I would say we're new to it, as is most everyone, and we're learning as fast as we can. I do expect productivity gains, but probably not in the short, short run. In fact, probably a little bit more added expense as you pay for the tools of AI before you get the maximum benefit from them is the way that I would think about it for the next say six to nine months. But we have lots of exciting pilots internally in our product design development. We've used some AI for many years in our Jane products to help assess clinical reasoning ability. We use things like natural language processing with IBM Watson in the last several years. And now we're further advancing our products with the large language model search capabilities in our new HLX. So we're seeing implementations now of AI in our products as well. So we're very excited about the potential for AI to change both how we work and how we build products. I would say probably, and this is probably true of most organizations, they'll probably see a bit of an increase in expenses before they see a bit of a decrease in expenses. Paying for all these tools and learning to use them will have a bit of a curve. But I'm optimistic for the long run impact to make us much more efficient. There are certain roles I think can almost be automated. We're seeing that we have a pilot going on or researching software in this area in the paralegal space would help design contract templates. And we think it's going to be incredibly effective at helping us in our contracting process, so I hope that answered your questions. Lots of initiatives, probably a little bit increase of expense in this year and then I'm expecting great things in the years to come though from efficiencies benefit, product launches and customer benefit.

Great, thanks. And then one follow-up, so I guess with these new deals that you closed in fourth quarter, I guess like an update on these pricing escalators, were you successful in getting pricing escalators in these new contracts? Are you seeing like these new products making it easier to negotiate price escalators into the contracts or any commentary you can provide there would be great?

One of the things we're finding is that in a strange way the customers appreciate the escalators. Because if you enter a three- or four-year contract with a flat price and then when you come up for renewal there's a big jump and your budget isn't ready for it to reflect the changes in market. And so in a strange way, and being a laggard in implementing escalators, but now fully deployed, meaning that every time we sell our new software, for example, as a learning customer, comes with renewal, we've been very successful. I would say a 95% plus hit rate of incorporating escalators into every renewal. And so I think it'll be a multiyear process over say 36 months. If you think of an average contract length of three years, we'll be able to incorporate escalators into every base contract. We're just not getting any pushback yet. And we've rolled out the program now in our other two primary application areas. Now once you implement an escalator, it doesn't start until the next year. And so kind of you think of a three-year average contract, a three and a half year average contract at HealthStream, as they come up for renewal. We renew them and we insert the escalators and then their impact begins the next year, that first year of escalation in the new contract and so it will be a multi-year impact. But I would say that we're in the process of fully deploying, meaning I expect as every contract renews, we have a very high success rate of incorporating base escalators in the contracts, which is very exciting and should provide a within 36 months a new base level of growth for the company, which maybe is a bit of an answer to a prior analyst's question about another positive element to getting us in the midterm objective growth range we articulated earlier, 5% to 7%.

Great, I appreciate the color, thanks.

Our next question comes from Ryan Daniels at William Blair.

Yes. Thanks for taking the question. Bobby, I was hoping you could go into a little more detail on HLX and when that might go to full launch? I think you said you're in three pilots now, so I'm curious when that might be a meaningful contributor?

Sure. We've begun product demonstrations. The sales team was trained at this year's sales meeting just a few weeks ago and so we have pricing and it's available now. So, we're beginning the sales process now. You know, of course there's nothing like successful customers to point to when you're working on the sale, but we found several things. One, after watching this space for years, meaning the HLX, the learning experience space, we finally launched our solution and we've seen it that it'll have a material positive impact, being healthcare focused. We think that the criticality of having well defined development pathways for people with this mixed media approach and user guided learning is going to be very powerful for workforce development needs in healthcare, both helping with the themes of organization, providing a better tool set other than kind of top down administrative of learning now you can put people on exploratory career journeys. And so some of our early pilots I look forward to talking more about, but we have a governmental entity that's looking to develop new categories of healthcare workers up in New York that is piloting and they're really excited about it because if they have a deficit of a certain type of worker, they think that the HLX will help them guide people to those career paths, which is similar to what we think employers might do. So, to summarize, the product is live, it's available for sale, the sales force is trained on it, we're beginning to go to market, and also as an add on or extension to the HealthStream Learning center, we think it provides tremendous additional value at a relatively small incremental cost, especially compared to competitors. So again, efficiently built on the HealthStream platform, allowed for rapid development cycles, healthcare tailored with some AI features that make it more healthcare specific and then focus on the career development opportunities for healthcare workers we think fits a broader need in the market. So I think we'll start to see some sales of that in the first half of this year and then once the pilot's successful at these larger organizations, I expect sales to pick up in the second half.

Okay, perfect. Thank you for that. And then as a follow up, I'm curious, as you go to market with more interoperability between your three core application suites, are you starting to see more cross sell and upsell opportunity emerge upon renewals and is it driving up user satisfaction as well as they can tie things like credentialing and learning pathways together to really advance their workflows? Thanks.

Well, I'd still say this is a year that manifests more. And so what I would say is that the senior executive team is working to find our first, I guess I'd call them our Enterprise Workforce platform. Our Enterprise Workforce suite, the suite of suites we're kind of working with, trying to find a couple of key customers that will go on that journey with us. So I'd say it's not broadly manifesting yet and cross selling, but I think we're well positioned to see some of that also in the second half of the year. Of course, we already have amazing cross selling going on anyway, even as independent applications because our nearly 60 people in account management are always working to cross introduce the product. So, a big part of our long history is effective cross selling and growing the value per person per year at our accounts and we're very good at it. I think when it becomes more technology enabled and they see the benefits. As you pointed out, we think there are concrete benefits to health systems and say onboarding physicians when our learning and credentialing systems work together. And I think again, by the middle of this year, we'll have more tangible benefits to show our customers about how that's progressing.

Okay, perfect. Thank you so much. Congrats on all the recent awards and all the product enhancements, thanks.

Thank you. Well, we wanted you to see where some of our CapEx was going because, we put a reasonable amount into product development in the form of direct software investments and capitalized software investments and it's good when those come out with winning products out the backside.

I'm showing no further questions at this time. I would now like to turn it back to Bobby for closing remarks.

Thank you to everyone following us, especially to our employees. Congratulations to our three promoted senior executives and also we wish the best with Michael. Susan, I look forward to our next meetings as we talk about the future together with Michael. All employees should take great pride in accomplishing our G2 rating number one and getting our systems through the security protocols that make us HITRUST certified. Amazing set of accomplishments. Thank you to all of nearly 1,100 HealthStream employees for delivering a great year and look forward to 2025 and look forward to all of you on our next earnings call. Thank you much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.