Good morning, and welcome to HealthStream's Second Quarter 2025 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded [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, and good morning. Thank you for joining us today to discuss our second quarter 2025 results. Also on 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, and these include 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 that we may refer to in this call. So with that start and that opening, I'll now turn the call over to CEO, Bobby Frist.

Good morning. Thank you, Mollie. Good morning, everyone. It does seem like a quarter of follow-ups. We've got some news to share about from our last earnings call related to our sales pipeline, macroeconomic conditions and, of course, financial results. So I'm going to hit highlights first of the financial results, which we feel good about the quarter and the results we'll be reporting. In the second quarter, we achieved record quarterly revenue, which is always an exciting milestone shows we're moving up into the right. I like that which is up 4% from the second quarter of last year. Operating income was up 33.4% and net income was up 29.3%, while adjusted EBITDA was up 11.3%, all those are over the same quarter last year. We increased our expectations for net income for full year 2025 in our financial guidance and reiterated our expectations for revenue, adjusted EBITDA and capital expenditures. And so later in the call, Scotty, of course, will expand on each of those. And there's some exciting developments in all of our core application suites, learning, credentialing and scheduling, which we'll provide in the back half of this presentation. And those are the things we're most excited about to help driving our business results. First, let's look back to our prior quarterly call. In our last call, we mentioned we were tracking a handful of while we characterize them as medium or large-sized deals that were originally expected to close in the first quarter. And I'm pleased to report that 4 of the 5 deals that we were tracking were signed during the second quarter. And the average new order contract value of those was $2.2 million across each of the four deals that's closed. And also in good news, the fifth deal is expected to…

All right. Thanks, Bobby, and good morning. Let's go over the financial results for the second quarter. Unless otherwise noted, the comparisons will be against the same period of last year. Revenues were a record of $74.4 million, up 4%. Operating income was $5.9 million, up 33.4%. Net income was $5.4 million, up 29.3%. Earnings per share was $0.18 per share, up from $0.14 per share and adjusted EBITDA was $17.6 million and was up 11.3%. Revenues increased by $2.8 million or 4% and were $74.4 million compared to $71.6 million in last year's second quarter. Revenues from subscription products were up $2.9 million or 4.2% while professional service revenues were down $0.1 million or 3.5%. Our core solutions continued to deliver strong subscription revenue growth with CredentialStream growing by 26%, ShiftWizard growing by 21% and competency suite growing by 18%, offsetting the strong growth in these solutions were declines from legacy products and credentialing and scheduling totaling $1.8 million compared to last year. Excluding the impact of legacy products from the core business, the core business grew over 8% in the quarter. Our remaining performance obligations were $618 million as of the end of the second quarter that compares to $538 million for the same period of last year. We expect approximately 39% of the remaining performance obligations will be converted to revenue over the next 12 months and that 68% will be converted over the next 24 months. Gross margin came in at 64.6% compared to 66.8% in the prior year quarter. Gross margin was impacted by an increase in our cloud hosting costs which are primarily for the CredentialStream application and the hStream platform. As noted on the last earnings call, to improve the scalability and performance of CredentialStream, we added more capacity in our Azure hosting…

Thank you, Scotty. I think then this section, we'll jump into the business update, highlight the successes we've achieved in our learning, credentialing and scheduling application suites during the second quarter. As many of you know, our learning business includes our flagship application, HealthStream Learning Center along with many other applications, assessment tools and content libraries, including our clinical content products. HealthStream Learning Center continues to grow as do many of the solutions that are delivered through it. Today, however, I want to focus on our brand-new learning application, HealthStream Learning Experience, and we brought that up in the first half of the call, we call it the HLX. As I mentioned, it is a modern healthcare specific application offers the workforce personalized self-directed intelligent learning and development pathways. This is a nice contrast to the HealthStream Learning Center which is really more of an assignment driven, helps organize compliance-oriented training where you push content to individuals. HLX helps shape educational pathways for individuals and it's more self-directed in nature. So the two together give a really rounded approach to learning and development. And it's a completely modernized built and one thing that is very excited about it, well, there's two things. First, last month, the HealthStream Learning Experience went live with 47,000 users at a large health system. So it's moved, clearly, it's graduated from the pilot phase to a revenue-generating product in the quarter. So it's very exciting to go live with 47,000 users at a large health system. In response to the early [indiscernible] an executive at that organization said, the utilization we are seeing thus far is incredible. And so we're excited to see it kind of move from the R&D labs and the pilot phase to a go-live billable product, and we look forward to…

[Operator Instructions] The first call comes from the line of Matthew Hewitt of Craig-Hallum.

Maybe first up, on the gross margins, Scotty, you have kind of explained what the headwinds were there in the quarter. Should you -- or should we anticipate the gross margins kind of bouncing back up here in Q3? Or is it going to take a few quarters to kind of get those back up the couple of hundred basis points that they were down?

Probably, we'll still can see it to have around the 65% mark for the remainder of the year. We still -- we'll see those ongoing costs related to the scale and performance improvements that we put in place, but we're also trying to take measures to manage that cost line item for us overall. So we'll take a few quarters to get there, but we'll kind of see it hover around 65%-ish it's kind of still in line with our kind of midterm objectives that we set forth several years back. So we're kind of falling to the bottom of that range, but we're still kind of in the 65% to 66% range.

Got it. And then regarding the HLX platform, congratulations on some of the early success that you're seeing there. Bobby, I think you mentioned 47,000 users are now live. You got some positive feedback from that account. Maybe a little bit of color on what does the pipeline look for -- look like for that application? And what -- how should we be thinking about a ramp for that as we get into the back half of this year and look at '26?

Well, the first is that the ramp is forecasted in all of our guidance. So there's no exceptional change. Subscription business is steady incremental improvement is the way to grow a subscription business. I think the HLX gives us yet another opportunity to add that. It is an incremental add for base customers or a new entry point for new customers. And we've begun in the piloting phase for the last, say, six months. We've begun to tease it out with our sales team to seed the market with some educational materials about it. So I think now the pipeline building begins now that we have a live customer that, in fact, billing has begun for. So it is a revenue-generating product now. There's an incremental add-on. It is a subscription product and the business of building interest and pipeline for it begins now as we go to the live product and equipping the sales team with the tools they need to promote its availability. I think it's an important product. It's kind of a paradigm shift that progressive organizations are more likely to adopt earlier. The ones that have a great interest in maintaining and developing the workforce and given them the tools for self-development again, which is different than kind of a command and control model of regulatory compliance training, this is more oriented towards development and retention and maybe cross training and so people can gain new skills and new areas. And so I think it's very relevant for today's workforce and to our customer base and the serious business of building a pipeline is now beginning. We'll report on that in the coming quarters. But again, I think it is an incremental opportunity, it's not something where we're changing our guidance based on the launch of the products. So I just want to -- I want to be careful. It's an exciting new subscription product that we hope to see incremental gains from.

The next question comes from the line of John Pinney of Canaccord Genuity.

This is Richard Close. I had a question, Bobby, can you talk a little bit more about the comments with respect to ShiftWizard and the legacy products offsetting some of that growth? And just maybe a little bit more detail in terms of like the timing you said next year, essentially that offset is essentially going away. Just walk me through that. We got on a little late here. So I just want to go over that again, make sure I understand.

Sure. There wasn't a lot of detail, but I think the tone of both is that the go-forward SaaS applications have superseded in terms of absolute value and growth rates, the revenue of the legacy applications from which we're trying to migrate. So in both cases, and we're kind of achieving new milestones where each quarter, the legacy applications get a little smaller and a little less material to the overall financial outlook, while the subscription products as you heard, have good growth rates and are now the majority of the revenue in that category. So I think that we did mention the offset this quarter. I think, Scotty, mentioned, Scotty, it was about $1.8 million was the declines from the family of legacy products across credentialing and scheduling, and we didn't break it out by a specific line. But those declines for our overall growth rate down relative to the growth rates you're seeing on the subscription products. So we just, again, characterized it all. I think in ShiftWizard, we give a little bit more color just that the growth of ShiftWizard and the decline of ANSOS is hitting rates where in a couple more quarters, it will be even less material overall. And so maybe we can see a little more of the organic growth rate of ShiftWizard start to contribute as opposed to kind of almost fully offset growth when the loss is $1.8 million and the gains are across subscriptions is $2.9 million, you can see that it really affects growth.

Okay. That's helpful. And were you going to add something there?

No, I was just going to say Scotty, if you want to add more, but I think those are the highlights. And each quarter, we'll try to give a little more clarity as we progress.

Okay. That's helpful. And then on CredentialStream, I guess, through some costs at that to get back on track as you said. Was there any reputational damage or anything to call out with respect to retention or anything like that based on what happened in the first quarter?

Well, certainly, when your services aren't as you would expect at the level of excellence you demand of yourself and your customers' demand, there's frustration. We continue to remain in high-level context, our account management programs and our executive leadership with all of our key customers. And of course, there's some frustration in there. We think we can get through it all with minimal impact. There's always some consequence to it, but that's, of course, factored into how we think about our overall guidance. So I don't think there'll be any major surprises. That would change how we change our outlook on the year. It's hard to go through 25 years of history like this and occasional bumps in the process as you expand in this case, an expansion related growth problem caught us a bit off guard. But I feel really good about how we responded and are working with all of our customers to get them all through it as well. And on the back side, just more capacity, more speed, more focused to do even better and to avoid this kind of problem in the future. So overall, nothing that would change our outlook for the year.

Okay. That's helpful. And then I guess my final question or final two. Just following all the health care related news sources and all that. There's been a decent not huge in terms of employment cuts by various hospitals and 100 here, 100 there, that type of thing. I guess, I'm curious how you think about that in terms of on overall subscriptions, I mean, you're -- you have such a deep penetration and maybe that's just modest cuts here and there, but how you're thinking about the whole health care employment market and any impact to HealthStream?

I think overall, health care employment will continue to grow over the next five years and roles may change and more nurse practitioners, less primary care doctors, there may be overall relative shortages to demand. But I think overall, there's just going to be more health care needs. And so -- and while if you look at research organizations are going through this reduction in funding from the federal government for research, sure their role position eliminations there. Hopefully, the country finds a way to reinstigate its research programs and find new funding sources. But I think those are relatively small to the overall demand for health care services, the new types of roles being created and growing rapidly like nurse practitioners and the supply of new nurses. I think the capitalistic market is responding to try to fill the demand for skilled competent health care givers and we think we're part of that journey. So I don't see material changes certainly not downward in the employment numbers. Certain subsegments in the market are particularly challenged financially right now, like the skilled nursing market, it kind of has good years and bad years. I'd say these are more challenging years in that market. We're present in that market. So as they change both ownership models, private equity and experience potentially less access to federally funded patient-- insured patients. There's going to be pockets of challenges. The small rural hospitals may face challenges, but that almost depends on things we can't tell yet, which is like the state's response to the new legislation. For us, these macro conditions, I think employment will go up. And so that was the root of your question is around the number of people. I think over time, there'll be more health care providers. The way…

[Operator Instructions] The next question comes from the line of Vincent Colicchio of Barrington Research.

Yes, Bobby, curious, how are the price accelerators playing out? And were they included in the four large deals you just landed?

Yes. I need to check specifically those, but I believe we're now officially working them into every new and renewed contract and generally being accepted as more an established pattern across all of health care IT. So we're glad to have that model in place and credentialing, learning and scheduling as contracts are gained and renewed we're working on price escalators. And they're, of course, negotiated, but we're actually finding it's reasonable negotiation. We're trying to get essentially as best we can close to cost of living level adjustments on an annual basis. So this will take 3, 3.5 more years to play out fully, but it's exciting to be layering it in with every single renewal of new contract. In fact, I think it would be an exception to not have them at this point.

And could you provide an update on NurseGrid, in particular, I'm interested in the e-commerce performance?

Yes. I didn't -- I don't have the numbers right in front of me, but NurseGrid, we have three or four monetization strategies on NurseGrid and several of them are at play. The core one is we launched NurseGrid Learn in the application and I believe it's doing in excess of about 50,000 a month in collective commerce revenue. So we're generating revenue now through that network, it's exciting. We're also meeting needs for the nurses. We have a strategic partnership with group called Plannery and business relationship with them and Plannery is helping nurses consolidate student debt and save money. And so it's not really an advertising relationship, it's a business relationship, but their services are highly valued by our nurses and we're beginning to refer business to them and share in that business outcome. But while importantly, saving money for nurses. So it's really a fantastic kind of value add. We launched a job function on the site, which is not yet generating revenue, but generating lots of interest. And so watch for that in the coming quarters as we learn to help our nurses see opportunities in front of them. And so -- and then finally, the audience for NurseGrid continues to grow organically passing, I believe it's -- I'll shoot I hope someone text me I think it's 640,000 monthly active users on NurseGrid. And I'll watch my text and correct that if I'm off a little bit. But I think it's growing around 1,500 to 2,000 a week. One other important point about NurseGrid is we've now shifted the app to use our platform identity management service. So all the nurses on NurseGrid are logging in with an hStream ID, which is an identity capability issued by our Platform-as-a-Service capabilities. And that's going to allow us to bring even more value to the nurses on NurseGrid as we're able to bring forward things like some of their credentials like, for example, if they had earned an American Red Cross certificate, it can now show up in their portfolio on NurseGrid. So I think it will be even more useful to the nurses to be able to use and benefit from the platform identity service. And so watch for more announcements in that area as well. Lots of advances with NurseGrid and more to come.

This does conclude the question-and-answer portion of our call. I would now like to hand it back over to Robert Frist for -- excuse me, for closing remarks.

Well, thank you, everyone, for participating in this earnings call. We look forward to the next quarter. Thanks to all HealthStreamers who made this all possible. I love being the spokesperson for your excellent work and look forward to reporting out on the next quarterly earnings call. Thank you, everyone, and see you next time.

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