Healthstream Inc Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the HealthStream Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mollie Condra, Vice President, Investor Relations and Communications. Please, go ahead, ma'am.

Thank you and good morning. Thank you for joining us today to discuss our second quarter 2020 results. Also on the conference call with me are Robert A. Frist Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause 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. So with that start, at this time, I'll turn it over to Bobby Frist.

Thank you, Molly. Good morning, everyone, and welcome to our second quarter 2020 earnings conference call. In our last conference call on April 28, we indicated that the number of confirmed COVID-19 cases in the U.S. was projected to soon exceed 1 million, which occurred the following day on April 29. Since then, this number has more than quadrupled, now surpassing 4 million, with approximately 150,000 deaths reported in the U.S., including over 500 among healthcare workers. At HealthStream, we remain committed to supporting the U.S. healthcare workforce, the heroes who are risking their lives to care for others. I want to take a moment to thank healthcare workers around the world. Unfortunately, many of the challenges we discussed in our April call still hold true. The impact of COVID-19 has been pervasive, rapidly changing, and marked by uncertainty. Efforts to control the virus have led to quarantines, travel restrictions, shelter-in-place orders, social distancing guidelines, and limitations on business activities. While some states and cities are beginning to lift restrictions, the results have been troubling, with 44 out of 50 states seeing rising infection rates, including record highs for hospitalizations and deaths. These pandemic-related measures continue to cause severe economic decline both in the U.S. and worldwide, particularly impacting the healthcare industry. Our business, which provides workforce and provider solutions to healthcare organizations, is likely to feel these adverse effects. We do not believe COVID-19 significantly impacted our revenue during the first half of 2020, but we anticipate it will do so in the latter part of this year and possibly into the next year, as lower sales volumes may lead to customers delaying or deferring purchasing decisions. As you know, in a subscription-based model like ours, decreased sales volumes in the present typically result in reduced revenue in future periods, which we now expect. Customers are gradually adapting to virtual meetings and product demos, and there remains interest in our offerings, but sales will continue to be affected as healthcare organizations manage their budgets in response to COVID-19. The extent and duration of this impact will depend on how long the pandemic lasts. It all starts with our clients, the healthcare organizations negatively impacted by COVID-19 on various fronts—clinically, financially, and operationally. For much of this year, essential revenue from services such as elective surgeries has nearly ground to a halt due to restrictions like shelter-in-place orders. Although some elective surgeries are now being permitted, the recent rise in cases threatens any financial recovery. The American Hospital Association reported on July 1 that hospital financial losses for the full year 2020, accounting for CARES Act funding, are expected to reach $323 billion, with losses from July to December anticipated to increase by at least $120.5 billion on top of the earlier $202.6 billion in losses this year. Contributing to these losses are declines in both inpatient (average 19.5%) and outpatient services (average 34.5%) and added costs for PPE and other COVID-related expenses. Many hospitals do not expect to return to pre-COVID volume levels by the end of 2020. According to Becker's Healthcare, over 260 hospitals have furloughed staff recently, with dozens more implementing layoffs. Becker's also reported on July 9 that only 6,700 hospital jobs were added in June after losing 161,000 jobs in April and May. This is particularly pertinent to us because our products work on a subscription basis, thus we need to monitor these numbers closely. One consequence of hospitals reducing their workforce may be fewer employees renewing contracts with us as those contracts come up. Unfortunately, it is unclear how long pandemic-related conditions will persist or if they will worsen. Given the challenges faced by healthcare organizations, we continue to monitor our customers' ability and willingness to pay for our solutions promptly, implement our purchased solutions, and renew or purchase new products and services. All three dimensions are monitored on a weekly basis among our customer base. Scotty will discuss cash collections and implementation delays in his CFO report, but I want to address sales and renewals, which continue but at a slower pace with uncertainty about when customers will return to pre-COVID buying decisions. This is not surprising considering what our customers are experiencing right now. Many still prohibit sales representatives from visiting until the situation stabilizes. While we have managed to close deals across all our sales teams, we are seeing some decisions being temporarily postponed or deferred to later in the year. In light of the ongoing adverse effects COVID-19 is having on the healthcare industry and our business, we shared in our last call that we have implemented certain expense management measures that positively impacted our second quarter financial results. These measures include deferring increases to base salaries, limiting hiring for critical positions, reducing the company’s 401(k) match, and negotiating payment term extensions with key vendors. We will continue to monitor the pandemic situation and may take further expense management actions if necessary. Despite COVID-19, we are still conducting business. It is essential to note that our direction and strategy remain unchanged. The pandemic may slow our pace, but we are making progress along the same strategic path. I want to update you on the three business transitions we introduced in previous calls, all designed to position us as a higher-margin, more profitable company in the coming years, although the pandemic may extend these transitions beyond our original timeline. First, we shifted our sales and marketing focus from legacy resuscitation products to a new suite of simulation offerings. The new Red Cross Resuscitation Suite, which launched in January 2019, includes BLS, ALS, and PALS competency-based curricula designed for healthcare professionals. Our customers' priorities have shifted in response to COVID-19 and providing care for COVID-19 patients, yet we have witnessed new sales. For instance, in the second quarter, Ardent Health Services signed an enterprise-wide agreement for 30 hospitals and 180 clinics. Other organizations, including Minimally Invasive Surgery of Hawaii and various behavioral health organizations, have also contracted for these solutions. To accommodate customers wanting to proceed with training, we developed an innovative studio for virtual instruction, receiving positive feedback with an average rating of 4.5 out of 5. In February, we expanded our resuscitation offerings with the Stable program—a leading neonatal education solution, now exclusively available online through HealthStream, and we have seen purchasing activity for this program in the second quarter. The second transition involves the adoption of our new VerityStream platform, which we launched in the first quarter of 2018 for managing credentialing and privileging within healthcare organizations. During the second quarter of 2020, 30 accounts were contracted for VerityStream, bringing the total to 258 both from new clients and existing clients migrating from our previous platforms. The strong sales in late 2019 created an implementation backlog that is lengthening implementation times and our revenue timelines for VerityStream. Some customers added in the second quarter include Bon Secours Mercy Health, PeaceHealth, and Phoenix Children's Hospitals. The third transition involves customers upgrading to the hStream platform, which powers all activities within the HealthStream ecosystem. In the second quarter, we added about 87,000 new hStream subscriptions, raising our total to approximately 3.5 million subscriptions. I want to remind everyone that these three transitions are multi-year efforts. Last quarter, I stated we were about 15 months into a 36-month journey. Given COVID-19 uncertainties, particularly regarding its duration, it is challenging to predict how much time might be added to that journey. However, after 18 months, I can affirm that we are continuing to make substantial progress on all three transitions, and we still expect to emerge as a higher-margin, more profitable company. Scotty's report will highlight an improvement in gross margins. We are fortunate to have entered the pandemic with a strong balance sheet, no debt, and a fully available $50 million credit facility. Instead of facing a liquidity crisis, we are well-positioned to invest in the future of the company. For now, this includes maintaining capital investments in product development and renewing our active M&A strategy. While we previously paused our M&A efforts, I am officially announcing that we will re-engage in evaluating opportunities more actively at this time and continue our investment strategy. Now, I will turn it over to Scotty Roberts for a detailed discussion of our second quarter financial metrics and how we view our financial outlook for 2020 in light of the COVID-19 pandemic.

Thank you, Bobby, and good morning to everyone listening in today. I'll begin with the highlights of our second quarter financial results and then cover the COVID-19 impact further. For the second quarter, revenues were down 5% or $3.2 million to $60.6 million. Operating income was up 90% to $4.3 million. Net income was up 43% to $3.4 million. Our EPS was $0.11 per diluted share compared to $0.07 per diluted share in the prior year, and adjusted EBITDA was up 2% to $12 million. Revenues from the Workforce Solutions segment totaled $48.9 million for the second quarter and are down 7% versus the prior year. This decline was primarily influenced by the expected reduction in the legacy resuscitation products, which decreased by 31% or $4.8 million and were $10.7 million this year compared to $15.5 million in the prior year. We anticipate revenues from these products will continue declining and will approximate $8.5 million in the third quarter and $6 million in the fourth quarter and then become zero thereafter. Revenues from all other Workforce products increased by $1.3 million and included a $1.8 million or 5% increase from our platform and content subscriptions. But this was offset by a decline of $0.5 million in professional services. Revenues from the Provider Solutions segment were $11.7 million and grew by 3% over the prior year. This growth came primarily from the December 2019 acquisition of CredentialMyDoc, while revenue growth from the new VerityStream product contributed as well but on a smaller scale. The implementation backlog we mentioned last quarter has begun to improve. The contributions to revenue from the backlog were not significant this quarter. Our gross margins improved to 62.1% compared to 58% in the prior year, which marks the third consecutive quarter that our gross margin has exceeded 60%. This improvement is primarily a result of the reduced revenues from the low-margin legacy resuscitation products and revenue contributions from other higher-margin products. Operating expenses excluding the cost of revenues were down 4% or $1.4 million from the prior year. And the prior year did include stock grants to over 800 of our employees that were facilitated by our CEO and that resulted in a $2.2 million stock compensation charge. We experienced lower operating expenses resulting from cost control measures and precautions in response to COVID-19 such as travel restrictions, freezes to employee salaries, and lower trade show expenses due to event cancellations. We estimate the impact of our cost control measures benefited the second quarter by approximately $1.7 million. Offsetting these favorable expense items, though, were approximately $1.1 million of expenses related to the CredentialMyDoc and NurseGrid acquisitions, which were not present in the prior year. These factors led to our operating income improving by 90% to $4.3 million and adjusted EBITDA improving by 2% to $12 million. The impact of the $2.2 million stock compensation charge in the second quarter of 2019 had a more positive impact on the growth in operating income for the second quarter of 2020 than it did on the growth in EBITDA and cash flows. Our cash and investment balances ended the quarter at approximately $144.5 million, which is up from $142 million last quarter. And working capital was approximately $106.2 million. Cash flows from operations were $13.5 million compared to $36.6 million in the prior year. Our days sales outstanding were 47 days, which is the same as in the prior year, but rose from 44 days in the first quarter of 2020 as we've been experiencing slower payments from customers as a result of COVID-19. While our cash balances increased by $2.5 million during the quarter, our cash flows from operations were impacted by lower collections compared to last year, which is due to the decline in legacy resuscitation revenues and billings as well as lower new sales, some implementation delays, and slower payments caused by the financial strain that COVID-19 is having on our customers. Our capital expenditures during the quarter were approximately $4.3 million and are $8.3 million year-to-date. We remain strategic in our approach to capital deployment during these uncertain economic conditions and continue to seek opportunities for capital investments that align with our initiatives and business principles such as new product development and enhancing our hStream capabilities. Last quarter, we announced the authorization of a share repurchase program of up to $30 million of our outstanding common stock. To date we have repurchased approximately $10 million pursuant to the program. The repurchase program will terminate on the earlier of March 12, 2021 or when the maximum dollar amount under the program has been exhausted. We may suspend or discontinue making purchases under the program at any time and we plan to closely monitor factors such as market conditions, our liquidity, working capital, and cash flow projections when making decisions regarding the program. Now I'd like to provide some details on how the COVID-19 pandemic has impacted our financial results and operations thus far and our outlook going forward. As a reminder, we decided to withdraw our 2020 financial guidance last quarter because of the uncertainty about the extent, timing, and duration of the COVID-19 pandemic may have on our operating and financial results. We continue to believe that the extent, timing, and duration of COVID-19's negative impact on our operating results and financial condition will be driven by many factors including the length and severity of the COVID-19 pandemic and the impact of the pandemic on economic activity, particularly with respect to healthcare organizations. As a result of the unpredictable and evolving environment related to the COVID-19 pandemic, at this time, we cannot reasonably quantify the impact that the pandemic will have on our operating and financial results in 2020. Due to this continued uncertainty, we are not reissuing 2020 guidance at this time. During the first quarter, the pandemic began causing unprecedented disruption across the country as infections were spreading in major cities, schools and universities closed, unemployment rates rose to their highest level since the 1930s, states implemented shelter in place orders, and many companies began working from home. Many healthcare providers were restricted from performing elective surgeries and procedures, were experiencing rising costs, and even furloughing their employees. Now four months later, after attempts to lift shelter in place orders and reopen businesses, the rate of infection seems to be growing faster each day and many of these trends are not showing signs of improvement. While many pharmaceutical companies are developing and testing vaccines and medications to treat this disease, the timeline for a possible vaccine and antiviral drugs or other successful treatments is difficult to predict. Until meaningful progress is made on this front, the social and economic impact may continue to stagnate or deteriorate further. As Bobby mentioned earlier, the projected financial losses in the hospital segment of healthcare are projected to exceed $300 billion in 2020. This negative outlook is likely to have a downstream effect on other segments of healthcare and service providers within the healthcare industry. Through the second quarter, the impact of COVID-19 did not have a material negative impact on our revenues, operating income, or EBITDA. Although, we don't anticipate this will continue to be the case. Our subscription revenues are mostly generated from sales that occurred in prior periods and from renewals of existing contracts. Because of the contractual nature of our subscription revenues, which are generally for multiyear contracts, we have not experienced significant declines resulting from COVID-19. Since March, we've been monitoring the impact that COVID-19 is having on our customers and how it impacts our sales activities, implementations, and collections. While we have been able to achieve new sales and renewals, our bookings are lower compared to both the prior year and versus our sales targets for this year. Because our customers are under financial strain, they have become more focused on managing their expenses including reducing discretionary expenses rather than taking on additional spend. In some cases, they have also reduced their workforce through layoffs or furloughs. Additionally, since mid-March, our sales teams have not been able to travel and conduct on-site meetings with customers or attend trade shows, although they have been successful conducting virtual meetings and remain in active dialogue with customers. As a result, we are seeing delays in purchase decisions of our products, especially for products our customers view as discretionary to them. Also, if the layoffs and furloughs made by our customers become permanent, we may experience declines in subscriptions and revenues upon renewal of their contracts. While we have experienced a negative impact from implementation delays related to COVID-19, these delays have not been consistent across products or across customers. Our Provider Solutions business segment has, in some instances, been more sensitive to implementation delays than our Workforce Solutions segment, as a result of complexities associated with implementing certain of the solutions offered through the Provider Solutions business segment. As I mentioned earlier, our DSO increased to 47 days this quarter and our cash flows from operations were down compared to the prior year for the reasons previously stated. While we have experienced slower collections, we did not experience any material bad debts or customer bankruptcies this quarter. If our customers' financial conditions continue to deteriorate, we expect it will negatively impact our cash flows. On the expense side, last quarter we began implementing expense control measures, such as freezing salary increases to all employees including executives. We deferred hiring most of the new budgeted positions. We restricted employee travel and rescheduled trade shows and customer conferences. As a result of these cost control measures, our operating expenses for the quarter were favorable compared to the prior year by approximately $1.7 million. We view these cost reductions as short-term benefits to our operating performance. And we expect at a minimum to extend into the third quarter but could be even longer. We're not sure if and when these expenses will return to normal run rates. We also believe the cost control measures taken to date are prudent and are prepared to take additional cost-saving measures should the circumstances deteriorate further. We think it's important to responsibly manage expenses and maintain adequate access to capital while striking a balance to pursue investment opportunities for growth and innovation. To support these objectives, we maintain a strong balance sheet including $144.5 million of cash and investments and full access to a $50 million line of credit facility, which remains untapped. We continue to make internal investments and have several new products in development that are moving forward. We also continue to evaluate M&A opportunities and minority investments. And while we did not have much share repurchase activity in the quarter, the plan remains active. We believe these initiatives remain in the long-term best interest of shareholders and the company, though we will continue to evaluate them in connection with COVID-19 related developments and adjust them if necessary. That concludes my comments for today. Thanks for your time. And I will now turn the call back over to Bobby.

Thank you, Scotty. I'd like to close up with a few quick remarks here. First, I'd like to let everyone know we remain focused on the safety and well-being of our 900 employees. We required our entire workforce across the country to begin working remotely from home on March 16th. And we continue to work remotely to-date. Our employees are doing a fantastic job in working from home, as all operations are continuing smoothly. So I wanted you to know about the great sense of accomplishment in our employees keeping our operations smooth and current. I credit their outstanding abilities and commitment and the strong culture we built at HealthStream. An important foundation of our culture is our constitution, which includes the values that we call our employees to reflect in their work with customers and each other. One such value is our streaming good value. Our constitution states as good corporate citizens we strive to create a positive social impact on the communities we serve, including our own workplace environment. We believe every employee has the responsibility to enact good works for others. During the second quarter, I believe our value of streaming good was realized company-wide in at least a couple of important areas. First, beginning in February of this year, our customers began using our proprietary technology platform to offer and deliver COVID-19 training and education courses to their staff as they began to prepare for the COVID-19 patients. In March, as we previously reported, we made available to all caregivers, free of charge, a curated library for proprietary content and to our customers, the bundle of cross-training courses to further their staff's preparation to develop safe and effective care to COVID-19 patients. To-date there have been over 2.3 million courses completed across our platform, which includes the self-authored COVID-19 courses and this free library of resources. It's really an outstanding impact by our organization, our efforts, and some of our partners that contributed to these resources. We believe we're having a positive impact. And clearly, one thing we see is the individual healthcare workers are seeking to self-educate beyond even what their organizations require, and as they enroll in these COVID-19 courses. Nurses comprised the largest number of those taking these courses, and the area within the hospitals with the highest utilization of the emergency room and emergency departments. I thought you'd find that interesting, which is obviously where the crisis is. It's gratifying to see our customers use these solutions in this way, and at this scale to prepare and mobilize the healthcare workforce. Our value of streaming good has also been demonstrated with our strong commitment to social justice and racial equality. During the second quarter, as everyone knows, the pandemic was the only major health headline in the news. The events sparked from the death of George Floyd included nationwide protests and renewed national dialogue on race and diversity. Our employees created a group called Stream Forward. It is actively developing new initiatives to further support our commitment to diversity, equality, and inclusion for employees in all other communities that we serve. We consider the nation's healthcare providers, our customers, to be one of those communities, while we already have several course offerings related to diversity and cultural competency. We are currently looking to add quality content to this important area for our customers. We believe there is significant need in this area. And we look forward to sharing updates with you on our programs, with this effort in mind. Both of these developments related to our employees streaming good were made possible by the strong culture we built. I'd like to ask Mollie Condra to tell you a little bit more about that. And share some news with you.

Thank you, Bobby. During the second quarter, Bobby Frist challenged employees in a virtual town hall meeting to go to comparably.com and provide a review of our company. Comparably.com is a publicly facing site where employees rate their companies. Over 530 reviews were submitted, which included over 11,500 ratings. I was pleased to see that we scored an A in work culture, where 97% of HealthStream employees call their work environment positive. And 99% of them say they look forward to interacting with their team every day. Last week, comparably.com announced their national Best Places to Work Awards. I'm pleased to tell you that HealthStream was recognized with two awards: the top CEO for diversity, where Bobby Frist ranked number 22, out of the top 25 CEOs, and top CEO for women, where he ranked number 37 out of the top 50s. These awards were based on over 60,000 companies' employee responses. Our employees were honored that our company's CEO was recognized in this way as he was listed alongside many other CEOs from some of the nation's largest companies, including companies like Amazon, Google, Microsoft, and ADP. So with that in mind, I'll turn it over to Bobby to close.

As we continue working remotely, HealthStream's employees are rising to the occasion as we battle against the pandemic. I began this call by thanking healthcare workers, and I'd like to end this call by thanking HealthStream employees for the great job they're doing in supporting those healthcare workers on the front line. Thank you all. At this time, I'd like to turn it over to questions for the investor community.

Thank you. Our first question comes from Ryan Daniels of William Blair. You may proceed with your question.

Hey, good morning. This is Jared Haase in for Ryan. Thanks for the questions. Just wanted to ask one about the hStream subscription metric. So it looks like that was up sequentially from the first quarter, but at maybe a slower rate than what we had seen in recent periods. So, could you maybe just talk a little bit more about the dynamics there? Should we just think about that more as just kind of slower new additions on its clients and health systems are sort of balancing other priorities at the moment in the short run versus maybe churn related to layoffs and things like that already starting to flow through the platform?

Yeah. I think it's a little hard to discern the exact reason, but definitely, a lowering in velocity of migrations or say switching from the older platform to the new one is an element of it. There would be some churn in the number as well since it's a net number, but I think that's maybe less significant than – there are a group of variables all grouped together. I don't know how to tease out the difference in the COVID impact, which would be more forward-looking than the migration. So what I would say is that maybe implementations have slowed and there's some churn in the number as well. I don't know if that helps but those are – both variables are part of the number, obviously it's in that number.

Yeah absolutely. No that is helpful. Thanks for that. And then yes maybe just a quick follow-up. So you obviously you talked a little bit about the challenges that persist in the selling environment implementations and that sort of thing. I was hoping maybe we could just dig in a little bit just on the trend line that you saw over the balance of the quarter. Maybe how things shaped up in the June timeframe, and how things have continued to progress in July maybe relative to where we were back in the March-April timeframe when all this kind of started.

Yeah. It is really interesting. As Scotty mentioned that, we're kind of – we're below our prior year sales velocity from a contract order value standpoint. We're also obviously below our targets for this year as we sit here at the midpoint of the year. We feel like a lot of that is delayed decisions meaning our sales team and we look at the absolute value of the pipelines. The pipeline still looks strong. There's still – no one has said, we're absolutely not going to do this. It feels more like deferrals to me. But you just – you don't know. All we do know is that, we're behind our goals and we're behind last year. But again when we assess the total pipeline it feels like the opportunities are still in the pipeline across – broadly across our solution sets. So with an abundance of caution, we're essentially re-forecasting and projecting a negative impact on sales velocity through the remainder of the year. In the last month of the quarter, we saw some good signs. As we mentioned, clients seem more willing to take virtual meetings to get more accustomed to virtual training on implementations. We did see a catch-up in the backlog of implementations for VerityStream. And so we're seeing some positive signs. Also, we announced the system-level purchasing of the Red Cross solution by Ardent Health, and we thought that was a good sign of vitality. And so it's very regional as well. That's another comment worth noting. We have a strong presence across all states in the country, particularly strong in Texas and Florida. And so, one kind of concern now is that Texas and Florida, two of the most impacted states in the last say month, and so trying to figure out if their operations will be consumed now. And we have spoken to some CEOs and senior officers and actually have some on our Board that operate inside big health systems. And one thing they see is a little different in the last month than, say, three months ago, was there's a bit more time to prep after watching what's happened in the northeastern parts of the country. They're trying to maintain some sense of operating at redline consistently while maintaining some elective surgeries. And so, it seems to me that no one is fully shutting down the elective components of their health systems, at least not right now. And I view that as a different dimension to the problem than, say, 90 days ago, where the initial reaction was to stop all elective surgeries. So, as you can tell, it's a mixed bag of impact, which results in uncertainty in the withholding of guidance. But, we did see some signs of life, enterprise-level purchasing, increased receptivity to virtual meetings and in the pockets of the company to return to some purchasing in general, and catch up on implementation backlog. So, I hope that helps characterize it. We're trying to keep our pulse and our finger on the pulse very closely. Scotty talked a little bit about cash collections. And we feel pretty good about that, although they're again down from the prior year.

Thank you. Our next question comes from Matthew with Craig-Hallum. You may proceed with your question.

Good morning and thank you for taking the questions. I guess I want to follow-up a little bit on the Ardent Health contract. Obviously, the situation with COVID and you talked about some of the challenges that you're facing, yet you're able to sign a pretty notable win. Could you talk a little bit about the sales process, maybe what made this one unique? And is that something that you could replicate with other hospitals and health systems?

We are actively promoting the advantages of our new program, which we find exciting due to its superior learning methodology. We aim to ensure that it is also economically beneficial. Organizations typically have budgeted for this type of training, not because it is legally required, but because it has become a best practice and standard to equip everyone with these skills. We believe we offer a highly innovative and comprehensive solution that is financially viable and can be a part of flexible decision-making. For these reasons, we continue to have strong pipelines in various areas of our business, including this product. However, getting everyone to sign off is just one step; reviewing the opportunity and implementing the new system pose additional challenges, especially since operations can get busy. Nonetheless, we are encouraged by the prospects, as this seems to be the right financial decision, promotes quality improvement, and aligns with their organization's initiatives at this moment.

Understood. Thanks, and then maybe one separate question. You pointed out in the press release and then you addressed it on the call here today, the lower travel and conference-related expenses. Obviously, we don't know where the virus is going to go from here. But as you look out, maybe over the next six to 12 months, is it your expectation that those expenses will stay at this lower level? And has it almost created, if you will, a new normal or even once we're past the pandemic, where many of these types of situations could end up being conference calls or being Zoom meetings or what have you versus going back to the face-to-face?

Yes. To clarify, we anticipate that the expected savings run rate of approximately $1.7 million from our specific cost-saving measures will continue at least into the third quarter. We cannot make projections beyond that, as there may be opportunities to travel again. Our focus is on having a strong account executive management program, and we are committed to becoming trusted advisers to organizations as they train, develop, and retain their vital workforce. We believe this adviser role is often best fulfilled in person, and we hope to see our team able to travel again someday. The new normal is uncertain; however, due to the rapid adoption of virtual tools, there is greater familiarity and acceptance of virtual meetings. I expect that as we move into next year, the new normal will involve increased use of these technologies in the sales and relationship-building processes. While we may not return to previous travel levels, I do anticipate some level of travel resuming. It will depend on overcoming the challenges of the pandemic and increasing confidence in travel as vaccines are distributed. For now, we aim to maintain our travel restrictions through the third quarter, and we will provide updates on our plans for the fourth quarter and first quarter based on the prevailing conditions. Ultimately, the new normal will likely mean less travel once it resumes.

Okay, great. Thanks.

Thank you. Our next question comes from Richard Close with Canaccord Genuity. You may proceed with your question.

Thank you and congratulations on the recognition you mentioned. Regarding the gross margin, it's impressive to see that you have achieved three quarters above 60%. Could you provide some insights on how much of this is due to the ramp down of Laerdal compared to the other higher margin products you mentioned? Are these higher margin products primarily the new resuscitation products or are there other products you can discuss?

Yes. Certainly, the primary dynamic is the roll off as you saw I think about a $4.9 million decline year-over-year or quarter-to-quarter of the legacy resuscitation products that are some of the lowest margin products in our portfolio. So clearly, the loss of those revenues is going to change the gross margin. That said, there are many initiatives small and large that contribute to the blended improvements and we've talked about some of them. A lot of them won't manifest for longer time periods. The VerityStream migrations eventually consolidating to one platform will definitely have a lower cost to operate a single platform than five platforms, so we anticipate as we mentioned hopefully a constant improvement, may bounce down a little bit quarter-to-quarter but kind of a steady profile improvement of our gross margin capabilities as an organization. But you're right to point out the primary dynamic is both the new sales of the Red Cross Suite where we enjoy a little better margin and the drop-off of the legacy resuscitation products.

Okay. Regarding renewals, since you mentioned that you haven't experienced a negative impact from COVID on revenue, just some on bookings or sales, can you share any insights about renewals as we move from the first to the fourth quarter? Do you have a larger percentage of renewals occurring in the second half? Also, once a renewal is signed, if a company decides to sign for a lower number of employees, does that change take effect immediately, or is there a gradual decrease?

If a company were to renew and sign a new contract, it typically happens at the end of the term, resulting in a shift to the new economic conditions, whatever they may be. Therefore, if there is a lower employee count, it would lead to a lower billing at that time. Historically, our contracts range from three to five years, which is a broad range, but it is not a one to two year cycle. This means that about one-third of our base would come up for renewal each year. There are larger accounts among the top 10, which may sometimes renew a couple of contracts in one period or occasionally skip a year with lighter renewals. Generally, renewals are well-distributed, but there might be a slight tendency towards increased sales in the second and fourth quarters, resulting in somewhat higher renewal activity during those periods. Overall, renewals are fairly evenly spaced across both large accounts and time. We might experience an anomaly where two of our top 10 customers renew in the same quarter, but this would happen infrequently, perhaps once every two years, rather than significantly impacting any specific quarter or period.

And then just thoughts on M&A. I know a good amount of M&A over the last three, four years or so have been on the Provider Solutions side. Obviously, you had the NurseGrid and Workforce here recently. But as you think about M&A and reengaging as you mentioned beginning now, I guess this quarter from the pause, is there a preference? I mean is the Provider Solutions fully flushed out now so you'd be focusing more on adding on the Workforce or just any thoughts in and around that?

Yes sure. It is interesting. We're finding through the hStream infrastructure, there are lots of logical extensions to how we define our ability to impact the workforce engagement, workforce retention, workforce development. Of course, maintaining the credentials and privileges is a certain area of expansion as well. So I think in general, as we get more and more of our organizations migrating to the hStream platform, it opens up our definition of how to extend our model in logical, not tangential but logical business extensions. And so, the idea here is moving to one over time, one common infrastructure that allows us to extend where credential improvising was just the first logical extension. And some of the themes of course needs to relate to the healthcare workforce needs to relate to the retention engagement development and management of them or their workflows. So we think there are a lot of interesting ways to extend the model. Right now, for example in Workforce, our investments are focused on content development and investment in companies that bring us some content assets where we can co-own to help improve our margins. We've mentioned that in prior calls. In fact, we did make a small minority investment in the quarter. We'll be talking about that coming. It's very small, but it's indicative of the type that was into kind of a content asset. And so maybe more of those software applications that extend functionality that touch on the workforce. We're really excited about what we've done with NurseGrid and how it may ultimately complement our e-portfolio tool set that we're building. And so, I guess you just have to wait and see but we have a lot of exciting ideas on how to extend this model as it relates to the U.S. healthcare workforce their management development retention and just in general their workflows. One slightly new dimension to the model is this NurseGrid application. It's the business to professional direct. So as we think about having millions of people in a network, they've mostly been consumers through their organization. So their organization has been our primary customer that employs them. I think in the next several years, you'll start to see us have the end user as a customer as well, and so watch for that NurseGrid is kind of the beginning of that concept.

Great. My final question is about a year ago when you mentioned moving from the hosting aspect of your business, possibly related to hStream. I can't recall if it was Azure or Amazon that you were using, but there were some duplicate hosting costs. Can you discuss whether that situation is still ongoing or when it is expected to be resolved?

Yes. That would be one of the longer-term improvements in gross margin expected over the next 24 to 36 months. Currently, we need to invest and scale up in various areas, including our hosted environments, which, despite being fully web-based SaaS, we manage ourselves. We also utilize pure SaaS and PaaS environments in Azure and Amazon's web services. At the moment, the costs from these duplicative efforts will remain in the model and are likely to persist for at least another year.

Thank you. Our next question comes from Vincent Colicchio with Barrington Research. You may proceed with your question.

Yes. Bobby, I'm curious, have you seen a significant increase from last quarter to now in terms of a portion of your client base looking for better payment terms?

I'll let Scotty kind of characterize that, because he's been dealing with that. But in general, it hasn't been as much as I thought kind of overall. But maybe Scotty if you could comment a little bit on customers and their request for payment modifications?

Yes, we've received some requests from customers, but they are not widespread across our client base. The requests have mostly come from a smaller group, which includes both national accounts and smaller customers. While we don't see this happening every day, we have been responsive to their stories and concerns, working together as best as we can. However, this has slightly impacted our collections for the quarter, with some accommodations we've made, and others being a result of customers continuing to slow pay due to their current conditions.

Okay. Thanks for that. And one more Bobby. Wondering are you seeing better pricing in the M&A market, or are things reflecting sort of the overall equity market?

I believe they are mirroring the overall equity market. I have not noticed any significant changes yet. Many companies are still evaluating the situation; some were clearly affected by COVID immediately, while many of the businesses we focus on are subscription-based. It’s somewhat challenging to determine the short, medium, and long-term effects on our operations. From what I can observe, they are maintaining their valuations as best as possible at the moment. The next few quarters might adjust the market multiples, but we won’t know until we reach that point.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Robert Frist for any further remarks.

Thank you all for participating in our second quarter earnings conference call. Look forward to reporting the third quarter and updating you on our business conditions. Thank you to all HealthStream employees for delivering an amazing work result and financial result and kind of hunkering down with us to get through this tough time. Appreciate their contributions to overall to our success and forward momentum. See you guys on the next earnings call. Thanks. Bye.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.