Healthstream Inc Q4 FY2020 Earnings Call

Thank you for joining us today. Welcome to the HealthStream Inc Fourth Quarter and Full Year 2020 Earnings Conference Call. This conference is being recorded. I will now turn the call over to Mollie Condra, Vice President of Investor Relations and Communications. Please proceed.

Thank you, and good morning. And thank you for joining us today to discuss our fourth quarter and full year 2020 results. Also in the conference call with me are Robert 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 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 and 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 it to net income attributable to HealthStream is included in the earnings release that we issued yesterday, and may be referenced in this call. So, at this time, I'll now turn the call over to Bobby Frist.

Thank you, Mollie. Good morning and welcome to our fourth quarter and full year 2020 earnings call. There's a lot to cover today. To call 2020 unprecedented hardly seems to scratch the surface. I think we can all agree this was a year unlike any other and of course, this call will synopsize things that happened in the year and talk a bit about the future. Despite the adverse conditions of the pandemic, the HealthStream team never stopped living our mission and vision. And we are focused on improving the quality of healthcare. It seems this vision has never been more important than at this time. So our employees are focused on execution. To start our call, I want to look forward as we discuss how we've been busy over the last 24 months, especially this last year laying the groundwork for what we believe will generate long-term shareholder value. As part of the discussion, I’m going to update you on each of the key transitions that we’ve discussed in the past several calls and characterize and re-characterize them. With only 10 months ago, we reached an inflection point where the major business risks associated with these transitions like market acceptance, product adoption, and technology viability are behind us. We'll talk more about these transitions in a moment. But first, let's look at financial guidance, which we are pleased to reinstate now. We expect revenue to be in the range of $242.5 million to $252.5 million and adjusted EBITDA to be in the range of $34 million on the low end to $38.3 million on the higher end. In my view, one of the most remarkable things about this guidance is projecting the potential for revenue growth despite the $38.4 million revenue decline in legacy resuscitation products from 2020 to 2021. And the $4.3 million to $5.3 million negative impact of acquisition-related deferred revenue write-downs. That's a lot to overcome, and I'm proud of our team for working hard to put us in a position to have a good shot at showing top-line growth on a year-over-year basis despite these really tough headwinds. Another thing that you'll note is that we're guiding to adjusted EBITDA instead of operating income this year. At this point, we believe adjusted EBITDA guidance coupled with revenue guidance provides a better indicator of the company's financial performance and will be useful to current and potential investors. In our calculation of adjusted EBITDA, I want to point out that we exclude the accounting impact of deferred revenue write-downs from acquisitions. Given that we've recently completed five acquisitions, we believe that providing guidance through a metric that excludes the fluctuations associated with this accounting treatment will help to provide a more consistent view over time. Now, I want to take you through what we intend to accomplish through these business transitions that we've mentioned and talked about in the prior quarters, actually over a two year period. And a little bit about our growth philosophy and the way we think about these objectives in general. This means we're going to be giving directional information that covers not just 2021, but a little bit into 2022, which is a longer view than we normally provide. So building on the anticipated results for 2021, which I just provided, we want to talk a little bit about what a return to normalcy might look like for us in 2022. Some expectations about 2022, after having just talked about guidance for 2021. First, our goal is to deliver organic high single-digit revenue growth rates. I think that's an important statement to make given what happened in the last 24 months with these changes in our revenue model. Second, our goal is approximately a 65% gross margin profile. I think that's still a few points higher than we delivered in the fourth quarter. We feel directionally comfortable that that's where we're headed in the coming 24 months with a 65% gross margin profile. And third, we would expect in 2022 to see our adjusted EBITDA margins of 15% to 20% of revenues. I think that’s one of the more important metrics for us to look at as we climb through the challenges presented by the revenue declines associated with the legacy resuscitation revenue products. Achieving, perhaps more importantly, sustaining these objectives requires consistent investment in innovation, and I think it's important to note that in 2021, while we're also fighting through the changes, both organically and inorganically from the decline in resuscitation revenues, we are investing very actively in the businesses that we acquired. We're fortunate to begin here with a solid balance sheet to do that. No debt and a $65 million credit facility that remains fully available to us. This allows us to invest in organic R&D initiatives, as well as making the appropriate investments to help our recent acquisitions achieve their potential. We acquire companies to ensure that HealthStream remains the innovative and disruptive technology platform that our customers and investors expect it to be. Now, let's talk about these three transitions. In each of our quarterly calls the last couple of years, I provided updates regarding each. As I said last quarter, a lot of the challenges previously associated with these transitions are now behind us. Some will go on for years, but we're reaching an inflection point where some of the key business risks associated with transitions are behind us or imminently behind us as there are only 10 months remaining in the 36-month horizon that I articulated a few years ago. So let's go through one at a time. First, we have transitioned our sales and marketing efforts from legacy resuscitation products to our new resuscitation offering. As a reminder, the Red Cross Resuscitation Suite program is comprised of BLS, ALS, and PALS competency development curriculum, and we launched it in January of 2019. It brings an updated highly adaptive competency-based development solution to healthcare professionals. It offers certification for healthcare professionals who successfully demonstrate proficiency of life-saving resuscitation knowledge and skills. While customers' focus has necessarily shifted in the last year to responding to developments related to COVID-19 and treating COVID-19 patients, we have continued to see new sales this week. For the full year 2020, over 180 new contracts were signed for the Red Cross Suite. I think this is quite an accomplishment given its relative newness to the market. Some of these customers included, for example, Norton Healthcare and Cedars-Sinai Medical Center, and other customers like Air Methods who chose to expand their services even more broadly across their organization in the year. The second transition involves the adoption and migration to our new Verity hStream application suite. In the first quarter of 2018, we announced the launch of Verity hStream, our new application for managing a full spectrum of credentialing, privileging, and enrollment needs in healthcare organizations. During the fourth quarter of 2020, 39 customer accounts were contracted for the Verity hStream application suite, bringing our cumulative total to approximately 345. These customers represent a mix of new customers and existing customers who chose to migrate from our legacy credentialing and privileging platforms to the new Verity hStream application suite. Some of the customers we contracted in the fourth quarter include University of Utah Health, On Our Health System, and St. Charles Health System. Importantly, all new customers, including the distinguished ones I just mentioned, come onto our new enterprise solution, the Verity hStream platform application suite. The third transition involves our customers upgrading to the hStream platform, which is the essential technology that powers all the activity in the HealthStream ecosystem. Increasingly, our products, applications, and content offerings are connecting to the new hStream infrastructure. In the fourth quarter, we added approximately 380,000 net new hStream subscriptions, bringing our cumulative total to approximately 4.2 million subscriptions. Our quarterly updates regarding these three business transitions began at the start of 2019 approximately 24 months ago. We are therefore about two-thirds of the way through what I originally described as a likely 36-month journey. As I mentioned, many of the major transitional risks previously associated with these transitions are now behind us. For example, we now see strong market acceptance of the Red Cross suite and its certification as we now have customers in all 50 states. We have seen compelling product adoption of our Verity hStream application suite with approximately 345 customers and many notable referenceable accounts. We have seen firm technology viability for our hStream platform as evidenced by the large scale deployment of applications that utilize services from the new hStream PaaS architecture. What's important to understand is that in each case, the viability of what we were transitioning to is now part of our core business. We will talk about them less and less as transitions moving forward and more and more about how these other solutions are contributing to realizing the revenue growth, gross margin, and EBITDA objectives that I highlighted earlier in the call. At this time, I'm going to turn it over to Scotty Roberts to provide a more detailed discussion of financial metrics for the fourth quarter, and then I’ll come back for some closing comments and questions.

Good morning, and thanks to everyone joining us today. During this morning's call, I plan to review our financial results for the fourth quarter and provide more information about our M&A activity, as well as discuss guidance expectations for 2021. I will briefly touch on the impact of COVID-19. The discussion of our financial results will be for continuing operations only, and comparisons will be against the prior year fourth quarter unless otherwise stated. For the fourth quarter, revenues were $61.8 million or down 1%. Operating income was $1.1 million and down 66%. Income from continuing operations was $0.9 million or down to 74%. EPS from continuing operations was $0.03 per diluted share, down from $0.11 per diluted share in the prior year. Adjusted EBITDA was $10.7 million or down 4%. After pausing our M&A plans earlier this year, we had an active quarter to close out the year. During the fourth quarter, we acquired ShiftWizard, ANSOS, and myClinicalExchange. And in January, we acquired ComplyALIGN. We're excited about the future opportunities these companies provide us and our customers. Given that two of these three acquisitions closed in the final month of the quarter, the impact on the quarter's results I just highlighted included revenues of $2.1 million, which is net of deferred revenue write-down of $0.9 million. It also included $1.2 million of diligence expenses and $0.7 million of amortization expense. I will provide more information about how these acquisitions impact our 2021 forecast in a few minutes. Revenues from the Workforce Solutions segment totaled $49.7 million for the fourth quarter, and were down 2% or $1.2 million compared to the prior year. Revenues from the legacy resuscitation products declined by $5.7 million during the fourth quarter. For the full year, revenues from the legacy products were $38.4 million, compared to $58.9 million in 2019, and they're expected to be zero in 2021. Other workforce revenues increased by $4.5 million or 12%, and were comprised of an increase from platform and content subscriptions of $2.4 million or 7% and $2.1 million from the acquisitions completed in the quarter. Revenues from the American Red Cross stimulation suite program, which includes both subscriptions and simulation equipment, was also a strong contributor to the fourth quarter revenue growth. Revenues from the Provider Solutions segment totaled $12.1 million for the fourth quarter and grew by 3% over the prior year, which was primarily associated with the acquisition of CredentialMyDoc that we completed in December of 2019. Our gross margin improved to 63.2% compared to 60.3% last year, reductions in the lower margin legacy resuscitation revenues, and increased revenues from other higher margin products continue to yield improvement in our overall gross margin. Operating expenses, excluding cost of revenues, were up 10% or $3.5 million over the prior year. This increase reflects our investments in product development, incremental expenses from the acquired companies, and diligence costs. While we increased investments in these areas, we continue to benefit from lower expenses resulting from travel restrictions and tradeshow cancellations of approximately $1.7 million as a result of COVID-19. The combination of these factors led to our operating income declining by $2.2 million or 66% to $1.1 million and adjusted EBITDA declining by $0.5 million or 4% to $10.7 million. As Bobby mentioned, we've updated our definition of adjusted EBITDA to adjust for the impact of deferred revenue write-downs associated with the fair value accounting for acquired businesses. The impact of deferred revenue write-downs was $0.9 million during the fourth quarter of 2020 and $51,000 during the fourth quarter of 2019. Our cash flows from operations were $35.9 million this year, compared to a record high of $65.7 million last year. The reduction in cash flows from operations is primarily due to the lower cash receipts of about $23 million, mostly coming from a reduction in legacy resuscitation products and higher overall expenses compared to the prior year. DSO increased to 50 days compared to 39 days in the fourth quarter of last year. Acquisitions completed during the fourth quarter increased our DSO by six days. Despite facing uncertainty and challenges caused by the pandemic, we were able to maintain a strong financial position over the course of the year. We implemented measures to control expenses and maintain liquidity, enabling us to operate without significant disruption or financial strain, while continuing to pursue strategic opportunities to deploy capital. We used $102 million of cash to fund three acquisitions during the fourth quarter. Our capital expenditures were $7.5 million during the quarter, $21 million for the full year. In addition, share repurchases approximated $3.6 million for the quarter, and were $20 million for the full year. We ended the year with cash and investment balances of $46.5 million. Now let's turn to our financial expectations for 2021. While there remains uncertainty about the extent, timing and duration of COVID-19's continued impact on our operating results and financial condition, we are providing financial guidance for 2021 as follows: Consolidated revenues are forecasted to range between $242.5 million and $252.5 million, with workforce revenues forecasted to range between $195 million and $203 million, and provider revenues forecasted to range between $47.5 million and $49.5 million. Revenues within the workforce segment include contributions from the acquisitions we've completed since October, which have netted deferred revenue write-downs between $4.3 million and $5.3 million. We are forecasting adjusted EBITDA to range between $34 million and $38.3 million. As a reminder, EBITDA is a non-GAAP financial measure used by management. We believe it is also useful to investors in assessing the company's performance. We anticipate that capital expenditures, which includes capitalized software development and content, will range between $25 million and $27 million. It's important to note that 2021 revenues will reflect a $38.4 million reduction from the legacy resuscitation products, which also negatively impacts the adjusted EBITDA compared to 2020. Over the past two years, we’ve marketed and sold the American Red Cross Resuscitation Suite, and expect an increase in contributions to revenue and adjusted EBITDA from these products in 2021. At the same time, they're not expected to fully replace the lost revenues or profits from the legacy resuscitation products this year. In terms of profitability, we’re targeting this inflection point to occur around the second half of 2022 if we remain successful in gaining market share for this solution. We've also continued to diversify our product portfolio with higher margin solutions to improve profitability. Proprietary applications, such as Verity hStream, our credentialing and privileging application, innovative workforce development solutions, such as our partnership with the American Red Cross, and the newly acquired staff scheduling applications are examples of investments we've made to improve gross margins. For 2021, we anticipate gross margins to be in the mid-60% range, which we believe is the level we can maintain throughout the year and through 2022. As mentioned, the capital deployed over the past year was primarily focused on acquiring assets and technologies in the scheduling space that we believe can enhance our profitability metrics over time. To improve our market position, we plan to reinvest expected returns from these acquisitions and make incremental investments into sales, marketing, and product development. We anticipate these investments, along with the impact of deferred revenue write-downs, intangible amortization, integration costs, and transition services, will result in a $2 million to $3 million reduction to our adjusted EBITDA, which is reflected in our guidance. Absent the impact of deferred revenue write-down and our decision to actively reinvest in these companies we acquired last year, we believe these companies, taken in the aggregate, are showing a net profit, as opposed to net losses for the year. Our forecast seems that customer purchasing decisions for our products gradually return to pre-pandemic levels over the course of the year, and that new bookings and renewals perform better than they did in 2020. It also seems a gradual return of our own pre-pandemic spending, such as travel and trade shows, which essentially ceased after the first quarter of last year. Collectively, our forecast includes meaningful investments in sales, marketing, and product development in 2021, which are expected to result in a decline in adjusted EBITDA compared to 2020 but we believe will support revenue growth and adjusted EBITDA improvements beyond 2021. Our forecast does not include the impact of any acquisitions that we may complete during 2021, other than the ComplyALIGN acquisition, which was completed in January. Now, let me wrap up by providing some additional thoughts about the COVID-19 impact on our business. While our forecasts seem a gradual improvement in sales and renewals, the pandemic's negative and financial impact on our customers may continue to cause uncertainty in their purchasing decisions for our products. We continue to closely monitor our liquidity including weekly cash flows, customer payment patterns, and bankruptcy notices. We did not experience any significant bad debts during the past year, but our DSO increased in the fourth quarter, though remained within an acceptable range of our expectations. Although we have experienced somewhat slower collections from customers, economic conditions may worsen, and our customers' financial conditions may deteriorate, which could negatively impact our future cash flows. Finally, we ended the quarter with approximately $46.5 million in cash and investments. We also renewed our revolving credit facility in the fourth quarter and increased the borrowing capacity to $65 million. We think it's important to responsibly manage expenses and maintain adequate access to capital while balancing investment opportunities for growth and innovation. We remain focused on allocating capital to support future growth initiatives and improve shareholder value, including through acquisitions. Although for the near term we'll be focused on integrating the companies we've recently acquired. We also have approximately $10 million remaining under our share repurchase program. We believe our multiyear objectives to grow revenues, improve gross margins, and deliver incremental EBITDA are in the long-term best interest of shareholders and the company.

Thank you, Scotty. Some closing comments here before we go to questions. It's really been a great year for our technology innovations at HealthStream; driving innovation is one of our core values that we express to nearly 1,000 employees in our Constitution. And we believe that we're living up to this. I'll give you some examples; in the fourth quarter alone, six of our products altogether received 115 excellence awards from the Brandon Hall Group, which is considered the leading preeminent research organization in the country focused exclusively on Learning and Technology. Included among this list were the American Red Cross Resuscitation Suite and our implementation of it which won both Best Advanced in Gaming or Simulation Technology and Best Advanced in Learning Management Technology. Our nurse residency programs also won two awards, one for Best Advanced in Onboarding Technology and another for Best Advanced in Emerging Learning Technology. So we're really excited to celebrate these technical innovations now being recognized industry-wide as leading in our industry. In the fourth quarter, we were awarded two patents for our next generation clinical solutions, and we’ve been working on developing an intellectual property portfolio and we’re succeeding. In the fourth quarter, we were awarded two patents for our next generation clinical solutions that are specifically designed to help healthcare providers drive outcomes and recognize efficiencies. The first patent covers our proprietary system and methodology for using data to build role-based specialty pathways for resuscitation education and certification. This complements the Red Cross Resuscitation Suite to deliver innovation in this area of critical training and education. We're currently using this patent in connection with our partner AROM to provide specialized training to perioperative nurses. We also received a patent around the natural language capabilities of our proprietary AI engine, which I look forward to telling you more about soon. We are pleased to see the national recognition of this caliber bestowed to HealthStream and to our solutions. We've been putting a lot of energy into their development over the years, so it's very exciting and rewarding to see that happen. Operationally, we've been very busy. During 2020, we acquired four companies, and we added a fifth just last month. We're excited to welcome all five companies to the HealthStream family. I'd like to take this opportunity to say something about each one. Three of the five acquisitions, NurseGrid, ShiftWizard, and ANSOS, are focused on hospital scheduling. Together, they form a brand new solution group for us, which we refer to as HealthStream Scheduling. This solution group is led by HealthStream Senior Executive Scott McQuigg, and it forms the third leg of our company’s three-legged stool. Some of you may be wondering what I mean by this metaphor, and maybe heard me talk about it before, or already figured it out. But we view our workforce development solutions as forming one leg of the stool, our Provider Solutions forming another leg, and scheduling as the final leg. Each of these three solutions importantly shares a lot in common. For example, each represents enterprise software designed to help our healthcare customers fulfill the mission of providing care. Each of the three solution groups are also positioned to leverage one another as they connect through and leverage the core foundation of our past technology platform known as hStream. Working together, customers will be able to make sure that they have the right people in the right place and time providing patient care in the right way. We’ve worked hard to assemble all three legs of the stool and the platform that powers them and connects them and interconnects them. You’ll probably hear me use this metaphor for our business again in the future. In many ways, while the revenue has the potential for slight growth in 2021, the company I feel is fundamentally stronger because it's a more diversified set of revenue streams with a higher gross margin profile. So we're kind of excited that although on the surface, things may look similar to the prior year, really, it's a stronger, more diversified, and more interconnected company that's well positioned. So back to the acquisitions, we're excited to add myClinicalExchange and ComplyALIGN to HealthStream. We haven't talked a lot about those. So let me take a second on those. myClinicalExchange fits our model of ecosystem expansion really well. Through their SAP solution, they interface with hospitals, and with nursing and medical students applying for internships at those hospitals. By collecting and processing student data, myClinicalExchange is able to help thousands of students get the internships they seek in these hospitals by presenting their credentials to hospitals in the form the hospitals require. Although a small one at this time, this marks our first expansion into the nursing and medical student markets, but it also has the benefit of being familiar to us as it's a software solution that directly benefits our hospital customers. ComplyALIGN, as the name indicates, aligns directly with our core compliance business. Historically, one of our strengths is in this compliance area. Through its SaaS-based policy management solution, it allows hospitals to manage and update very policies they require to remain in compliance and ensure they're providing the best care possible. This is a heavy lift in most hospitals, as they maintain well over 1,000 dynamic policies and procedures at any given time. We're pleased to now be in a position to help them with this task, as it kind of overlays a lot of the regulatory and educational products. As we've grown, both organically and inorganically, we've been fortunate to add senior leadership around key areas of business. In January, Kevin O'Hara joined HealthStream as a Senior Vice President and General Manager of platform solutions. That’s of course, hStream. For those of you who've been following the company for a while, Kevin's name may sound familiar; he’s actually returning to HealthStream as he was an executive here for almost a decade. He left in 2011 to become the CEO of an innovative startup, and after leading it to success and selling it, we're very fortunate to have him returning to oversee the growth, development, and integration of our hStream platform. Also, in January, Scott Fenstermacher joined the executive team as our Senior Vice President of Sales. Scott’s outstanding sales leadership since 2012, when he joined HealthStream to build and lead the ICD-10 Solutions team. Since that time, he has been instrumental in the company's growth, and made it an easy decision to promote him to our enterprise head of sales. I also want to take this opportunity to honor and thank Dr. C. Martin Harris for his decade of seamless service on our Board of Directors. Dr. Harris served as Chief Information Officer for the Cleveland Clinic for 20 years and more recently joined Dell Medical School at the University of Texas, Austin. Dr. Harris’ last day on the board will be at the end of this week, and we wish him all the best in his future endeavors, which we are sure will benefit the practice of medicine and the quality of care for years to come. I want to close with a couple of things and acknowledgments. Throughout the pandemic, we've never been more honored to support the brave health professionals providing care for those who need it, even as we've just crossed over the grim milestone of 0.5 million COVID-related deaths in the US. There are and appears to be reason for optimism as the number of new cases is declining and vaccines are increasingly becoming accessible for more and more people. Hopefully, this period will soon become a chapter in our history as we move forward. Until then, we continue to recognize and support the heroic and tireless work of each and every frontline worker. In particular, I want to recognize healthcare workers in Texas who have been forced to contend with the loss of electricity and water over the past few frigid days. Your perseverance epitomizes the value and grit that will move us past the last 12 months of tragedies. Finally, I want to thank our employees for your persistence and hard work remaining focused in the face of these great challenges. And delivering what I think is a relatively exciting forward look into 2021 and 2022. With exciting new products and technologies that have the chance to change the industry and improve the quality of healthcare. Thank you to our nearly 1,000 HealthStream employees. At this time, I'd like to turn it over to questions from our investor community.

Our first question comes from Ryan Daniels with William Blair.

Yes, hey, good morning, everyone. And thanks for taking the questions. This is Jared Austin for Ryan. I wanted to start just talking about the 2022 outlook that you had mentioned and appreciate getting some of that color. In terms of the high single-digit organic growth outlook, Bobby, I'm curious if you could maybe just talk a little bit more about some of the specific drivers that you're seeing that kind of gives you the visibility or the comfort in providing that outlook. And if you could maybe talk kind of around sort of the expectations for each of those three legs of the stool, as you alluded to a moment ago.

I can't cover everything, but I can address some of it. We are in a good position to update our guidance for 2021 with a certain level of confidence, as we mentioned. It's important to share what the outlook may be as we navigate through this year, which marks the end of the year-over-year comparisons following a $38.4 million decline in the resuscitation suite. There are many factors that give us confidence in the guidance we have set for 2022. We believe it is essential to communicate these insights. The forecast of single-digit growth comes from various reasons built into our model, particularly from recent acquisitions that we believe will yield returns. Events like the deferred revenue write-down will be addressed through our accounting processes and will reflect some growth, but more importantly, we anticipate organic growth across many product areas, which is supported by recent sales from our newer platforms. A key contributor to our goal of achieving a 65% gross margin is the successful adoption and market penetration of the Red Cross Resuscitation Suite program, which has seen 180 contracts over the past year—a significant achievement that has shifted market share from what was previously dominated by a single entity to a new, credible player with scientific backing and competitive strength. We remain optimistic about this core aspect of our workforce development portfolio. Additionally, we have organic products that have not been highlighted as much. Years ago, we invested in developing a new AI engine called Jane, which has recently seen notable success at scale. Earlier this year, we signed one of our first multi-million dollar contracts for the Jane platform. This product, which emerged from technologies we acquired several years back, is now making its market debut as a powerful and distinct application. Expect to hear more about Jane in the coming months. You asked what contributes to our confidence; it’s the high-margin, organically developed application that comes from long-ago acquisitions, which we believe has significant market impact potential. Stay tuned for more updates on Jane. Regarding the Verity hStream, we have previously discussed the transitions involved, and it will take time to migrate customers from the acquired companies. We recognized the migration as a business risk two and a half years ago because, although we attained a market-leading position through acquisitions, we needed to establish and validate the new replacement platform. Currently, we have over 345 contracts on this new platform with successful customer migrations. The risks associated with launching new products, including potential market rejection or technology issues, are valid. However, we heard your concerns about the lengthy transitions to newer platforms. Today, we can demonstrate that our new platform meets market needs, evident by our 345 contracts and satisfied, referenceable customers, alongside increasing market share for the Verity hStream. These are three strong reasons for our optimistic growth outlook in 2022. We have acquired three companies to create a scheduling business, establishing a leading position across diverse platforms. There’s plenty of opportunity ahead. We decided on significant investments in 2021, adding over 30 positions rather than merely seeking operational efficiencies. We are actively hiring new employees in sales, marketing, and technology development, enhancing our capability in this venture. Thus, 2021 will focus on investments, guiding our discussions about 2022. There are many reasons for optimism, including organic products gaining market traction, previous partnerships that were uncertain are now seeing adoption, and migrations to the new hStream platform are increasing. They are becoming more interconnected; it's not just theoretical anymore—they are functioning effectively, contributing 280,000 subscriptions to the PaaS architecture, which strengthens my optimism for our guidance. We project high single-digit revenue growth for 2022, following a year that allowed for growth potential, which I consider impressive. Our teams have effectively backfilled the $38.4 million revenue loss this year through both organic and inorganic means. Regarding the goal of a 65% gross margin, we are a software company, and while we have higher costs than some firms due to our content sales through partnerships, we believe we can realistically progress from the high to mid-50s toward the mid-60s in our gross margin over the next 24 months. I am confident in this improvement due to changes in our partnerships.

Got it, yes, that's all super helpful. I appreciate all the color and you can definitely see there are quite a few tailwinds here to support the business going forward. So I will go ahead and land there. I'll hop back in the queue, but thanks for all that color.

Our next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group.

Good morning. Thank you for taking the questions. And we did notice in your guidance last night in the press release that there was a potential for growth, which is pretty commendable given the headwinds that you're facing. The first one: the last couple of quarters, Bobby, you've talked about maybe hospitals being a little reluctant, given the pandemic and everything that they were already facing to purchase new software and transition from one platform to another. As the vaccines are being administered, and as the rate of infection appears to be declining, how are those conversations changing? What are your expectations as we get into, even closer to the summer months and into the back half of the year?

Well, first, we see our customers, the hospitals and healthcare providers and surgery centers learning to operate in a manner that allows them to provide for COVID and traditional services. They are just learning; they're learning to deliver the services and vaccinate people while also doing the more normal programs and service lines and surgeries that they did in the past. So, I’m not declaring by any means it's over, and there are lots of concerns about new variants and other challenges they face. But resilience has been amazing; they’ve fought through all of this in an unvaccinated state. Now, I think there’s some growing confidence that, with our healthcare workforce vaccinated, the emergence of the new vaccines, and the rate of deployment of the vaccine, just that there’s this new sense of opportunity among them. Our surveys of the nurse workforce showed incredible burnout and fatigue — that was a month ago — but I’m sensing even last month, a little bit of a shift where people can see some light at the end of the tunnel. Hospital operations certainly aren’t normal again, but they are entertaining the operating future. It’s different. Telemedicine will be a more permanent part of the landscape, for example. This may be an area where we need to focus on some of our opportunities in education and training. Every challenge presents opportunities. I’m not declaring a return to normalcy; there are plenty of risks in front of us. But we do see operations proceeding as if to say, 'Okay, this is what hit us. Now we need to move forward and continue to modernize how we operate, how we train and educate, how we manage the time and schedules of our employees, and how we credential and privilege and onboard our new physicians.' So we see a bit of return to ‘we’re going to operate through all this’. We hope for a gradual return to normalcy in the next 18 months.

Got it. Thanks. And then the last couple of years you’ve done a lot of heavy lifting with these platform upgrades, and I’m curious, as you’ve noted that these new applications, these new platforms are functional, they work, and can help the customer. Does the sales cycle shorten because of that? Or is it hard to differentiate between the newness of the application or the platform versus what we've been dealing with COVID? It's really hard to tell whether the sales cycle shortens because of one or the other, or a combination of the two.

Yes, I'm not going to project shortened sales cycles right now; there's just too much uncertainty. I would say that as our PaaS architecture matures in the next two years, it gets easier and easier to launch organic products and attempt to service them out into our network more rapidly. As our application suites get more connected to hStream, it gives them more ability to iterate faster and drive new product concepts. Part of this move to PaaS is hopefully a kind of a speedier ecosystem. If you think of that profile, the company has achieved some amazing growth; let’s just say the $10 million or $15 million range seems to be within range of what we achieve this year. It looks optically flat, but really, what happened is amazing. It’s a far more diversified $0.25 billion company. It’s now a three-legged stool instead of two. What was once a major dependence on a single vendor is now a dependence on an emerging vendor partnership, with the retention of the old relationship. So it's important to note that while we're losing nearly $60 million this year from the legacy, we have maintained a strategic relationship that will generate revenues in the future from this new way the relationship is structured. So it's just a much more diversified business model across $250 million in revenue, and that’s been achieved in the face of this challenge of COVID and this rapidly declining $60 million product. There’s less reliance on it, and there’s a whole new segment in our business that allows us to hedge against future risks. I think it's a fundamentally stronger, more diversified company.

Got it, and then one quick one here, and then I’ll hop back into the queue. I don't know if this is for you, Bobby, or Scotty; I’m curious if you can answer this. Now with three legs to the stool, just from a modeling perspective, should we anticipate three different segments, Workforce Solutions, Provider Solutions, and the new piece, or will you just stay with the two at least for the near future? Thank you.

Yes, I think for the near future, it stays the same. My hope and ambition, kind of like Salesforce.com, is it eventually the unifying factor of all of our businesses, the hStream PaaS architecture, and essentially, we have a future where we see one architecture and then application sets that connect to it. If anything, directionally, it would be my hope someday that we’re more of a single platform company with a lot of diversified revenue streams connected to it instead of segments. So, directionally, that's more where we're headed than more segments. I think we’re headed towards an hStream platform, and a unifying metric like the hStream subscriber base, with interconnectivity between the application sets down to the PaaS architecture. So if anything, our businesses are becoming our focus areas and application sets are becoming more symmetrical and not more segmented.

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

Great. Can you hear me? Okay? Okay, excellent. I've had some communication issues this morning. So that's good. With respect, maybe for Scotty, I think you mentioned this, but I didn't necessarily get it all. But with respect to the deferred revenue write-down, that's an add-back on adjusted EBITDA. Did you quantify the size of that that's expected here in 2021?

Yes, Richard. Hey, how are you doing? Yes, we did, and it's actually in the earnings release too. There's a reconciliation table to our guidance for that measure, and it's between $4.3 million and $5.3 million, the impact we’re expecting for 2020.

Okay, great. I appreciate that. I apologize I don't have internet access this morning, so I'm sort of scrambling. Bobby, with respect to the three areas, workforce, provider solutions, and scheduling — how do you think about the total addressable markets and your growth versus what the market is growing in those various segments?

Richard, I see a lot of room for innovation in each of the three areas and interconnectivity. So there's a lot of derivative opportunities that come from being in those three lines. A core audience, for example, that’s common to a lot of those applications is the nursing workforce; we have a market-leading position and nurses log into our platforms. So there are a lot of derivative opportunities that come from that. We think more of an ecosystem with data mobility between the different application sets. We've talked about provider solutions, the learning and development and workforce development, and in scheduling — we see a lot of opportunity that increases the net opportunity and the benefit to customers in these health systems. We’ve talked about some of the interconnectivity and there are just dozens of examples of where we're headed. For example, credentials earned in the workforce development network can automatically populate into the credentialing and privileging platform — that’s a good example. For scheduling, we can better match the skills and competencies of the nurses to the patient acuity. There are opportunities for better matching algorithms for scheduling. We think these opportunities present financial opportunity as we integrate the data and leverage the ecosystem itself. Within each of the three focus areas, we think there’s plenty of room to gain market share; our products are innovative, and there’s a lot of dissatisfaction with the current status in many of these areas. When there’s dissatisfaction, you have old archaic systems like scheduling or time management, which are just outdated. We think there's room to innovate and deliver value, and value can equate to financial opportunity. So, relative to our size, we see a lot of opportunity, and plenty to pursue in the next few years to show the kind of growth we've talked about in our guidance.

Okay, maybe as a follow-up to that, with respect to the go-to-market and sales process, is it the same person? Or are different parts of the hospital administration that are dealing with each of these offerings? I guess how centralized is it? Or is it decentralized in terms of the purchasing?

Within the three legs of the stool, there are probably product sets and application sets targeting seven different buyers. It is distributed across the budgets; there are a few key players that are more common across those six or seven areas. Some of the more niche areas would be compliance, and hospitals handle compliance in different ways. The Chief Nursing Officer is a common decision-maker in the scheduling business and all of the Workforce Development solution sets like the Jane platform and the Red Cross Resuscitation Suite program. There are some common buyers and then there are some focus areas. We have a strong revenue cycle education program that targets that VP of Finance. We have a small sales team focused on reaching the financial operations of hospitals; we have a much larger sales operation focused on building relationships with Chief Nursing Officers to take the appropriate products. There are a few common buyers, but there are many areas within the budget by different business leaders—some decision makers are more common like the Chief Nursing Officer, while some focus areas are more niche-specific. Having a really strong revenue cycle education program targeting the VP of Finance and the Chief Nursing Officer allows us to use a competitive advantage in a diversified model.

Okay, that’s helpful. And then on the Provider Solutions, you’ve obviously had some buying in terms of new customers, as well as existing customers transitioning to Verity hStream. As you sit back here, like I guess, three or four years from the acquisitions that you made to get into the credentialing side of things and the integration and rollout of the new product, has the growth opportunity disappointed you from the standpoint of did you think there was more opportunity in there? Just any thoughts in terms of looking back and seeing how that market has met or exceeded or not met expectations?

Yes, I think the transition was difficult to build a replacement platform; it requires a lot of investment and kind of fortitude by the team to see it through and get it ready. But in the last 12 months, we're starting to see the benefits of that hard work as we start to win a better share of the RFPs and kind of gain and market acceptance and adoption of that platform. So I think the returns are still in front of us. I would like to have gotten there sooner? Yes. Was it harder than anyone wants it to be? Yes. It’s hard to acquire three or four companies, assemble one brand, and build a replacement product, keeping your customers and migrating them to a new platform. It’s taken longer to get to this point, and great efforts from our teams are getting us there. But I do feel like the opportunity is still in front of us. That whole set of applications has grown to be much more comprehensive than just credentialing, for example, as it’s moved into privileging and onboarding and now performance management dimensions around physician performance management. A lot of the data that’s coming from those platforms, the suite has expanded to be one of the most comprehensive in managing the onboarding and performance management of physicians over time, not just credentialing and privileging. We’re really excited about the expansion view of that application set. It’s relatively niche, though, compared to like the scale of EHR, like I don’t think credentialing and privileging is that kind of multi-billion dollar revenue opportunity. But again, relative to our current scale, there’s plenty of growth opportunity to deliver substantially larger company in this area and application set.

Okay, do I have time to ask one more? So, given the response that provider solutions, you obviously did have a big uplift there in terms of rolling out a SaaS unified SaaS product. As we think about the scheduling and there have been three or four now acquisitions on that front, as you think about the integration of the existing products that you acquired and then thinking about over the next year or so in terms of investments, how big of an uplift is it? Are you sunsetting those products over time and you're integrating them? Is this going to be a new SaaS platform, similar to Verity hStream? How should we think about that?

Yes, I think it's similar but with lessons learned from the Verity hStream journey. The other cool thing is that we’d already seen in the market some demands. When we bought NurseGrid, there were demands to integrate it with ANSOS from some of our field, because before we owned ANSOS, some of the work through a partnership had already begun on integration and leveraging each other’s capabilities. So it’s kind of cool that there's a bit of a jumpstart based on market forces making those platforms leverage each other. I think that the first 24 months, obviously, you heard me say we’re going to add about 30 personnel to those acquired companies to really round out sales, marketing, and product development. So you’ll see a stronger push earlier into energizing the sales organization. As I mentioned, some of the work of vision for integrating the technologies for example, we’ll integrate NurseGrid benefits and technologies into ANSOS and ShiftWizard first. I would say within this year, we would see benefits of those systems talking to each other where the NurseGrid application brings a strategic and competitive benefit to both ShiftWizard and ANSOS. Beyond that, we are assembling a leadership team. We have a 35-page playbook on how we did it with Verity hStream to build a brand and platform and make technical decisions on its path. In all cases, we’ll be wiring these applications to the hStream platform in the coming 24 months, and that’s part of our forecast. We are connecting NurseGrid, ANSOS, and ShiftWizard. We’ve already begun to segment which applications are more appropriate for which scale and size of opportunity, branding them, and how it works will take us a little longer to figure out. But we're making the necessary investments, and we have a 35-page playbook that unifies the Verity hStream team on how to pursue this. I’m really excited about it. We’ve got right three assets together and the right team is forming around this opportunity unlike anything else; it represents its own transition that will result in new applications, software, and branding emerging probably in the next 24 months.

Okay, thank you very much.

But I think Richard, your comment of thinking of it like Verity hStream is a good analogy. So we thought about when we acquired the assets that we were going to invest, not look for synergies right now, we were going to look for strategic advantage for the applications, and then invest in strengthening what were relatively small sales organizations into larger ones, and getting the technical benefits by connecting them to hStream which is the emerging PaaS architecture. I think it’s right to think of it, but hopefully the journey can be a little less painful and faster than the Verity hStream journey because we’re better at it now, we’ve learned how to do it.

Our next question comes from the line of Vincent Colicchio with Barrington Research.

Yes, Scotty, what is the revenue contribution you’re expecting from acquisitions in 2021?

Hey, Vince, how are you doing? With regard specifically to those acquisitions and this latest release in conference call. If you look back at last quarter, we talked briefly about ShiftWizard contributing historically around $4 million, so they were a growing company. We're going to obviously feel a little bit of the brunt of deferred revenue right now from the acquisitions, but ShiftWizard was about $4 million when we acquired it historically. In our ANSOS announcement that we did back in December or late November, we kind of gave some forward-looking expectations on that transaction as well. I think it was in the $16 million to $19 million range, that's net of deferred revenue write-down. So it does somewhere in the mid-20s when you add back our deferred revenue write-down. The other acquisitions are much smaller in scale, and there will be some contribution there, but we're quantifying it and speaking to it separately.

Okay, thanks for that. And then, Bobby, not to beat a dead horse with the Verity so to speak, did you mention what portion of Verity clients have migrated to the new platform?

No, we haven't. But we have lots of customers to go; we’re seeing steady conversions. I mentioned the 39 this quarter, so we're seeing conversions and new market share gains on the platform. But no, we’re probably not going to report it because the margin profile is similar. It’s going to take a long time to migrate everyone. We don't have plans to force any migrations, so we’re just going to treat it as one software unit. But all the new sales and transitioning customers are seeing increasing benefits of moving to a new platform. The concept of this being a transition; we've kind of re-characterized it as the transition of customers from old to the new platform will take time. But the financial implications of that are not huge because they're both relatively high-margin software applications.

And then one last one for me: the change healthcare business, what has historical growth really looked like in that business?

Well, I don't know what we filed on their historical business. But it's solid, more of a margin and profile and large customer acquired business for us. The innovation and growth was going to come from the ShiftWizard platform. So I don’t have that number for you, Vince.

Vince, we haven't disclosed any historical on that one yet. You should see something in our financials as we file our 10-K here pretty soon.

Thank you. And I’m showing no further questions at this time. And I'd like to turn the conference back over to Robert Frist for any further remarks.

Thank you. I look forward to reporting the next quarter earnings call here shortly. They come up rather quickly as we do year-end and then move into the first quarter. Thank you, guys, and we look forward to the next call.

Ladies and gentlemen, this concludes today's program. You may all disconnect. Everyone, have a great day.