Healthstream Inc Q2 FY2021 Earnings Call

Welcome to HealthStream’s Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

Thank you and good morning. Thank you for joining us today to discuss our second quarter 2021 results. Also in the conference call with me today are Robert A. Frist Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President. I'd also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K, 10-Q and our earnings release. Additionally, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call. So with that in mind, at this time, I'll turn the call over to Bobby Frist.

Thank you, Mollie. Good morning, everyone, and welcome to our second quarter 2021 earnings call. A lot to cover here, but I think first context is important. I want to remind everybody that as the nation moves forward through the pandemic, it's clear that this long journey has grown bumpier with the recent rise of the Delta variant, which is causing a 36% increase in the number of hospitalizations. According to the CDC, nearly half of adults in the US have been fully vaccinated, and as that number rises, we at HealthStream remain hopeful that progress towards beating the pandemic will continue, but we must keep in mind that our customers are on the front lines responding to this new spike in cases. We started today's call able to tell you that our commitment to helping them improve the quality of healthcare has never been stronger. We are trying to align our interests and energies with our hospital customers and our continuing customers. I'll comment on branch performance for the quarter and the first half of the year. We remain laser-focused on growing the company, which is why we were able to deliver another strong quarter with top-line revenues increasing by 7% and adjusted EBITDA increasing by 20% over the same period last year to a record $14.5 million. Based on those results, we have updated our financial guidance. We wanted to hit that early in the conference call. We now expect revenue for the full year 2021 to be in the range of $253 million to $257 million. For context, the midpoint of the new range is $5 million higher than the midpoint of the previous range. I believe one of the most remarkable things about this guidance is that we are projecting revenue growth despite a $38.4 million decline in revenue associated with our legacy resuscitation products from 2020 to 2021 and a $4 million to $4.3 million negative impact of acquisition-related deferred revenue write-downs. So our teams have done a great job both organically and through acquisitions of backfilling those revenue challenges I just articulated. Additionally, we now expect adjusted EBITDA for the full year 2021 to increase to be in the range of $48 million to $50 million compared to the range of $40 million to $44 million as announced just last quarter. There were some unique factors that helped contribute to the record-setting adjusted EBITDA in the first half of the year, which are not expected to repeat during the second half of the year. For example, in the first half of the year, there wasn’t much travel at all, and we do expect to have projected return to travel spend. It was not at the full level of pre-pandemic, but we do expect to see travel begin to recover for HealthStreamers across the country, and so we'll begin to see travel expenses come into the modeling as they return in the second half of the year. Additionally, macro workforce trends have made recruiting, retention, and hiring much more complex. Those are more difficult in the last say six months as the macro trends support everybody peeking out from the pandemic and looking around to see if there's opportunity. It has been both a detriment and a benefit to HealthStream this trend of everybody looking for something new. So to catch up on our planned hiring, we were definitely behind our plan in hiring in the first half of the year, which resulted in improved EBITDA, but we need to reserve the right to catch up on our need to get the people in place that we had planned to have in place in the second half of the year. We're doing everything we can, and our new VP of HR and our recruiting teams are doing a great job adding new people, but our turnover has increased. So in the second half of the year, we expect additional costs in personnel that we were unable to net add in the first half of the year. We did have a net add, but just not where we plan to be. Finally, we're committed to increasing our investment in our newly acquired scheduling business, making it into one business or one focus area in the second half of 2021. We'll talk a bit about that here at the end of the conference call, but our new guidance reflects all three of these things for example and captures them as mentioned. As we look forward, it’s not only the contributions of our long-standing product portfolio that give us confidence, but it’s the market’s enthusiastic response to our newer solutions that give us the confidence to put those objectives and goals for 2022 forward. The market embraced our resuscitation solution from the American Red Cross and many of our other exciting innovative products that are contributing to our growth with their unique outcomes driven approach. Today, I want to spend a minute on Jane. Jane is one of these new products, the first of its kind in the market. Jane is an AI-driven clinical development solution that uses natural language processing powered by IBM Watson, which is a mouthful, but basically it is a cutting solution to helping assess the competency profile of staff and give them an individualized intelligent plan of how to improve not only their knowledge of their work but their critical thinking ability. Jane is truly our kind of breakthrough expert system, a digital coach particularly focused on our nursing population. Jane has been recognized industry-wide with six prestigious awards from Brandon Hall in the last year and a unique approach through its newly awarded patent. We couldn't be more excited about the position of our Jane application set. In 2021, we first began offering Jane at scale, our goal was to average one sale of Jane per week, and as reported last quarter, we did achieve that throughout 2020. So I believe it's about 52 sales of Jane that were in the books last year, but this year we continue this good momentum in the second quarter. For example, we had 23 new sales of more than one a week during the second quarter alone. It's good to see that new product gaining some traction in the market. As customer utilization grows and Jane's capabilities expand, we will keep updating you on how Jane is changing the industry. It’s a really exciting product, and it’s more than just a singular product. It’s kind of a framework that we can attach more and more capabilities to, and we are excited about Jane. An important part of our strategic and patent focus now and in the last several years has involved these key transitions. We use the word transition to infer risk in transitioning our business to achieve higher margins, and we articulated a story of three transitions over the last three years, each with some major business risk. The great thing today is we believe we've crossed an inflection point where the major business risks that posed a substantial threat to our business are gone. We're really at a point now, trying to assess the opportunity behind these transitions. We believe we’ve moved beyond questions such as when we launched the Red Cross Resuscitation Suite program, would it be acceptable? We're beyond the acceptance now. We’re in all 50 states with hundreds of contracts, system adoption is beyond the essential pair of launching new products and having them fail in the market. Now the question is how good can it be, and it's a better place to be right now. The product adoption of VerityStream has been significant as well. We built a new platform called the CredentialStream Application Set, and we launched it. We were excited about it, but you never know how that’s going to go. Now again, with over 400 contracts on VerityStream, the market adoption and acceptance of this cutting-edge platform is a matter of how much market share we can capture, and our teams are winning well in the market with the new CredentialStream SaaS-based application. The final transition is about the HealthStream platform, and while it's still an immature platform, it is starting to be the connective tissue between all of our application sets. We’ve proven that some of the core functionality of the platform works. For example, the Red Cross Resuscitation Suite program takes advantage of this architecture to use the identity management and infrastructure in the architecture. We've masked well over 0.5 million subscriptions at this point for the new product, which is quite staggering to move that much market share to the American Red Cross Resuscitation Suite program in a short time since its launch in February of '19. We continue to be excited about the product. In February of 2020, we began selling additional product called the Stable program, which is a leading neonatal education program around stabilizing neonates, and resuscitation is a component of it. This highly anticipated program is now available online exclusively through HealthStream, and we had strong sales in the second quarter, adding to our thousands of subscriptions for the Stable program. This diversification of our product portfolio is fantastic to see as well as success from the core product, namely the American Red Cross Resuscitation Suite. Now, in the second quarter of 2021, 42 new customer accounts contracted for the VerityStream application suite, CredentialStream, bringing our cumulative total to well over 400 accounts. These accounts represent a mix of new customers and existing customers who are choosing to migrate from our legacy credentialing and privileging platforms. Some of these customers include high-quality health systems like Sentara Health, Shan Healthcare, the University of Florida, and Mercy Health System, which have selected the CredentialStream application set. Importantly, all of our new customers are coming onto the enterprise solution, which is our top solution built from our acquisitions in the last eight years. We’re excited to gain traction with that application set. The HealthStream platform is getting exciting as well. We think of it as the connective tissue, almost like an operating system that can help improve data mobility between applications that HealthStream offers, aiding in the portability of data about the people in our ecosystem. We added 180,000 net new subscriptions, bringing our cumulative total to 4.52 million subscriptions through the HealthStream technologies capabilities and solutions, which we are very excited about. At this time, I'd like to turn it over to Scotty Roberts for a more detailed look at our financials, and then we'll swing back around at the end and talk about the investments we want to make and some of the strategy and philosophy around our relatively new scheduling capacity management business. So, Scotty, I’ll turn it over to you.

Okay. Thanks, Bobby, and good morning, everyone. I'd like to begin my discussion with the highlight of the quarter, which is our achievement of a new record adjusted EBITDA of $14.5 million, following the previous record of $13.6 million during the first quarter. Having set back-to-back records of adjusted EBITDA, we are raising the full-year guidance to now range between $48 million and $50 million. Before I go over that data guidance in more detail, let me first speak to the results for the quarter. Revenues were $64.8 million, which is up 7% over last year and included balanced growth within both segments. Revenues for 2021 were impacted by a $1.2 million reduction associated with deferred revenue write-downs, which is primarily from acquisitions that we completed during the fourth quarter of last year. Operating income was $3.4 million, down 20%. Net income was $2.4 million, down 29%; and EPS was $0.08 per diluted share, down from $0.11 per diluted share in the prior year. While these GAAP-based financial measures experienced declines, our non-GAAP performance measure, adjusted EBITDA improved to $14.5 million, up 20%. Both of our business segments contribute to the revenue growth over the prior year. Workforce Solutions revenues were $52.2 million, up 6.7%, and revenues from Provider Solutions were $12.7 million, up 8.5%. We overcame a nearly $10 million headwind from the legacy resuscitation business during the quarter and delivered year-over-year growth of 7%. Revenues from recent acquisitions and organic growth from both segments contributed to this year-over-year improvement. Workforce revenues included $1 million from Legacy Resuscitation in the quarter and also benefited from some non-recurring software licenses and professional services from our scheduling and capacity management products. When you exclude revenues from the Legacy Resuscitation business, our consolidated revenues grew by 28%, which comprised 13% organic and 15% from acquisitions. Our gross margin was 65%, consistent with our objective to be in the mid-60% range for the year. As our revenue mix has shifted away from the legacy resuscitation products, revenues from higher-margin products are backfilling the top line and improving our economics. We are on track to maintain gross margins in the mid-60% range for this year and expect to continue doing so for the next year. Operating expenses, excluding cost of revenues, were up 16%, or $5.4 million. This increase reflects investments in our core business and incremental expenses associated with businesses that we acquired over the past year, including the costs for integration and transition services expected to conclude by year-end. Additionally, we began classifying software expenses related to our production environments under cost of revenues, while they had historically been classified as G&A expenses. Our EBITDA margins improved as well, coming in at 22.4% compared to 20% last year. Now switching to the balance sheet and cash flows, our cash flows from operations improved to $24.3 million this year, compared to $13.5 million last year. DSO for the quarter also improved to 43 days compared to 47 days last year. Our free cash flows year-to-date were $11.6 million, compared to $4.6 million last year, and we ended the quarter with cash and investment balances of $55.1 million, down slightly for the quarter while working capital improved by over $6 million. Capital expenditures incurred, including capitalized software development, totaled $6.9 million for the quarter and $11.2 million year-to-date. Now, let's go over updated financial expectations for 2021. We are increasing our revenue ranges and now forecast consolidated revenues to range between $253 million and $257 million, with workforce revenues forecasted to range between $203.5 million and $206.5 million and provider revenues forecasted to range between $49.5 million and $50.5 million. We also raised our adjusted EBITDA range to be between $48 million and $50 million. We continue to anticipate that capital expenditures will range between $25 million and $27 million. As we think about expectations for the second half of the year, we anticipate continued year-over-year revenue growth from both segments. In our revenue guidance, we expect some leveling in the second half, mainly because the first half included some non-recurring revenues that we did not expect to occur at the same levels. This includes $2.8 million of legacy resuscitation revenues and about $2 million of non-recurring software license sales and professional services projects delivered in the first half from our scheduling and capacity management solutions, which we forecasted to be down in the second half. Looking at adjusted EBITDA, the record first half of 2021 was partially due to those non-recurring revenue items mentioned. We were delayed in making some meaningful investments in sales, marketing, and product development, including in scheduling and capacity management businesses we recently acquired. One reason for the delayed expenses is the higher employee vacancy rate we experienced, which created short-term savings relative to our plan. We've successfully brought on new employees, but the net additions to staffing factored into our previous guidance had not materialized as expected. Our second-half outlook assumes these investments begin to ramp up, resulting in lower EBITDA relative to the first half of the year. We also expect certain expenses that were halted due to COVID to return to our run rate, such as employee travel and trade shows. Finally, our forecast does not include the impact of any potential acquisitions that may occur during the remainder of 2021. Now I'll wrap up with a few other updates. We're seeing continued improvement in sales and renewals, which we've begun to see in our bookings over the past two quarters. Our new sales bookings are up compared to the same quarter last year, which was at the height of COVID-19, and renewals are also performing better than last year, helping us achieve growth in a year with now a $38 million revenue decline from the legacy resuscitation business. While there continue to be signs of improving conditions, some degree of uncertainty remains, as we still see some delayed purchasing decisions, especially for discretionary products in our workforce segment. On the other hand, demand for credentialing products has been growing, and the Provider Solutions segment had another strong sales quarter. We've been operating for the past six quarters without significant business travel, with our employees working remotely. We are eager to reopen our offices in Tennessee, Colorado, and California later this quarter and for employees to have the opportunity to see their colleagues in person again. Because our remote work arrangements have been successful, we will adopt a hybrid work policy, allowing employees to work from home or the office. We've evaluated our office space needs and determined that we will not renew several of our office leases when they expire over the next 12 months. While reducing our office space needs will create cost savings, we expect that having more employees moving away from a city containing an office will necessitate more travel than these employees had in the past. We will continue to monitor our office space needs to make adjustments as deemed appropriate. Thank you, and that concludes my comments for today. Bobby, I'll turn it back over to you.

What I'd like to do is talk a little bit about our planned investments and our approach to building the scheduling and capacity management business, which is currently the result of three recent acquisitions. If we look back, we can see what we've been able to do creating the VerityStream application suite through four acquisitions over eight years. Six years ago, we took these four standalone companies, combined them into a new business group, and created a new platform of application sets to migrate those customers to. It is a multiyear journey, a story of time and investment that’s required to make these assets market-leading and more than the sum of their parts. We have a very successful playbook for doing that, and the five-year trajectory of VerityStream is something we look forward to repeating with our capacity management and scheduling business. We've appointed a leadership team to identify areas for investment. We acquired these businesses to innovate and invest. We think we can accomplish the same for our scheduling and capacity management business faster. It’s important to remind everyone that this journey will require increased investment in people. We plan to increase headcount, invest in sales and product development heavily in this area of scheduling capacity management. Hopefully, sooner than three to five years, we will begin to see market-leading innovations and products emerge in that area. We already have strategies in place for early technical integration between the acquisitions that will provide them competitive advantages. We are excited about our position and expect to provide operational updates on the business from now on. We will discuss our progress as NurseGrid, ShiftWizard, and Sauce become a unified product suite. We expect to introduce market-leading innovations as well. To wrap up, I’d like to welcome our employees to our new hybrid workplace. Our offices will become resource centers for employees from around the world to visit, leveraging a work-anywhere approach that emphasizes collaboration and human interaction. We expect to have employees travel more to gather for strategic planning in these resource centers. Thank you to our employees for navigating these challenges and pushing us forward over the last 16 months. Their commitment to improving the quality of healthcare by developing the people that deliver care continues to be demonstrated consistently. The challenges of the pandemic have brought out the best in everyone, and I’m excited to report on their progress, accomplishments, patents, awards, new work styles, and new customers they are bringing in. It's all very exciting.

The question-and-answer session will begin at this time. Your first question comes from Richard Close with Canaccord Genuity.

Yeah. Thanks for the time and for taking my question. Congratulations on the results. Just curious about the hiring environment; specifically here in Nashville, I assume you guys are looking for technology people, and it seems like a pretty competitive marketplace with a lot of tech moving into the city, but just curious in terms of whether that’s increasing the wages that you would typically bring on tech people.

Glad to comment on that. You're right to observe that we're subject to the same macro forces that everyone seems to be discussing. Everyone is kind of peeking out after 16 months of this new work style, expressing a desire for change. We are seeing an increased turnover rate. That said, we are benefactors because of our fruitful culture that attracts new employees. We are witnessing a net addition, though the total turnover is higher than in the past. So it’s an interesting dynamic—many energetic new employees coming in while others seek new experiences. Overall, we have been able to add more people despite some turnover, but it has been more turbulent than in the past. Regarding costs, we have not seen a material increase when hiring new employees thus far; we are largely at market. Some areas are compressed, and we might see upward pressure on compensation, but currently, we are managing decent salary bands.

Just a couple of questions; maybe for Scotty, regarding the comments on the $6 million travel and trade show expense in the pre-COVID world. Are you going to be at half of that $6 million or what?

Regarding travel, we budgeted an incremental return. We anticipate about $250,000 for the third quarter and $500,000 for the fourth quarter. We expect to ramp up but have no exact figure for the new normal. That’s kind of placeholder numbers for now.

Okay. That’s helpful. And then Scotty, you mentioned some sort of shift in expenses into cost of services. Was that something that happened in the second quarter? I am just trying to understand why the gross margin was a little bit higher, 66% in the first quarter, dropping to 65%. Was it that shift in expenses that was the primary contributor to that?

That's exactly what happened. There was a shift in expense allocation from G&A to cost of revenues.

And what specifically was that?

Software. I think we covered it as production environment related, not for licenses.

Okay. That's helpful. Thank you.

Your next question comes from the line of Ryan Daniels with William Blair.

Good morning. This is Jared Haase on for Ryan. Thanks for taking my questions. I'm just wondering if there have been any changes from HealthStream's perspective in terms of product development or marketing strategy in response to the hiring issues hospitals face?

We are positioned to support development and retention of hospital workforces. Our products result in higher engagement and help health systems become favored employers. Some hospitals see that light and begin to invest in employee development, offering career advancement opportunities. We also see opportunities around psychological wellbeing. Our products in that category help employers build relationships with their employees through continued development.

That makes sense. I just want to follow up regarding the improvement in bookings and renewals—would you classify that as market-based growth or do you feel it’s more indicative of competitive takeaways?

It’s probably all of the above. While we had some wins last year, it was difficult to compare results due to COVID. However, we saw solid wins this quarter, including a significant contract win with Prime Healthcare, and we continue to see good wins throughout our various markets.

Good morning, and congratulations on the quarter. A couple of questions on revenue guidance; your guidance essentially implies that it's flat in the second half versus the first half. Is that largely due to where we are with the pandemic and potential hiring issues in hospitals? Also is it fair to assume that hospitals will need to start hiring again next year, which should drive incremental growth?

Part of the leveling is due to the declines from our legacy resuscitation business, with $2.8 million not reoccurring in the second half. Additionally, we don’t expect one-time revenues and milestones that we were able to recognize in the first half. Some broader challenges could be a detriment or benefit based on how they face the pandemic.

Can you provide an update on the pipeline for Jane? It sounds like you had a good quarter with new additions.

We continue to aim for one sale per week as our objective. Although we had a substantial win in Q1, we didn’t see a repeat of that in Q2, but overall, we are still gaining traction. Jane's adoption is good, but it sits in the discretionary spending category, and we are seeing hesitancy in some buying decisions.

As you consider the return to normal and past user events, would you expect to hold those again in 2022, or do you plan to hold smaller events moving forward?

We actually stopped holding large conferences pre-pandemic in favor of smaller, more regionalized conferences and meetings spread throughout the year. We don’t have any plans to return to the large conference model and instead prefer user group meetings.

I just have a housekeeping question; can you give us the impact of the one-time software licensing revenue in the quarter?

The $2 million referenced is a combination of software licenses and larger professional services. It included almost a million in each quarter.

Are you seeing any signs of caution on spending due to the new variant or is it too early to tell?

It's too early to tell. Larger health systems have learned to operate under crisis mode and are better resourced. While there may be some deferred purchasing, the larger systems are prepared to handle spikes in COVID cases better than when they first began.

Could you clarify if Jane is solely used for nursing or if there is other opportunity?

Jane is largely focused on the nursing workforce, which represents over 40% of our subscriptions. There are opportunities to expand Jane for other assessments in different types of roles and functions, which we are actively pursuing.

There are no further questions at this time. I'd now like to turn the conference back to management.

Thank you. I look forward to reporting on these operational updates in the near future and thanks to our employees for delivering a great first half result.

This concludes today's conference call. Thank you for participating. You may now disconnect.