Healthstream Inc Q3 FY2021 Earnings Call

Good morning, and welcome to HealthStream's Third Quarter 2021 Earnings Conference Call. I will now turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you, and good morning. Thank you for joining us today to discuss our third 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 would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that could involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC 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. The table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call. So with that start, at this time, I'll turn the call over to Bobby Frist.

Thank you, Molly. Good morning, everyone, and welcome to our third quarter 2021 earnings call. I think context is important as we start the earnings call, so I'm going to give a brief update on our perspective on coronavirus. The coronavirus pandemic in the United States appears for the moment to be in retreat, and particularly in the markets where we practice and in the business where we operate. Since the start of September, daily cases have dropped by one-third and daily hospitalizations have fallen by more than one-fourth. And according to the CDC, approximately 58% of eligible adults in the U.S. have been fully vaccinated. As of October 22, as that number rises, we are hopeful that progress towards beating this pandemic will continue. I shared some of those statistics to just think through the impact on businesses. A meaningful part of the context is the long and medium and short-run impact of COVID on our business behaviors and therefore, how we plan our expenses and allocate our sales organization. So I want to speak to that for a bit. The long-run impact of COVID on all businesses is still being determined, but we can already see some of the permanent changes that are taking effect inside of our company. Like many companies, for example, we have adopted a hybrid workplace approach officially. And this is from a company that was really an in-person company for most of our existence. And now we have a full-on hybrid workplace approach. In fact, all of our offices and resource centers remain closed at this time, but we expect to open them by year-end. Offices will function as resource centers to employees, which is a little different than thinking of them as a place to work. In those resource centers, we'll hold strategic planning meetings, events and other special meetings, recognitions for employees, the things that help define the culture that are important. We'll ask employees to travel for those events. So it would be a little different than in the past where work from an office will be elective, but travel for events might be required to be part of developing our culture as a company. We have learned new ways of selling that incorporate virtual technology to a greater extent, and our customers have embraced this approach as well. So while travel for our sales teams will pick up from the near-zero levels over the last 16 months, I wouldn't anticipate that they would occur at the pre-pandemic level. I believe our travel expenses pre-pandemic were nearly $5 million a year, and I just don't see them getting back to that level. However, as we noted, the impact of COVID on our work style, we may see travel expenses go up for business related to what I'll call culture building and goal setting and performance management meetings by teams and team leaders and managers across HealthStream. And so it's an interesting dynamic where maybe sales business travel may go down, but because we're a fully remote workforce, we might have some mandatory meetings that are cultural development-oriented, bringing on new employees, gathering employees to celebrate accomplishments. Travel expenses may go up in those more elective categories historically. So to be an interesting dynamic to figure out how that all plays out and to what level each returns based on the new work styles. And so another impact that we're all assessing now across each company is the, I guess, what's been dubbed the great resignation. I think COVID has made many people, including health streamers, reevaluate their personal and work life. And for a variety of reasons, most of which are indirectly attributed to the events of the last 18 months or COVID, companies are seeing turnover at record levels. And these are companies of all types, and other CEOs I speak with are experiencing very similar turnover issues. HealthStream is no exception to that. But what's interesting is that as people look heads up from other industries, they find HealthStream an enticing place to work. We've experienced record levels of hiring in the last 12 months, but also very high levels of turnover. The net impact of that is a nearly only slightly positive headcount increase across our organization. Earlier in the year, we had anticipated being able to have the net increase of turnover to be much higher, maybe as much as 100 more employees than we've been able to achieve through our hiring in the first three quarters. And so that's resulted in lower expenses than maybe we had hoped to have. In other words, lower investment levels in people. We have had net hiring positives, but they're almost marginal compared to our expectations as we entered the year. And that is a direct impact of, I guess, what I'll call the great resignation along with others that have written about it. So again, it's a really strange dynamic where we've never had more people interested in working at HealthStream because they're reevaluating their work life from other places. Some of our employees are evaluating their work life at HealthStream and they're changing locations. It's really exciting to me that I've seen several of them already on the way back to HealthStream after six months away. The great resignation is something we all have to work out. The result has been higher turnover and lower expenses than we had originally planned. So a little better financial performance attributable not necessarily to good things, but to things like turnover and also some maybe longer-run challenges that are created by not having the staffing levels that we had expected to have. We keep trying to increase the hiring rates each quarter, and again, incredibly successful at hiring, but now what we need to see is the turnover rate slow down. I'm hopeful that in the next quarter or two, this will settle out a little bit, and we'll continue to get hiring head back in the right direction on hiring. So I want to talk about those short, medium and long-term impacts they create quite a challenge for forecasting. Because the nature of work has changed, the nature of travel will change, and the nature of where people want to work and how they want to work is changing. And I think HealthStream will be, in the long run, a net benefactor of all these changes, the virtualization of the workforce. We've been highly successful at running our operations and building our business. But like all major challenges occur like this pandemic, it creates different gaps in how you're operating and your learning curve and can result in operational challenges over time. So we're working through all those at the present time. I'd like to spend a few minutes talking about financial performance and turn it over to Scotty and maybe some context for our financial performance. First, I'll hit just a few of the highlights. Top line revenues increased by 5%, an increase in adjusted EBITDA of 15% over the first nine months of last year. So revenues increased by 5%, adjusted EBITDA up 15% over the first nine months of last year. Again, solid financial performance again in the third quarter. For the third quarter, revenues were $64.1 million, which is a 5% increase over the same period last year. This quarterly increase reflects substantial growth necessary to offset and rise above the previously announced anticipated headwind of the $9.2 million decline in legacy resuscitation revenues. We've talked about this for almost three years or more, the decline of a partnership affecting these legacy resuscitation revenues. So in the quarter, a negative $9.2 million. That's one of the last quarters with a material impact from these declines, but we were able to overcome that and deliver 5% growth from a mixture of organic and inorganic work from last year. So fantastic to deliver growth in the face of such headwinds. Based on these results, we've updated our financial guidance for the full year. We now expect revenue for the full year 2021 to be in the range of $255.5 million to $257.5 million. We've increased the bottom of the range and have a little more confidence in the higher end as well. One of the most remarkable things about this guidance is that we project revenue growth despite an anticipated full-year impact of $38.4 million in revenue decline from the legacy resuscitation products. We began the year knowing they would have a $38.4 million hole to fill, and I'm really proud of the types of growth we've delivered, thanks to lots of exciting new products and acquired products. Again, I'm excited about that result. We also had a negative impact of $4 million of acquisition-related deferred revenue write-downs. We overcame that as well. That revenue will come back over the next 12 months into our revenues, which is a good thing to help put a little growth into the future. Additionally, we now expect EBITDA for the full year 2021 to be in the range of $51 million to $53 million. It's up from our last expectation of $48 million to $50 million that was announced last quarter. Some of the continued outperformance is based on our inability to hire. We do have net positive hiring. We're net growing our headcount, just not at the levels we had expected. I'll comment again that there's a lag effect of COVID as we work through the great resignation. Again, I want to emphasize that we have record-setting levels of hiring new excited employees in HealthStream. The outcome is a net positive headcount, so we're not declining by any means. But we're also not adding as many as we had hoped. Some of that outperformance is attributable to that change in net hiring. There are new factors that have contributed to the increase in adjusted EBITDA, and I'll comment on those. For example, year-to-date revenues benefited from legacy resuscitation and perpetual software sales, which we expect to be less impactful during the fourth quarter. Additionally, the macro workforce trends, which I've covered in great detail, made it difficult to increase headcount as quickly as we planned. We now anticipate that in spite of three quarters of trying, we're going to say we expect that trend to continue through the end of the year. Our new guidance reflects that assumption. We'll continue to see headcount increase, but as I just mentioned, reflect to be essentially flat or slightly up. I now want to shift gears and talk a little bit about what we've discussed over the last three years. These key transitions were defined in an effort to create a higher growth and higher margin profile company that will be more profitable for shareholders. The good news is I believe this is the last call in which I'm going to talk in detail about the transitions. The reason for this is that I feel we've worked through the transitions over the course of this year. The word transition implies some kind of exceptional operational risk or business risk. I believe we're through the exceptional period of risk on these transitions. Each of the three transitions we've discussed has hit a milestone in my mind, where I'm comfortable saying there are business risks associated with the growth of these new product lines, but they're no longer existential risks to the company. Let's look at each of those real quick and put them to bed. The first was kind of proving market acceptance of the new resuscitation suite program with the American Red Cross. The second was the establishment of a new functional area with the VerityStream SaaS-based application. We had acquired several companies over the last several years, and we had launched a new set of applications for credentialing, privileging, and enrollment. I'm here to declare that the market has accepted the new VerityStream SaaS-based application we call Credential Stream. The third is the technical viability of our new platform architecture known as hStream. So here we go, let's put all three of them to bed. The market acceptance of a new innovative resuscitation solution has been established as evidenced by our sales of the American Red Cross suite to customers in each of the 50 states of the United States. The program is established, the credential is accepted. The sales teams are closing new business every week. This concept that the market wouldn't accept the second solution is gone now. We've moved material market share in the American Red Cross. We will continue to innovate and sell that product under a long-term partnership with the American Red Cross. The second transition, product adoption for a market-leading SaaS-based credentialing and privileging enrollment application has seen nearly 440 customers under contract. Many of them are implemented and live, and referenceable accounts. We have established that this newer platform we've built is accepted as customers migrate to it from the legacy platforms, and as new customers select it in open RFP bids and competitive bids. We now think we've built the application set of choice in the industry as it relates to credentialing, privileging, and enrollment. The risk we had was we acquired four companies, built a new product, and tried to move customers to it. I'm here to say that that level of risk is behind us. There are normal market risks from competition, but with 440 contracts and new RFPs being issued, we think we're going to land a disproportionate share. The third is the technical viability. We've been talking for quite some time now and hired a new CTO four years ago to lead the charge in building a new technical infrastructure that will make all of our applications more interrelatable, making data more portable and developing new services as the platform gets established. I'm here today to declare that the platform is real, it's operational, and we're releasing new functionality at the platform level, extending it into our applications at an increasing rate. This concludes a nearly three-year journey of talking about the three transitional business risks. We can now start to talk about our new applications, the new markets we want to proceed with, and a new paradigm for talking about our company, which I'll cover after I turn it over to Scotty Roberts for a detailed look at the numbers. Scotty?

Yes. Thanks, Bobby. I'm happy to report that we had another solid quarter of financial performance, and we're firmly on pace to achieve record annual revenues and adjusted EBITDA for the year, both while overcoming a $38 million revenue headwind as we entered into the year. On a year-to-date basis, we have been able to grow revenues by 5% and grow adjusted EBITDA by 15%. For the third quarter, revenues were $64.1 million, which is up 5% over last year and includes an $800,000 reduction associated with deferred revenue write-downs. Operating income was $1.8 million or down 43%, net income was $1.5 million, also down 43%, and EPS was $0.05 per diluted share, down from $0.08 per diluted share in the prior year. Adjusted EBITDA improved to $12.5 million, which is up 11.5%. Workforce Solutions revenues were $51.2 million and were up 4%, while revenues from Provider Solutions were $12.9 million and were up 10.7%. On a consolidated basis, we grew revenues by 5%, while overcoming a $9.2 million decline from the legacy resuscitation business. Revenues from recent acquisitions and growth in our core business more than offset this decline. When you exclude revenues from the legacy resuscitation business, consolidated revenues grew by approximately 24%, comprised of 10.5% organic and 13.7% from acquisitions. Our gross margin performed as we expected, coming in at just under 65% for the quarter. And our operating expenses, excluding cost of revenues, were up 15% or $5.3 million over last year. About two-thirds of this increase relates to the operating expenses from acquisitions that we completed primarily in the fourth quarter of last year. Our G&A expense during the quarter includes a charge of about $350,000 related to closing several leased satellite offices that will expire next year. Our adjusted EBITDA was $12.5 million, which is an increase of 11.5% over last year. The EBITDA margin was 19.5% compared to 18.4% last year. Our cash flows from operations improved to $36.4 million this year compared to $30.8 million last year. DSO also improved to 40 days compared to 43 days last year, and free cash flows were $17.3 million versus $16.7 million last year. Our cash and investment balances increased by $5.4 million in the quarter and reached $60.6 million at quarter end. Capital expenditures incurred were $5.6 million for the quarter and are up to $16.8 million year-to-date. After another strong quarter of financial performance, we have updated our financial guidance ranges as follows: We expect consolidated revenues to range between $255.5 million and $257.5 million, with workforce revenues forecasted to range between $205 and $206.5 million, and provider revenues forecasted to range between $50.5 million and $51 million. Adjusted EBITDA is now expected to range between $51 million and $53 million, and we expect capital expenditures to range between $25 million and $26 million. Our financial results continued to benefit from lower expenses than our previous guidance had anticipated. As was the case in the first half of the year, employee turnover remained higher than our normal experience, which we believe is consistent with employment trends facing most companies across the country. Although turnover has been higher than anticipated, we've been able to successfully fill open positions, the total head count has remained relatively flat over the course of the year, which has led to lower staffing levels and personnel costs than we had planned. Sales performance was also steady during the quarter, and we started to experience some challenges related to both the resurgence of COVID and the impact of employee turnover that I just mentioned. The ongoing impact of COVID on our customers continues to cause some delays and uncertainties in their purchasing decisions with us. We have experienced longer sales cycles and delayed decisions from customers with high COVID patient admissions. We are also monitoring several other challenges our customers may be facing such as vaccine mandates, nursing shortages, and overall staff turnover, which could impact their operations and financial condition. The impact of employee turnover on our sales production is significant, as losing quota-carrying reps mid-year and onboarding new hires presents challenges to achieving our goals for the year. Although, as we enter our busiest sales quarter, our teams are focused on finishing the year strong. That concludes my comments for this morning. Thank you for your time. I look forward to providing updates on our full year 2021 results and guidance for 2022 on our next call. Bobby, I'll turn it back over to you.

Thank you, Scotty. It's kind of an exciting pivot point for me now. We've talked for so long about transitions, and now we want to kind of begin the orientation process to the future and how we're going to talk about the business. We want to properly identify all of those as software applications or application suites. There is only going to be one platform at HealthStream, it's hStream. Going forward, think of HealthStream as a one-platform company, hStream is the platform, and we have developed multiple sets of applications that will increasingly connect to and leverage the single platform. You'll see us correct ourselves over the next year or two as we shift from calling it the learning platform to the learning application set or the learning application suite. The credentialing platform will become the credentialing application suite, and scheduling applications will include our scheduling and capacity management. We will have three primary application suites: learning and development, credentialing and privileging, and scheduling and capacity management. The reason we call them applications is because we expect them to connect to each other through the platform and leverage platform-level services. We're excited to transition now into this important dialogue. We report the number of subscriptions sold to hStream. It's my expectation that every application will sell with a license or a membership to the platform. We've begun that journey by bundling every sale of the learning architecture with an hStream license. In the third quarter, we added 402,000 team subscriptions, bringing our total to 4.92 million subscriptions. This represents a 29% increase over the same period last year. The growth in subscription is encouraging. I want to walk you through an example of hStream's growing power. Each of our applications already works well on its own, but with hStream, our applications are beginning to work more powerfully together. One critical reason for this is our new identity management service, the hStream ID. It allows data about individuals to be used across our various applications. If you think about maintaining license data on employees, you can appreciate the value of hStream ID. Through the hStream platform, licensed data can now enter through the learning application, be validated by a VerityStream application, and trigger our MyTeam application to inform managers when their employee's license is about to expire. By linking the identity of people in our ecosystem, we can provide services like validating a license that existed in one set of applications where the data is maintained and stored in another application. This allows us to provide improved services across departments. In the coming year, we look forward to providing you with additional updates about the growing power of hStream. I'd like to update you regarding our three application suites, starting with learning and development. It's our oldest suite, but there's much innovation happening. We released our AI-driven clinical competency application, known as Jane, and established a new industry standard in resuscitation certification with the American Red Cross. Also, our KnowledgeQ and Safety Q solutions have come together to form a dynamic governance risk and compliance solution. In fact, we've already sold the American Red Cross Resuscitation Suite to healthcare facilities of all types across the continuum of care in all 50 states. We've delivered to over 340,000 certifications through the platform, which began selling just 24 months ago. We've deployed over 7,000 high-tech Internet-connected manikins called Brayden Pro, which provide feedback to the user and connect to hStream. We're excited about how this option, which did not exist two years ago, has gained widespread adoption. Turning to the credentialing and privileging suite, three years ago we announced the launch of VerityStream. This third quarter, 47 customer accounts contracted for Credential Stream, comprising both new and existing customers migrating to the new platform. We're excited about this trend. The implementation cycles for this product are relatively complex, taking longer to get to revenue, so we anticipate some growth in the second half of next year. We plan to continue building this part of the business out and believe we have some significant innovations in store for the industry. This application suite will play a significant role in our growth. The last application set is scheduling, where we also plan to use a playbook of acquisitions to establish a leadership position in the scheduling system. Our acquired organizations, NurseGrid, ShiftWizard, and ANSOS, have combined over 380 customers. We are working on ensuring these organizations innovate over the coming year. NurseGrid is our B2C app available in the Apple App Store, and we've seen its community grow significantly. Now we have nearly 350,000 monthly active users and a 4.9-star rating. That concludes our updates for now, and I appreciate your continued interest.

This is Jack Senft on for Ryan Daniels. First off, congrats on the quarter and thank you for taking my question. I guess maybe if you can provide just a broader update on the health of your client base. I guess we've seen some early data points from publicly traded hospitals that suggest ED volumes are coming back. And I know in your prepared remarks, you did touch on the pandemic and seeing it subside a bit, possibly translating into potential ED volume return. So just kind of curious if that's something you're seeing broadly and any other color you can share among the client base.

Sure. In certain areas of our client base, it's kind of a regional impact. Their operations through the different waves of COVID have been interrupted, which I've referred to as air gaps. If you sold the system and wanted to begin implementation in certain parts of the country, they may have delayed implementation for 30 or 60 days while working through capacity and staffing issues. However, they have learned to manage the new norm fairly quickly, and I see they are more adaptable in managing, say, the Delta variant surge. The good news is that there are more treatments out, giving considerable confidence. In conversations with executives running large health systems, they express learning to operate successfully. They now face unprecedented challenges with their workforce due to the mobility of nurses, who are reevaluating their lives after enduring a lot of hard work. The need to prioritize retaining and developing people has increased, and I believe we will see more health systems investing in their workforce quality and retention. This bodes well for our positioning in the future. However, in the short run, cost pressures and turnover quality issues will be significant. I generally see recovery, with a few remaining pockets still facing challenges.

Good morning, and thank you for the broad-based update this morning. My first question relates to your employees, some of the challenges that you've been finding. Now that you've moved to more of a hybrid model or in many cases, maybe even just fully remote with occasional travel to meet up as a team, is that allowing you to recruit nationally? And if so, what types of barriers or challenges does that present?

Well, it was a culture where we got together a lot. We were predominantly focused in the office and spent much time celebrating successes, recognizing peers, and onboarding new employees face-to-face. The last 16 or more months we've not done that. So what we're declaring is a shift. We've gone from 11 leases down to three or four in the coming years. We're doubling down on key resource centers in San Diego, Boulder, and Nashville, which will better enable us to convene employees for significant team activities. Cost of convening will be higher, but it's essential for maintaining our culture, which is important for attracting talent. We have seen higher turnover, and it's largely driven by employees re-evaluating their careers and deciding to try something new. The good news is we've also seen some return of previous employees, which I believe indicates our culture's strength. Overall, I hope turnover will slow as new workers start at HealthStream, leading to a settled headcount.

I'll comment on that for you. In prior calls, I alluded to a couple of onetime items that were benefiting our revenues in the first half of the year. We saw less of that benefit in the third quarter and saw a sequential decline from Q2. Specifically, the legacy resuscitation continues to dwindle down. Additionally, we recorded fewer one-time software or perpetual license sales in Q3 than in previous quarters, impacting those numbers. So that’s primarily the two driving forces behind the sequential decline in Workforce Solutions.

Scotty, can you go over the acquired and organic percentages again? And just for clarity, that was total revenue you gave?

Yes. I mentioned that consolidated revenue growth, excluding the impact of legacy resuscitation assets, included 10.5% organic revenue growth and 13.7% from acquisitions, totaling about 24%.

Bobby, a follow-up on the last question. Is the transition to VerityStream from existing clients meeting your expectations in the quarter?

Yes, it exceeded expectations. A couple of things we've learned is that as long as the customers stay on older platforms until they're ready to migrate, there’s not a huge cost benefit for them to transition. But we are happy to see customers migrate when they're ready. And the number of clients moving to the new platform has been encouraging, especially as we're winning open market RFPs.

On the labor side, does the company continue to see moderate wage inflation?

So far, there has not been tremendous wage inflation. We have been able to promote internally to backfill positions. While we do expect some wage inflation to come as we bring employees back, we have managed to keep costs relatively flat by promoting internally and backfilling positions from within. However, I anticipate things may start to creep up on us in the next year.

Now I'll turn it over to Robert Frist for any closing remarks since we don't have any more questions in the queue.

I appreciate anyone who's stuck it out this long. The detailed update should be informative. We look forward to putting the transition behind us and speaking about the three application sets and the single platform company we're becoming. Thank you all for participating. Look forward to the next earnings call.

This will conclude today's conference call. You may now disconnect. Have a good day.