Healthstream Inc Q4 FY2022 Earnings Call

Good morning, and welcome to HealthStream's Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. 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 HealthStream's fourth quarter and full year 2022 results. Also in the conference call with me today is Robert A. Frist Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President of Finance and Accounting. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that could involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, 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 start, I'll now turn the call over to our CEO, Bobby Frist.

Thank you, Mollie. Good morning and welcome to our fourth quarter and full year 2022 earnings call. We do have a lot of developments to cover this morning, so let's first look at a quick view of financial performance. Moving to in-depth discussion of operational enhancements we've made to begin 2023. I'll turn it over to Scotty Roberts for a more detailed look at financials. And I do want to reiterate the fundamentals of who we are and where we're going. So let's start with that. And then exciting news around starting the cash dividend policy to share as well. So first, the financials. Each of the financial metrics highlighted in the earnings release, we did show growth in both the fourth quarter and the year when compared against the same period last year. For the full year of 2022, we delivered a record high amount of top line revenue of 266.8 million and a record adjusted EBITDA of 53.4 million. In 2023, we expect to eclipse both of these high watermarks, due in part to our streamlining of the company around our single platform strategy, where we used to be organized around two business segments, Workforce Solutions and Provider Solutions, we are now organized and managed as one operating company to unify our work to enhance and leverage our hStream technology platform. We call this our One HealthStream approach or initiative. And we're going to talk a little bit more about that in the rest of the script here. Before we go further, I want to cap 2022 and start 2023 by grounding everyone in our business. First and foremost, HealthStream is a healthcare technology company dedicated to developing, credentialing and scheduling the healthcare workforce through SaaS-based software solutions, each of which are becoming more valuable because of the interoperability they're achieving through our hStream technology platform. We sell our solutions on a subscription basis under contracts which average 3 to 5 years in length. That means our revenues are recurring and predictable. We are profitable, and we have little to no debt. We're solely focused on healthcare and more specifically, the healthcare workforce. The 10.9 million healthcare professionals work in the United States are the end users of our SaaS solutions and the target for our core applications. We are led by a seasoned team of executives who have a proven track record of generating strong earnings and cash flows through both organic and inorganic means, and I'm pleased that our executive leadership continues to evolve along with our business. Today, we are announcing new executive positions but the individuals filling those positions are familiar to you all and have shown themselves capable of driving growth through innovation. For example, as part of our One HealthStream approach, we are consolidating our credentialing and scheduling solution groups into one group that will be internally known as enterprise application solutions. Michael Sousa is being promoted to Executive Vice President of enterprise applications to lead this new group. It's kind of like a new group in a product family based on the similarities of the product lines. Having joined HealthStream in 2004, Michael has already distinguished himself as the executive leader of our enterprise sales department and more recently as the President of VerityStream. As many of you know, VerityStream is the brand we have used to refer to our credentialing business up to this point. Now we will drop the VerityStream brand in favor of operating as One HealthStream. We believe that the consolidation of credentialing and scheduling to enterprise applications will benefit customers by receiving a more integrated set of workflow solutions and we are pleased to have one of the top SaaS solution executives in healthcare leading this new group. We have also formed a new group called digital network development to focus on business-to-professional solutions. This group is innovative and new and exciting in their direction as being led by established healthcare executive, Scott McQuigg. We have a deep history of serving institutional customers through our B2B business model, but the growth of NurseGrid and the footprint of My Clinical Exchange, both acquired businesses through our M&A program, have shown us that we have a lot to offer the individuals who would like to become our customers as well. With that opportunity in front of us, Scott and this new group take on the opportunity to turn subscriptions into subscribers, and we expand our business-to-professional offerings. Considering Scott's many accomplishments at HealthStream and his prior entrepreneurial successes, he is uniquely qualified to grow professional audiences, user engagement and modernization strategies in his newly defined solution group. Scott will serve as Senior Vice President over our new digital and network solutions group. Our alignment around One HealthStream means organizing our company to achieve future growth and investing in areas where we see potential for growth and see key growth drivers. Our philosophy has always been to invest in the innovation necessary to deliver technology solutions that help improve the quality of healthcare, streamlining around One HealthStream as the next step in that journey. We believe the realignment announced today positions us to deliver strong financial growth and market-leading innovations going forward. This can be seen in the 2023 financial outlook described in our earnings release and the longer-term financial goals discussed during our September 2022 Investor Day presentation. As the macroeconomic forces of inflation and recession add challenges and uncertainty on a global scale, we are confident that HealthStream will continue to deliver strong and growing profits. There's still a great deal to talk about, but first let's look at a detailed look at the financials and I'll call on Scotty Roberts to do that our CFO.

All right, thank you, Bobby, and good morning. I'll start with the financial highlights for the fourth quarter and then speak to our financial outlook for 2023 and share how the operational changes we've made will impact our financial reporting beginning in the first quarter of 2023. Unless otherwise noted, comparisons are going to be against the same period of last year. Our revenues were 68.5 million and were up 7%, operating income was 3.1 million, up from an operating loss of 0.5 million. Net income was 2.5 million, up from a net loss of 0.4 million. EPS was $0.08 per share, up from a loss per share of $0.01 and adjusted EBITDA was 13.6 million and was up 13%. As a quick reminder, last year's fourth quarter included 2.4 million of stock compensation expense associated with a stock grant to over 1000 employees that was facilitated through a contribution of personally owned shares from our CEO. And despite being fully funded personally by our CEO, GAAP requires this transaction to be accounted for as a compensation expense of the company. This resulted in lower operating income and net income in last year's fourth quarter compared to this year. So now let's go back to our financial results. Our workforce solutions revenues were 55 million and were up 8%, and revenues from provider solutions were 13.5 million and were up less than 1%. Revenues from provider solutions were impacted by lower professional service revenues compared to last year while subscription revenue increased by 5%. After delivering a consolidated growth rate of 2% in the first half of the year, we finished with an overall growth rate of 6% in the second half. A steady progression of revenue from new sales, particularly from our learning and development solutions, along with a mid-year acquisition, contributed to this year-over-year improvement. Gross margin was 65.7% compared to 64.3% last year. After adjusting for the impact of the CEO stock grant accounting treatment, gross margins for last year would have also been 65.7%. Operating expenses excluding costs or revenues were flat, although last year's fourth quarter included the portion of the 2.4 million of stock compensation expense from the CEO stock grants employees, which I mentioned earlier. Aside from the reduction in stock compensation expense, we experienced year-over-year increases in sales, marketing, and product development expenses, which were mostly offset by reductions in G&A. Sales and marketing expenses increased by 7% due to a combination of growth in staffing levels, higher sales commissions related to a higher level of sales bookings, and increased travel versus the height of the pandemic. Our business travel expenses have been steadily increasing over the past several quarters. And they approximated $300,000 this quarter compared to just under $100,000 in the fourth quarter of last year. And for the full year, travel was up approximately 1 million and we expect travel to still continue to trend upwards in 2023. The investments that we've made in sales and marketing resulted in an improvement in our sales bookings during the fourth quarter compared to the first three quarters of the year, and they were notably higher than last year's fourth quarter. We had several key wins, including some large multiyear contracts across our portfolio of applications. Some of the larger deals specifically for the credentialing and scheduling enterprise applications typically have a longer cycle time to revenue generation than our learning applications. So we expect these subscriptions will begin to materialize into revenues later in 2023. Product development increased by 3%, which is net of the labor costs capitalized for software development. And capitalized labor costs increased approximately 1.2 million over the prior quarter resulting from investment towards our single platform strategy and suite of applications. General and administrative expenses declined by 12%, which came from several areas including lower bad debt charges, reductions in outside recruiting services, reductions in our leased office facilities, and other infrastructure-related costs. And last quarter, I mentioned that we decided to market about 1/3 of the space in our national headquarters for sublease, and this process is still underway. Our adjusted EBITDA came in at 13.6 million, it was about 13% over last year's fourth quarter, and adjusted EBITDA margin was 19.9%, compared to 18.7% last year. Let's move over to the balance sheet metrics. We ended the quarter with cash investment balances of 53.9 million. During the fourth quarter, we deployed 6.1 million of cash for capital expenditures, and we did not have any share repurchases this quarter. DSY was 42 days compared to 41 days last year. For the full year, cash flows from operations were 51.2 million, which were up 24% compared to 42.4 million last year. Free cash flows were 26.1 million compared to 17 million last year and were up 53%. On December 31 of 2022, we acquired substantially all the assets of eeds, a North Carolina-based healthcare technology company, offering a SaaS-based continuing education management system for healthcare organizations. The consideration we paid for eeds consisted of approximately 7 million in cash that was subject to customary purchase price adjustments, and the transfer of consideration occurred in January. In our history, our capital allocation approach has included a combination of investing internally, acquiring complementary businesses that fit our model, and returning value to shareholders through share repurchases. And, as announced yesterday, we introduced another means of returning value to our shareholders. Our Board of Directors adopted the dividend policy under which we intend to pay a quarterly cash dividend on our common stock. We believe our history of steady and consistent profitable growth along with positive cash flows provides us the opportunity to return value to shareholders via cash dividends, while continuing to invest in both organic and inorganic growth initiatives. The board declared a quarterly dividend of $0.025 per share, which will be payable on April 28, 2023, to shareholders of record as of April 17, 2023. As I already mentioned, we did not have any share repurchases this quarter, and there's approximately 1.9 million remaining under our current plan, which expires next month, and was earlier terminated by the company. Since 2020, we have deployed over 48 million towards share repurchases at an average price of $21.75 per share. Now, let's move over to our guidance expectations for 2023. We expect consolidated revenues to range between 277.5 million and 283 million. Adjusted EBITDA is expected to range between 57.5 million and 60.5 million, and capital expenditures are expected to range between 27 million and 29 million. Our guidance does not include assumptions for any acquisitions that we may complete during the year that do reflect the recently completed acquisition of eeds, which is expected to contribute between 1.6 million to 1.8 million of revenue during the year. Our objectives for growth include generating cross-sell and upsell opportunities across our customer base, increasing the revenue per subscriber, and growing the number of subscriptions to our hStream platform. We believe our workforce-centric ecosystem of solutions positions us well for continued expansion and growth. With the most adopted learning application in the healthcare industry, combined with a wide array of cost-effective content offerings that address our customers' needs for training, continuing education, and compliance, we anticipate another solid year of performance. In addition, migrating customers from legacy products to our SaaS solutions, specifically within our credentialing and scheduling application suite, is a top priority and will be another driver for growth. We expect to maintain our gross margin in the mid-60% range for the year, which is consistent with our medium-term objective of 65% to 68%. Now looking at our expense assumptions, over the past several years, we've made investments to scale our product development, sales, and marketing teams. And we expect modest incremental investments in these areas for 2023. We plan to increase the relative level of investment toward our single platform strategy, our scheduling application suite, and by expanding our business professional footprint, while somewhat stabilizing our investments in our learning and credentialing application suites. A meaningful portion of our capital expenditures over the years has been associated with capitalized software development. We expect the allocation this year will be similar. As I mentioned earlier, travel costs in 2022 are up and they're expected to gradually increase on a year-over-year basis to approximately $2 million for the full year. In addition, we anticipate certain costs will be impacted by the inflationary conditions that continue to persist. And as it relates to the organizational changes we announced yesterday, we expect to record severance charges in the first quarter of approximately 800,000, which has been taken into account with the guidance being provided. We anticipate that our forecasted adjusted EBITDA margin will increase to the 21% range, which is also consistent with our medium-term objective of 21% to 24%. We expect our effective tax rate to be between 25% and 26%. And I would also like to note that given some recent changes in how research and development expenditures are treated for income tax purposes, I expect that our cash tax payments will also increase during 2023. We have a long history of leveraging our M&A program to drive growth and expand our product portfolio. In 2022, we acquired two more companies, CloudCME and eeds, to round out a set of solutions that are unique to healthcare CME administration. As we highlighted during our investor day presentation last year, one of our growth strategies is to pursue opportunities through M&A and we'll remain disciplined in order to find the right strategic fit at an appropriate valuation that we believe will create a return. With a healthy cash position, no debt, access to a $65 million revolving credit facility, and our free cash flows, we are well positioned to support our capital allocation strategy for the year. Now, before turning it back over to Bobby, I want to read something to you that we began including in the management discussion and analysis portion of our periodic reports this time last year. It first appeared in our 2021 annual report on Form 10-K, and we have repeated it in our quarterly filing since, and it reads, we are in the process of more completely unifying the company under a single platform strategy that will serve as the foundation for the entire enterprise by enabling our applications through a common technology platform known as hStream. We believe that standalone applications, which already provide a powerful value proposition, will begin to leverage each other to more efficiently and effectively empower our customers to manage their businesses and improve their outcomes. I want to highlight this part in particular. As we continue to achieve this goal of orienting multiple applications in relation to a single technology platform, distinctions between our current reporting segments of workforce solutions and provider solutions may become less applicable or even obsolete in terms of how we operate and report on the company's business. Now I read you that excerpt from our filings because we've reached an inflection point and are now operating as a single platform company, whereas One HealthStream, as you heard Bobby say earlier, this is reflected in the way we run our business across the board, including in terms of technology, operations, accounting, our organizational structure, compensation, performance assessment, and resource allocation. It is something you've heard us talk about since we began reporting the subscription count for hStream in February of 2019, and more recently on our investor day call in September of last year. Today, our operations are aligned with our vision and we celebrate that fact. To reflect the way we now operate and organize ourselves as a single platform company it's necessary to begin reporting accordingly. From 2023 forward, our financial outlook and results will be provided on a one-segment basis. The results from prior periods will be provided on a two-segment basis given that we operated in two segments, workforce solutions and provider solutions. During the period, those results were generated. As our single platform approach advances, we look forward to determining new metrics that we may report in order to give you insight into our business and its growth.

Thank you, Scott, for that detail. Got lots to pick up on operationally, so let's get started. My comments at the start of the call were about positive aspects associated with streamlining our business according to our One HealthStream approach. I also want to pause and acknowledge the most challenging part of our realigning our business. And that is the elimination of 33 positions from our base of over 1,100 employees. With consolidation comes the need to eliminate overlapping roles. And that is driving the efficiency measures we announced to our employees yesterday afternoon. We've not taken this decision lightly and we wish all of our HealthStreamers past and present all the best moving forward. As I mentioned previously, we will continue to invest in our business and employee base and continue to channel those investments where we believe there'll be most likely to help recognize our vision of improving the quality of healthcare by developing the people who deliver care. With that, I want to quickly mention some of the successes we achieved to end 2022. For each of our learning, scheduling, credentialing, and now our platform solutions, I will highlight a win that I think characterizes where our business is heading. First, the HealthStream Learning Center is the most utilized learning management system in healthcare and continues to add new customers. In the last month of the year, Ardent Health Services purchased our HealthStream Learning Center to support that workforce enterprise-wide. We recently issued a press release about our partnership with Ardent Health, which I encourage you all to read if you haven't already. Second, we believe that our SaaS scheduling solution known as ShiftWizard is the best-in-class solution of its kind and it will only become more valuable to customers as it begins to integrate with other applications through our hStream technology platform. In December, Prime Healthcare, another enterprise-wide customer of our HealthStream Learning Center, also became an enterprise-wide customer of ShiftWizard, our SaaS scheduling solution. One reason this is noteworthy is because half of Prime's facilities converted from our legacy-installed scheduling products, while the other half purchased scheduling solutions from us for the first time. As a result, we welcome Prime Healthcare as an enterprise-wide customer of both the HealthStream Learning Center and now ShiftWizard. Our credentialing solutions also enjoyed the successful end of the year, both in terms of competitor takeouts and conversions from our legacy solutions to CredentialStream, which is the best-in-class solution for enrolling, credentialing, and privileging physicians. In March of 2022, Spectrum Health signed an enterprise contract for CredentialStream. Then in the fourth quarter of 2022, after merging with Beaumont Health and forming Corewell Health, they decided to extend the CredentialStream contract to all of Beaumont Health, replacing one of our top competitors in the process. This extension more than doubled the value of the original enterprise contract. As a forward-thinking health system, they're motivated to use CredentialStream's powerful technology to drive process and privilege standardization enterprise-wide while also accelerating optimal efficiency and effectiveness as the foundation for the newly combined entity Corewell Health. In terms of platform solutions, the hStream platform, the transaction that I'd like to highlight is a new type of sale for us. Less than three months after releasing our developer portal, we were able to provide Kaiser Permanente based in Northern California region an API-only deal that allows them to monitor and validate their entire workforce. Being able to sell APIs as a product is representative of our platform strategy becoming a very tangible reality. We look forward to more of these sales in the future. We believe these wins illustrate the value our customers see from our ability to provide enterprise-wide solutions. We believe that those solutions will become more valuable as the hStream technology platform enables interoperability across multiple applications. We continue to innovate across the company, which is helping us to create market-leading products. At the end of the fourth quarter, our innovation was recognized at five prestigious Brandon Hall awards. They include awards for our AQ compliance program, our quality management tool called Abacus, our HealthStream customer community, and two for our American Red Cross Resuscitation Suite, which included an award for best advance in education delivered through technology. Thank you to our employees that have worked to make these HealthStream products stand out above the rest and to earn these national recognitions and awards. On January 3, 2023, we also announced the acquisition of eeds. This acquisition expanded our ecosystem with an innovative SaaS-based continuing education management system for healthcare organizations. eeds represents the third acquisition in the specialty area that we completed within a 13-month period, making us a market leader in this niche area of healthcare technology. Importantly, we believe that the acquisitions of Rievent Technology, CloudCME, and eeds, which are all seeking the application manager businesses, showcase how our platform is well-positioned to empower new solutions that add to our growing ecosystem and marketplace. We plan to begin utilizing our well-established M&A program to enhance our ecosystem by bringing new and expanded offerings to our customers. Apart from the operational updates related to our one HealthStream approach, we also announced in our earnings release that Eddie Pearson, HealthStream's President and COO, will be retiring from his current role at the end of the second quarter this year. At that time, he plans to continue serving the company in a multiyear part-time leadership position that we are going to call Executive in Residence. Eddie has played a significant role in transforming the company during his 16-year tenure. When he joined the company in 2006, there were 200 employees and 27 million in revenue. Contrasting that to today's employee count of 1100 individuals and annual revenues of 267 million helps provide context for the magnitude of growth Eddie has helped the company achieve. The good news is that Eddie will still be at HealthStream in an important role where employees can learn from him and benefit from his years of experience and wisdom. As we draw closer to the date of this transition to his next role at HealthStream, there'll be much more said regarding Eddie's numerous contributions and legacy as president and COO. Before we move to questions, I want to discuss one more piece of exciting news, our new dividend policy. We are pleased that our strong balance sheet, including our reliable free cash flows puts us in a position to return value directly to shareholders through the company's first-ever quarterly cash dividend. Over the course of the year, we expect our new dividend policy to return approximately $3 million to shareholders. Importantly, we believe that our new dividend program highlights the fact that HealthStream is a profitable technology company that has both the discipline and the resources to return cash to our shareholders, while also pursuing our organic and inorganic growth strategies. So if you're interested in a profitable, highly recurring revenue, SaaS, PaaS, healthcare technology company that for 2023 expects to deliver steady growth and is determined to share some of its gains directly with shareholders in the form of the dividend, maybe HealthStream is the stock and the company for you. I'd like to turn it back over to the operator to begin our Q&A.

Our first question comes from Matt Hewitt with Craig Hallum.

Good morning and thank you for all the details and the update. Maybe first up, Bobby, could you describe what the sales environment is like? Obviously, the last couple of years it's been pretty challenging, hospitals reluctant to maybe bring in new software, given some of the challenges they were facing with COVID. It seems that that's freeing up. Now you've got some issues on the hiring and retention side at hospitals, but maybe just a little bit of color on what you're seeing from the customer side.

Yeah, I think the probably simplest way to say it is that our products are well aligned with business needs, but the larger customer base is under a lot of financial duress. I think 2022 was probably one of the most difficult financial times for acute care hospitals in a long time. Result of the shift in how they operated, the running out of COVID support funds. I think just in general, there are several exceptions of strong operators that are generating solid growth and profits, but I'd say on the whole, the target customer base is still under stress, financial stress, and particularly in the second half of 2022, I kind of saw that. The good news is that I still think our solutions are both aligned with the areas they need to invest in and are required to invest in for sake of OSHA safety training. In many cases, we also are the low-cost provider of that high-quality service. So we should be the selected vendor in those, when they make those choices. I feel that our products are now getting in a position where their capabilities are market-leading or very innovative. So I feel well positioned, but I don't want to underemphasize that the typical hospital CEO is still under a lot of pressure when investing and deploying capital or operating cash flow into really anything. So we are a bit cautious on our overall growth for the year. Some of it is related to long implementation cycles and some of it is related to the sales cycle still. I would see a much higher, I like our pipeline as they feel strong. We just have to see how well the deals close. And so we kind of have this essentially 4% to 6% top line growth range on us for the year, as we see how this all plays out. But it's an interesting dynamic because we're well aligned, but our customer base is under stress. But I think we have good price points that will entice them and a great sales team, and we've got a strong pipeline. We just have to see how well we can convert it. And then of course, implementations for scheduling and major enterprise adoption of scheduling and credentialing are rather long implementation cycles. So the time to revenue's a bit delayed. That's why we talked a little bit about the second half being a growth period.

That's really helpful. And maybe, a follow-up, getting a little more specific with the Ardent win, obviously congratulations there. Maybe if you could provide a little bit of detail on how long was that deal in the pipeline, you know, who were they or what were they using prior to converting over to hStream and the Learning Center and how long was that deal in the pipeline? How long did it take to get to close that one given some of the challenges that the customers are facing?

Well, sure. Well that one moved along fairly well over the course of a year. From the initiation of discussion was that they were going to look to the market to see what was available. They were on a competing application suite. And so it was a change for them to move to us. Unfortunately, we had previously, a year prior, convinced them to move on to the Red Cross application suite and connect to that program to the hStream platform. So they already had hStream licenses in place for a lot of their employee base, which shows how the model works. We connected to their existing platform their existing learning architectures, to the hStream platform, were able to sell the Red Cross program. They liked the program, it was approved, effective, and it also saved money over their prior programs. Then we introduced the Learning Center as a better way to manage the administration of the Red Cross program. Over the course of the year, we won them over and with them already having licenses to the hStream core technology, it made it more economical to just add on the Learning Center application. So it was a bit of a process, but it's also essentially an upsell because they have already adopted parts of our technologies, including the hStream itself.

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

Bobby, maybe just to build on some of the comments you just made to Matt's question. With respect to revenue growth in the first half, should that be somewhat flattish? And then seeing the growth, most of the growth in the second half of the year? Just curious on that.

Fair question. I don't think it's going to, we do think more in some areas of business will matriculate in the second half. But that said, like the learning platform is going live, and we'll get to those revenues sooner, for example. So no, I think the year will show growth. I haven't looked at its quarterization in the last 24 hours, I can't quite remember the ups and downs. Scotty may comment a little bit on, but the overall growth we have at 4% to 6%, and probably a little bit more weighted to the back half based on our current dialogue. But it doesn't mean no growth in the first couple quarters. I don't think maybe Scotty could come out and clarify the quarterization a little bit better.

Richard, it'll be quite as dramatic as last year. We've had 2% first half and the 6% second half kind of growth rate. I think it'd be a little bit more balanced than that. But we expect just given some of the kind of way revenue stream flows in over time that the second half will be a little more pronounced than the first half, but probably not as big of a gap as we saw last year.

And then considering you guys just posted 6.5% growth, I guess, in the fourth quarter. So you would gauge that for the year, the 4% to 6% is baking in some conservatism, just basically because of the current environment is uncertain?

There's definitely a little that but I don't know if I call it conservative. It is our best estimate based on all the variables it really is. I don't think we're trying to be overly conservative or overly aggressive. It's just kind of when we looked at our pipelines, how they're converting, we looked at our sport quarter sales, obviously very important to have some nice big wins there to know how they'll roll in. I think in the sense that the macro conditions are still tough. It's hard for us to get beyond that range right now as well as what I'm thinking. So I don't characterize it as conservative; I think it really is our accurate view of how things will play out in this year, of course, and without trying to over-engineer it to be conservative or aggressive. I think it's a careful study, the good news is we waited to get the year-end sales numbers in, and as you know, a lot of our growth for this year is based on how the contract flows were of the last two quarters of last year. So the growth numbers are largely a projection of how the sales of the fourth quarter and third quarter of last year will matriculate into this year.

And then when I think about something like the CloudCME acquisition early or mid-year, I guess, and then the EEDS here, and recently. Not huge from a revenue contribution, but how easy or hard is the process in terms of plugging that into the perhaps those offerings into the platform? And then just like cross-selling that into your significant base? Is that something where the sales process is relatively easy? Just any thoughts on that front?

Yeah, it's a great opportunity to kind of talk about the platform a little bit more and create clarity on it. How to best think about it for the next, say, 12 months. The first thing to remember is that the actual platform itself, the technology of the platform is growing and maturing, as reflected in the actual release of our developer portal and our first set of publicly available licensable APIs, and the Kaiser deal we just announced. So we're really excited about that. Each time we add to that platform, the actual technology capabilities of the platform, things will get faster, easier and better. That said, on a maturity curve, I would say that the platform technology is fairly new and immature, meaning there's so much in front of us, that's an opportunity to create leverage. A more constructive way to think about hStream, I think, for the next 12 months, is maybe the way you would think of say an Amazon Prime, it's a license that includes access to some technologies, but also a lot of other benefits. For example, the way Prime bundles in your free audio and video, the hStream licensed double then 300 free industry-sponsored courses with our learning system. We are selling lots of licenses to hStream when it's bundled with learning, for example. But because of the maturity level of the platform, not all of our applications are technologically leveraging the platform. We are still in the early stages of rolling out some of the core functions of the platform, like the common ID. Even of our own application suites, not many of them leverage the hStream ID infrastructure, which is the common infrastructure that we're now aggressively deploying. The good news is that particular part of the technology hStream ID is mature and ready to go. And now it's just a matter of this year of incorporating it into each product like CloudCME and eeds, and NurseGrid and ShiftWizard. We need to get all of those actually utilizing the hStream ID. This year should be a year of great progress in deploying that common identifier across all of our application suites because again, the tools are built and now we're in the kind of almost our own internal implementation cycle. I don't want to over-underestimate my excitement for the platform; I'm very high. It's well-positioned to include a value of a bundle of services in the license, which includes things like free courseware, a discount program, and also, as in the case of Kaiser, some direct access to APIs and functionality that they can pay for. I don't want to underestimate it or overestimate it. This year will be mostly about connecting our own platform to our own applications. The next year that will allow us to report more metrics about revenue per subscriber per application, that are connected to that application. Another way to think of it is, we've sold a lot of subscriptions to hStream and now we're going to convert them into subscribers. Subscribers are those that view direct benefit from the platform. I hope that kind of discussion just helps frame it up that the portal is real, and the APIs are growing. I expect new APIs to be delivered to the portal every quarter. Increasingly internally, our applications are being hardwired to the platform, with each time we hardwire something to the platform, it improves interoperability and functionality. We are in the process, for example, right now, of wiring the license API service into each application. So for example, won't it be great when you schedule a nurse in ShiftWizard and it checks their license validity in the background through the API? That's a service we would expect in the second half of the year. Those are just examples to clarify where we are on this platform journey. But we are clearly at an inflection point where the platform is manifesting in our business both directly as an example of the Kaiser license. Another large customer is using the APIs to power one of their own internal mobile applications, for example. We are beyond the R&D stage, but we're not at the fully deployed stage.

No, that's fine. It actually got to a couple questions I had in my back pocket here. My final question, if I can ask another one is on the digital network development business. So just if maybe you could, you know, describe that a little bit better, exactly what that is and how we should think about understanding the financial opportunity longer term there.

Scott, do you want to take that for a second?

Sure. Yeah, Richard. So this new solution group will be led by Scott McQuigg, as Bobby mentioned on the call. This is kind of forming a solution group around individuals versus the businesses that we've traditionally worked with over the years. We are trying to target that audience more discreetly and specifically. An example of applications that already have as assets are NurseGrid and My Clinical Exchange, both from prior acquisitions, so continuing to invest in those technologies to get more of a footprint directly with the individuals, our end users in healthcare. So that will play out over time. Obviously, just putting more attention to it as we head into 2023, but as time progresses, I think we'll see some more opportunities arise out of that. I think just trying to, like I said, get more footprint in those areas is our objective for this year.

Richard, just building on that. I love, we kind of coined this internal phrase of turning subscriptions into subscribers. If you think of the 5.4+ million subscription licenses that we sold the hStream, Scott McQuigg's new job is to try to find those individuals, as individual consumers over time. So for example, we have lots of visionary statements out there that haven't occurred yet, but they're in front of us under Scott McQuigg's leadership. An instance would be when a doctor is going through the credentialing process, and they need some CME to finish their credential report to show that they've gotten all the seeming requirements for their license maintenance. They may be short a class and in the new model, we would present them with an opportunity to enter their credit card and purchase that class that they're short, because we know what it was going to be able to recommend out of our massive library. That would result in a direct transaction in that case with the physician that was originated, because they're in the credentialing process at a health system. So this monetization of the individuals is an opportunity I'd say it's a long-run opportunity, but we're beginning to put a little bit of emphasis on it, because it allows us to look internally at all the channels and figure out where we might be able to catch an individual as a customer as well. We have two applications, My Clinical Exchange that are already onboarding professionals as individuals, and getting them in hStream as an individual. The other thing this implies is a more lifetime journey for people when they become in HealthStream’s ecosystem. Our goal is that when they're not employed, they say you're between employment, you work somewhere on the HealthStream Learning Center, you leave for a year, you work somewhere else on the HealthStream Learning Center. First thing is to make that transcript portable; that will happen in this technology. The second thing is between employment, maybe that doctor or nurse wants to check their record. They are not a customer through the business use of our software; they want to log in on their hStream ID. The long-run vision here is to keep all those individuals themselves interacting with our ecosystem and find if there's a financial opportunity there. I would just say we're very, very early to that. I don't expect a financial impact, certainly not the first half of this year. But it's a long-run important part of our vision that the platform enables us to think of those individuals as lifetime consumers at HealthStream. We've taken a senior executive early and put him in charge of thinking of that journey of those individuals. We’ve moved some of our applications that we call direct-to-professional applications, such as CME, which NurseGrid is, for example. NurseGrid is growing thousands of nurses a week, organically; its traffic, monthly active user number has doubled since we bought it. All of those nurses are electively individual consumers using the HealthStream ecosystem. They’re downloading the app of their own choosing, and they're using it as a social networking and scheduling management app as individuals. Now we will think, like, maybe that's a channel for those individuals to begin their journey as HealthStream, whether or not they're in a health system that uses one of our core applications like our HLC. It's going to be a long journey. I don't expect financial impact in the short run, but we wanted to go ahead and break it out because it's a unique set of business opportunities and challenges and put it under the leadership of Scott McQuigg, who has a history of building businesses of that nature.

Our next question comes from the line of Jared Haase with William Blair & Company.

Yeah, I guess you've talked a lot about some of the sort of product experience synergies from having the interoperability across a single platform. But, in the release, you also mentioned sort of branding and contracting, being consolidated as part of this single platform strategy as well. So maybe just a clarification, that's something you think can actually benefit the top line growth profile over time, just in terms of maybe speeding up sort of time to revenue or having a more cohesive message to the market? Or do you think of it as more of just kind of beneficial to the bottom line in terms of operational efficiencies? Thanks.

I hope it's both. We're early to making these changes obviously, and some of them were position changes, but I do think, I mean, obviously for a while, and of necessity, we operated a separate wholly-owned company, and it had its own infrastructure and its own thought, and it had to be built out to become market-leading the VerityStream company, led by Michael Sousa. In a way, it was kind of a hedge to all the other things that are going on in the company to separate that out, let it be focused on and get it to where it is. But as of really yesterday, we're folding those teams in, we're delayering the brand, so the VerityStream brand will go away. Customers, a lot of customers of VerityStream, the 600 new customers of VerityStream that bought the VerityStream product called CredentialStream, may or may not have paid attention to that it was a HealthStream product. Now, it will become crystal clear. It'll be part of HealthStream. All those customers will have a better appreciation as part of the HealthStream vision, part of the HealthStream company. I think that it should benefit both from the operational side and someday from a customer retention, recognition, and hopefully cross-selling as well. It's a little early to tell, but I would expect that operating off of a single master services contract, for example, will make it easier to buy when everything has a very similar structure legally. We're making that move to eliminate separate MSAs that the VerityStream organization had. It'll result in stream operations. Tier 1 customer support for a lot of the company will be centralized. Now instead of having separate Tier 1 data centers or support centers for scheduling and credentialing, I think you'll get operational synergies, and in the long run, let's say 24 months, we should see it help in the cross-selling and brand recognition for HealthStream. Most importantly, as the applications become more interoperable, which we're kind of at the dawn of that period. We want them to know that there's a reason to buy HealthStream Learning and HealthStream Credentialing because of how they work together. We're not quite there yet, but we're getting closer, and it's time to declare it now. So we're going to clean up branding and contracting initially.

And then I think, maybe just a related follow-up with specific to the guidance. So you're looking at the 100 basis points of EBITDA margin expansion that's embedded in the '23 outlook. I'm curious how much of that is would you say is directly related to some of the operational efficiencies that you announced in tandem with this, you know, inflection point of the single platform, and then how much of that sort of margin expansion is reflective of the natural embedded earnings growth coming from the, you know, top line organic growth profile? So I guess in other words, trying to sort of gauge how much to read into the 100 basis points of margin expansion as kind of normalized margin opportunity relative to maybe 2024 and beyond if we think about a longer term model.

I'll let Scotty address that. I mean, it's obviously a little bit of both contributing, and clearly when you delayer parts of your business where you have duplication of leadership, you know, it creates some immediate financial leverage. It certainly is important to the impact. But I also think just structurally, it represents the long-term vision to continue to move that gross margin and EBITDA margin up. That's reflective of, you know, a lot of our new products just generally have a higher gross margin profile than in our past. It is going to be, the answer's going to be a combination of both, but I'll let Scotty maybe chime in a little bit.

Yeah, Jared, I think without trying to get into specifics of quantifying it, I think that we do expect some of those synergies to flow through to improve EBITDA. But, you know, we're also planning to look for increasing investment in some areas where we need to, like in the hStream platform, and I think I mentioned our scheduling application and then this new area that we just mentioned on digital and network development. We see some costs coming out of the equation, but we're planning to reintroduce some new positions in the year as well to kind of offset some of that savings. There will be some savings that flow through. I did mention that in the first quarter, we expect to have a severance charge related to the employee departures, and that's about 800,000. So there's going to be a little bit of give and take throughout the course of the year. But again, we do expect some margin improvement just through the organic growth of the company as well.

Our next question comes from Vincent Colicchio with Barrington Research.

Yes, Bobby, I'm curious, will there be any meaningful changes in how the sales force is organized and operates?

Not now. Nothing is immediately planned. We've kind of built out the sales force the way we like it last year, and you know, it's broken between account management strategies. I do think that as a result of merging in VerityStream, things like the account management teams will take on slightly new probably account assignments. We'll think of them again as one set of customers instead of two sets of customers. I think there'll be a little of that. But structurally, you know, we have a certain number of account managers. We have a certain number of specialists and those components and structures remain the same. We also have what we call BDRs that generate the leads and process incoming leads from marketing. The way our mechanisms work between marketing and sales is similar. I do think, for example, the VerityStream sales team was in the market with a VerityStream brand, saying, hey, we're VerityStream, we have the CredentialStream product. As part of our provider solutions segment, so you think about all that, now they'll be entering the market as One HealthStream sales force. The VerityStream teams will carry on a HealthStream business product instead of VerityStream business product, providing more leverage to the brand and visibility to the company. So in that way, there will be some changes around semantics and positioning, but structurally, BDRs for business development and processes and marketing leads, account management infrastructure are similar to the same, maybe some reassignments in the specialized sales teams that go into target buyers, like the Chief Medical Officer for credentialing or the Chief Nursing Officer for a lot of our learning products like the Red Cross assess patient program, all that remains is very similar.

And how did cross selling perform in the quarter with your expectations?

Well, I mean, I gave those four examples to show, I think how we're emerging. You saw Prime Healthcare go from being just a learning customer to being a learning and now an enterprise scheduling customer. I think it would be our plan to continue that journey to show that in these three application areas, we are the best of breed, and to show they're increasingly interoperable, and increasingly leverageable. They improve efficiencies when you have more than one of our applications. I hope and expect that it'll cross over and become more a part of the story. If you look at our past, we're more individual SaaS applications and sometimes sold under different brands even. Now, in the present and future, it's entering the C-suite as HealthStream, and showing how these things can work together. Again, we're early just the quarter into showing how they work together. Not all of our applications are connected technologically to hStream, but this is the year for that. Our leadership team has been reorganized around that with the addition of Kevin O'Hara, Senior Vice President to lead the platform as a product. We have a really great release schedule of new capabilities of the platform really every quarter from here forward. I expect cross-selling should pick up.

I'm currently shown no further questions at this time. I'd like to hand the call back over to Robert Frist for closing remarks.

Well, I was so glad to get to the part where I can kind of ad-lib and answer your questions because there was so much change in the quarter from the dividend, Eddie Pearson's, I guess I'll call it semi-retirement to the structural changes and the branding changes that I was told to say on script. You've probably got a little sense that I was reading, reading, reading. It was fun to get your questions and answer them. We're obviously excited about the future and trying to get to that as soon as we can. Our expectations are steady ship with returning some to shareholders. We appreciate all of you guys following our story and publishing on it. Thanks, and we look forward to reporting our next quarter earnings. Thanks to all of our employees making all these great things happen. Congratulations on the Brandon Hall Awards. We'll see you guys next quarter. Thanks, everybody.

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