Healthstream Inc Q2 FY2023 Earnings Call

Good morning, and welcome to the HealthStream's Second Quarter 2023 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question-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 our second quarter 2023 results. So with that start, I'll now turn the call over to CEO, Bobby Frist.

Thank you, Mollie. Good morning, everyone, and welcome to our second quarter 2023 earnings call. Mollie, you were breaking up just a little bit, so I think I heard the hand off correctly, and maybe someone will text me if I'm also breaking up. But look, some quarters you move the company forward more than others, and this was one of those solid prints, as they say, or a good quarter. We're pleased to report our results to you now this morning. In the second quarter, in fact, we achieved record revenue and record adjusted EBITDA. So, I'd like to start by highlighting those strong financial metrics. Top-line revenue reached $69.2 million in the quarter, which was up 5% over the same period of 2022. We also delivered solid profitability with $15.3 million of adjusted EBITDA, which was up 17% over the same period of 2022. In just a minute, I'll describe some of the key customer wins in each of our learning, credentialing and scheduling application suites that help drive these results. So, before we dive into some business updates, let's take a moment to refresh everyone about our business overall, which is also helpful to anyone who's new to HealthStream. First and foremost, HealthStream is a healthcare technology company, dedicated to developing, credentialing and scheduling the healthcare workforce through SaaS-based solutions, each of which are becoming more valuable, we believe, because of the interoperability they are achieving through our hStream technology platform. We sell our solutions on a subscription basis under contracts, which average three to five years in length. That means our revenues are recurring and predictable. We are profitable, and we have little to no debt. We are solely focused on healthcare and, more specifically, the healthcare workforce. We define our addressable market as the 11.2 million healthcare professionals working in the United States in healthcare organizations. In the second quarter, HealthStream subscriptions also achieved a new high watermark of 5.6 million subscriptions, adding approximately 68,000 subscriptions. Even in the face of macroeconomic concerns and inflation and recession, we are confident that HealthStream will continue to provide results in line with our guidance range, which we just reiterated in our earnings release. So, overall, a fine print and good results. So, I'm proud of the team and what we're able to achieve. Now, I want to highlight each of our three primary application suites of learning, credentialing and scheduling. It includes a breadth of services and capabilities in each area. Our flagship application in the learning area is the HealthStream Learning Center, which is a learning management system. For credentialing, the flagship application is Credential Stream, which onboards credentials, privileges and enrolls physicians. And for scheduling, it is ShiftWizard, which is a software application that helps schedule, empower and engage the healthcare staff. We believe that each of our SaaS solutions is best-in-class, and the wins I'm about to describe kind of reinforce that belief. The HealthStream Learning Center is the most utilized learning management system in healthcare and continues to add new customers. In the second quarter, a Midwestern health system with approximately 2,000 employees chose our HealthStream Learning Center over six LMSs, one of which was a major ERP vendor. The customer clearly recognized the value of our integrated ecosystem. With this win, revenues at this customer grew from $8 per person per year to $80 per person per employee immediately, a 10x increase. So, of course, this is the kind of story we'd like to see more of, but increasingly, we're getting better at positioning our solutions together. Our credentialing solutions also enjoyed a successful quarter, both in terms of competitive takeouts and conversions from our legacy solutions to CredentialStream. In the second quarter, we contracted 38 new customers for CredentialStream, representing approximately 50,000 new subscriptions collectively. These new customers included many highly respected health organizations like Rush Health, the University of California Davis Health System and Augusta Health. Additionally, HealthStream's CredentialStream application was rated as the number one credentialing software on an online site. So, overall, a strong quarter for our credentialing suite. Our revenues from ShiftWizard grew 19% over the prior-year quarter as customers continue to report high customer satisfaction. As we continue to increase investment in ShiftWizard, it is only going to become more powerful and more differentiated in the marketplace.

All right. Thanks, Bobby, and good morning. Let's begin with the financial highlights for the second quarter. We delivered another solid quarter of financial results with many of our key financial metrics improving over the prior year, which resulted in new records for revenue and adjusted EBITDA, as Bobby mentioned. Revenues were $69.2 million, up 5%; operating income was $4 million, up 36%; net income was $4.1 million, up 34%; EPS was $0.13 per share, which was up 30%; and finally, adjusted EBITDA was $15.3 million and was up 17%. Our revenues for the second quarter were a record high of $69.2 million and were up $3.6 million or 5% compared to last year's second quarter. Organic revenue growth was 4% and the two acquisitions that we completed last year, CloudCME and eeds, contributed to the remainder of the growth. Revenues from subscription products accounted for 96% of total revenues and our subscription revenue came in at $66.5 million or an increase of 6%. Gross margin was 65.9% compared to 66.1% last year. Operating expenses, excluding cost of revenues, were up $1.2 million or 3% over last year's second quarter, of which approximately half of the increase came from the two acquisitions that we completed last year. Our effective tax rate for the second quarter was approximately 8% compared to 15% last year. Positively impacting the tax rate was approximately $600,000 in deferred tax benefits, resulting from the remeasurement of our deferred tax liabilities. Finally, our adjusted EBITDA was $15.3 million, which was up 17%, and adjusted EBITDA margin was 22.2% compared to 20% last year.

Okay, Scotty, thanks. Great financial results, good work by all the HealthStreamers to deliver them. I'd like to dive a little bit into the future state of the company and give some insights into the developments happening related to our hStream technology and our hStream platform. One encouraging development was the growing early momentum we saw in customers' use and adoptions of the APIs available in our developer portal, which we launched in the fourth quarter of 2022. For our customers, the APIs offer meaningful extensibility of our applications. We believe the extensibility increases the stickiness of our applications as customers begin to rely on functionality from our applications to power other applications that they use in their organizations. So, a couple of examples of use. One large health system that was a customer centralized their learning records with HealthStream by using our learning API to bring records in directly from a video system they're using to educate their staff into the HealthStream Learning Center transcript. What this does is it reinforces the HealthStream Learning transcript as the single source of truth for the longitudinal history of the training and development for employees. We believe these are just a couple of great examples of the APIs creating interoperability that benefits our customers and adds market differentiating value to our platform and applications. And I would expect that some of those services will be licensable services. So, I believe in the second half of the year, we'll drive our first direct-from-platform revenue, which will be exciting. Another benefit of an hStream subscription for a customer is the ability to participate in what we call a collaborative purchase process. The collaborative purchasing process has been around for a while and it's mostly in used in some of our larger accounts. However, in March, we launched a significantly enhanced collaborative application that empowers this purchasing process. For the first time, participants are accessing their collaborative application using their hStream ID. We can better match the participants with the products that are most valuable to them. The automated platform interface enables this by connecting directly to our price book, which is held in our sales force infrastructure. We expect to complete around 18 purchasing collaboratives this year, the last 10 of which will run on the new application. We had direct insight into the kind of organizational purchase process that we've never had before. On June 5, HealthStream announced the addition of Dr. Alex Jahangir to our Board of Directors. Dr. Jahangir is a nationally recognized physician executive with extensive experience, leading academic medical centers. We enthusiastically welcome Alex to our Board of Directors. As we reach the close of the portion here, I want to remind you about our new dividend policy. Over the course of the year, we expect a new dividend policy to return approximately $3 million to our shareholders. Halfway through the year, we are on track to meet that goal. So, if you are interested in a highly recurring revenue, profitable, SaaS, PaaS healthcare technology company that we expect to deliver steady growth as determined to share some of its profits directly to shareholders in the form of dividends, maybe HealthStream is the stock for you. Thank you all for listening in. We're looking forward to the next quarter. Don't forget to come to Nashville for the Nashville Healthcare Sessions. You'll see HealthStream participating as well. An opportunity to say hi to all the people that are changing healthcare for the better. Thank you to all HealthStreamers who made it happen, and we look forward to the next earnings call where we'll update you on the hStream platform, the portal technologies and hopefully what will be another strong quarter of customer wins and great stories.

This concludes today's conference call. Thank you all for participating, and enjoy the rest of your day. You may now all disconnect.