Healthstream Inc Q4 FY2023 Earnings Call

Good morning, and welcome to HealthStream's Fourth Quarter and Full Year 2023 Earnings Conference Call. This conference call is being recorded and all participants are in a listen-only mode. I will now turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you. Good morning and thank you for joining us today to discuss our fourth quarter and full year 2023 results. Also in the conference call with me today is Robert 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 CEO, Bobby Frist.

Good morning, everyone. I'm having a few connection issues. There might be a glitch here and there, but we'll push through it and do the best we can. For the earnings call, I'm really excited about how we finished the full year 2023. There are lots of exciting things to cover, and we'll do that in great detail in the next 30 minutes. We delivered record top-line revenue of $279.1 million and record adjusted EBITDA of $61.3 million. In our guidance for 2024, we expect to surpass both of those high-water marks as we further expand our ecosystem with exciting new products, new sales channels, and new target markets. The significant development in our market expansion strategy allows us to directly reach individual end users, like physicians, nurses, and nursing students. Our extreme focus enables us to approach individuals effectively. Our online platform website is better designed for handling purposes. The most popular purchase due to the DEA mandate was the opioid course, with over 2,700 orders placed. We're also amplifying our ability to reach and sell to individual nurses through NurseGrid Learn, which is linked via our popular NurseGrid app. As a reminder, NurseGrid is the most popular app for nurses based on ratings and downloads in the Apple Store, with about 1 in 6 nurses in the U.S. regularly using it. During the third and fourth quarters of 2023, over 1,800 orders were placed by nurses. I'm excited about our early success in selling direct to healthcare professionals with our new e-commerce-enabled hStream platform. I believe that the ability to participate in our ecosystem throughout one's healthcare journey includes new opportunities for caregivers to advance their skills. Before we go further, I wanted to provide a high-level reminder about our core business, especially for the benefit of those who may be new to HealthStream. HealthStream is a healthcare technology company dedicated to developing, credentialing, and scheduling healthcare workforce through SaaS-based solutions, each of which are becoming more valuable because of the interoperability they're achieving through our new hStream technology platform. Historically, we sell our solutions on a subscription basis under contracts that average 3 to 5 years in length, making our revenues recurring and predictable. In fact, as of today, 96% of our revenues are subscription-based. We are profitable, have no interest-bearing debt, and a strong cash balance of $71.1 million. We are solely focused on healthcare and more specifically, the healthcare workforce. The 12.3 million healthcare professionals and nursing students in the United States comprise the total addressable market for our SaaS solutions. We saw a good mix of revenue contributors throughout our portfolio, but I want to call out and quantify a couple of areas that impacted our growth rate for the quarter. Our focus continues to be on stabilizing existing customers and migrating them to ShiftWizard, which grew its revenue by 31% in the quarter. Future declines associated with the remaining $14 million of ANSOS-related revenue are contemplated in our 2024 guidance. So now I will need to take a quick pause as it looks like we might be experiencing bigger connection issues than I thought. I apologize for that. I'm going to need to find another dial-in. Give me just a second. Hey, Mollie. Can you hear me well enough to pick up since the script is written? If you could pick up where I left off?

Sure. So I'll start where Bobby left off, if I understood that correctly. In the fourth quarter, revenues from our scheduling application ShiftWizard grew 31% over the prior year quarter as customers continue to report high customer satisfaction. Since purchasing ShiftWizard in October 2020, we have selected it as our primary scheduling application and significantly expanded its ability to perform at enterprise scale and it is only going to become more powerful and differentiated in the market in the coming year. In the fourth quarter, we welcomed many new customers for ShiftWizard, including Norman Regional Hospital, Freeman Health Systems, and Phelps Health. Revenues from our credentialing, privileging, and enrollment application CredentialStream grew 52% in the fourth quarter versus the same period last year. In the fourth quarter, we contracted 37 new customers for our CredentialStream solutions, including many highly respected healthcare organizations like Intermountain Healthcare, Lyra Health, and Dayton Children's Hospital. There's still a great deal to talk about. But right now, I'm going to turn it over to CFO, Scotty Roberts for a more detailed look at our financial performance and expectations.

I'm going to start my portion of the call today with a recap of our financial results for the fourth quarter and then I'll go over our financial outlook for 2024. Unless otherwise noted, the comparisons will be against the same period of last year. We continue to deliver solid results as we closed out the fourth quarter of 2023. Revenues were $70.6 million, up 3%. Operating income was $4.3 million, up 38%. Net income was $4.6 million, up 87%. Earnings per share were $0.15 per share, up from $0.08 per share. Finally, adjusted EBITDA was $16 million, up 17%. Our revenues increased by $2.1 million or 3% coming in at $70.6 million, compared to $68.5 million in last year's fourth quarter. Our revenue mix continued to tilt in the direction of subscriptions versus professional services. In fact, revenues from subscription products accounted for 96% of total revenues and were $67.9 million, increasing by 4% in the quarter. Professional service revenues declined by $0.5 million or 17%, which negatively impacted our growth rate of approximately 80 basis points. Now let me provide some more color about the revenue results. As Bobby and Mollie mentioned earlier, we saw a good mix of growth contributors throughout our portfolio, but I want to call out a couple areas that impacted our growth rate for the quarter. First, I want to mention the ANSOS scheduling products. Their revenue was down $0.5 million or 13% in the quarter. Our focus continues to be on stabilizing existing ANSOS customers and migrating them to ShiftWizard, our SaaS scheduling application, which grew its revenue by 31% in the quarter. Future declines associated with the remaining $14 million of ANSOS-related revenue are contemplated in our 2024 guidance. Moving to operating expenses, the reorganization of the business as a single operating segment at the beginning of the year led to efficiencies and cost synergies in our operations that are reflected in our financial results for the quarter. Our operating expenses, excluding cost of revenues, remained relatively stable, with a modest increase of $0.4 million or 1%. Our adjusted EBITDA was $16 million, which was up 17%, and adjusted EBITDA margin improved to 22.6% compared to 19.9% last year. For the full year, our cash flows from operations improved by $12.8 million or 25%, coming in at $64 million, and free cash flows improved to a record high of $36 million, compared to $26.1 million last year, an increase of 38%. We believe that while we did not complete any acquisitions during 2023, we maintained an active M&A program to evaluate potential transactions that fit our investment criteria. In February of 2023, our Board of Directors adopted a dividend policy, which allowed us to return $3.1 million of cash back to shareholders last year. As for our share repurchase program during the quarter, we made $6.8 million of share repurchases with $1.1 million remaining under the program. Our current share repurchase program will expire on the earlier of March 31, 2024, or when the maximum dollar amount under the program has been expended. So now as we turn our attention to metrics that are more relatable to revenue growth and our medium-term financial objectives, we expect consolidated revenues for 2024 to range between $292 million and $296 million. This guidance does not include assumptions for any acquisitions we may complete during the year. Our revenue guidance range implies a growth rate between 4.6% and 6.1%, and we expect steady performance across the year. We expect gross margin to be around 66% for the year and subscription revenue mix from solutions we own vs partner solutions will be the primary influences on gross margin. We have just under 1,100 employees and approximately 50 open positions as of the beginning of the year. Our staffing costs are expected to increase steadily across the year. We expect both product development and sales and marketing to increase in the 4% to 6% range. I want to highlight our dividend policy as we continue to apply a disciplined approach to our capital allocation strategy, which includes M&A, dividends and share repurchases.

Thanks, Scotty. What I'm going to do now is repeat part of my earlier section because we need a good record of it and then I'm going to pick up with my concluding remarks. Good morning, thank you, Mollie, for the handoff earlier. We delivered record top-line revenue of $279.1 million and record adjusted EBITDA of $61.3 million. The ability to sell directly to individual end-users like physicians, nurses, and nursing students is a significant development in our market expansion strategy. During the last two quarters, we amplified our reach and sales to individual nurses through NurseGrid Learn. As a reminder, NurseGrid is the number one app for nurses in the Apple Store. I'm excited about our early success in selling direct to healthcare professionals with our new e-commerce-enabled hStream platform. We continue to build on our strategies and develop our technologies. If I break out again, I'm going to ask Scotty to do the same and repeat the key points. It's important that we provide additional details for our shareholders about how we're integrating these solutions. Continuing to invest in our workforce technology, we anticipate that our Cash Stream operations will continue to grow as both our products and partnerships advance. The relationships we’ve built with hospitals and healthcare systems have positioned us well for the future.

Our first question comes from Matt Hewitt with Craig-Hallum.

Maybe first up, just a point of clarification, I think, Scotty, you mentioned there was $14 million left in ANSOS legacy contracts. I'm just curious, will those contracts be up for renewal or conversion, I guess, this year, or does it expand beyond this year? I'm just trying to figure out what the headwind is that you're facing this year.

I'll start to take that and then let Scotty add to it. The total remaining business with ANSOS is about $14 million. Our hope and expectation are that we'll retain all that business until which time we can eventually upgrade them to the newer technologies like ShiftWizard. We've experienced some attrition, but we're working hard to retain our current customers while transitioning them to the new platform.

It's a mix of contracts that are in their auto-renewal phase, plus a good mix of customers who have entered into agreements for multiple years of renewal. Our objective is to continue to support the customers and migrate them to ShiftWizard, but we're also here to support their use of the existing application.

Bobby, as you look at selling more directly to the end user, particularly to the nurses, historically, you're signing, I think you mentioned again today, 3 to 5 year contracts with your hospital customers. With nurses, are those not 3 to 5 year contracts? How does that change your visibility?

We focus on ensuring that our products and services meet the needs of nursing students and professionals. Our goal is to secure long-term commitments with nursing schools that will help guide their students as they transition into the workforce. While this revenue might be a little less predictable, it represents good margin opportunity and incremental revenue for HealthStream.

Our next question comes from Jared Haase with William Blair. We focus on ensuring that our products and services meet the needs of nursing students and professionals. Our goal is to secure long-term commitments with nursing schools that will help guide their students as they transition into the workforce. While this revenue might be a little less predictable, it represents good margin opportunity and incremental revenue for HealthStream.

Bobby, maybe just to start, I was hoping to unpack a little more color just around recent sales cycle trends. It seems like others in the health care IT space are starting to flatten, maybe some improvements in the selling environment with health systems relative to what the environment was like going into 2023? So, I'd just be curious if that's something you've experienced in any meaningful way.

It's in different pockets. We have seen some strength in the pipeline for products like CredentialStream and ShiftWizard, highlighted by their substantial year-over-year growth. However, there are still areas, such as the skilled nursing market, that are under financial stress and experiencing increased churn. Overall, I would describe the environment as improved compared to the middle of COVID.

And then maybe just one on the 2024 outlook. The revenue guidance range looks a bit narrower than the guidance for 2023. I'm curious if there's anything we should infer from that regarding your level of confidence at this point in the year.

In general, as we approach our guidance, the business remains predictable. While there are some variables like ANSOS that add uncertainty, we feel more comfortable with this tighter range of guidance as we get better at forecasting performance. We believe we are improving with the data we are using to forecast sales and we hope that we can hit our guidance range.

Our next question comes from Stephanie Davis with Barclays. I'm curious if there's anything we should infer from that regarding your level of confidence at this point in the year. Robert Frist, CEO, responded that as they approach their guidance, the business remains predictable. While there are some variables, like ANSOS, that add uncertainty, they feel more comfortable with this tighter range of guidance as they improve their forecasting performance. They believe they are getting better with the data used to forecast sales and hope to meet their guidance range.

I want to go back to the 2024 guidance. Just curious if you could talk a little bit more about the drivers of more sequentially stable growth in margins given your cost optimization and network expansion efforts?

We've been working on efficiencies in our operations and have found synergies as we've migrated to a single operating model. This has allowed us to better manage our G&A and other operational costs as we build stability in the growth and improve margins overall.

Our next question comes from Richard Close with Canaccord Genuity. I want to go back to the 2024 guidance. Just curious if you could talk a little bit more about the drivers of more sequentially stable growth in margins given your cost optimization and network expansion efforts? We've been working on efficiencies in our operations and have found synergies as we've migrated to a single operating model. This has allowed us to better manage our G&A and other operational costs as we build stability in the growth and improve margins overall.

Scotty, I was curious on modeling revenue with hStream subscribers going away. Just wondering what the best way to forecast going forward.

Certainly! We are evaluating new metrics that can provide better insight into our performance. While we've used hStream subscriptions as a measure of our platform's scalability, we recognize it's time to review and potentially shift to metrics such as ARR that will offer more clarity around our financial growth and revenue potential.

On ANSOS, is the remaining $14 million just maintenance and support revenue? And if there's any detail in terms of the success rate of converting to the ShiftWizard product would be helpful?

Yes, the contracts have both maintenance fees and recurring revenue associated with them. As for the migration to ShiftWizard, we've seen some success, although attrition remains an issue. We are dedicated to stabilizing our relationships with existing ANSOS users and improving our customer satisfaction as we work to convert them.

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.