Healthstream Inc Q2 FY2024 Earnings Call

Good morning and welcome to HealthStream's Second Quarter 2024 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 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. Good morning and thank you for joining us today to discuss our second quarter 2024 results. Also in the conference call with me 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 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 the net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call. So at this time, I'll turn the call over to CEO, Bobby Frist.

Thank you, Mollie. Good morning everyone, and welcome to our second quarter 2024 earnings call. We'll just jump right in and hit some of the key highlights. Pleased to report that during the second quarter, our financial performance showed year-over-year increases in each of the major categories that we highlight in our earnings release. So we finished the quarter with strong sales and a solid sales pipeline, and we were able to reiterate our 2024 guidance ranges. In particular, we're seeing strong sales pipelines on CredentialStream in our credentialing area, ShiftWizard in our scheduling area, and our new enterprise competency suite in learning. We'll talk more about some of these later in the call, which we believe that the emerging enterprise competency suite is the most complete offering of its kind in the industry. I'm also excited about ongoing progress towards key development milestones on our HealthStream platform, and as I've promised last time, we're going to give a bit of a platform update, at least through the technical lens of developmental progress. We're beginning to see the first examples of interoperability between our applications, which is kind of the great promise of the platform. And we're seeing how customers and partners utilize components of the platform to enhance interoperability with their other systems like ERPs and EHRs. Amid all those positive developments, there are two one-time customer-related events in the second quarter that resulted in some temporary headwinds that we're confident we'll push through over the course of the year. So, let's address those kind of upfront here. One headwind impacting revenue growth in the quarter was based on a timing anomaly at one of our larger customers. Importantly, we believe this anomaly will self-correct over the remainder of the year such that it is not expected to negatively impact full-year revenue. Essentially, administrative responsibility for assigning and setting completion dates or completion requirements for a certain cohort of learners changed. Thousands of learners who were previously required to complete certain courses in 90 days were given 365 days to complete the courses by the assignment. And of course, if you're anything like me and someone says you have to finish something in 90 days or 365 days, most people put it off, and that's exactly what happened here. Once the customer realized what had happened in this administrative function in our system, we're both taking steps to address it. They don't want tens of thousands of employees rushing on the last day to do this, so they're working through it. Once the customer realized what had happened, we think that completion rates will accelerate for the remainder of the year and come back as originally forecasted, despite the unexpected slowdown. The reason this happened is that for a subset of content we sold this customer, we bill and recognize revenue based on consumption that occurred in the quarter. This is the only instance of consumption-based billing that we have at scale, and we do not plan to expand this type of billing model going forward. At any rate, we expect the revenue to catch up in the second half of the year, so we're not particularly concerned about it. The second one-time customer event that currently impacted us both in the quarter and looking forward is due to the widely publicized bankruptcy of one of our strategic accounts, Steward Health Care System. Historically, a great customer, Steward ran into some financial difficulties and declared bankruptcy during the second quarter. The impact of missed payments from periods prior to the bankruptcy filing had a negative impact on net income, adjusted EBITDA, earnings per share, and operating income in the second quarter. We expect negative impacts to revenue and other financial metrics in the last half of the year as well. We've estimated these negative impacts and they are factored into our reiterated guidance. At present, we believe that the impact from this bankruptcy may move us toward the lower end of our revenue guidance range, and we'll see how it impacts us as we move forward. That said, it's possible that the bankruptcy will allow the customer to make payments in the second half of the year, as we continue to provide services. Additionally, it’s possible that some of the divested facilities will still utilize our services, generating business in the second half of the year. Those are potential mitigating factors, but we're not counting on them. We expect this customer bankruptcy to have an ongoing negative impact on our financials this year, and it's factored into our reiterated guidance. I want to summarize our business for anyone who is new to HealthStream's story. 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 because of the interoperability they're achieving through our hStream technology platform. Historically, we sell our solutions on a subscription basis under contracts that average three to five years in length, which makes our revenues recurring and predictable. In fact, 96% of our revenues are subscription-based. We've also started to open our sales channels directly to healthcare professionals and nursing students across continuous healthcare training. We are profitable, we have no interest-bearing debt, and a strong cash balance of $83 million. We're solely focused on healthcare and, more specifically, the healthcare workforce, which comprises the core addressable market for our SaaS solutions. Before turning it over to our CFO, Scotty Roberts, I'd like to highlight some successes that we've achieved in our core application areas. In learning, scheduling, credentialing, we've made fantastic progress. Let's start with our learning application suite. We've got some exciting announcements in the second half of the year related to enhancing the capabilities of this very powerful area of our business. The HealthStream Learning Center application is our flagship product and continues to be strong in the market. When it comes up for renewal, it frequently presents our customers an opportunity to purchase multiple new solutions along with it. This results in expanding wallet share. One of our West Coast customers used their renewal of the HealthStream Learning Center as an opportunity to add additional products, including our new Insights plus Reporting and Analytics tool. Due to their growth, they also added approximately 5,400 users to their base of 22,000. The new five-year agreement includes a 3.5% pricing escalator. The annual recurring revenue from this renewal increased 111% from approximately $376,000 to $795,000, making this a strong example of expanding wallet share. Moving on to our scheduling application suite, we believe that our SaaS application, known as ShiftWizard, is the best scheduling solution in healthcare and is becoming more valuable to customers as it integrates with other applications through our hStream technology platform. Revenues from ShiftWizard grew 34% over the prior year quarter. ShiftWizard has become the largest revenue generator in our scheduling product portfolio, surpassing legacy applications like ANSOS and Enterprise Visibility. We contracted several new customers to ShiftWizard this quarter, including Stillwater Medical Center, Mary Free Bed Rehabilitation, and Roswell Park. Lastly, our credentialing solutions also enjoyed a successful quarter, seeing competitive takeouts and conversions from our legacy solutions to CredentialStream. In the second quarter, CredentialStream added 34 new customer organizations, where approximately 65% were new and 35% were migrations from our legacy credentialing applications. Representative of these CredentialStream customers in the second quarter are respected healthcare organizations like Baptist South Florida, Oregon Health and Science Medicine, and Penn Medicine. I'll now turn it over to Scotty Roberts for a review of the financials and will come back to me for a platform update.

Thank you, Bobby, and good morning everyone. I'd like to begin by quantifying the customer bankruptcy matter and the negative impact it had on our results for the quarter. As Bobby described, one of our customers filed for bankruptcy protection in the second quarter, and at that time we had over $1 million in receivables owed by the customer, which led to us recording an operating loss of approximately $1 million during the quarter. To be clear, there was no impact on revenue in the second quarter as the loss related to uncollected fees prior to their bankruptcy filing. Due to the ongoing uncertainty about this customer's future and their announcement to divest many of their facilities, we've factored the potential lost revenues of $1 million and lost profits of about $0.5 million into our financial expectations for the second half of the year. To recap, the customer bankruptcy negatively impacted the second quarter's operating income by $1 million, net income by $0.8 million, earnings per share by $0.02 per share, and adjusted EBITDA by $1 million. Now, let's go over the results for the quarter. Revenues for the quarter were $71.6 million, up 3.4%. Operating income was $4.4 million, up 10.1%. Net income was $4.2 million, up 0.8%. Earnings per share were $0.14, up from $0.13 per share, and adjusted EBITDA was $15.8 million, up 3.3%. Our revenues increased by $2.4 million, or 3.4%, going from $69.2 million in last year's second quarter. Revenues from our subscription products accounted for 96% of total revenues, totaling $69 million, an increase of $2.5 million or 3.8%, while professional services revenues were $2.5 million, declining by $0.1 million or 5.5%. There are a few factors affecting revenue that I want to provide some additional color on. The impact of the consumption variance from one of our larger accounts was approximately $0.5 million. Specifically, their consumption declined by that much compared to the first quarter, representing a timing variance against the expected run rate. Overall revenue from our scheduling application ShiftWizard grew 34% over the prior year quarter. Our subscription revenue from ShiftWizard grew by 18%, and its one-time implementation services revenue grew 145% over the last year. The performance of ShiftWizard is promising, especially as it integrates with our hStream technology platform. The counter to ShiftWizard's strong growth is the ongoing attrition from the ANSOS Scheduling products, which declined by $600,000 or 15% versus last year. Additionally, our initiative to sell directly to professionals through our e-commerce channels delivered approximately $0.8 million in revenue, up by 41% over the first quarter. Our remaining performance obligations were $538 million as of the end of the second quarter, and we expect approximately 43% of the revenue backlog to be converted over the next 12 months. Gross margin came in at 66.8%, up from 65.9% last year. Operating expenses, excluding cost of revenues, increased by 4.3%, primarily due to product development, which was up 9.5%, while G&A costs were up 5.4%, primarily impacted by the bad debt charges I mentioned. Adjusted EBITDA was $15.8 million, representing a 3.3% increase, and the adjusted EBITDA margin was 22.1%. Now, let’s take a look at the balance sheet metrics. We ended the quarter with cash and investment balances of $83 million, down slightly from $83.7 million last quarter. We deployed $6.7 million for capital expenditures and paid $0.8 million to shareholders through our dividend program during the quarter. Our days sales outstanding improved to 45 days compared to 50 days last year, which is a positive result despite the bad debt charges from the customer bankruptcy previously mentioned. Year-to-date, our cash flow from operations was up 7% over the prior year and free cash flows improved by $2.1 million or 20%, totaling $12.9 million. With a strong balance sheet containing $83 million of cash and no debt, we are well positioned to deploy our available capital in a variety of ways to enhance shareholder value, such as pursuing acquisitions, paying dividends, or making share repurchases. We maintain an active pipeline regarding M&A opportunities that fit our criteria. In respect to our dividend program, we declared a quarterly cash dividend of $0.28 per share to be paid in August, and we currently do not have an active share repurchase program. Moving on to guidance, we expect consolidated revenues to range between $292 million and $296 million. However, we anticipate the bankruptcy impact may tend to move us toward the lower end of that range. We expect net income to range between $16.7 million and $18.6 million and adjusted EBITDA between $64.5 million and $67.5 million. This guidance does not include assumptions for any acquisitions we may complete during the year. Looking to the second half of the year, we expect sequential quarterly revenue growth driven by a backlog of contracts already sold but not implemented, particularly within our credentialing and scheduling application suites. Revenue contributions from strong bookings at the end of the second quarter, a solid sales pipeline, and catch-up from the consumption shortfall in Q2 are factored into our revenue guidance range. So that concludes my comments for this quarter's earnings call. Thanks for your time this morning, and I'll now turn it back over to Bobby for some additional updates.

Thank you, Scotty. We'll wrap up here with a platform update and a new market that we're beginning to pursue with our CredentialStream application. At this time, let's talk about some key hStream platform initiatives. Our focus is to cement our position as healthcare’s people platform. We believe there's a place for an integrated set of application suites alongside the ERP vendors and EHR systems to provide functionality specific to healthcare organizations and their workforce. At the center of our strategy is our hStream platform, providing the foundation for these application suites, as well as applications and analytics that add value. We monetize this platform today through three subscription products, one for each of our application suites in learning, credentialing, and scheduling. We’ve sold hStream for learning and credentialing for several years and introduced hStream for scheduling in late 2023. Each of these subscription products provides customers access to the hStream platform and exclusive applications, services, content, and other benefits. We continue to add new benefits to each of these hStream packages. A key component of our platform strategy is having a single identifier for all individuals in our ecosystem. We call this their hStream ID. We are increasing the number of individuals with hStream IDs significantly by making hStream ID functionality available in more of our applications. For example, we began requiring students using our myClinicalExchange application to create or add an hStream ID in April 2023, and we have added over 110,000 new hStream IDs through the app since then. Out of our 23 internal applications that are candidates for integration with hStream ID, 14 now have some integration using it as a native login or enabling a user to link an hStream ID. Another key component of our strategy is centralizing certain functional domains, particularly around people, into platform services and APIs. Currently, we have three live services: professional license service and API, professional certification service and API, and the learning transcript service and API. Each of these services acts as a clearinghouse for data validation. We continue to add licenses, certifications, and learning events and are expanding other services in the people domains like education history and work history. We expose access to these services and APIs through our hStream developer portal, which currently has 12 APIs and webhooks available, comprising hundreds of endpoints for customers and partners. Furthermore, another exciting update I want to share is that our credentialing business is expanding to address the health plan market. Many have asked in previous quarters about this market, especially after we announced a win at Blue Cross Blue Shield Arkansas. I’m here to confirm that we have signed 10 health plans in the last two years, including the Blue Cross Blue Shield of Arkansas and health plans associated with health systems like the Banner Health Plan and the Providence Health Plan. Our tailored solution for this market is called Network by HealthStream, offering the industry's only network relationship management system, NRM. We believe HealthStream will be uniquely positioned to connect payors and healthcare systems in a way that will enhance credentialing and verification abilities for both. We are planning an expanded marketing approach for the Network product later this year and will update you on our progress. For now, I want to say that we are excited to be addressing this new market of buyers and have made some progress securing 10 accounts already. I also want to note that the large majority of revenue from sales to health plan customers is yet to be recognized, as we are still in the implementation phase of these new sales. I believe this offers additional confidence as we enter the second half of the year. In summary, if you’re interested in a profitable, highly recurring revenue, SaaS/PaaS healthcare technology company that expects steady growth and is committed to delivering gains directly to shareholders in the form of dividends, perhaps HealthStream is worth your consideration. In June, HealthStream was ranked as the Ninth Best Company to Work For among US health services companies by US News and World Report. The panel that selected us considered the feedback and sentiments from our employees in their analysis. I’d like to thank all our employees for creating a positive culture at HealthStream as we work together to improve the quality of healthcare by developing the people who deliver care. I will now turn it back to the operator for Q&A, and Scotty will join me to help answer questions.

And our first question is going to come from the line of Matt Hewitt with Craig-Hallum. Your line is open. Please go ahead.

Good morning and congratulations on the progress. Maybe first up, just because it's front of mind for a lot of people. On the CrowdStrike situation, obviously there's been a lot of commentary about hospitals being impacted. Was there any impact for HealthStream directly? And what are you hearing from customers and are they able to get back up and running here quickly?

Great question. From our perspective, the impact was minimal on us and therefore, I guess by extrapolation, as it relates to our products, our customers. We did find a few isolated cases where it was impactful, but I think we were able to work through that fairly quickly. I haven't gotten the full report from our team yet, but early reports indicate that the impact on our base, in relation to the use of our products, was minimal and almost non-existent across our broader network.

That's great. And then kind of following up on your last commentary there about the Network by HealthStream. How much does that increase your end market opportunity? I mean, I think the last count, we were up to like 8 million potential employees that could be using one or more applications from HealthStream. This obviously expands that market, but how should we be thinking about size for that opportunity?

We haven't really scoped it yet. We're working on that as we recalibrate our launch. We've had initial success, as we mentioned, with ten locations, mostly health plans attached to health systems. However, we intentionally didn't add it yet to our Total Addressable Market (TAM) as we want to observe its progression a little more before quantifying it.

Got it. And maybe one last one and I'll hop back in the queue. But I think you mentioned the West Coast customer that you called out with the price escalator, 3.5% increase with the renewal. Is it fair to look at broadly across your customers, and maybe on an annualized basis, looking at those pricing increases as a component? How should we think about it? Is 3% as kind of a base growth for your revenues? And then obviously the cross-selling and the new opportunities with new customers and all of that can help get you back to maybe a double-digit type growth rate on the top line?

Well, it could be a component of our growth. However, we've never used escalators at any scale across all our contracts. Our pricing models are based on term, and so term and volume have been our primary drivers. It took us over a year of planning to roll out the escalator model, and what I would note is that a very low single-digit percent of our contracts currently have escalators included. Therefore, it will take several years for the escalator model to have a meaningful impact on our revenues. We anticipate it being a long-term, slow catalyst for growth.

Thank you. And one moment as we take our next question. And our next question comes from the line of Stephanie Davis with Barclays. Your line is open. Please go ahead.

Hi guys, this is Anna Kruszenski on for Stephanie. Congrats on the quarter and thank you for taking our questions. The first one, I was wondering if you could talk about how you're thinking about the evolution of your salesforce as you move to more of this cross-sales motion and just what sort of investments that will take and how are you incentivizing your salesforce?

Sure, great question. We feel that we have the appropriate sales organization size. Now the nature of some of the positions may shift over time. For example, our current mix is around 200 people that are focused on selling products, with about 60 of them as account managers focusing on growing account revenue. The other 140 are specialists, spread across product categories. I don't envision a future where we need significantly more people, but there may be a higher ratio of account managers to salespeople over time. Additionally, our new e-commerce capabilities will help reduce the burden on salespeople for renewals, allowing them to focus on acquiring new business. Overall, I think our personnel count is right for the current market and the three core products we offer.

Got it. Thank you for all that color. That's super helpful. And then just as a follow-up, I was wondering if you could talk about how you're approaching the move to a single sign-on and where you guys are in terms of tech investments and just how you're rolling that out to clients?

As I mentioned, the central feature of our platform is building a single ID service. About 14 of our 27 apps have implemented hStream ID. We're midway through this implementation, and while a lot remains, we have the tools and development teams in place to support the platform without needing to add more developers. It will take time, but I am excited about what we are seeing with hStream ID as it is crucial for connecting our individual applications within our platform.

Yeah. Hey, good morning and thanks for taking the questions. Maybe just to start, Bobby, I was hoping to get some additional color on the strong selling trends to close out the quarter. I guess, are you seeing any kind of incremental improvement in the client base or anything that's changing from a competitive landscape perspective driving the strength there? Any thoughts on what that could imply for growth set up for 2025?

You're always looking to layer subscriptions, which is a great model when implemented correctly. We had a nail-biting end of Q2 as our sales pipeline performed well, making up for earlier pushed deals. Additionally, the nature of the pipeline is changing because we're better at describing value propositions and bundling our products. There is a growing pipeline of bigger deals, possibly because of better bundling strategies. I believe that there is a macro trend of healthcare systems investing more in their workforce to reduce turnover and attract talent, making our tools particularly relevant in recruiting and retention strategies.

That's great. I appreciate that color. And then as a follow-up, I'll ask about the health plan opportunity. I know it's still early days here, but does that have a compounding impact on making your offerings for providers more attractive or strategic? There seem to be synergies sitting between payors and providers with this network offering?

We are excited about the potential for data portability between the plans and health systems, where they're using similar CredentialStream systems. However, we need to gain market share in the health plan market before we start touting interoperability benefits. The hStream ID will be crucial in maintaining rosters for health plan customers, and we anticipate exciting potential as we continue to make progress.

Yes, thanks for the questions. Congrats on the results given some headwinds. Bobby, just clarifying on the escalators, I want to make sure I understand that. Is that like a 3.5% each year of the term of the contract or just when the contract comes up for renewal?

Yeah, sure. Richard, it's an annual escalator, so each year the price would increase by that 3.5%.

I want to add some color here. We're excited about it, but less than 1% of our contracts had escalators built in so far. Given that, it will take several years to see a meaningful impact.

Thanks for the questions. Bobby, could you clarify if the 15% decline in ANSOS was for subscribers or revenue? And how does it compare to recent quarters? Are things worsening or stabilizing?

That decline was 15% on last year's revenue, about a $600,000 decline. The rate of attrition has been consistent for the past four to six quarters.

Are there any clients that are in financial distress we should be concerned about?

On the whole, we're not seeing any changes in payment patterns yet. We hope the situation with Steward remains isolated, and we haven't observed macro trends indicating distress in our larger base of acute hospitals. However, there are changes in some submarkets, particularly skilled nursing, but overall, we're optimistic given our cash flow from operations remains strong. Thank you to everyone involved. Friends and family on the journey with our 1,100 employees, we're trying to build a great company. We appreciate the analysts following our story and providing feedback. Business is never easy, and although there were some challenges this quarter, we’re optimistic about the future.

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