Healthstream Inc Q2 FY2025 Earnings Call

Good morning, and welcome to HealthStream's Second Quarter 2025 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. I will now turn the conference over to Mollie Condra, Head 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 2025 results. Also on 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, and these include 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 that we may refer to in this call. So with that start and that opening, I'll now turn the call over to CEO, Bobby Frist.

Good morning, everyone. It feels like we've had a quarter focused on follow-ups. We have some updates to share from our last earnings call regarding our sales pipeline, macroeconomic conditions, and financial results. I'll start with the financial highlights, which we are pleased with for this quarter. In the second quarter, we reported record revenue, marking a significant milestone as we continue to grow. This revenue reflects a 4% increase from the same quarter last year. Our operating income rose by 33.4%, and our net income increased by 29.3%. Adjusted EBITDA grew by 11.3%, all compared to the previous year. We've raised our net income expectations for the full year of 2025 in our financial guidance and reaffirmed our outlook for revenue, adjusted EBITDA, and capital expenditures. Scotty will elaborate on these topics later in the call. There have been exciting developments in our core application suites, including learning, credentialing, and scheduling, which we will discuss further in this presentation. Reflecting back on our previous call, we noted several medium to large deals that were expected to close in the first quarter. I'm happy to share that four out of the five deals we were tracking were signed in the second quarter. The average contract value for these four deals was $2.2 million each. Additionally, the fifth deal is anticipated to close early in the third quarter, which is a positive update on the deals mentioned last quarter. It's also encouraging that these deals represent a nice balance across our various applications and suites. For instance, one deal was a multimillion-dollar, multiyear contract from a notable health system for our American Red Cross Resuscitation program—one of our key partnerships and offerings. We are glad to see this success in the Northeast, and we look forward to growing this account further as they utilize more of our solutions. Another deal involved a broad range of our products, including our competency suite, showcasing the effectiveness of our new bundling strategy that meets our customers' end-to-end competency program needs. This bundling strategy around staff development and competency assessment led to a multimillion-dollar deal signed in the second quarter. Additionally, CredentialStream secured a deal with another major health system for enterprise-wide adoption, while our scheduling application ShiftWizard was also contracted by a top health organization. These four enterprise deals illustrate both the diversity and significance of our recent wins, with one more expected. A key topic of interest is AI. It seems that no earnings call is complete without discussing AI and our corresponding strategies. At HealthStream, we are focused on leveraging AI to enhance efficiency in our business operations. We are exploring role augmentation and enhancing application development, with numerous prototypes and pilots in the efficiency category and new initiatives to offer competitive differentiation across our product suites. HealthStream has a legacy of integrating AI into healthcare, starting with our GenAI program launched over five years ago. This program was among the first to assess clinical competency and reasoning among nurses using AI techniques. We believe it is a pioneering product that continues to evolve and improve over time, recently earning another patent related to its use of natural language processing and deep learning for competency assessments. AI also plays a vital role in our new learning application, the HealthStream Learning Experience (HLX). This application, announced last quarter, offers personalized, self-directed intelligent learning pathways tailored to healthcare professionals. It utilizes a variety of learning modalities and engages individuals with a modern user experience. HLX incorporates OpenAI's Chat GPT-4.0, enabling faster and more accurate search capabilities, which will enhance the recommendations made to users based on their experiences and needs. We are excited about the advancements of GenAI and HLX as examples of our commitment to equipping customers with cutting-edge tools for employee development and competency assessment. Building a culture around AI is essential for successful implementation. We are actively working to engage our team in collecting necessary data and planning pilot programs. Developers will soon have access to tools like Cursor AI or Copilot, transitioning from pilot to production mode, enhancing our in-house development capabilities. Every company must address how AI will augment their roles, and HealthStream is committed to this journey, establishing governance around our AI initiatives and funding technology growth. I'm thrilled with the progress my team is making and the leadership guiding us in incorporating AI into our business strategies. Before I hand over to Scotty, I would like to summarize HealthStream's story for any potential new investors. HealthStream is a healthcare technology company focused on developing, credentialing, and scheduling the healthcare workforce through SaaS-based solutions. The company is transitioning from SaaS to a Platform as a Service (PaaS) architecture to enhance interoperability across our applications. We hold 20 patents for our innovative products, have received over 40 Brandon Hall Awards for excellence in learning and development, and primarily sell our solutions through subscription contracts averaging 3 to 5 years, resulting in 97% of our revenue being subscription-based. We've begun to open our sales channels directly to healthcare professionals and nursing students. We are profitable, have no interest-bearing debt, and maintain a strong cash balance of $90.6 million. Our focus remains on healthcare, particularly the healthcare workforce and those training to enter the field. The core total addressable market for our solutions includes 12.6 million healthcare professionals and nursing students in the United States. Now, I’ll pass it over to our CFO, Scotty Roberts, to provide a more detailed review of our financial performance for the quarter and our outlook moving forward.

All right. Thanks, Bobby, and good morning. Let's go over the financial results for the second quarter. Unless otherwise noted, the comparisons will be against the same period of last year. Revenues were a record of $74.4 million, up 4%. Operating income was $5.9 million, up 33.4%. Net income was $5.4 million, up 29.3%. Earnings per share was $0.18 per share, up from $0.14 per share, and adjusted EBITDA was $17.6 million, up 11.3%. Revenues increased by $2.8 million or 4% and were $74.4 million compared to $71.6 million in last year's second quarter. Revenues from subscription products were up $2.9 million or 4.2% while professional service revenues were down $0.1 million or 3.5%. Our core solutions continued to deliver strong subscription revenue growth with CredentialStream growing by 26%, ShiftWizard growing by 21% and competency suite growing by 18%, offsetting the strong growth in these solutions were declines from legacy products and credentialing and scheduling totaling $1.8 million compared to last year. Excluding the impact of legacy products from the core business, the core business grew over 8% in the quarter. Our remaining performance obligations were $618 million as of the end of the second quarter that compares to $538 million for the same period of last year. We expect approximately 39% of the remaining performance obligations will be converted to revenue over the next 12 months and that 68% will be converted over the next 24 months. Gross margin came in at 64.6% compared to 66.8% in the prior year quarter. Gross margin was impacted by an increase in our cloud hosting costs which are primarily for the CredentialStream application and the hStream platform. As noted on the last earnings call, to improve the scalability and performance of CredentialStream, we added more capacity in our Azure hosting environment. In addition, changes in product mix resulted in higher royalty costs in the quarter. Operating expenses, excluding cost of revenues, declined by 2.9%. Sales and Marketing expenses were up 3.5% and were primarily from additions to our staffing. Depreciation and amortization was up 4.8%, and that was primarily from capitalized software amortization. Our General and Administrative expenses were down 22.6%, and that's due to lower bad debt charges and lower rent resulting from the commencement of the sublease for a portion of our Nashville office space. And finally, product development expenses were flat compared to last year. Net income improved to $5.4 million, which was up 29.3% over last year. And finally, adjusted EBITDA came in at $17.6 million, which was up 11.3%, and our adjusted EBITDA margin was 23.7%, which compares to 22.1% last year. Moving on to the balance sheet. We ended the quarter with cash and investment balances of $90.6 million compared to $113.3 million last quarter. During the second quarter, we deployed $9 million for capital expenditures. We paid $0.9 million to shareholders through our dividend program, and we repurchased $18.1 million of our common stock under the share repurchase program that we announced in May. Our days sales outstanding improved to 35 days compared to 45 days last year. This improvement resulted from more timely customer payments compared to the prior year. As I mentioned just a moment ago, our bad debt charges were lower compared to last year, although we did have a midsized customer file for bankruptcy, resulting in an increase to our allowance for doubtful accounts in the quarter of approximately $150,000. On a year-to-date basis, cash flows from operations were $32.1 million compared to $27.4 million in the prior year, an increase of 17.2%. Also on a year-to-date basis, free cash flow improved by $1.3 million or 10.1% and was $14.2 million compared to $12.9 million last year. This improvement is a result of the growth in our billings and improved cash collections, but was partially offset by a $3.4 million increase in payments for capital expenditures. With $90.6 million of cash and investments, free cash flows and no debt, we are well positioned to deploy capital to improve shareholder value. We maintain a disciplined approach to capital allocation and how we prioritize our use of capital. Our utmost priority is making organic investments back into the business, which is evident by our annual capital expenditure and R&D plans. The second is pursuing acquisition opportunities, which we have a long track record of executing. Third is returning a portion of our profits back to shareholders in the form of cash dividends. And the fourth priority is that our Board may authorize share repurchase programs, which they did last quarter. Speaking of, in May, our Board of Directors authorized a $25 million share repurchase program. During the second quarter, we repurchased $18.1 million of our common stock, and we've made $6.9 million of share repurchases during the month of July, completing the full program. From an M&A perspective, we maintain an active pipeline and continue to evaluate opportunities that may align with our product and platform strategy. In respect to our dividend program, yesterday, our Board of Directors declared a quarterly cash dividend of $0.031 per share to be paid on August 29 to holders of record on August 18. I'll wrap up my comments this morning with a recap of our financial outlook for the year, which is mostly unchanged except for a refinement to our net income outlook. We continue to expect that consolidated revenues will range between $297.5 million and $303.5 million. We now expect that net income will range between $19.5 million and $22.4 million, mainly because we now expect lower depreciation and amortization. We continue to expect that adjusted EBITDA will range between $68.5 million and $72.5 million and continue to expect capital expenditures to range between $31 million and $34 million. This guidance does not include assumptions for any acquisitions that we may complete during the year. And that concludes my comments for this quarter's call. As always, thanks for your time, and I'll now turn the call back over to Bobby for further updates.

Thank you, Scotty. In this section, I would like to provide a business update and highlight the successes we have achieved in our learning, credentialing, and scheduling application suites during the second quarter. As many of you know, our learning business includes our flagship application, the HealthStream Learning Center, along with various applications, assessment tools, and content libraries, including our clinical content products. The HealthStream Learning Center continues to grow, as do many of the solutions delivered through it. However, today I want to focus on our new learning application, the HealthStream Learning Experience, which we call HLX. This is a modern healthcare-specific application that offers the workforce personalized, self-directed intelligent learning and development pathways. This contrasts with the HealthStream Learning Center, which is more assignment-driven and focuses on organizing compliance-oriented training through push content. HLX shapes educational pathways for individuals and is more self-directed. Together, these two provide a comprehensive approach to learning and development. One exciting aspect is that last month, the HealthStream Learning Experience went live with 47,000 users at a large health system, marking its transition from pilot phase to a revenue-generating product. An executive from that organization noted that the utilization has been incredible so far. We are excited to see it progress from research and development to a live billable product and look forward to building a strong pipeline for this application. It is important to note that the application is purchased alongside the HealthStream Learning Center, extending its capabilities rather than replacing it. They work together through APIs available in our platform services to create powerful enterprise-class learning tools for large organizations, particularly in healthcare. Another exciting aspect of HLX is that it is our first application built on the hStream platform, meaning it was developed directly on and is fully integrated with our platform. One of the benefits of becoming a platform company is more rapid development of scalable enterprise-class applications. From concept to billable launch, this took about 18 months. While that timeframe may seem lengthy, achieving this milestone is impressive. We look forward to launching it into the broader market as an upsell opportunity for our existing customers and for new customer acquisition. Now, let’s discuss the credentialing suite. This suite of applications empowers health organizations to credential, privilege, and enroll mostly their physician population. Last quarter, we reported some technology scaling issues with our CredentialStream product, but I'm happy to report that those issues have been resolved. We are back on track with improved processes and expanded capacity, allowing us to handle over 1 million subscriptions to the CredentialStream application suite. We invested considerable resources to address these scaling issues, and we believe they are resolved, positioning us for future growth. CredentialStream was our strongest revenue generator compared to the same period last year, indicating we are already benefiting from increased capacity as we add customers. However, the measures taken to eliminate scaling issues did result in some unplanned operating costs, which affected EBITDA and gross margin. Although these were wise investments, we wish we had addressed them sooner. Our teams have responded well, and we believe we have eliminated the capacity-related issues with CredentialStream. We see credentialing as a key area for innovation, driving profits and productivity for our customers. We are enhancing our CredentialStream suite to help health organizations reduce the time it takes to onboard and credential a physician, allowing them to generate revenue more quickly. Currently, it takes an average of 120 days to onboard a physician, equating to lost revenue for healthcare organizations. Our goal is to shorten that timeframe. Now, shifting to scheduling, our core product, ShiftWizard, continues to perform well with strong revenue growth. We are pleased that ShiftWizard has surpassed our legacy ANSOS suite of products in second-quarter revenue contribution. This growth ensures that ShiftWizard is recognized as a best-in-class solution for clinical staff scheduling. Our sales of ShiftWizard have come from both competitive takeouts and growth with existing customers. Unfortunately, the decline of our legacy ANSOS products is still affecting the overall growth rate in our scheduling suite. The good news is that the revenue from the ANSOS legacy products is diminishing, and we expect that next year, it will have less negative impact on ShiftWizard's growth performance. I also want to briefly mention the signing of the One Big Beautiful Bill, a significant event in healthcare policy. The impact of this bill will unfold over time, presenting various opportunities and challenges to our customers. We believe HealthStream is uniquely positioned to help customers improve their workflow needs. Customers have been preparing for these changes, which is likely why some deals took longer to close than anticipated. However, we are encouraged that several of our customers chose our solutions. Our hStream technology platform is beginning to show results, allowing customers to experience the benefits of interoperability. We’ve declared this the year of the platform—not just in terms of revenue but in showcasing the advantages of interoperability. As we move forward, we plan to educate customers on the benefits of this emerging interoperability. I'd like to remind everyone of our company profile. We appeal to the investor community as a profitable company with highly recurring revenue in the SaaS healthcare technology sector. We expect steady growth and plan to distribute some gains directly to shareholders in the form of a small dividend. We believe HealthStream aligns with the profile many investors are looking for—conservatively managed yet visionary. I conclude my remarks here and will now turn the call back to the operator for the question-and-answer session.

The first call comes from Matthew Hewitt of Craig-Hallum.

Maybe first up, on the gross margins, Scotty, you have kind of explained what the headwinds were there in the quarter. Should we anticipate the gross margins bouncing back up here in Q3? Or is it going to take a few quarters to get those back up a couple of hundred basis points that they were down?

Probably, we’ll still see it hover around the 65% mark for the remainder of the year. We still anticipate ongoing costs related to the scale and performance improvements that we put in place, but we’re also trying to take measures to manage that cost line item for us overall. So it will take a few quarters to get there, but we’ll kind of see it hover around 65%-ish, still in line with our midterm objectives that we set forth several years back. So we’re kind of falling to the bottom of that range, but we’re still kind of in the 65% to 66% range.

Got it. And then regarding the HLX platform, congratulations on some of the early success that you’re seeing there. Bobby, I think you mentioned 47,000 users are now live. You've got some positive feedback from that account. Maybe a little bit of color on what does the pipeline look like for that application? And how should we be thinking about a ramp for that as we get into the back half of this year and look at '26?

Well, the first is that the ramp is forecasted in all of our guidance. So there’s no exceptional change. Subscription business is steady incremental improvement is the way to grow a subscription business. I think the HLX gives us yet another opportunity to add that. It is an incremental add for base customers or a new entry point for new customers. We’ve begun in the piloting phase for the last, say, six months. We’ve begun to tease it out with our sales team to seed the market with some educational materials about it. So I think now the pipeline building begins now that we have a live customer that, in fact, billing has begun for. It is a revenue-generating product now. There’s an incremental add-on. It is a subscription product, and the business of building interest and pipeline for it begins now as we go to the live product and equipping the sales team with the tools they need to promote its availability. I think it’s an important product. It’s kind of a paradigm shift that progressive organizations are more likely to adopt earlier. The ones that have a great interest in maintaining and developing the workforce and giving them the tools for self-development, again, which is different than a command and control model of regulatory compliance training. This is more oriented towards development and retention and maybe cross-training so people can gain new skills and new areas. I think it's very relevant for today's workforce and for our customer base, and the serious business of building a pipeline is now beginning. We'll report on that in the coming quarters. But again, it’s an exciting new subscription product that we hope to see incremental gains from.

The next question comes from the line of John Pinney of Canaccord Genuity.

This is Richard Close. I had a question, Bobby, can you talk a little bit more about the comments with respect to ShiftWizard and the legacy products offsetting some of that growth? And just maybe a little bit more detail in terms of like the timing you said next year, essentially that offset is going to be going away. Just walk me through that. We got on a little late here. So I just want to go over that again, make sure I understand.

Sure. There wasn't a lot of detail, but I think the tone of both is that the go-forward SaaS applications have superseded in terms of absolute value and growth rates the revenue of the legacy applications from which we're trying to migrate. In both cases, and we're kind of achieving new milestones where each quarter the legacy applications get a little smaller and a little less material to the overall financial outlook while the subscription products, as you heard, have good growth rates and are now the majority of the revenue in that category. We did mention the offset this quarter. Scotty mentioned, Scotty, it was about $1.8 million was the decline from the family of legacy products across credentialing and scheduling, and we didn't break it out by a specific line. But those declines for our overall growth rate down relative to the growth rates you're seeing on the subscription products. We characterized it all. I think in ShiftWizard, we give a little bit more color just that the growth of ShiftWizard and the decline of ANSOS is hitting rates where in a couple more quarters, it will be even less material overall. Maybe we can see a little more of the organic growth rate of ShiftWizard start to contribute as opposed to kind of almost fully offset growth when the loss is $1.8 million and the gains across subscriptions are $2.9 million. You can see that it really affects growth.

Okay. That’s helpful. And were you going to add something there?

No, I was just going to say Scotty, if you want to add more, but I think those are the highlights. Each quarter, we’ll try to give a little more clarity as we progress.

Okay. That’s helpful. And then on CredentialStream, I guess, you threw some costs at that to get back on track as you said. Was there any reputational damage or anything to call out with respect to retention or anything like that based on what happened in the first quarter?

Well, certainly, when your services aren't at the level of excellence you demand of yourself and your customers demand, there's frustration. We continue to maintain high-level contacts, our account management programs and our executive leadership with all of our key customers. Of course, there’s some frustration in there. We think we can get through it all with minimal impact. There’s always some consequence, but that’s factored into how we think about our overall guidance. I don't think there will be any major surprises. It’s hard to get through 25 years of history like this without occasional bumps in the process as we expand in this case; an expansion-related growth problem caught us a bit off guard. I feel really good about how we responded and are working with all of our customers to get them through it as well. On the back side, just more capacity, more speed and more focus to do even better and to avoid this kind of problem in the future. Overall, nothing that would change our outlook for the year.

Okay. That’s helpful. And then I guess my final question or final two. Just following all the health care-related news sources and all that. There’s been a decent, not huge, in terms of employment cuts by various hospitals and 100 here, 100 there, that type of thing. I’m curious how you think about that in terms of overall subscriptions. I mean, you have such a deep penetration and maybe that’s just modest cuts here and there, but how you’re thinking about the whole health care employment market and any impact on HealthStream?

I think overall, health care employment will continue to grow over the next five years and roles may change such as seeing more nurse practitioners, fewer primary care doctors; there may be overall relative shortages to demand. But I think overall, there are going to be more healthcare needs. While if you look at research organizations going through this reduction in funding from the federal government for research, sure, their role position eliminations there. Hopefully, the country finds a way to reinstate its research programs and find new funding sources. But I think those are relatively small to the overall demand for healthcare services, and the new types of roles being created are growing rapidly like nurse practitioners and the supply of new nurses. The capitalistic market is responding to try to fill the demand for skilled, competent healthcare givers, and we think we're part of that journey. So I don't see material changes, certainly not downward in the employment numbers. Certain subsegments in the market are particularly challenged financially right now, like the skilled nursing market, which kind of has good years and bad years. I'd say these are more challenging years in that market. We are present in that market. As they change both ownership models, private equity and experience potentially less access to federally funded patient-insured patients, pockets of challenges will emerge. The small, rural hospitals may face challenges, but that almost depends on things we can't fully control, such as the state's response to new legislation. For us, these macro conditions, I think employment will go up. That was the root of your question regarding the number of people. I think, over time, there will be more healthcare providers. The relative unknowns are the legislative changes and their impacts. For us, we'll see how downstream impacts purchasing patterns. We experienced a little of that in Q1 as deals moved into Q2. Part of that pipeline that was expected in Q1 will now deliver early in Q3. So there is a lag effect to consider, and that’s how we’re most thinking about these macro conditions.

The next question comes from the line of Vincent Colicchio of Barrington Research.

Yes, Bobby, curious, how are the price accelerators playing out? And were they included in the four large deals you just landed?

Yes. I need to check specifically on those, but I believe we're now officially working them into every new and renewed contract and generally being accepted as more of an established pattern across all of healthcare IT. So we're glad to have that model in place and credentialing, learning and scheduling as contracts are gained and renewed. We are working on price escalators, and they're, of course, negotiated, but we're finding it's reasonable negotiations. We're trying to get, as best we can, close to cost of living level adjustments on an annual basis. This will take 3 to 3.5 more years to play out fully, but it's exciting to be layering it in with every single renewal of new contracts. It would be an exception not to have them at this point.

And could you provide an update on NurseGrid, in particular, I'm interested in the e-commerce performance?

Yes. I don't have the numbers right in front of me, but NurseGrid has three or four monetization strategies on NurseGrid, and several of them are at play. The core one is we launched NurseGrid Learn in the application, and I believe it's doing in excess of about $50,000 a month in collective commerce revenue. We’re generating revenue now through that network, and it’s exciting. We’re also meeting needs for the nurses. We have a strategic partnership with a group called Plannery as well. Plannery is helping nurses consolidate student debt and save money. It’s not an advertising relationship; it’s a business relationship, but their services are highly valued by our nurses, and we’re beginning to refer business to them and participate in that business outcome. It’s really a fantastic value add. We launched a job function on the site, which is not yet generating revenue but is generating a lot of interest. Watch for that in the coming quarters as we learn to help our nurses see opportunities in front of them. The audience for NurseGrid continues to grow organically, I believe passing 640,000 monthly active users. I’ll watch my text and correct that if I’m off a little bit. It’s growing around 1,500 to 2,000 a week. One other important point about NurseGrid is we’ve now shifted the app to use our platform's identity management service. All the nurses on NurseGrid are logging in with an hStream ID, an identity capability issued by our platform-as-a-service capabilities. That’s going to allow us to bring even more value to the nurses on NurseGrid, such as allowing credentials like American Red Cross certificates to show up in their portfolio. I think it will be even more useful to the nurses to be able to use and benefit from the platform's identity service. We have a lot of advances with NurseGrid and more to come.

This does conclude the question-and-answer portion of our call. I would now like to hand it back over to Robert Frist for closing remarks.

Well, thank you, everyone, for participating in this earnings call. We look forward to the next quarter. Thanks to all HealthStreamers who made this possible. I love being the spokesperson for your excellent work and look forward to reporting out on the next quarterly earnings call. Thank you, everyone, and see you next time.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.