Earnings Call Transcript - HSTM Q4 2024

Operator, Operator

Good morning, and welcome to HealthStream's Fourth Quarter and Full Year 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. I will now turn the conference over to Mollie Condra, Head of Investor Relations and Communications. Please go ahead, Ms. Condra.

Mollie Condra, Head of Investor Relations and Communications

Thank you. Good morning and thank you for joining us today to discuss our fourth quarter and full year 2024 results. Also on 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 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.

Robert Frist, CEO

Thank you, Mollie. Good morning everyone, and welcome to our fourth quarter and full year 2024 earnings call. We definitely have a lot to cover and look forward to getting to your questions at the end. I'll just start out with some financial overview. I'm pleased to report that we finished the full year 2024 with strong year-over-year increases across all of our key financial metrics. Full year revenues were up 4.5%, net income was up 31.5%, operating income was up 32.9% and adjusted EBITDA was up 9%. Looking forward to 2025, as we think forward, we expect HealthStream to continue to deliver growth in each of the areas where we provide financial guidance as we anticipate organic revenue between $302 million and $307 million, net income between $19.2 million and $21.4 million, and adjusted EBITDA between $70 million and $74 million. These forward looks do not include any acquisitions that we may complete during the year, though our strong cash balance is $97.2 million, and our untapped line of credit and no long-term debt position us to take advantage of M&A opportunities as they arise. As we think about 2025, we're going to focus on rekindling our M&A. We've been a little bit quiet on that front, and I do feel that both the pipeline of opportunities and those that are good fits for our business there seem to be more available to look at and review. I look forward to 2025 being a rekindling of our M&A program. Since our last conference call, I'm pleased to report that our HStream platform has made some excellent progress, as indicated in some of our recent press releases. Internally, we've declared 2025 as the Year of the Platform, and I know we've talked about the platform for a while now, but we're really starting to see it manifest in both our strategies, communications, and to customer benefit. We're going to continue to advance our platform as a service capabilities to create interoperability among our primary applications, the ones that the healthcare workforce constantly uses. In fact, we've seen a material increase in our customers accessing the features and functions of the platform directly through the developer portal. For example, in the developer portal, we've seen over 400 developers from 184 customer accounts accessing the platform APIs to date. It’s a really nice sign that the platform is beginning to mature into a useful toolset for our customers, with direct access to features and functions of the platform from over 400 developers and 184 customer accounts. I look forward to that someday being all customer accounts and we're seeing this nice expansion of utilization of these platform level APIs. Importantly, the interoperability we're enabling starts with our own application suites of learning, credentialing, and scheduling, all of which are being powered at some level from the platform at the HStream platform level. The HStream platform is designed to extend interoperability well beyond HealthStream's own proprietary applications, as it begins to power third-party applications as well. When we talk about the Year of the Platform, we are referring to the year when the platform interoperability increases meaningfully among our own applications and also begins to manifest in third-party applications. We believe that creating this type of network effect will help improve the quality of healthcare, which is one of our fundamental purposes and will drive our business results over the next several years. While interoperability is a key feature, it's not the only benefit we're recognizing from moving to a single platform or the HStream platform. Due to its API-first design, HStream is allowing us to develop new applications and functionality faster and more efficiently than ever before. Last quarter, we announced the release of the HealthStream Learning Experience, which is the first application to be built on top of the HStream platform itself. We're excited about the HealthStream Learning Experience, which we call the HLX for several reasons. Not only is it our first application built on the HStream platform, it is the only application of its kind designed specifically for healthcare. Using AI-native design, the HLX offers the healthcare workforce personalized, self-directed, intelligent learning and development pathways and incorporates a wide range of learning modalities from journals to VR simulations. Its modern design and interface are built to provide the healthcare workforce with the unique learning they need in the way they want to experience their learning journey. Because it is built on top of the HStream platform, the HLX is interoperable with the HealthStream Learning Center, our learning management system. Three large health organizations that are longtime users of the HealthStream Learning Center are launch partners and entering a pilot phase for the HLX. We're super excited about the HLX. It represents a major refresh of our learning technologies and learner capabilities. Speaking of the HealthStream Learning Center, it kind of stole the spotlight last week as G2 named it the number one software in all of healthcare across all types of software applications and products. G2 is the most trusted and largest review site, and the rankings are based on verified customer reviews, which makes the honor all the more special to us. I have to admit it was fun to see the HLC recognized on the NASDAQ Electronic Board in Times Square as the top software application in healthcare. That's not just a category killer in learning; that’s across all software applications in healthcare rated by G2. I want that to sink in for a minute for our teams too. They've done an amazing job building, maintaining, and growing the HealthStream Learning Center, and now with the HLX, we are looking at exciting new frontiers in learning for HealthStream. It's also great to see that in that same list, CredentialStream topped the charts ranking number 5 overall. Once again, that’s not just in credentialing software; that’s 5 overall in healthcare application software, making it the highest ranking credentialing application in healthcare. We think a key reason for our learning and credentialing applications to rank so highly is because of the innovation they are beginning to enjoy from the HStream platform. We look forward to adding to that platform value throughout 2025, the Year of the Platform. Before we go further in our call, I want to briefly summarize our business for the benefit of anyone who is new to the HealthStream 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. The company holds 20 patents for its innovative products, which have been awarded over 40 Brandon Hall awards. 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. As I mentioned, we have also started to open our sales channels directly to healthcare professionals and nursing students across the continuum of healthcare training. We are profitable, have no interest-bearing debt, and a strong cash balance of $97.2 million. We are solely focused on healthcare and more specifically, on the healthcare workforce and those preparing to enter it. The 12.6 million healthcare professionals and nursing students in the United States comprise the core total addressable market for our SaaS solutions. Look, there's still a lot to talk about and I look forward to my second section, but before I do that, I want to turn it over to Scotty Roberts, our Chief Financial Officer, for a more detailed look at our financial performance for the quarter and the year.

Scott Roberts, CFO and Senior VP of Finance and Accounting

All right, thanks Bobby, and good morning. I look forward to discussing the financial results we achieved in 2024 and our outlook for 2025 with you today. Unless otherwise noted, the comparisons would be against the same period of last year. I'd like to start off by congratulating our teams on another successful year. The drive and dedication to building great products for our customers is paying off, as evidenced by the accomplishments that Bobby just mentioned. Now let’s get into the financial discussion. Revenues were $74.2 million, up 5.2%. Operating income was $4.7 million, up 10.2%. Net income was $4.9 million, up 6.5%. Earnings per share was $0.16 per share, up from $0.15 per share, and adjusted EBITDA was $16.2 million and was up 1.3%. Our revenues increased by $3.7 million, or 5.2%, coming in at $74.2 million, compared to $70.6 million in last year's fourth quarter. Revenues from our subscription products accounted for 96% of total revenues and were $71.2 million, increasing by $3.2 million, or 4.8%, and Professional Services revenues were $3.1 million, increasing by $0.4 million, or 15.7%. Subscription revenue growth contributors included CredentialStream with 28% growth, ShiftWizard with 17% growth, and the Competency Suite with 8% growth. Partially offsetting this growth were declines of legacy products, including the ANSOS product suite, Echo, and MSOW, which are often on-premise as opposed to SaaS solutions. Taken together, the legacy products I just mentioned resulted in fourth quarter revenue declines of approximately $1 million compared to the fourth quarter of last year. Our remaining performance obligations were $621 million as of the end of the quarter compared to $541 million for the same period of last year. This improvement is due to the strong fourth quarter performance we had. We expect approximately 40% of the revenue backlog to be converted over the next 12 months. Gross margin came in at 66.2% compared to 66% in the prior year quarter. Cloud hosting, software, and labor costs contributed most of the increase in cost of revenues over the prior year quarter. Operating expenses excluding cost of revenues increased by 5%. Product development was up 6.3% and sales and marketing were up 9.3%. These increases primarily resulted from higher labor costs associated with additions to staffing levels in our product development area over the prior year, higher sales commissions associated with the growth in revenues, and increased investments in marketing initiatives including the development of our e-commerce channels. G&A costs were up 4.3%, primarily resulting from increased stock-based compensation and higher bad debt charges, which were primarily associated with customer bankruptcies. Depreciation and amortization declined by 0.6%, and adjusted EBITDA came in at $16.2 million, which was up 1.3%, and adjusted EBITDA margin was 21.8% compared to 22.6% last year. Now let's move on and go over the balance sheet metrics. We ended the quarter with cash and investment balances of $97.2 million, up from $94.9 million last quarter. During the quarter, we deployed $6.8 million for capital expenditures, completed two acquisitions which were TCPS and the Clinical Hub for a combined outlay of $1.3 million, and paid $0.9 million to shareholders through our dividend program. We also made $1.6 million in income tax payments during the quarter. Our days sales outstanding improved to a record low of 35 days compared to 42 days last year. As I mentioned just a moment ago, bad debt charges were up in the fourth quarter and they totaled $2.6 million for the full year, which was up from $1 million in the prior year. Approximately $1.8 million of the bad debt charges that we incurred during 2024 resulted from three highly publicized customer bankruptcies. While these bankruptcies are unfortunate, we don't think this represents a broad trend across the industry. Year-to-date, our cash flows from operations were down 9.9% or $6.3 million from the prior year. They came in at $57.7 million compared to $64 million last year. Free cash flows were down $6.5 million or 17.9% and were $29.5 million compared to $36 million last year. I want to provide some more context about our cash flows and why there was a decline this year. For many years, we've utilized net operating losses and other deductions to help offset our cash tax liabilities. In 2024, the tax benefits from the NOLs were less impactful and our cash tax liabilities were greater than they were in the past several years. In fact, we had approximately $6.1 million more of income tax payments in 2024 compared to 2023. In addition, just the general timing of disbursements at the end of the year also played into the year-over-year decline in free cash flows. Our balance sheet remains strong with $97.2 million of cash and no debt, providing us with several options to strategically deploy available 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, including two small tuck-ins during the fourth quarter. The third is returning a portion of profits back to shareholders in the form of cash dividends. The fourth priority is that our board may authorize share repurchase programs which we also have a successful track record of executing. From an M&A perspective, we maintain an active pipeline and continue to evaluate opportunities that fit our criteria which include industry, product, and financial among others. While the M&A markets in healthcare technology have been slower than usual over the past 18 to 24 months, we expect to see them begin to pick back up over the next 12 months. Now let's transition over to the financial guidance for 2025, which we announced yesterday in our earnings release. We expect consolidated revenues to range between $302 million and $307 million. We expect net income to range between $19.2 million and $21.4 million, adjusted EBITDA to range between $70 million and $74 million, and capital expenditures are expected to range between $31 million and $34 million. This guidance does not include assumptions for any acquisitions that we may complete during the year. Our revenue guidance range implies a growth rate between 3.6% and 5.3%, and we expect more of the growth will be concentrated in the second half of the year versus the first half. There are a couple of factors that we expect will impact comparisons in the first half of the year, which include reduced revenues from the customer bankruptcies and reduced revenues from perpetual license sales of legacy products. We expect gross margins to come in around 66% for the year. For expenses, we plan to ramp-up hiring rates, so our labor costs are expected to increase steadily across the year. Expect product development expense to increase in the 2% to 3% range, sales and marketing expense to increase in the 4% to 6% range, G&A costs are expected to be flat to down 1%, and depreciation and amortization is expected to increase between 7% and 9%. We expect the effective tax rate will be in the 20% to 22% range. Our capital expenditure forecast anticipates between $27 million and $29 million of capitalized software investments across the HStream platform and our three application suites to further differentiate and enhance our product offerings. It also includes approximately $4 million to $5 million for technology upgrades within our data centers, which is where we host the majority of our learning application solutions. This includes firewalls, storage networks, and servers which typically have a four to six-year lifespan, so every few years we have to upgrade and replace these assets. In closing, I want to share the news that our board approved an increase in the cash dividend to be paid out to shareholders. They approved a dividend payment of $3.1 per share, which is an increase of 10.7% over the previous quarter's dividend of $2.8 per share. This is the second increase we've announced in our dividend since we began the program two years ago. The upcoming dividend is payable on March 21, 2025, to holders of record on March 10, 2025. We continue to be confident in our ability to accomplish our innovative organic growth strategies while also returning cash to our investors in the form of a dividend. Well, that wraps up my comments for this quarter's call. Thanks for your time this morning and I'll now turn it to Bobby for some additional updates.

Robert Frist, CEO

Thank you, Scotty. In this back third here, I look forward to updating some highlights related to our core applications. I thought it would be good to take a little time to focus on scheduling, credentialing, and learning application suites and some of their accomplishments during the fourth quarter. First off, we'll start with scheduling ShiftWizard, which is our core product in scheduling. I think you all know we're working really hard to make ShiftWizard have what we call feature parity with our legacy ANSOS products, and we expect that here in the middle of the year, so we're excited about that advance. ShiftWizard, the core product in scheduling earns the Best-in-Class Award for Software and Services. And for those of you keeping score at home, that means that each of our core applications in scheduling, credentialing, and learning just notched major awards victories, and all those awards are based on customer feedback. Congratulations to our teams on earning these recognitions. Importantly, ShiftWizard continued to deliver strong revenue growth as well. Revenues grew 17% over the fourth quarter of last year and 25.1% over the full year 2023. In the fourth quarter, sales were both from transitions from our legacy ANSOS application like Guthrie Clinic and St. Francis Health System and from competitive take-outs like Stormont Vail Healthcare and John Muir Health, among others. Let's move to credentialing here for a minute. We're really excited again. We put a lot of time, almost 18 months of really hard effort into earning the HITRUST r2 certification for our credentialing application suite. This is the gold standard of information security and compliance assurance and we're happy to deliver that peace of mind to our CredentialStream customers. CredentialStream also had a productive fourth quarter and full year in terms of growth. Revenues grew 28% over the fourth quarter last year and 35% over the full year 2023. These results included sales from both new customers and customers who chose to migrate from our legacy credentialing applications, such as Kettering Health and Geisinger Medical Center were among enterprise CredentialStream deals that we closed in the fourth quarter. This brings us to our learning application suite and I started to talk about that on that application suite. Again, it's gratifying to have the HealthStream Learning Center named as G2's best software application in healthcare, and that's happening while we're in the midst of a major enhancement cycle that spans the entire learning application suite. Significant enhancements include innovations in our Insights Reporting, which is the core reporting and data architecture, and the introduction of the groundbreaking HealthStream Learning Experience. We launched Insights Plus in the first quarter, our new reporting analytics capability of 2024, and it already has over 5,600 users across 252 organizations. We launched the HealthStream Learning Experience in January this year, so just a few weeks ago. We've already implemented an AI-powered search feature in the HLX and as I mentioned, three exciting major early adopters are in the pilot phase with the HealthStream Learning Experience. With the advances being achieved in our emerging HStream platform, we've realigned our operations to better support growth and so I want to turn a little attention to our internal structure and some updates to our leadership. As we move towards a single HealthStream, single platform strategy, we call it the One HealthStream initiative inside of our company. We approached the Year of the Platform, which is this key year of integrating the three applications with each other through the platform and connecting those applications to the social networks we're building through the platform. In an effort to better organize around those key initiatives and make this Year of the Platform, Senior Vice President Kevin O'Hara has been promoted to Executive Vice President, Enterprise Workforce Platform. Through this promotion, we've integrated the management of the HStream platform and our three core application suites, Learning, Credentialing and Scheduling, to be under Kevin's leadership as our suite of suites. We now move these three primary applications to one leader and promote him, Kevin O'Hara, and his job this year is to make it the Year of the Platform, to make those applications further connect to each other and to the platform itself. Congratulations to Kevin O'Hara and we look forward to his leadership on this important initiative. Executive Vice President Michael Collier has been promoted, adding additional responsibilities to his current Executive Vice President role. Essentially, we're going to pull a lot of operations off of our product leaders like Kevin and Trisha Coady, and we'll talk about in a minute and centralize them under Michael Collier. Michael Collier is assuming, in addition to his corporate strategy development, a large part of HealthStream's operations. His responsibilities in this new role will cover a broader scope of HealthStream's enterprise operations, which will now also include customer success management, implementations, and onboarding for all the company's products and services. Instead of having separate onboarding and implementation groups under separate leaders, we're pulling onboarding, success management, and implementations under one leader, Michael Collier. Senior Vice President, Trisha Coady, based on her incredible performance across her workforce development solution sets in the last year, delivering a lot of our growth and managing over half of our revenue for the company, has been promoted to Executive Vice President of Workforce Development Solutions. She will continue to provide executive leadership over our workforce development suite of solutions which includes our products in competency development, like Jane, and our competency suite and resuscitation and quality and safety and revenue cycle. So she has a very broad suite of tools that are very relevant to the clinical workflows, clinical development of the clinical workforce. Michael Sousa, who has served as Executive Vice President, Enterprise Applications, will be leaving the company at the end of March. This is after a long 20-year tenure with HealthStream where he's helped deliver amazing results for those 20 years. Looking back on when he joined, the company was around 140 employees and $20 million in revenue, and as he leaves, he can be proud that he's helped build a company with over 1,000 employees and nearly $300 million in revenue. Great appreciation of Michael Sousa as he enters the next step in his exciting career. Both parties intend to find a way to work together in the future, and we expect that his future endeavors will lead to partnership with HealthStream and a partnership with our ecosystem. We'll see if we can pull that off. It will be exciting. Again, congratulations to Michael Sousa. Thank you for his 20 years of service helping build the company, and I look forward to seeing how Trisha Coady, Michael Collier, and Kevin O'Hara can continue to deliver the excellent results in their new roles as we lead the company forward. About two weeks from now, HealthStream will be holding its Annual Credentialing User Group Conference at our corporate office in Nashville, Tennessee. This event is called Thrive25 and we expect about 350 of our CredentialStream customers to attend, network, and participate in roundtable discussions. They'll attend training sessions and learn more from one another in those two days, March 11th and 12th. We look forward to welcoming customers to Nashville and to HealthStream here in the coming weeks. Now, my pitch to all of you as shareholders, I like to think this way. If you're interested in a small, but growing profitable company with highly recurring revenue, focused on the future of the SaaS and PaaS platform as a service-powered company. We expect to deliver steady growth and have determined to share some of our gains with shareholders in the form of a dividend. Maybe HealthStream is the right stock for you, and so I can’t stop myself from asking for the sale. We'd love to see you all listening to this call become shareholders of HealthStream and go on the journey with us. We work hard every day to deliver shareholder value. I'm just excited about how our products are beginning to deliver in the marketplace. At this time, I'd like to turn it over to the operator to begin Q&A.

Operator, Operator

Thank you, sir. Our first question comes from Matt Hewitt of Craig-Hallum. Your line is open.

Matthew Hewitt, Analyst

Good morning and thank you for taking the questions and for all the details. Maybe the first question is, last year you set out some kind of mid-term targets for revenue growth, gross margins, and EBITDA margins. You've now hit two of those and hopefully that continues. The third one is the revenue growth. You've pointed to a 7% to 10% top-line growth. What's it going to take to achieve that type of a growth profile? It seems like the last couple of years you've kind of been in that mid-single-digits. What's going to be the lever to kind of accelerate that growth rate?

Robert Frist, CEO

Yes, fair enough. First of all, I just want to break down that number set. The 7% to 10% was composed of 5% to 7% of organic and 1% to 3% of inorganic. As I mentioned, we do hope to see and we think we're good at executing M&A and we have the resources to do it. The 1% to 3% inorganic, I feel like over time we’ll be able to deliver that part of the growth profile. That leads to the 5% to 7%. We did give that guidance at the end of 2022 as it wasn't guidance, it was really a set of medium-term objectives, and the aspiration was to achieve organic growth in the 5% to 7% range within a three-year time frame. I will note that the fourth quarter was the first quarter we kind of pushed in, we did the 5.2%. As we looked at the forward year, we still see that we have this offsetting decline from the rapidly growing SaaS applications that we mentioned against some of our legacy businesses. We predicted another year where we have to handle that trade-off between migrating customers and some lost customers against the more rapidly growing SaaS applications. Eventually, of course, we'll work through that problem and then hope to return to more natural growth rates of the newer products overall. In addition, in the meantime, we're working on improving our margin profiles. I think the shift to the platform technologies enables us to be more efficient in the way we deliver the revenues. We do look forward to staying within the range and pushing to the top of those ranges from our medium-term objectives and from measures of cash flow and particularly EBITDA, which is a measured target that we focus on. I think we’ll keep working on these priorities, and we will continue to advance the business until we figure it out. We have great new products to take to market and see if we can outperform in those to get us into those growth ranges. We'll keep iterating until we get it right.

Matthew Hewitt, Analyst

No, that's incredibly helpful. And maybe just one point. The headwinds that you've been facing as you've been shifting customers from Perpetual to SaaS, is there any way to quantify what that headwind is? I think last year, if I'm not mistaken, it was like 1% to 2%, which in the end would have ultimately put you in the lower end of that 7% to 10%. But as we look at 2025, is it a similar magnitude, another 1% to 2% headwind this year?

Robert Frist, CEO

I think those are the kind of details, especially when we talk about medium-term objectives. I want to leave those for a potential Investor Day. We haven't committed to the date just yet, but we're trying to get one scheduled for the first half of the year, and I think it's appropriate to separate annual guidance and our annual forward look from our medium-term objectives which are just that, they're objectives that we drive toward. So, I think I'd leave those kinds of questions and specifically that one for an Investor Day, and it's our commitment to try to get one scheduled before the first half of this year.

Matthew Hewitt, Analyst

Got it. And then maybe one final question. I think last quarter you had kind of noted that your pipelines were incredibly strong. In fact, I think you even noted 3x coverage. I'm just curious, your success rate in closing those? What are you hearing from customers? Was there any hesitancy at the end of the year to maybe hold off until January? Just any color along the pipeline closure rate would be helpful. Thank you.

Robert Frist, CEO

Yes, actually, I think you could see that a little bit. We mentioned that contract backlog. It really did move up significantly. We had some really good sales performance in the fourth quarter, multiyear contracts, of course, but the remaining performance obligations had a nice jump. It doesn't always correlate directly to revenue growth because the length of the term of the contract matters and all that. But it was nice to see some of that pipeline come rushing in, particularly in December. Even remarkably, a meaningful percentage of our overall annual sales occurred in the last five days. It was exciting to watch that pipeline. I think we still have a strong pipeline as we enter the year, and we're optimistic. January was a tiny bit slow because we did so well in December, but I've already seen February start turning around and we're expecting great things for this year. We maintain one of the strongest pipelines I've seen in our history. So we're excited and expect the sales team to deliver great results this year as well.

Operator, Operator

Our next question comes from John Pinney at Canaccord Genuity. Your line is open.

John Pinney, Analyst

Hi, John Pinney on for Richard Close. Thanks for the questions. Just to start with AI, you're using it in HLX. Are you seeing any efficiencies to drive efficiencies in product development or anything like that using AI internally?

Robert Frist, CEO

It's really fascinating. We have bifurcated the problem even at the Board level, separating the opportunity of AI from both its internal application and how it changes how we build and perform our work, including experimenting with AI to help us in our sales process. We have several pilots running to use AI to help us program and develop. Yes, there are a lot of internal initiatives to make us more efficient that we're undertaking now. I would say we're new to it, as is most everyone, and we're learning as fast as we can. I do expect productivity gains but probably not in the short run. In fact, probably a little bit more added expense as you pay for the tools of AI before you get the maximum benefit from them is how I think about it for the next six to nine months. But we have lots of exciting pilots internally in our product design development. We've used some AI for many years in our Jane products to help assess clinical reasoning ability. We use natural language processing with IBM Watson in the last several years, and now we're further advancing our products with the large language model search capabilities in our new HLX. We’re seeing implementations now of AI in our products and are very excited about the potential for AI to change both how we work and how we build products. I expect that in the short run there might be an increase in expenses before we see a decrease in expenses as we invest in these tools and learn to use them effectively. I am optimistic for the long-term impact of AI to make us much more efficient. Some roles can almost be automated, and we're researching software in this area, and we think it's going to be incredibly effective at assisting us.

John Pinney, Analyst

Great, thanks. And then one follow-up, with these new deals that you closed in the fourth quarter, an update on these pricing escalators. Were you successful in getting pricing escalators in these new contracts? Are you seeing that these new products are making it easier to negotiate price escalators into the contracts or any commentary you can provide there would be great?

Robert Frist, CEO

One of the things we're finding is that, in a strange way, customers appreciate the escalators. If you enter a three- or four-year contract with a flat price and then when you come up for renewal, there's a big jump, and your budget isn't ready for it to reflect the changes in the market. Being a latecomer to implementing escalators, we have been very successful. I'd say a 95% plus hit rate of incorporating escalators into renewals. I think it'll be a multiyear process over 36 months. If you think of an average contract length of three years, we’ll incorporate escalators into every renewal. We’re just not receiving pushback yet. We have rolled out this program in our other two primary application areas. Once you implement an escalator, it doesn't start until the next year. Considering an average contract length at HealthStream, we’ll renew them and insert the escalators, and their impact begins the next year, that first year of escalation in the new contract. The multiyear impact we expect will provide a new base level of growth for the company.

John Pinney, Analyst

Great, I appreciate the color, thanks.

Operator, Operator

Our next question comes from Ryan Daniels at William Blair. Your line is open.

Ryan Daniels, Analyst

Yes. Thanks for taking the question. Bobby, I was hoping you could go into a little more detail on HLX and when that might go to full launch? I think you said you're in three pilots now, so I'm curious when that might be a meaningful contributor?

Robert Frist, CEO

Sure. We've begun product demonstrations. The sales team was trained at this year's sales meeting just a few weeks ago, and we have pricing and it's available now. We're beginning the sales process. Of course, there's nothing like successful customers to point to when you're working on sales, but we believe that having our solution be healthcare focused will provide a material positive impact. We think having well-defined development pathways for people with a mixed-media approach and user-guided learning will be powerful for workforce development needs in healthcare. One of our early pilots includes a government entity up in New York looking to develop new categories of healthcare workers. They’re really excited about the HLX, believing it will help them guide people in those career paths, similar to how we think employers may use it. In summary, the product is live, it's available for sale, the sales force is trained on it, and we are beginning to go to market. We also think it provides tremendous value as an add-on to the HealthStream Learning Center at a relatively small incremental cost, especially compared to competitors. Efficiently built on the HealthStream platform has allowed for rapid development cycles. We expect to start seeing some sales of that in the first half of this year, and once the pilots are successful at these larger organizations, I expect sales to pick up in the second half.

Ryan Daniels, Analyst

Okay, perfect. Thank you for that. As a follow-up, are you seeing more cross-sell and upsell opportunities emerge upon renewals with more interoperability between your three core application suites? Is it driving up user satisfaction as they can tie things like credentialing and learning pathways together to really advance their workflows? Thanks.

Robert Frist, CEO

Well, I'd still say this is a year that manifests more. The senior executive team is working to find our first, I guess I'd call them our Enterprise Workforce platform. We're kind of working with a few key customers that will go on that journey with us. It's not broadly manifesting yet and cross-selling, but I think we're well-positioned to see some of that also in the second half of the year. We already have amazing cross-selling going on even as independent applications. Our nearly 60 people in account management are always working to cross-introduce products. A significant part of our history is effective cross-selling and growing the value per person per year at our accounts, and we’re very good at it. We believe there are concrete benefits to health systems, such as onboarding physicians when our learning and credentialing systems work together. By the middle of this year, we should have more tangible benefits to show our customers regarding that progress. Well, we wanted you to see where some of our CapEx was going because we put a reasonable amount into product development in the form of direct software investments and capitalized software investments, and it’s good when those come out as winning products.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn it back to Bobby for closing remarks.

Robert Frist, CEO

Thank you to everyone following us, especially to our employees. Congratulations to our three promoted senior executives and also we wish the best to Michael Sousa. I look forward to our next meetings as we talk about the future together with Michael. All employees should take great pride in accomplishing our G2 rating number one and getting our systems through the security protocols that make us HITRUST certified. Amazing set of accomplishments. Thank you to all of nearly 1,100 HealthStream employees for delivering a great year, and I look forward to 2025 and to all of you on our next earnings call. Thank you.

Operator, Operator

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