HealthStream, Inc. (NASDAQ:HSTM) Q3 2023 Earnings Call Transcript

HealthStream, Inc. (NASDAQ:HSTM) Q3 2023 Earnings Call Transcript October 24, 2023

Operator: Good morning, and welcome to HealthStream’s Third Quarter 2023 Earnings Conference Call. At this time, I would like to inform you that this conference call is being recorded. [Operator Instructions]. I will now turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.

Mollie Condra: Thank you, and good morning, everybody. Thank you for joining us today to discuss our third quarter 2023 results. Also in the conference call with me today is Robert Frist, Jr. CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President of Finance and Accounting. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that 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: Thank you, Mollie. Good morning, everyone. We have a lot to cover for our third quarter 2023 earnings call. In the third quarter, we achieved record revenue and record adjusted EBITDA. Top line revenue reached $70.3 million in the quarter, which was up 5% over the same period of 2022 and adjusted EBITDA increased to $16.2 million, which is a 28% improvement over the same period of 2022. If I reflect back, it was a quarter of financial high watermarks, also excellent progress on our single platform strategy, some exciting sales wins I’m going to talk about. But most of all, the quarter was characterized by the strong leveraged EBITDA growth we delivered and expect to continue delivering. Another way to think about performance is through the higher margins and greater operating efficiency we delivered.

For example, through our investments in proprietary content and applications, our gross margins have improved to be in line with our medium-term financial goals of 65% to 68%. In addition, our single platform approach continues to streamline how we organize our workforce. For example, we delivered increasing revenue per employee for the past 4 consecutive quarters. Let’s take a minute just to kind of refresh and really define HealthStream for our audience. I think we might have some new folks out there that want to hear how we describe and position our business. First and foremost, HealthStream is a health care technology company dedicated to developing, credentialing and scheduling the health care workforce through SaaS-based applications and solutions, each of which are becoming more valuable because of the interoperability they are achieving through our hStream technology platform.

We sell our solutions on a subscription basis under contracts, which average 3 to 5 years in length. That means our revenues are recurring and predictable. In fact, and we checked this the course yesterday, 96% of our revenues are subscription-based. We are profitable. We have no interest-bearing debt. We have a strong cash balance of $71 million and we are solely focused on health care and more specifically the health care workforce. In fact, the way we define our addressable market is as the 11.2 million health care professionals working in the United States in health care organizations. Though our market is also beginning to show signs of expansion into the pre-professional markets like nursing schools as well, and we’re going to talk about that in the second half of this presentation this morning.

As we enter the fourth quarter, we are confident that HealthStream will continue to provide results in line with our guidance range, importantly, including our increased guidance range for adjusted EBITDA of $59 million to $62 million. In addition to expanding into new markets like nursing schools, this quarter, we demonstrated some increasing share of wallet with existing customers. And I’m really excited to highlight 2 examples of that in the quarter. First, one of our large customers renewed their HealthStream Learning Center and their hStream subscriptions for learning for 16,000 users, but they didn’t stop there. They also decided to leverage our marketplace of workforce solutions and they added EBSCO clinical skills, our checklist product, Psych Hub, Skillsoft, HealthEquity and Belonging curriculum, and Talent Tracks, one of our development programs as part of their 5-year subscription.

That 6 new products add at the time of renewal. And as a result, this account is moving from approximately $16.52 per person per year to $30.99 per person per year. And this was not an isolated example. Another one of our large accounts expanded their HealthStream Learning Center contract and their hStream subscriptions for learning from 15,000 to 19,000. But while they’re expanding the subscriptions, they also were renewing their SafetyQ product, their checklist and their CE Unlimited orders. They also added new to the contract, our Quality OB program and our Jane products while additionally expanding their subscriptions to our nurse residency program. So for all for a 3-year term, so for this account, we’re moving from approximately $81.24 per person per year to $108.58 per person per year.

And remember, the count went up from 15,000 to 19,000 all in the same renewal process. So we’re excited to be demonstrating this expansion of wallet share at the customers that we already have. And obviously, these 2 examples are customers that are deep into our ecology. They kind of shop within the 4 walls of HealthStream Ecology. Our partners and programs are promoted to them in our various applications that are increasingly interoperable become more interesting to them. So these are 2 great examples. We have a strategic accounts program. The goal is to expand like this at our top 150 accounts. So we’re really excited to see these 2 great renewals, extensions and product additions, increasing share of wallet. So we’re grateful for the significantly expanding commitments to these customers and others like them that they’re making each time they come for renewal.

And we want them to know that HealthStream is committed to ensuring they get even greater leverage out of their hStream membership. That’s that underlying infrastructure that’s making it all work together. And each time the renewal rolls around, trying to make sure they appreciate the interoperability that every quarter we release new capabilities that show interoperability of our various application suites. It’s also a strong quarter for our CredentialStream solutions, and this is important because we put a lot of capital into building out our CredentialStream solutions in the credential privilege in enroll area of our company. And so it’s great to see that we’re finally seeing and beginning to see really strong growth. So both in terms of competitive takeouts and conversions from our legacy solutions, in the third quarter, we contracted 32 new customers for our CredentialStream solutions.

And that, importantly, represents about 114,000 new subscriptions collectively. And remember, when you subscribe to our CredentialStream application suite, you also become a member of our hStream for credentialing and hStream platform technology. So we’re excited to add through part of the model, 114,000 new subscriptions. New customers include highly respected health organizations like Northwell Health, AlohaCare and Banner Health. And revenues from subscriptions to CredentialStream in the third quarter grew 56% over the same period last year. Not the smaller product. It’s still in our top 10 for sure, but we’re really excited to see this application suite that we’ve been consistently investing in for several years now show this exciting growth.

Again, with 32 new takeout or new customers and 56% year-over-year revenue growth. But not to be outdone, we have another area of our business that’s performing. It’s our — in the third quarter, revenues from ShiftWizard, which is our scheduling business grew 33% over the prior year quarter as customers continue to report high customer satisfaction. So really excited to see this relatively modest, as you all know, we acquired 3 companies in the scheduling space, and we’re beginning to see some real promise in growth in this area, even though we have a lot of building to do in this area of increased investment as well. But we’re really excited to deliver 33% year-over-year growth in the ShiftWizard subscriptions. We have selected ShiftWizard as our primary kind of go-forward application set, and we’re significantly expanding its ability to perform at an enterprise scale.

And so we’re working to make our ShiftWizard application appropriate for our largest customers, and we continue to invest to add scale and capacity and new features and capabilities to the ShiftWizard application suite. Really excited for the teams delivering that. And during the quarter, some of the many new customers that we added were Palomar Health, Great Plains Health and Richmond University Medical Center. So excited to see some great new additions to our customers coming and joining the HealthStream ecosystem by selecting ShiftWizard, the application suite. So obviously, really exciting developments during the quarter. And we just — in the back half of this, after I turn it over to Scotty, we’re going to talk about — we talked about kind of share of wallet in the first half year.

We’ll talk about market expansion opportunities in the second half. So let’s turn it over to Scotty and do a deep dive in the numbers and bring it back to me for reduction of market expansion.

Scott Roberts: All right. Thank you, Bobby, and good morning. I’ll jump right in and hit the financial highlights for the third quarter. And unless otherwise noted, the comparisons will be against the same period of last year. As Bobby mentioned, it was a record quarter in which we achieved new high watermarks for revenue and adjusted EBITDA. We achieved record revenues of $70.3 million, up 5%. Operating income was $4.9 million, up 104%. Net income was $3.9 million, up 5%. Earnings per share was $0.13 per share, up from $0.12 per share. And finally, adjusted EBITDA was also a record high, coming in at $16.2 million and was up 28%. Now let’s start with revenues, which surpassed the $70 million-mark for the first time and were up $3.1 million or approximately 5% compared to last year’s third quarter.

Revenues from subscription products accounted for 96% of total revenues and our subscription revenue came in at $67.5 million or an increase of 5%, while revenues from professional services were $2.9 million and declined by 11%. As a software company, our focus is growing subscription revenue versus services revenue and the quarter’s performance reflects just that. Gross margin was 66.5%, up from 65.3% last year and positively benefited from changes in revenue mix, including growth from products that we own. Additionally, cost of revenues only increased by $0.2 million or 1%, which was due in part to lower compensation expenses resulting from the organizational changes that we implemented earlier in the year. Though these were partially offset by our hosting and software costs.

Operating expenses, excluding cost of revenues were up $0.4 million or 1% over last year’s third quarter. Depreciation and amortization were up 8% and G&A was up 2%, while product development and sales and marketing were down 5% and 1%, respectively. Our product development costs declined by 5%, which is net of labor costs that were capitalized for software development. We maintain a consistent level of staffing and base compensation compared to last year, our capitalized labor costs increased approximately $600,000 over the prior year quarter. Sales and marketing expenses were down 1% or less than $100,000. Staffing levels were down slightly, resulting in lower base compensation, but this was partially offset by higher sales commissions, which is consistent with the growth in revenues.

G&A expenses increased by 2% or around $200,000 and were mostly a result of higher bad debt charges and professional service fees but were also partially offset by lower staffing costs and other general expenses. Our adjusted EBITDA was a record high of $16.2 million, which was up 28% and our adjusted EBITDA margin improved to 23.1% compared to 18.9% last year. The growth in revenues, improved gross margins and their operational efficiencies from the consolidation efforts we made during the first quarter led to this improvement. Now let me mention our hStream subscription count before moving on to the balance sheet. In the third quarter, hStream subscriptions increased by $113,000 over the previous quarter, total of approximately $5.7 million.

Now let’s take a look at the balance sheet metrics. We ended the quarter with cash and investment balances of $71.8 million, which was up from $56 million last quarter. During the quarter, we deployed $6.7 million for capital expenditures, paid $0.8 million to shareholders through our dividend program, and we repurchased $2.1 million of our common stock under the share repurchase program that we announced in September. Day sales outstanding increased to 43 days compared to a record low of 38 days last year. But DSO came down by 7 days when compared to last quarter. As a matter of context, I’m comfortable with our receivables metrics and the improvement that we made during the quarter with cash collections. On a year-to-date basis, our cash flows from operations improved by $7.1 million or 16% versus last year, coming in at $50.2 million and free cash flows also improved to $28.8 million compared to $24.1 million last year.

As for the third quarter, free cash flows were $18 million, another record high for us, which help boost the cash balance to over $71 million. Remember, our free cash flows are seasonal with the first and third quarters generally being the strongest and cash flows tending to be closer to breakeven in the second and fourth quarters. With regard to our capital allocation, aside from the capital investments that we make into our products, we’re also deploying capital to improve shareholder value through cash dividends and share repurchases. Since the adoption of a dividend policy by our Board of Directors earlier this year, we have made 3 quarterly cash dividend payments so far this year, returning $2.3 million back to shareholders. And yesterday, our Board of Directors declared a fourth quarter dividend that will be paid in December.

In respect to share repurchases, last month, we announced a $10 million share repurchase program. We made $2.1 million of share repurchases during the third quarter and through yesterday, we had purchased a total of $8.9 million under the $10 million program. And this program will terminate on the earlier of March 31, 2024, or when the maximum dollar amount under the program has been extended. We may suspend or discontinue making purchases under the program at any time. Also, earlier this month, we entered into an agreement with Truist Bank to renew our line of credit facility for another 3 years. The credit facility terms and conditions are basically the same as before, and you can find out more details about this transaction in the Form 8-K we filed on October 10.

You’ll notice that we capped the facility at $50 million, which we feel is an appropriate size for us given our strong balance sheet and growing free cash flows. Now as for guidance expectations, we have updated our financial expectations as follows. We continue to expect that consolidated revenues will range between $277.5 million and $283 million. We have updated adjusted EBITDA, which is now expected to range between $59 million and $62 million compared to the previous range of $57.5 million to $60.5 million. Capital expenditures are still expected to range between $27 million and $29 million. While our guidance includes the acquisition of eeds, which occurred late last year, does not include assumptions for any acquisitions that we may complete during the remainder of the year.

So now let me take a brief moment to provide some additional thoughts on the guidance before turning the call back over to Bobby. Our forecasted revenues for the year are trending to around the midpoint of the range, which would imply around a 5% growth rate over the last year. And as for adjusted EBITDA, our focus on operating efficiency and higher gross margins is translating into financial leverage. And at the midpoint of our increased guidance range, this would imply around 13% growth over last year. Furthermore, I want to share 2 other metrics that reinforce our performance. Our annualized revenue per employee has improved from $234,000 to $259,000 and annualized adjusted EBITDA per employee has improved from $44,000 to $60,000 compared to the third quarter of last year.

That concludes my comments for this quarter’s call. Thanks for your time this morning, and I’ll now turn the call back over to Bobby for some additional updates.

Robert Frist: Thank you, Scotty, and excited to dive into that portion of my presentation here. In the first half of the call, we focused on how we’re selling more products to existing customers. And now I want to take this portion and focus on some market expansion that we’re working on and very excited to see some traction in. So by selling directly to nursing students and nursing schools, we’re just beginning to sell our products to a whole new set of customers, and we saw some traction on that in the third quarter. Some of you may recall that we acquired a company called myClinicalExchange in December of 2020. And you can think of myClinicalExchange, both the company and the product as a bridge between students, these nursing students, and the hospitals that hire them and put them into rotations to gain experience to ultimately become a nurse.

So myClinicalExchange is like a connection bridge between the student and those rotations. And it’s also used interestingly to kind of credential and profile and onboard these nurses into these internships and rotations. So it has a little dimension to it to kind of qualifying the applicants as well. Year-to-date, we generated just over $3 million of revenue from this product, again, kind of a new category for us. And that’s a 27% increase over the same period last year. So it’s exciting after we deploy the capital and the acquisition and kind of declared that we’ll be entering the market of these students. We just love this idea because they get to the students, even pre-profession before they’re nurses. And then they enter the workforce with hStream ID, and we’re just really excited to see progress in those areas.

So far this year, we placed over 161,000 clinical rotations. So that’s placing a student of some sort, most nurses, into a rotation in a hospital. And the hospitals love this because, of course, as they become nurses, they become candidates to work at that hospital. So this product, myClinicalExchange, which grew 27% over the prior year, is doing 2 great things for us, helping us be an ally to our hospital customers by bringing them the best nursing students. And it’s also allowing us to build a business relationship with these nursing students before they enter the market as professionals, so they’re engaging with our technologies and platforms earlier in their career, which we’re really excited about. So when they enter into the myClinicalExchange application, it gives HealthStream direct access to the students who use it.

And with this access, we can better understand what products the students need before they transition into their professional careers. And we can begin selling those products directly to them and importantly, to their schools. So in addition to targeting the expansion by targeting the nursing students, we’re also expanding to selling to nursing schools. In the third quarter, 1 of the largest nursing schools in the country, completed an enterprise purchase of the American Red Cross Resuscitation Suite. And we’re really excited to see this dynamic because how exciting is it for a new nurse while in school to earn this credential and carry it forward into the market. So after careful consideration, this customer determined that HealthStream and the American Red Cross provide the best solution for fulfilling the resuscitation certification need of student, and it’s a 2-year credential.

So they enter the market now with that credential. And if they show up at a hospital that uses the hStream platform and those credentials automatically populate into the learning application. So again, another example of interoperability finding new — in this case, customers or individual professionals before they [indiscernible] would have engaged with HealthStream. For us to be engaging earlier, we’re excited for these graduates to enter the market with this stronger resume. We’re excited for the Red Cross who gets to develop the clinical skills of these at an earlier stage than they might have otherwise. So all around, a lot of excitement about how we’re expanding the definition of our market to include the pre-professional market and specifically nursing schools.

So we’re in the early days of this journey, but you can tell from myClinicalExchange traction, the 27% growth and that we’re getting to this new market and they’re entering the market with their hStream ID, which is just a really exciting new way to think about how we define our market overall. So I’ll shift gears here and just wrap up for our employees by showing how we’re demonstrating our streaming good value. We have this constitution, we run our business by and streaming is one of our many important values. And we’re able to demonstrate a streaming good value in this quarter. By the way, we were able to serve the health care professionals on the front line in Maui, where the historic fires were really devastating overall. And they include just kind of incredible mental health challenges for the workforce as they tried their best to provide services and care for the survivors of those horrible fires in Hawaii.

So HealthStream was able to team up with 1 of our partners, Psych Hub, an we were able to — which we do have an equity investment in Psych Hub, so that was exciting for that reason as well. And we also teamed up with Hawaii State Nursing Center — the Hawaii State Center for Nursing and we organized a complete online offering of psychological first aid training and education, and we did this free of charge. And so we’re able to help Hawaii, help the nursing — the nurses in that state, in their recovery mode and kind of process all of they are going through. We’re excited that allow our employees to live their streaming good value and provide this valuable service at a time of need. And just for idea of how we can extend our capabilities to our platforms and technologies for the betterment in this case, the well-being of the nurse population and the health care providers that we’re fighting so hard on the front lines in Hawaii.

So we’re honored to be a crucial resource to these health care professionals and that we consider them national heroes, and we’re excited to be a part of that provision of care. So as we close this portion of the call, I want to — I do want to remind you about our dividend policy, we began earlier this year. We made the third payment under this policy about a month ago. And just yesterday, our Board approved what will be the fourth installment of quarterly payments under the plan, and that will be paid on December 22. We’re pleased with our strong balance sheet and our strong operational performance puts us in a position to return value directly to shareholders as the company’s first quarterly cash dividend program. Over the course of full year 2023, we expect our new dividend policy to return approximately $3 million to shareholders.

And we’re on track to meet that goal, and we will consider whether to expand dividend program next year. So we look forward to taking that up in future board discussions. If you’re interested in a profitable recurring revenue, 96% subscription SaaS pass health care technology company that for 2023, expect to deliver steady growth and is determined to share some of those gains directly to shareholders, maybe HealthStream is the company and the stock for you if you’re here listening. We’d love to have you guys as shareholders to go on this journey with us. Let’s turn it back over to the operator and begin the Q&A session with our analysts.

See also 12 Defensive Healthcare Dividend Stocks To Invest In and 20 Highest Paying Countries for Doctors.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Matt Hewitt with Craig-Hallum.

Matthew Hewitt: Thank you for all the detailed commentary so far. Maybe first off, what are you hearing from hospitals, just the broader market trends? Obviously, you had a couple of companies report this morning. talking about procedure volumes up, but still seeing some difficulties or headwinds on the income side of the equation. What are you hearing from customers? And how are you able to kind of navigate that?

Robert Frist: Well, the challenge for them is a lot of their issues around workforce. We do think that our solutions are a great aid in the development, retention and better management of the workforce. So part of that cost structure that they’re working hard to manage is related to workforce retention, engagement and development. So I think we’re aligned with helping them do the challenges that may be driving some of those financial challenges that they articulated. So I feel aligned with our customers and trying to help them through this period. It’s good to see the volumes up. We like that as a sign of strength for our hospital customers and all of our continuum market customers as well. So there’s some signs there that are positive.

And I do think the areas they have the biggest challenges and are the topics of the CEOs, which are how do we retain, engage, develop and better manage our workforce. So we’re proud that our 1,100 employees are aligned. And when we’re called in, we can be a help on everything from a psychological well-being, like we talked about in Hawaii, to the skills development like the Red Cross program which we think is a lower cost, higher quality program than the competition and all the way on through to nursing skill development with our Jane products. So we think that we’re aligned to help them work their way through the challenges that they are talking about in the macro level.

Matthew Hewitt: Understood. That’s helpful. And then a question, that the 11.2 million employees that you — that your applications address. Does that include the nursing schools, the students, that you are now kind of opening up this new market?

Robert Frist: I don’t think it does. I’m about 98% sure it does not. We — that metric is defined in our Ks and Qs, and I’m pretty sure it doesn’t include the pre-professional market. And so nursing schools, we are believing and on this call, declaring as an expansion of our opportunities. So we may have to adjust that number over time. It’s new for us and our first big sale occurred in the quarter. So we’ll look to see how to adjust that definition of market. But we are particularly interested in getting to these right before they become nurses. We don’t go all the way down to grade school, but I do think catching them in their last year of nursing school, we’re clearly now onboarding tens of thousands of new nursing students into our network and getting them an ID right before they enter the professional market. And so we’re really excited about that. I think that represents a market expansion and definition for us.

Matthew Hewitt: That makes a ton of sense going after that, those potential future nurses. And so maybe one last question, maybe more for Scotty, but gross margins, obviously, another nice step up there. And I know it’s within the midpoint of your kind of your 3-year target. But what would be the impediment of kind of growing beyond the 67%, 68% over the near term? I mean, is there anything that would stand in the way of that? I mean you’ve seen some pretty nice growth in that metric over the past few quarters. I’m just curious what would be the — what would prevent you from expanding further?

Robert Frist: I’ll try first and let Scotty add. I think one of the things that we’re excited about is that almost all of our new products are being built using our platform technologies, use some of our APIs that gives us a little inherently more leveraged and a little faster rate of production of new products and introduction of those products. So my general sense is that the ideas in the pipeline and the things that we’re working on are generally either data-driven products where we own the data, our content products, where we own the content or application suites that we’re building organically using our new platform technology. So in general, over time, I think that the growing parts of our business have inherently higher gross margins.

So right now, we need to stay and define our target within that range. But I think there should be this kind of continued slight upward pressure on that gross margin opportunity because the nature of what we’re building is different than, say, the origins of the company that were built around partner content that had higher cost of goods. So I think that my general answer is that I don’t see what could stop us from continued expansion. But we have outlined these 3-year objectives, and we’re really excited to be landing already on that 1 measure in the range of our multi-year objective. So we’re glad to see that progress year-to-date. Scotty, If you want to add anything to that, but hopefully, that addresses the question.

Scott Roberts: Yes. I mean I think, Matt, that’s obviously where we’re headed is. Trying to continue to improve on that metric. And just for a little additional context, just one thing to keep in mind as we’ve talked about transitioning to a PaaS company and continuing to progress down that road. One of the things that’s influencing margins to some degree likely continue to influence margins is just a move from a traditional hosting environments on a co-location type of environment to cloud hosting. So our investments in cloud continue to increase. And obviously, that’s the cost of delivering our service. So it’s influencing margins to some degree. But as our products continue to migrate towards higher-margin solutions. We think that will overcome some of those costs that we’re seeing increasing related to cloud.

Operator: Our next question comes from the line of Jared Haase of William Blair.

Jared Haase: Yes. This is Jared Haase on for Ryan Daniels. Bobby, maybe just — was hoping to get a little bit more color on the credentialing application suite. And specifically, I know you announced a couple of new product innovations for that suite of products. So it would just be great to get your perspective of how you’re thinking about the demand environment for the CredentialStream suite and maybe how you’re still thinking about HealthStream position relative to the market?

Robert Frist: Sure. On the CredentialStream suite, it is — first, you got that right. It is a suite. And so it’s a set of roles and capabilities and application that is increasingly connected to the hStream technologies. It has some really powerful differentiators built into it, like our privileged library, which is a curated data asset that we own and a differentiator in the market. So — and it’s also, we believe, 1 of the most complete application suites in the market. So we think it’s highly competitive against the competitive landscape. We find ourselves a finalist in almost every competition that is available to us in the markets that we’ve defined. And so we think it’s competitive because it includes capabilities around credentialing, privileging, enrolling them insurance and insurance and the onboarding process is both facilitating some of the HR onboarding processes like training and facilitating the EHR provisioning process by also delivering some of the training to get them ready to be provisioned on the electronic health record system.

And so we think we just have a very complete definition of the application suite that works together really, really well. Also, one of our philosophical differences in our competition is it’s kind of a physician centered process, kind of a back-office process. Our Physician Hub is gaining in both popularity. We watch it’s Net Promoter Score, which is positive. And with physicians who are taking a little bit more personal control over this credentialing, privileging, enrollment process. So the physician hub component is also, we think, a differentiating point of view for us redefining the workflows a little bit around the Physician. And we’re seeing that engagement really be strong with the physician hub component of the CredentialStream application suite.