Yahoo Finance HealthStream, Inc. (NASDAQ:HSTM) Q1 2024 Earnings Call Transcript
HealthStream, Inc. (NASDAQ:HSTM) Q1 2024 Earnings Call Transcript April 23, 2024
HealthStream, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to HealthStream's First Quarter 2024 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions-and-answers after the presentation. I will now turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.
Mollie Condra: Thank you and good morning. Thank you for joining us today to discuss our first quarter 2024 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, including forms 10-K, 10-Q, and our earnings release.
Additionally, we may reference measures such as the 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 today, I'll turn the call over to CEO, Bobby Frist.
Bobby Frist: Thank you, Molly. Good morning, everyone and welcome to our first quarter 2024 earnings call. As our analysts sometimes say, it was a solid print. In the first quarter, we achieved record revenue and record adjusted EBITDA. In fact, our quarterly financial performance showed year-over-year increases in each of the major categories we highlight in our earnings release. I'm excited to be able to report that hyper-performance. The first quarter revenues were $72.8 million, up 6% over the first quarter of last year and adjusted EBITDA was $17.1 million, up 24% over the first quarter of last year. We were able to reiterate our financial guidance ranges for the full-year of 2024 and right now, we have the full expectation that we'll be able to hit the ball right down the middle of the fairway.
We're looking to the middle of the range and performance. So we're excited to deliver these strong financial results and reiterate our financial range objects with an expectation of going right down the middle. Later in this call, after Scotty's discussion about financials, I'm going to describe some of the developments in learning, credentialing and scheduling application suites that are helping drive these results. I do want to back up a little bit and talk about an emerging trend we're seeing that I think is worth calling out. The trend I'm referring to is the increasing amount of attention that health organizations are paying to their workforce kind of broadly defined. Now more than ever, we believe that Healthcare CEOs are embracing the fact that their workforce is their most valuable asset and the staffing shortages that were exacerbated by the pandemic really served to reinforce the ongoing importance of taking care of your workforce and hopefully, from our point of view, investing in them to retain and develop them in their capabilities and capacity.
And you know these are the things that HealthStream has been focused on for a long, long time. We're just laser focused on workflow applications that improve both the quality, the knowledge of, and the knowledge by these healthcare professionals and of course, their skill sets. We also make sure the right people are in the right place at the right time. So there's a lot of things that we do that help organizations focus and bring deliberate focus on retaining and developing workforce. In fact, if you ask any HealthStream employee, you know, I'd say they're proud to say that our vision has always been about improving the quality of healthcare through the people of healthcare by improving, who they are and what their skills are. And so, we've held that vision to improve the quality of healthcare by developing the people who deliver care for a long time.
And based on our conversation with customers, it's just increasingly becoming a top priority for them as well, the healthcare workforce as a topic. And you can look at that from any direction, from workforce shortages, the needs to cross develop competencies and skills, these are all emerging, kind of, the hospitals are realizing their need to invest in these areas. Healthcare can be complex, but working together with our customers, we help them take care of these people and we know how to do that well. It's just something that benefits everyone. So our three application suites along with the HealthStream platform underpinning them now and our deep network of customers have helped position HealthStream as the workforce platform of choice or maybe as sometimes we say, the people platform for healthcare.
Moving on to more specific business topics, I'm going to share two updates that we believe are emerging parts of our business that could become growth drivers in future years. To be clear, not material contributors today, but the expected growth results are -- we're excited to see the initial results in these areas that we're going to discuss. The first is we're excited to advance our commerce capabilities. For the longest time, most all of our sales have been done facilitated by a field sales organization, which is wonderful. And we build strong bridges and relationships with 1,000s of customers through this incredible sales organization. But increasingly they're supported with e-commerce capabilities that are a part of our hStream platform and we're building out these capabilities for three areas of commerce.
The first is kind of enterprise level purchasing, we call collaborative purchasing. And we brought this up on prior calls, but our collaborative purchasing tools are now evolving with better e-commerce capabilities built in, and so that's exciting. The second is, I guess what we would call departmental level purchasing. It's business-to-business purchasing kind of at the departmental level. And we now have new tools that we're launching that department heads and others manage their education, training and development budgets through commerce tools, which is exciting. And then finally, the one I'm going to talk about is actually the newest, how to focus on the individuals in our ecosystem with commerce -- direct to individual commerce purchasing.
And during our last call, I mentioned to you that we'd started selling what's called the DEA mandated opioid course. It's required of physicians through kind of a federal mandate, so it has strong tailwinds. But through our e-commerce capabilities and through multi-channel, we were able to present the opportunity to purchase this course in our own network and in some cases promoting it inside of our own application areas. I can now report that we had approximately $0.5 in DEA course sales, direct to professional, direct to doctors, sales of the DEA course during the first quarter alone. And so, this is really an exciting kind of breakthrough moment, as we use our new commerce tools to allow for direct purchasing by physicians of, in this case, this course.
Now again, this course is a bit anomalous, because it's a unique opportunity based on a federal mandate, time sensitive and we happen to have just the right content for it, but nonetheless, wouldn't have been possible without being powered by our new commerce tools. So taken by itself, this represents -- one selling to group of individuals. But in this greater scheme of things, we think it represents an opportunity to expand these direct professional commerce capabilities. As the people platform of healthcare, I think HealthStream is well positioned to know what individuals need, when they need, which course and when, and then also how to get it to them. And so, I feel well positioned to extend this commerce capability people platform for healthcare.
Well, you know, the other channel where we're seeing expansion of direct commerce is through NurseGrid Learn and you'll recall that our NurseGrid app is extraordinarily popular with nurses. We have over a $0.5 million monthly active users, and if you ask almost any nurse, you're going to have a really high hit rate that they both like NurseGrid, the app, which helps them manage their personal schedules and work schedules. And they're beginning to appreciate some of its new features and capabilities like NurseGrid Learn. And so, we begin to see some recent transactional volume through NurseGrid Learn, direct to nurses as well, so I'm excited to see that start to be powered by our new commerce tools. Let's move on to the expansion of our total addressable market, which we announced in October of last year.
Specifically, I want to provide you with some [Technical Difficulty] we're making around nursing schools. After completing our first major enterprise sale to one of the largest nursing schools in the nation, I'm pleased to announce that we have now fully implemented our HealthStream technology platform and the Red Cross [Technical Difficulty] over a dozen of their campuses. And we expect the full rollout during this quarter, the second quarter. So an exciting rollout to one of the largest nursing schools in the nation using [Technical Difficulty] technology platform, the hStream ID along with the Red Cross Resuscitation Suite. And now they're entering work when they get their first job after graduating and becoming nurses, they enter work with a Red Cross certificate, thanks to this new relationship with nursing school, with this large nursing system.
And so we're excited to see them enter the workforce with that ID and with that Red Cross credential. We'll be able to report more on our progress here financially, but the implementation wave has begun, and we're really excited about that. And you know, really the great opportunity is that the data on their completion of that certificate would carry forward with them into work if they land at a facility or health organization that uses our learning application suite. And so, we're really excited about that advance course, also powered by the hStream platform and its interoperability APIs. So again, excited to see both technical progress and financial implementation progress in the nursing school market. Of course, with this as a working model, we'll work our best to figure out how to expand sales opportunities in that channel as well.
So those are the two opportunities I wanted to cover, the DEA MATE direct to professional and the nursing school early developments there of entering the nursing market -- nursing school market and nursing student market. And so we're excited to report progress in both of those areas. I do want to manage expectations. These are new areas, new channels. They're not material parts of our business, but we do see some light. We're excited to see some light at the end of the development tunnel and declaring these as an expanded market opportunity in our prior earnings calls. So again, we're excited to see those developments. I want to describe, just as a reminder for anyone new on the call, the base level description of our business, so you can kind of take away the nature of our business.
First and foremost, HealthStream is a healthcare technology. We're focused on the development of our technology platform, and we're dedicated to developing, credentialing, and scheduling the healthcare workforce. So three kind of unique healthcare workflows related to their people that we provide through our SaaS based application stacks. And increasingly, those three separate SAS technology stacks that do credentialing, learning, and development and scheduling are becoming interoperable through the hStream technology platform we've been building. Historically, we sell all of our solutions on a subscription basis under contracts that average [Technical Difficulty] years, which makes our revenues both recurring and predictable. And we'd like to get some credit for that eventually that this is a recurring revenue SaaS subscription business.
In fact, 96% of our revenues are subscription based. As I mentioned, we have also started to open our sales channels directly to professionals and nursing students. We are profitable. We have no interest-bearing debt. We have strong cash balance, which did surge a good bit in Q1 to $83.7 million, that's up $12.6 million over the prior quarter. So good free cash flows and cash flows during the quarter. We were solely focused on healthcare, more specifically the healthcare workforce. That's an important [Technical Difficulty] especially given the trends I mentioned at the open of this call. There are 12.3 million healthcare professionals and nursing students, which we define as our total addressable market. [Technical Difficulty] We hope over time, they'll engage with us through all three of our major primary application suites and all of our secondary applications as well.
And we want them all -- we want to thank them all 12.3 of them -- 12.3 million of them essentially as members of our ecology -- of our ecosystem and we're making good headwinds towards making it a network effect or an ecology through the hStream platform. Well [Technical Difficulty] I'd like to turn over to Scotty Roberts to take a little deeper dive into the numbers, because I just hit the top couple. Thank you. Go ahead, Scotty.
Scotty Roberts: All right. Thanks Bobby, and good morning. So, I'll jump right in and go over the financial highlights for the first quarter and unless otherwise noted, the comparisons will be against the same period of last year. I'm pleased to share that we continue to deliver solid performance for the first quarter, growing both topline and adjusted EBITDA. Revenues for the quarter were $72.8 million, up 6%. Operating income was $5.7 million, up 97%. Net income was $5.2 million, up 99%. Earnings per share was $0.17 per share, up from $0.09 per share, and adjusted EBITDA was $17.1 million and was up 24%. Revenues increased by $3.8 million or 6%, coming in at $72.8 million, compared to $68.9 million in last year's first quarter.
Revenues from our subscription products accounted for 96% of total revenues and were $70.2 million, increasing by 6%. Subscription revenues, as we've defined them for some time, predominantly include SaaS solutions, but also software license and maintenance fees. Software licenses are associated with legacy products such as our ANSOS scheduling solution and are occasionally sold to existing customers. I'm calling this to your attention here because one-time license revenues were approximately $0.8 million in the first quarter, and they increased by $0.5 million over the prior year. In fact, the $0.8 million of revenue in the quarter came exclusively from one ANSOS sale. We do not expect one-time license sales to continue at this level, and I want to remind you that the $0.8 million of first quarter license sales should not be modeled to repeat in upcoming quarters.
Additionally, our professional service revenues declined by $0.4 million, or 13%. In the last quarter, I discussed two products that are experiencing declines in revenues, so I want to give a quick update on those. The first are renewals of the ANSOS scheduling products, and the second is our quality manager solution. During the first quarter, these products collectively declined by $0.6 million or 13%. On the positive side, our initiative to sell directly to professionals through our commerce channels delivered over $0.5 million of revenue in the quarter. Our remaining performance obligations were $514 million as of the end of the quarter, compared to $504 million for the same period of last year and we expect approximately 44% of the revenue backlog to be converted over the next 12 months.
Gross margin was 66.2%, compared to 65.4% last year. This improvement is primarily due to the growth in revenues and from a cost perspective, our staffing costs were down due to last year's reorganization efforts while royalties, hosting and software grew over the prior year and more than offset the labor cost reductions. As for operating expenses, we were able to maintain operating expenses, excluding cost of revenues to a 1% increase and most of this increase year-over-year was from depreciation and amortization, which was up 4% and product development expenses were up 3%. Our G&A and sales and marketing expenses were down 6% and less than 1% respectively. Adjusted EBITDA was $17.1 million, which was about 24%, and adjusted EBITDA margin improved to 23.4%, compared to 19.9% last year.
As a reminder, last year's adjusted EBITDA was negatively impacted by $1 million of severance charges associated with the reorganization under our single platform strategy. Now let's go over the balance sheet metrics. We ended the quarter with cash and investment balances of $83.7 million, compared to $71.1 million last quarter. During the quarter, we deployed $7.8 million for capital expenditures and paid $0.8 million to shareholders through our dividend program. For receivables management, overall it was a strong quarter of collections, which led to days sales outstanding of 46 days, compared to 51 days last year. DSO has improved, bad debt charges were not material and generally speaking, the payment timeliness from our customer base remains fairly stable.
Now switching to cash flows, our cash flows from operations were up slightly over the prior year, coming in at $20.9 million and free cash flows improved by $1.1 million or 9%. With a strong balance sheet containing over $83 million of cash and no debt, we are in a good position to strategically deploy our available capital in a variety of ways, including M&A, dividends, and share repurchases. Yesterday, our Board of Directors declared a quarterly cash dividend of $2.8 per share to be paid in May. Our share repurchase program expired on March 31st and there were no shares repurchased during the quarter. For this program, we repurchased $8.9 million out of the $10 million authorization. Now, as for guidance, we are reaffirming the financial expectations that were previously announced in February.
We expect consolidated revenues to range between $292 million and $296 million. We expect adjusted EBITDA to range between $64.5 million and $67.5 million, and for capital expenditures to range between $28 million and $30 million. This guidance does not include assumptions for any acquisitions that we may complete during the year. That wraps up my comments for this quarter's call. Thanks for your time this morning, and now turn the call back over to Bobby.
Bobby Frist: Thank you, Scotty. I'm going to highlight a few of the areas, where we saw some success in each of our three primary application suites and talk a little bit about some advances in our [Technical Difficulty] technology, we call hStream as well. So, our HealthStream Learning Center is the application, it's kind of a flagship product of our learning application set and it continues to be strong in the market. But importantly, when the HealthStream Learning Center customers are up for renewal, we frequently see customers purchase multiple new solutions along with it when they renew. And this is kind of an example of expanding wallet share is kind of a way to think about that. And one of our academic medical center customers used their renewal of the HealthStream Learning Center as an opportunity to evaluate how HealthStream might help them serve their entire clinical workforce.
And this may be an example of the tailwind I mentioned earlier. The customer already purchased various HealthStream solutions for different subsets of their population, and when it came time to renew, they concluded that by pairing that with the renewal with a purchase of HealthStream competency suite and that would benefit their entire clinical workforce, adding on the competency suite to the learning center. The competency suite is a comprehensive and cohesive bundle of applications and content used to develop the clinical staff, and in this case they added that kind of that entire bundle. The customer also added our nurse residency program, which onboard newly graduated nurses, which is kind of an important kind of continuum of service from some of the work we're doing now in nursing schools.
And so, we saw them add the nurse residency program to the account as well. So, the net result was the ARR, the recurring revenue, for that customer grew by 31% or approximately $100,000 in the first quarter, making this a good example of expanding wallet share and kind of cross selling products, in this case adding on clinical competency bundles and the nurse residency program, upon renewal of their base learning center contract. With our SaaS scheduling solution, shifting gears now known as ShiftWizard is a best-in-class solution of its kind, and we think it will only become more valuable to customers as it begins to integrate with other [Technical Difficulty] applicants through our hStream technology platform. In the first quarter, revenues from ShiftWizard grew 26% over the prior year quarter as customers continue to report high customer satisfaction with the ShiftWizard application.
We contracted several new customers during the quarter, which we're excited about. Welcome Samaritan Medical Center, Bay State Health, and Hutchison Regional Medical Center, all new customers for ShiftWizard, we're excited to add you to our customer list. Our credentialing solutions also enjoyed a successful start to the year, both in terms of competitive take outs and conversions from our legacy solutions, and you're going to see an increased focus by our sales team on these conversions this year. We think it's really time now, as we tell our customers at the start of the year, time to migrate, so if you're on our older legacy platforms of HealthLine and Morrisey, you'll be hearing from HealthStream that we think that credential stream is right for you and it's time to get under the migration process.
So, this best-in-class solution for enrolling [Technical Difficulty] and privileging physicians is really just in a market leading position, we believe. One thing you may not know about credential streaming, one of its differentiating characteristics is we believe it's the first credentialing solution that really engages with the physician and the credentialing process. We think of it as much more user centered software and we think that's a good thing. We see increasing traffic by physicians logging in and taking control of the credentialing process individually and professionally. And so, we're proud that our [Technical Difficulty] suite is kind of physician centered in many ways, and we think that's consistent with being the people platform of healthcare.
We want to make that as pain free a process as possible for physicians, and we laser focus on the net promoter score from physicians on that particular application. So, you may not have known that one of our twists is that our credentialing system has a lot of tools that are easy to use by the physicians themselves to take control of the process. In the first quarter, we contracted 33,000 new subscribers for credential stream, which is an exciting add and we've now exceeded over 1 million subscribers on the credential stream application suite, which is really exciting. And we welcome new customers like Arkansas Blue Cross Blue Shield, which is really exciting, because it's slightly different kind of customer profile than our hospitals [Technical Difficulty] Tufts Medical Center, Dartmouth Health and Littleton Regional Healthcare, all added the credential stream application suite to their processes, and we're excited to welcome them as customers.
In terms of our platform solutions, the momentum we're seeing with regard to customers using adoption of our APIs is paving the way for an exciting future for the company. As a reminder, we launched the hStream [Technical Difficulty] portal in the fourth quarter of 2022, so it's fairly new. I think of this developer portal as a window into the actual platform. So, we talk now about the three application suites, but the platform that we call hStream is driven by a growing library of APIs that we make available under license to our customers, and some of them get access based on the fees they've already paid, like if you use the HealthStream Learning Center, you get access to learning APIs. But over time, we also think these APIs and their capabilities and datasets that are in the platform will themselves become monetizable assets.
So, we're excited about that. In the developer portal, kind of, as a sign of life or a sign that the platform strategy is working, we saw a doubling of different measures of utilization of these platform level capabilities. So the portal provides access to modern, scalable, secure architecture with a growing collection of shared services, platform level applications and APIs to connect two and among all of these different components. At the end of the first quarter 2024, 104 healthcare organizations have chosen to open an account on the developer portal, which is kind of how you get access to these APIs and collectively 237 of their developers have account level access to a growing library of APIs, most of them currently in the learning area to then integrate our technology into their broader technology environment, for example into their intranets and other applications they may build.
For example, in the first quarter, Stanford Healthcare built an internal app that provides easy access to epic course completions. And so, here's an example using the developer portal, the APIs by Stanford Health, who have licensed access to these APIs, because they're a customer of the broader you know hStream platform and they are incorporating those into this new app that helps them deliver access to epic course completion, so it's really exciting. And there are plenty of other examples, New England Life Care app to conveniently retrieve course and assignment progress, and they're also using the APIs in the developer portal. So as these APIs get more and more utilized, we feel we get more threaded into the broader [Technical Difficulty] platforms of our customers.
So, we think that demonstrates the value of our platform strategies increasingly and hopefully provides more value and utility to our customers. And we think again, as the platform expands, there'll be more and more capabilities in the platform, more reasons to use it and more interoperable, and then in the long range vision, of course, monetizing these capabilities directly is also an exciting possibility. So I think, as I think about concluding, I'd say if you're interested in profitable, recurring revenue SaaS and increasingly a PaaS, a platform-as-a-service healthcare technology company, that for 2024 we expect to deliver steady growth, kind of down the middle of the fairway of our guidance in fact, and we're determined to share some of our gains directly with shareholders in the form of a dividend, one which we increased last quarter, maybe HealthStream [Technical Difficulty] company and a good stock for you if you're a new investor.
If you're a shareholder, we welcome you to participate in and know remind you that our annual shareholder meeting is scheduled to take place virtually on Thursday, May 30 at 02:00 p.m. and notifications of the meeting and access to the proxy statement 10-K and shareholder letter were sent out on April 15. So, if you're a shareholder, we encourage you to vote your shares and participate in the future of our company. I'll now turn it back over to the operator to begin the questions.
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