HealthStream [HSTM] Conference call transcript for 2023 q1
2023-04-25 15:52:05
Fiscal: 2023 q1
Operator: Good morning, and welcome to HealthStream's First Quarter 2023 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 question-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 2023 results. Also in the conference call with me is, Robert A. Frist Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President of Finance and Accounting. I would also like to remind you this morning 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. With that start, I'll now turn the call over to CEO, Bobby Frist.
Robert A. Frist Jr.: Good morning. Thank you, Mollie. Lots to cover this morning, we'll get started. I think one of the first things is different and we're excited about is on this earnings call is our new dividend policy. It was announced on February 20, through which we'll be paying our first cash dividend on Friday of this week. I'm also pleased to share that our second dividend was announced yesterday in our earnings release and will be paid in June. Quarterly cash dividends are a new element of our shareholder return strategy and we're excited to make our first ever quarterly dividend payment under that policy, that new policy, and it's following a strong quarter of financial results and we're going to talk more about both of those throughout the course of this call. Let's turn to the financials and do a few highlights and then, of course, Scotty will do more detail. For the first quarter of 2023, we delivered a record amount of quarterly top line revenue $68.9 million that was up 5% over the same period of 2022. We had a solid quarter of profitability resulting in EBITDA $13.7 million which after accounting for a $1 million severance expense that was related to a restructuring announced in our call in February, we've gained some efficiencies on a go-forward basis. We believe that the efficiencies resulting from the restructuring will begin to have a positive impact on our financial performance beginning in the second quarter of this year. And of course, this has taken into consideration in our guidance, which we're reiterating today. More importantly, with the restructuring in place, we now operate and are organized as a single platform company. Our hStream technology platform is increasingly at the core of everything we do, where we used to be organized as two business segments. They were called workforce solutions and provider solutions. We are now unified as a single platform Company by our hStream technology platform. We refer to this internally as our one HealthStream approach and we're organizing our company around that approach. Under that approach, we'll continue to invest in our platform as a service technologies that power both our SaaS application suites as well as the applications of our customers and partners. By utilizing our hStream technology platform to create interoperability among our expanding array of SaaS solutions, we believe we will help improve healthcare, continue to grow our business and provide a growing value proposition to customers of more than one of our application suites. Before we move further into call, I'll take a minute to refresh everyone about our business. And I think this is helpful for those that are new to the HealthStream story, which I hope there are many of you on this call. 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 are achieving through our hStream technology platform. We sell our solutions on a subscription basis under contracts which average three to five years in length, that means our revenues are recurring and predictable. We are profitable and we have little to no debt. We are solely focused on healthcare and more specifically the healthcare workforce. 11.2 million healthcare professionals working in the United States of the end users of our SaaS solutions. Now let's take a look at our present and the things that are helping drive future growth. The launch of HealthStream's developer portal in the fourth quarter of 2022 marks an inflection point in our advancing capabilities to more rapidly build interoperability among our applications and third party applications from customers and partners. Key to this process is the access to our APIs which are smaller reusable services that can be assembled to quickly add features and functionality both to proprietary and third party applications. In the first quarter, this was demonstrated successfully through beta testing with three customers where primary source verified license data was shared between our Workforce Validate application and our learning center application. With the integration in place, managers will now, will be able to partner compliance and HR teams to ensure their staff are up-to-date on their licenses with data that has been primary source verified against the various state licensing boards. We have almost 100 customers that have already requested to have this new integration activated at the organizations during the second quarter. So again, those are customers of both Workforce Validate, which is relatively new product and HealthStream learning center, which is an established product in the market. And that integration allows for the shared data occurring between those two applications, which shares the information across the applications, and we think those are loving that feature. In fact, as I said, 100 of them have requested to activate that integration. So that is an example of seeing some power and value being added through the hStream platform technology. The number of customers contracting for Workforce Validate also increased in the first quarter. We added 31 new health organizations on the Workforce Validate application set. We think this is a great example of hStream creating interoperability that benefits customers and add value to our platform and applications. Examples like the one I cited give us confidence that our one HealthStream approach possesses us to deliver strong financial growth and market leading innovations going forward. Evidence of this can be seen in the 2023 financial outlook described in our earnings release and the mid-range financial goals discussed during our September 2022 Investor Day presentation. Both of which we believe we're on track to deliver in the coming months and years. As the macroeconomic forces of inflation and recession add challenges and uncertainty on a global scale, we remain confident that HealthStream will continue to provide strong and growing profits. Along these lines, we believe that the revenue impact from slower bookings during COVID will be behind us as the first half of this year closes, which gives us confidence to reaffirm the financial outlook we provided earlier in the year. And so at this time, I'll turn it over to Scotty Roberts, for a more detailed look at the financial performance and the expectations going forward. Scotty?
Scotty Roberts: Alright. Thank you, Bobby, and good morning. Let's begin with the financial highlights for the first quarter, and unless otherwise noted, the comparisons that I will discuss will be against the same period of last year. We're pleased that delivered a solid quarter of financial results, which were as follows. Revenues were $68.9 million and were up 5%. Operating income was $2.9 million was down 28%. Net income was $2.6 million down 9%. Earnings per share was $0.09 per share for both the first quarter of 2023 and 2022. And finally, adjusted EBITDA was $13.7 million and was down 2%. I'd like to emphasize during the first quarter of 2023, our operating income, net income and adjusted EBITDA metrics were negatively impacted by $1 million severance charge. This $1 million severance expense resulted from the previously announced elimination of 33 positions that were made to further consolidate and streamline our operations under a single platform company strategy. Now back to the results for the quarter. Our revenues were $68.9 million and were up $3.5 million or a little over 5%. Revenues from subscription products were $66 million and increase by 6% while revenues from professional services were $2.9 million and they declined by 11%. Also revenues from the two acquisitions that we completed last year which was CloudCME and Eeds contributed about one-third of the year-over-year revenue growth. Gross margin was 65.4% compared to 66.3% last year. Margins were somewhat impacted by a portion of the severance charges I mentioned as well as increased royalties and cloud hosting costs. We expect our investments in cloud hosting will continue increasing for two primary reasons. The first is associated with growth from our SaaS based CredentialStream application suite. And the second, is due to an increase in hStream technology platform's capabilities. Our operating expenses excluding cost of revenues were up $2.9 million or 7% over last year's first quarter, of which approximately $900,000 or 31% relates to the two acquisitions we completed last year. We also experienced increases in sales, marketing and product development expenses, while G&A expenses declined compared to last year. Sales and marketing expenses increased by 13% due to a combination of growth in staffing levels and increased travel. Our travel costs were approximately $700,000 this quarter compared to less than $100,000 in last year's first quarter. With an increase in customer site visits as well as industry trade shows, we've been resuming customer and business travel for several quarters now, and for the first time in three years, we hosted our company-wide sales meeting in person at our Nashville office. It was a fantastic opportunity for our sales teams to convene, collaborate, and plan for the year ahead. Our product development cost increased by 12% which is net of labor cost that would capitalize for software development. Capitalized labor costs increased about $800,000 over the prior year quarter. The increase in product development as a result of investments towards our single platform strategy and suite of applications as well as the costs associated with the two acquisitions we made last year. General and administrative expenses declined by 3% as a result of reduced spending in several areas. Including reductions in outside recruiting services, lower professional service fees and other infrastructure related costs. And finally, our adjusted EBITDA was $13.7 million which was down 2% and adjusted EBITDA margin was 19.9% compared to 21.4% last year. But for the $1 million severance expense, our adjusted EBITDA would have increased over last year, and our adjusted EBITDA margin would have been approximately 21.4%. Now moving to the balance sheet metrics, we ended the quarter with cash and investment balances of $58.7 million. During the quarter, we deployed $6.6 million of cash for the acquisition of Eeds and $8.4 million towards capital expenditures and we did not have any share repurchases during the quarter. DSO increased to 51 days compared to 46 days last year and the increase in DSO was primarily related to a single customer with a multimillion dollar balance and they remitted payment in early April. Our cash flows from operations were down less than 1% versus last year, coming in at $20.5 million and free cash flows were $12.1 million compared to $13.7 million last year. Free cash flows were lower due to higher payments for capital expenditures, and the timing of cash collections. As announced in February, our Board of Directors adopted a dividend policy under which we intend to pay a quarterly cash dividend on our common stock at an initial rate of $0.025 per share per quarter. The first quarterly cash dividend, $0.025 per share will be paid on April 28, 2023 to shareholders of record as of April 17, 2023. And yesterday, our Board of Directors approved another cash dividend of $0.025 per share to be paid on June 23, 2023 to shareholders of record as of June 12, 2023. Further, the company intends to declare and pay two more quarterly cash dividends this year, which would equate to four dividends paid in the year. Now let's review our guidance expectations for 2023. We are reaffirming the financial expectations that were previously announced in February. To recap, we expect consolidated revenues to range between $277.5 million and $283 million. Adjusted EBITDA is expected to range between $57.5 million and $60.5 million. And capital expenditures are expected to range between $27 million and $29 million. Our guidance takes into account the operating expense reductions related to the previously announced restructuring including the 33 eliminated positions. While our guidance also includes the recently completed acquisition of Eeds, that does not include assumptions for any acquisitions that we may complete during the remainder of the year. Now 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.
Robert A. Frist Jr.: Thank you, Scotty, for those details. I'm going to turn it back to kind of a business narrative and hit some highlights. Of course, our strategy overall is to continue to finally to grow the health and strength of business and of course grow revenues. And we have lots of ways that we can do that with our growing ecosystem. We want to grow subscriptions and we want to grow wallet share from our subscribers. In this quarter, we fell a little short in terms of growing our hStream subscriptions. It's a fairly immature metric and we're working on enhancing its definitions, for example, in the second half of this year, we expect to announce our hStream for scheduling product definition. So we'll have more products connected to hStream. And also we'll be having a new form of subscription under hStream, we're going to call individual memberships, which is different than enterprise memberships to hStream. So it's kind of a moving and volatile metric to begin with. And probably be much more meaningful next year. That said, we fell a little short in terms of growing hStream subscriptions this quarter Our subscription count dropped by 20000 versus last quarter, which is less than 0.5 percentage point of our 5.52 million subscription The slight dip was based on the timing of two non-renewals in the quarter, both of which we had already factored into our financial guidance. There were two customers that really only used one of our many solutions. They weren't particularly heavy users of the totality of our ecosystem. They're less wed to our business model and to our Company. And their non-renewals was obviously a disappointment we'd like to have renewed them. And what our experience is, is that over time those kind of customers tend to come back around and plug back into our ecosystem and then we began to grow them as subscriptions, subscribers and we continue to get more wallet count. So, I think we'll look forward to redeveloping those relationships and getting back into one of the many doors that we can enter at our customer base. Four of our five largest customers up for renewal for the remainder of the year have already renewed and is trending positive. So with that solid indicator for the rest of the year, we have confidence on the continued growth of hStream subscriptions on a go forward basis. And focusing on overall revenue growth, we did a nice job of winning wallet share from our subscribers in the quarter, which obviously drove our 5% top line growth. And that means that our -- that more of our subscribers purchased and used more of our products which is exactly how we want our marketplace approach to work. It also resulted in revenue growth for the quarter, which is in line with our forecast and while we haven't factored it into this year's guidance, I'm optimistic that our marketplace and solution is expanding rapidly enough and increasing in value to the point where we eventually win back the two customers that chose not renew in Q1. We'll look forward to welcome them back in the fall when that happens. A few other highlights that we want to cover for each of our product application suites, the learning, scheduling, credentialing application suites, and then course our platform itself. We saw competitive wins and growing interest in the marketplace concepts overall and the advantages of being a member of HealthStream’s hStream network are becoming more and more apparent. I'm going to give you a few examples. The HealthStream Learning Center is the most utilized learning management system in healthcare and continues to add new customers. In the first quarter, we announced in a press release that Ardent Health Services purchased our HealthStream Learning Center to support their workforce enterprise wide. Subsequent to that announcement, they have chosen to add several clinical content offerings. Moreover, as a member of our hStream network, they launched and HealthStream sales collaborative in March to conveniently offer content to the 15 hospitals in their system. The HealthStream sales collaboratives allow facilities within health system to optimize purchasing decisions in alignment with their education budgets and professional development objectives. And so here we have an example of a hospital system entering our ecology, our network by purchasing the learning center. And then almost immediately expanding the services through what we call our purchasing collaboratives, our sales collaboratives and expanding their purchasing across multiple products almost immediately. That's a good example of health system that buys into the value proposition and we grow share of wallet and get an increasing amount in this case of their educational budget. So we're excited about that as an example of how to continue to grow. We believe our staff scheduling solution that's known as ShiftWizard is the best in class solution and best of its kind and will only become more valuable to customers as it becomes more integrated with other applications through our HealthStream our hStream technology platform. In the first quarter, revenues from ShiftWizard grew 30% over the prior year quarter as customers continued to report high customer satisfaction with over 96% positive rating. We contracted new customers to ShiftWizard in the quarter, such as [Perm Health] (ph), Mercy Cedar Rapids and Catawba Valley Medical Center are examples of the new customers we're welcoming to the ShiftWizard application set. Our credentialing solutions also enjoyed a successful start to the year, both in terms of competitive takeouts and conversions from our legacy solutions to CredentialStream. Which we also believe is best in class solution for enrolling, credentialing and privileging physicians. In the first quarter, we contracted 29 new customers for a CredentialStream representing 33,000 new subscriptions, collectively. These new customers included many highly respected healthcare organizations like Summit Health, AMSURG, TriHealth and Valley Health System. In terms of our platform solutions, the early momentum we're seeing with regard to customers' use and adoption of our APIs is paving the way for an exciting future for the Company. As a reminder, we launched the developer portal in the fourth quarter of 2022, which delivers a powerful addition to our hStream platform capability. The portal provides access to modern, scalable, secure architecture with a growing collection of shared services, platform level applications and APIs to connect to and among all of these components. At the end of the first quarter, 32 health organizations had chosen to open an account on the developer portal where collectively 135 of the developers have account level access to the seven APIs currently available with more to come. That's a little bit of an update on our platform strategies. We're just seeing customers turn to our developer portal to get access to these platform level services at an increasing clip and I'm excited to provide that development kind of coming out of the beta stage and kind of the live utilization of the platform services. And I gave the example earlier of one of them that integrated the flow of data on verified credentials between two application sets at HealthStream. We're really excited about the potential represented in these APIs and our platform strategy and hStream developer portal as an access point to our infrastructure. We believe these customer wins and successful developments illustrate value our customers see from our ability to provide enterprise wide solutions, and we're confident they become more valuable as they become more integrated and more interoperable across multiple applications. And as I said, the second half of the year, expect more applications to come online connected to the hStream platform itself. Shifting gears in the first quarter, we announced the acquisition of Eeds, with this acquisition we expanded our ecosystem with innovative SaaS based continue education management system for healthcare organizations. Eeds represents the third acquisition in the specialty area that we completed within a 13 month period making us a market leader in this niche of healthcare technology. Importantly, we believe that the acquisition of Rievent Technology, CloudCME and Eeds, which are all CME application management businesses showcases how our platform is well positioned to empower new solutions that add our growing ecosystem and marketplace. Since we're into the second quarter of 2023 right now, I want to share that this is the last quarterly call with Eddie Pearson, HealthStream's President and COO, serving in his current position. As announced earlier this year, Eddie will be retiring from his current role at the end of the second quarter and assuming a new role. At that time, he plans to continue serving the Company in a multi-year part-time leadership position as Executive-in-Residence. And that's really excited about that new role while it will be less time with the Company, we expect for continued contributions for many years to come as he develops the leaders across HealthStream, global setting and global payment programs. Since joining the HealthStream in 2006, Eddie has played transformative role in completing, we were reflecting that when he joined the company had about $26 million in revenue. And Eddie Pearson, the President and COO, to Executive-in-Residence, were left last year with $265 million in revenue. So, 10 times the growth under Eddie's leadership, fantastic outcome. We're grateful for his years of service and dedication to HealthStream as he has helped shape our culture and our Company into what it is today. And we're also just excited that he's going to stay around and help coach and develop our leaders and future leaders of HealthStream. Thank you, Eddie. I’d like to also mention that Mike Shmerling, the HealthStream, the long standing HealthStream Board members since 2005, is not standing for re-election at our upcoming annual meeting. He's also decided to move into more retirement phase for his life, we're so appreciative of his service to our Board. He's been our audit of our chair. He's been the chair of our audit committee for many years now and successfully led that function. He's a veteran entrepreneur with a strong track record of growing companies and he's been a great contributor to HealthStream's growth story and leadership over our financial matters as chair of our audit committee. He's added independent experience perspective of the Board and again we're just appreciative. Terry Rappuhn, who joined the Board in January 2022, has become the new chair of our audit committee when Michael, service on the Board ends. So we've already planned for this to occur. And we want to thank Michael for his service and Terry for her continued service in this new capacity as chair of our audit committee. As we reached the close of this portion of the call today, I want to reiterate our dividend policy, which I mentioned at the opening of the call, we're pleased to have a strong balance sheet including reliable free cash flows and now we're sharing a portion of the free cash flows with our shareholders. And that's a return directly to shareholders. And I think in today's economy and time as companies are performing, sharing some of the gains is the right thing to do, and so we're excited to continue with the dividend policy during the second quarter and on throughout the year where we expect to make multiple payments one each quarter throughout the year. And so, I think as we think about the totality of the quarter, and the future that we're excited for HealthStream, we’ve got a strong profitable, highly recurring revenue SaaS application suite with new past services emerging. And so our senior leadership team and Board of Directors are excited for the future and continued growth into the future. If you're already a shareholder, you know that our Annual Shareholder Meeting is scheduled to take place virtually on Thursday, May 25th, at 2 PM, and notifications of the meeting and access to the proxy statement 10-K and Shareholder Letter were sent out on April 12. So you should have those in your mailbox or digitally. We encourage you to vote your shares, anticipate in the future of our Company. And now I'd like to turn it over to the operator, to go back to Q&A with our analysts.
Operator: Thank you, sir. The question-and-answer session will begin at this time. [Operator Instructions]. Your first question comes from the line of Matt Hewitt from Craig Hallum.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Richard Close from Canaccord Genuity.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Jack Melick from William Blair. Hi, good morning.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Vincent Colicchio from Barrington.
Operator: Thank you. At this time, I would like to turn the conference back over to Robert Frist for closing remarks.
Robert A. Frist Jr.: Thank you to HealthStream employees who delivered this quarter and helped us organize and grow throughout this restructuring period. And thank you to our shareholders for following along our story and our analysts that tell the story. Particularly thanks to Eddie Pearson and Michael Shmerling for their long standing service and specific roles for the Company. And I look forward to their continued guidance and advice as we move forward, but in different capacities. Look forward to reporting the next quarter earnings and of course paying the dividend to you guys in a few days. See you. Thanks.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
