HealthStream, Inc.

Welcome to Healthstream's first quarter 2021 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in listen-only mode. At the request of the company, we will open the conference up for questions, answers after the presentation. I will now turn the conference over to Molly Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you and good morning. Thank you for joining us today to discuss our first quarter 2021 results. Also in the conference call with me today are Robert A. Frist, Jr., CEO and Chairman of HealthStream, and Scotty Roberts, CFO and Senior Vice President. 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 risk 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 at this time, I'll turn the call over to Bobby Frist.

Thank you, Molly. Good morning and welcome to our first quarter 2021 earnings conference call. There is so much news to cover this morning. I can't wait to get started. But I think context is very important. And so, First, we'll contextualize. The nation continues to move through the pandemic, and there are reasons for cautious optimism, especially here in the U.S., given that over half of U.S. adults have now at least one vaccine dose and a third are fully vaccinated. And as we celebrate this remarkable progress, there are plenty of challenges still remaining regarding the pandemic that affects us as individuals and, of course, our company as well. For example, figuring out our new work-from-home models and our approach to operating as a business is and making them more whatever the new norm is, the new permanent new norm is going to be. We're working on that diligently now. So what I can tell you with absolute certainty is that HealthStream's mission that's focused on the people of health care and improving the quality of health care by helping develop, retain, engage, and credential those that are in health care remains constant. And as you listen to our call today, I hope you recognize our commitment to that mission, how we're striving to achieve it, and you're going to hear how we're executing on it through some of our exciting new products, many of which have been in development for years and are emerging into the marketplace as we speak. So I'm going to give a little more detail today about some of these exciting new products or progress with them. So to start out, though, I do want to start on our financial guidance, which we updated after a strong first quarter of necessity. The quarter included a record high adjusted EBITDA. That's in our company's history. And record quarterly sales for VerityStream. which is, as you know, been working diligently on VerityStream for several years through a combination of three or four acquisitions to build a new application set in credentialing and privileging. And we're seeing it emerge now, delivering record quarterly sales. I can't wait to share more details on that. And there are also two multimillion-dollar contracts for our emerging products. These are products that we are excited about, and now we're glad to see the market get excited about them as well. And so with all that context, we expect revenue for the full year 2021 to be in the range of $245 million to $255 million and adjusted EBITDA to be in the range of $40 million to $44 million. So I'm excited to provide that updated guidance to all of our financial community and current investors. As I stated in our call in February, I believe one of the most remarkable things about this guidance is that we are projecting potential revenue growth despite the a $38.4 million revenue decline in legacy resuscitation products from 2020 to 2021, and the $4 to $4.3 million negative impact of acquisition-related deferred revenue write-downs. So despite these headwinds, our first quarter performance gives us confidence in our improved financial expectations for 2021, where we believe we have a good shot at showing top-line revenue growth on a year-over-year basis. So, you know, I think that's a great accomplishment by our team to have figured out the balance of both organic growth, as we'll talk about, and inorganic growth to deliver what looks like the potential now to actually deliver growth in a year with such material financial headwinds from a declining product set. So I'm going to take a moment to reiterate some of the directional information I provided in our last call on what we can expect beyond the current year, which is a little bit longer view than we normally provide. It's building on our anticipated results for 2021. In 2022, we expect to deliver organic, high, single-digit revenue growth rates. And second, we've been focused on our gross margin profile. We're expecting a gross margin profile of 65%, approximately 65% in that timeframe as well. And third, a return to adjusted EBITDA margins of 15% to 20%. We saw some depression in those margins earlier. as we saw the product changes and investment changes we've been making the last few years. But we see a return to those margins for adjusted EBITDA in 2021. So it's not only the continued success of our longstanding product portfolios, but also the market's enthusiastic response to our innovative new solutions that contributes to our confidence in the company's future growth. And I'm going to highlight a couple of those now. One of those new innovative products that we call Jane, It's the first of its kind in the market, to the best of our knowledge. Jane is AI-driven. It has components of really exciting technology in it, but it's not the technology that's exciting about it. It's about what it does for clinicians. It's one of the first intelligent competency development systems in the market. It's got components like natural language processing by IBM Watson, and so the state-of-the-art technology is changing the way nurses assess and develop and maintain their clinical competencies. Let me explain how it works just a little bit. Through two acquisitions through our M&A program, we acquired testing services and data sets, some of which had 30 years of history on how to evaluate the clinical competence of nurses specifically. And over the years, we painstakingly converted that data into dynamic algorithms that involve components of AI capable of having real-time conversations with nurses and Next, we developed high-quality video simulations that present clinical events that nurses respond to in real time by telling Jane what they believe is happening and what should be done for the patient. This produces an assessment that identifies nurses' strengths and areas for improvement. But we didn't stop there. In order to make Jane a true virtual coach, like a mentor to nurses, we took our proprietary taxonomy engine and connected it from the assessments that I talked about that are included in Jane to a library of 1,800 content titles. This allows Jane to provide a personalized learning plan to each nurse by identifying particular areas of need and then recommending actual education and training to address their unique individual needs. So you can probably tell we're excited about Jane, and I'm excited about it because it's been, what, over five years in development, and we started selling it, you know, 18 months ago, and And we're not the only ones excited about Jane. Jane just recently won six of the industry's most prestigious awards, including two first-place awards from the Brandon Hall Group. One was a gold medal for best advance in AI and machine learning, and another was a gold medal for best advance in emerging learning technology. So we're excited that others are seeing what we see in our new Jane capabilities. These awards recognize that Jane has moved assessments from the pen and paper world and clicked through online tests to an immersive multimedia journey that is specifically tailored to each nurse. We're also pleased that Jane was awarded a patent to further recognize its one-of-a-kind technology and approach. Awards aside, we think the greatest act like Jane can deliver is adoption by our customers, right, because we think it can have an impact on eventually the skills and capabilities and competencies of their staff. In 2020, when we first began offering Jane at scale, our goal is to sell Jane to one account per week every week of the year. We actually accomplished that goal and on a similar pace so far in 2021. As I mentioned earlier, we had a leading health system make a multimillion-dollar enterprise-wide purchase of Jane, kind of the first of its type, kind of at scale, in this first quarter of 2021. As customer utilization grows and Jane's capabilities expand, we look forward to updating you on how Jane is helping healthcare providers improve the quality of care that patients receive. And I think it's one of the most exciting developments we've had at Lstream in a long time. And it's not an overnight thing. It's taken many years to build, tune, and refine, and test, and have customers evaluate the Jane technologies. So, you know, our focus remains on innovation, and that's a little hard to see given all the transitions we've been talking about in the last several years. But we think these innovations can deliver improved outcomes and higher-skilled workers in health care. So I do want to talk a bit about the transitions, though. An important part of our strategic focus has involved several key transitions we've discussed on, you know, really for over two years. I believe we've crossed an inflection point where the major business risks associated with the transitions are – Like market acceptance, these are the major risks. Will the market accept what we build? Will we get any adoption of the technology? Will the technology be viable even? There's always questions like that if you've been building technology for a long time. And it's my sense that many of those kind of major business risks, I call them existential risks, are behind us. And we're kind of doing operational risk phase on these three transitions. And so it's a different kind of risk, and we're two years into this three-year, a little more than two years into the three-year transitions, and I guess I'm kind of declaring the existential risks of these major transitions behind us. And we have normal market competitive risks and the normal dynamics, but, you know, the technologies we've been building are viable now, and they're starting to make a difference. So, for example, the Red Cross Resuscitation Suite Program comprised of BLS, ALS, and PALS competency development curricula We launched it in January of 2019. It brings an updated, highly adaptive, competency-based development solution to healthcare professionals. It offers certification to healthcare professionals successfully demonstrating proficiency of life-saving resuscitation knowledge and skills. So it's a really well-defined product. And I think, you know, when we first went on the journey in early 19, we were uncertain of its adoption. But just by way of an update, the program has been adopted across all 50 states. And since then, Since its launch, we've amassed over 289 new contracts signed by customers, which includes healthcare facilities of all types and sizes from across the continuum of care. It includes some of the industry's largest acute care health systems like HCA, Community Health Systems, Quorum, and Trinity, along with many of the most award-winning, thought-leading acute care organizations like Cedars-Sinai and Kettering Health Network. And in the non-acute space as well, we have really great wins and customer benefits going to say Fresenius Medical Care, one of the largest renal care providers in the U.S., and the LHC Group, a leading home health care service provider operating in 35 states. So all of them have seen the innovation of the Red Cross Resuscitation Suite, particularly how it's executed through the HealthStream network, the HealthStream platform, bringing just really exceptional capabilities to this relatively new product. But like I said, with 289 new contracts, and some of those representing hundreds and hundreds, if not more locations and facilities and thousands, over half a million workers have now moved through the program or engaged in the program. We're through the concept of, look, will it be accepted as a viable solution in the market? I mean, now we face normal execution against our competition. How much market share can we gain? How will it continue its growth trajectory? So it's helpful to think through a bit of history. It took us 12 years to build our highest level of adjusted EBITDA contribution from our legacy resuscitation offering. So 12 years of selling and marketing the legacy products. We expect to eclipse that level of adjusted EBITDA contribution from sales of our Red Cross suite in just three and a half years. So by the middle of 2022 is our current forecast where we will eclipse what was the highest level of adjusted EBITDA from the prior legacy platform. So we do have some time to go in front of us, but we're on an incredible trajectory with the Red Cross Resuscitation Suite. And speaking of resuscitation offerings, it's important to understand, too, that we're building a more comprehensive portfolio of simulation offerings and resuscitation offerings. So in February of 2020, we announced the addition of the STABLE program. That's a leading neonatal education solution. It's highly respected, and it's now available online exclusively through HealthStream. And we saw strong sales in the first quarter as it was adding to our thousands of subscriptions to the stable program. It's just a really well-known program nationally and in some cases internationally. And we've helped develop and take it online in an online format from a classroom format. And it's being well received in the market. So our portfolio is no longer dependent on a single application point in our simulation suite and our resuscitation training offerings. It's being broadened. So we're committed to the continued diversification of that product portfolio and have exciting new advances coming in areas like OB, specific dimensions to resuscitation in specific care settings. The second transition that we talked about is VerityStream, and we've created it through four acquisitions and been working diligently for four years to build a kind of a common vision, a common team to focus on. credentialing and privileging enrollment needs in healthcare. And during the first quarter of 2021, 45 customer accounts contracted for the VerityStream application suite. And we call that the credential stream suite, bringing our cumulative total to approximately 390 customers on the new credential stream suite. And this included one new customer that signed a multi-year, multi-million dollar contract for VerityStream's next generation SaaS application. And it represents the single largest sale in VerityStream's history. And so we're really excited that this product, this transition, if you will, from four acquisitions to one common approach and one SaaS application suite called CredentialStream, you know, with 390 accounts now contracted for that new platform, we think we're beyond just proving its technical viability. And so the existential risk of the four acquisitions bringing them into one company we think is behind us. Now we're in the normal business risk of, of how much market share can we gain against the competition, and how well can we position the product for future growth and how competitive it will be. And I think we're well positioned on all those fronts with VerityStream and the CredentialStream platform. And it's measured by the kind of customers you see coming onto the platform. In the first quarter, Providence Health System and Mount Sinai Health System and Atlantic Health System and Seattle's Children's Hospital, all these new customers are including the distinguished ones I just mentioned, came on to the new enterprise credential streaming platform through contract. And we're in the midst of working through implementation strategies for all of them. So we're excited to be gaining adoption of the best-in-class solution. It's our belief. And with best-in-class customers, it's really kind of an exciting part of this transitional journey. And, again, there's always challenges in front of us, learning the new selling models that are more virtual and and getting through all these implementation backlogs from new signed customers to get to revenue recognition. There's plenty to do to continue to execute in this area, and there's plenty of business risk. But I do think that at this point, 27 months into this migration, we've at least proven the viability and the acceptability, the market acceptance of the Credential Stream platform built by the Barrett Stream team. They've done a fantastic job. The third area to talk about is the upgrade or kind of a move to a PaaS strategy through the 8Stream platform. And we do have a lot of work left here. Not all of our application sets, particularly our new acquisitions in the fourth quarter and the first quarter, are wired to or even benefiting from this new PaaS architecture we've been building for over three and a half years. But increasingly, we are connecting them to the PaaS architecture, and that's allowing us to develop things more rapidly. It's allowing us to interconnect applications that connect down to the H-Stream platform. It's allowing us to put value-added services in the new platform that can manifest back out in the application sets, like the learning and development set, credentialing and privileging set, and the scheduling and capacity management set of applications. So we're finding ways to this past infrastructure we've been building to connect to and power up into each of those application sets. So just a quick update on that. In the first quarter, we added approximately 121,000 net new hStream subscriptions, bringing our cumulative totals to about 4.34 million subscriptions. Those are subscriptions, not subscribers. It's important to note, you know, if you're using an application that connects to hStream, you're going to get a subscription to hStream, and that could be tailored a little bit based on the application you're licensing from us, the features of hStream you're getting and the benefits from that subscription. And so it is possible for an individual to have multiple subscriptions to the HStream platform by buying multiple applications that connect to the HStream platform or derive benefit from it, say, economically, like maybe a discount. So HStream brings value to customers and partners alike, and it's important to remember that since inception, for example, the American Red Cross suite has been powered by the HStream PaaS architecture. Our updates with regard to these business transitions began at the start of 2019. That's 27 months ago from really about now. And we continue to work on each of these transitions. But as I've said, we're moved to an operational execution phase of these. So we're going to talk a lot less about transitions and transitional risks on a go-forward basis and talk a little bit more about the things that are exciting that are emerging like Jane and other new products that are coming into the market as we speak. At this time, I think it's important to take a look at the finances. The one thing we want everyone to hear and our analysts to hear, we had a really good first quarter. Obviously, we're excited about it. But there are reasons to be conservative as we go forward, including increased need for investment, some one-time expenses that were not in Q1 that as we return to normal operations, like putting pay raises back in place for employees, we'll have increased expenses. So we still need to, even though we had a strong first quarter, be cautious about how we model the future because we're still in an investment phase. With that, I'll turn it over to Scotty Roberts.