HealthStream, Inc.

Q2 2021 Earnings Conference Call

7/27/2021

spk03: Good morning and thank you for standing by. Welcome to the HealthStreams second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Molly Kondra, Vice President, Investor Relations and Communications. Ms. Kondra, you may begin.
spk02: Thank you and good morning. Thank you for joining us today to discuss our second 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 involve risk and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning those 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 the 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 in mind, at this time, I'll turn the call over to Bobby Frist.
spk09: Thank you, Molly. Good morning, everyone. Welcome to our second quarter 2021 earnings call. A lot to cover today, but I think first context is important. And I wanted to remind everybody that as the nation moves forward through the pandemic, it's clear that this long journey has grown bumpier in the recent rise of the Delta variant, which is causing a 36% increase in the number of hospitalizations. According to the CDC, nearly half of adults in the U.S. have been fully vaccinated. And as that number rises, we at Healthstream remain hopeful that progress towards beating the pandemic will continue. But we must keep in mind that it is our customers, our customers that are ones on the front lines responding to this new spike in the cases. And as we start today's call, I can tell you that our commitment to helping them improve the quality of health care has never been stronger. We're trying to align our interest and energies with our hospital customers and our continuum customers. I'd like to comment on financial performance for the quarter and the first half of the year. We remain laser focused on growing the company. which is why we were able to deliver another strong quarter with top-line revenues increasing 7% and adjusted EBITDA increasing 20% over the same period last year to a record $14.5 million. And based on those results, we have updated our financial guidance. We wanted to hit that early in the conference call. We now expect revenue for the full year 2021 to be in the range of $253 million to $257 million. For context, the midpoint of the new range is $5 million higher than the midpoint of the previous range. I believe one of the most remarkable things about this guidance is that we are projecting revenue growth despite a $38.4 million decline in revenue associated with our legacy resuscitation products from 2020 to 2021 and a $4 million to $4.3 million negative impact of acquisition-related deferred revenue write-downs. So our teams have done a great job, both organically and through acquisitions, of backfilling those revenue challenges that I just articulated. Additionally, we now expect adjusted EBITDA for the full year 2021 to increase to be in the range of $48 to $50 million. And that's compared to a range of $40 to $44 million that was announced just last quarter. There were some unique factors, however, that helped contribute to the record-setting adjusted EBITDA in the first half of the year, which are not expected to repeat during the second half of the year. For example, in the first half of the year, there wasn't much travel at all, and we do expect and have projected a return to travel expenses. Now, not at the full level pre-pandemic, but we do expect to see travel begin to recover for health streamers across the country. And so we'll begin to see travel expenses come into the modelings as a return in the second half of the year. Additionally, macro workforce trends have made recruiting, retention, and hiring much more complex. Basically, all those are more difficult in the last, say, six months as the macro trends support everybody peeking up from the pandemic and looking around to see if there's new opportunities. And no exception to HealthStream. It's been a detriment and a benefit to HealthStream, this trend of everybody looking for something new. catch up on our planned hiring. We were definitely behind our plan in hiring in the first half of the year, which resulted in improved EBITDA, but we need to reserve the right to catch up on hiring. We need to get the people in place that we had planned to have in place in the second half of the year, and so we're doing everything we can, and our new VP of HR and our recruiting teams are doing a great job adding new people, but our turnover has increased, so Second half of the year, we expect additional costs and personnel that we were unable to net add in the first half of the year. We did have net add, but just not where we planned to be. And finally, we're committed to increase our investment in our newly acquired scheduling businesses, making it into one business or one focus area in the second half of 2021. And we'll talk a bit about that here at the end of the conference call. But our new guidance reflects all three of these things, for example. and captures them in the guidance ranges I provided above. So I'll take a moment to comment on our financial goals for 2022 because in the last earnings call for the first time, we looked forward beyond 2021. As you know, we had expected 2021 to be one of our toughest years with a $38 million decline in one of our product lines. But as you can tell, we found a way through that in the first half successfully. And so we wanted to get some view into 2022, or at least our goals for 2022. And so here's what I can say about those now. Building on anticipated results now for 2021, our goals for 2022 are, first, to deliver organic, high, single-digit revenue growth rates. And for us, that's probably 7% to 9%. Second, to achieve approximately 65% gross margin profile. which is fantastic because we have been delivering on that in the last two quarters at 65% gross margin profile, which was the point of several of our transitional business work we've been doing the last three years that we've been talking about. And so essentially we feel we've achieved that, that general approximate level of gross margin profile, which is a meaningful improvement from our historical gross margin profile. And we expect to be able to continue to deliver that at 65% approximately into 2022. And third, we want to deliver adjusted EBITDA margins of 17% to 21%, which is an increase over our previously stated goal of 15% to 20%. So a little bump in our expected, taking off the bottom of the range essentially and bumping it up a little bit on our expected EBITDA margins into 2022, up to 17% to 21%. And that would be an improvement of our historical norms, which hover in the 17% to 18%. So we hope to be able to at least maintain historical, but hopefully have some upside to that in this new range of 17% to 21% EBITDA margins into 2022. Remember, these are goals, so they're short of guidance, meaning the models are all in flux. And we want to have targets out there. We want people to understand that we're working to be a growth-oriented company, improve our profitability profile, and establish what looks to be now slightly higher EBITDA margins as well. So we'll state those as goals, not guidance for 2022, but we thought we'd give some context as we look forward. You know, it's not only the contributions of our longstanding product portfolios that give us confidence, but it's the market's enthusiastic response to our newer solutions that have given us the confidence to put forward those kind of objectives and goals for 2022. And it's the market's embrace of our resuscitation solution from the American Red Cross and many of our other exciting innovative products that are contributing to our growth with their unique outcomes-driven approaches. So I want to talk a bit about one of those. We've talked pretty extensively, and we'll talk more about the American Red Cross resuscitation suite. But today I want to spend a minute on Jane. So Jane is one of these new products. It was first of its kind in the market. Jane is an AI-driven clinical development solution that uses natural language processing powered by IBM Watson. And that's a mouthful, but basically it is a cutting-edge solution for helping assess the competency profile of staff and give them individualized, intelligent plans on how to improve not only their knowledge of their work, but their critical thinking ability. So Jane is truly a state-of-the-art kind of breakthrough expert system. It's kind of like a digital coach, particularly focused on our nursing population. And Jane has been recognized industry-wide with six prestigious awards from Bandon Hall in the last year and a unique approach through its newly awarded patent. So we couldn't be more excited about the position of our Jane application set and so a bit of business progress as well. In 2020, when we first began offering Jane at scale, our goal was to average one sale of Jane per week. And as we reported last quarter, we did achieve that throughout 2020. So I believe it was about 52 sales of Jane that were in the books last year. But this year, we continue with good momentum. In the second quarter, for example, we have 23 new sales, so more than one a week during the second quarter alone. So that's It's good to see that new product gaining some traction in the market. And as customer utilization grows and Jane's capabilities expand, we look forward to updating you on how Jane is changing the industry. It's a really exciting product. And it's more than just a singular product. It's kind of a framework that we can attach more and more capabilities to. So we're excited about Jane. An important part of our strategic and tactical focus now is And in the last several years has involved these key transitions. We've articulated these three transitions. And we use the word transition kind of in a way to infer risk, you know, that we were transitioning our business to achieve higher margins. And we articulated a story of three transitions over the last three years. And each of them had some, I guess I would characterize as major business risk. And the great thing about today is I believe we've crossed an inflection point where the major business risks, what I kind of coined the existential risks, you know, the threat to our business is gone. And we're really in the phase now where we're trying to assess what's the opportunity behind each of these transitions. In other words, I think we're through some of the questions. For example, when we launched the Red Cross Resuscitation Suite Program, you know, would it be accepted? Well, we're beyond acceptance now. We're in all 50 states now. hundreds and hundreds of contracts, system adoption. And so we're just beyond the kind of the existential threat of launching a new product and it fails in the market. Now the question is, you know, how good can it be? And that's a better place to be right now. In addition, the product adoption of VerityStream. So we built a new platform, the VerityStream platform called CredentialStream, our application set. And we launched it. We were excited about it, but you never know how that's going to go. And now, again, with over 400 contracts on VerityStream, the new CredentialStream platform. I think the acceptance of the market or the market adoption and acceptance of it as a cutting-edge platform, we're kind of beyond questioning that. Now it's just a matter of how much market share can we get. And our team is really excited that they seem to be winning really well in the market with the new CredentialStream SaaS-based application. And then finally, this third transition is, I'm trying to retire the word transition and just give you operational updates from here forward. But the third transition was about the HStream platform. And while it's still an immature platform, it is starting to be the interconnection kind of tissue between all of our application sets. And we've proven that some of the core functionality of the platform works. For example, the Red Cross resuscitation suite program takes advantage of the PaaS architecture to use the identity management and login infrastructure in the past architecture. So we know it works, and we're excited to kind of pass this point of talking about it as a transitional risk and just start to provide more normalized operational updates on these three business initiatives now that I'll call them. So a little more detail on each of those, but I've covered some already. But on the Red Cross resuscitation suite, we thought we'd share a few milestones on it. As I mentioned, we're in all 50 states now. So, again, product adoption not a question anymore. And, in fact, we've amassed well over half a million subscriptions at this point for the new product, which is really quite staggering that we've been able to move that much market share to the American Red Cross Resuscitation Suite Program really in a very short time period since its launch in February of 2019. So we continue to be excited about the product, and in fact, you know, as we think about it, what's really great, too, is that the portfolio around resuscitation has also expanded. And so in February of 2020, we announced an additional product called the STABLE program, and it's a leading neonatal education program around stabilizing neonates and resuscitation as a component of it. And this highly expected program is now available online exclusively through HealthStream. And we've had strong sales in the second quarter, adding to our thousands of subscriptions for the Staple program. And, again, this is in the portfolio of resuscitation. So not only have we found success with the American Red Cross Resuscitation Suite program, but the complementary products that can be built around, surround, and supportive of that program are beginning to gain traction in the market. And so, you know, organizations like – Akron Children's Hospital, Asperis Healthcare, and Ascension Health are adopting the stable program, which is really fantastic to see. So I'm pleased to see diversification of that portfolio area of our company, as well as success of the core product, which, again, American Red Cross. So I've talked a bit already about the operational update on VerityStream, but I thought a little more color would be useful. During the second quarter of 2021, in fact, 42 new customer accounts contracted for the VerityStream application suite, which is called CredentialStream. And that brings our cumulative total to well over 400 accounts. These accounts represent a mix of new customers and existing customers who are choosing to migrate from our legacy credentialing and privileging platforms to the new VerityStream application suite. And so some of these customers that we contract in the second quarter are main brands that people may represent in high-quality health systems, like Centara Health, Shands Healthcare at the University of Florida, and even Mercy Health System has selected the Credential Stream application set. And importantly, it's good to know that all of our new customers, including the ones I just mentioned, are coming on to the Enterprise Solution, the Credential Stream Enterprise Solution. So it's our top solution and the one that we built as a result of studying and building from the acquisitions we've made over the last, say, eight years. So we're excited to be gaining traction with that application set. And then finally, the HStream platform is getting exciting now. We think of it as connective tissue, almost like an operating system that can help us improve data mobility between applications that HealthStream offers help us improve portability of data about the people in our ecosystem. And so it was exciting to see that we added 180,000 net new H-Stream subscriptions by embedding some access to those technologies into the contracts that we're signing, the new contracts we're signing. So that brings our cumulative total to 4.52 million subscriptions to the H-Stream technologies, capabilities, and solutions, which we're really, really excited about. At this time, I'd like to turn it over to Scotty Roberts for a more detailed look at the financials, and then we'll swing back around at the end and talk about the investments we want to make and some of the strategy and philosophy around our relatively new, we call it the third leg of our stool, but our relatively new scheduling and capacity management business. So, Scotty, I'll turn it over to you.
spk07: Okay. Thanks, Bobby, and good morning, everyone. I'd like to begin my discussion with the highlight of the quarter. which is our achievement of a new record adjusted EBITDA of 14.5 million, which is after setting the previous record of 13.6 million during the first quarter. Having set back-to-back records of adjusted EBITDA, we're raising the full year guidance to now range between 48 and 50 million, which is up from the previous range of 40 to 44 million. Before I go over the updated guidance in more detail, though, let me first speak to the results for the quarter. Revenues were $64.8 million, which is up 7% over last year, and included balanced growth within both segments. Revenues for 2021 were impacted by $1.2 million reduction associated with deferred revenue write-downs, which was primarily from acquisitions that we completed during the fourth quarter of last year. Operating income was $3.4 million, or down 20%. Net income was $2.4 million, or down 29%. and EPS was $0.08 per deleted share, down from $0.11 per deleted share in the prior year. While these GAAP-based financial measures experienced declines, our non-GAAP performance measure, adjusted EBITDA, improved to $14.5 million, which was up 20%. Both of our business segments are contributing to their revenue growth over the prior year. Workforce Solutions revenues were $52.2 million and were up 6.7%, and revenues from provider solutions were $12.7 million and were up 8.5%. We overcame a nearly $10 million headwind from the legacy resuscitation business during the quarter and delivered year-over-year growth of 7%. Revenues from recent acquisitions and organic growth from both segments contributed to this year-over-year improvement. Workforce revenues included $1 million of legacy resuscitation in the quarter and also benefited from some non-recurring software license and professional services from our scheduling and capacity management products. When you exclude revenues from the legacy resuscitation business, our consolidated revenues grew by 28%, which was comprised of 13% organic and 15% from acquisitions. Our gross margin was 65%, which is consistent with our objective to be in the mid 60% range for the year. As our revenue mix has shifted away from the legacy resuscitation products, revenues from higher margin products are backfilling the top line and providing improved economics to us. We're on track to maintain gross margins in the mid 60% range for this year and expect to continue doing so for next year. Operating expenses excluding cost of revenues were up 16% or $5.4 million. This increase reflects investments in our core business and the incremental expenses associated with businesses that we acquired over the past year, including the costs for integration and transition services, which are expected to conclude by year-end. Additionally, we began classifying software expenses related to our production environments under cost of revenues while they had historically been classified as a G&A expense. Our EBITDA margins improved as well, coming in at 22.4% compared to 20% last year. Now switching to the balance sheet and cash flows. Our cash flows from operations improved to 24.3 million this year compared to 13.5 million last year. BSO for the quarter also improved to 43 days compared to 47 days last year. Our free cash flows year-to-date were 11.6 million compared to 4.6 million last year, and we ended the quarter with cash and investment balances of 55.1 million, which was down slightly for the quarter, while working capital improved by over 6 million. Capital expenditures incurred, which includes capitalized software development, were 6.9 million for the quarter and are 11.2 million year-to-date. Now let's go over our updated financial expectations for 2021. We are increasing our revenue ranges and now forecast consolidated revenues to range between $253 and $257 million, with workforce revenues forecasted to range between $203.5 and $206.5 million, and provider revenues forecasted to range between $49.5 and $50.5 million. We also raised our adjusted EBITDA range to be between 48 and 50 million. We continue to anticipate that capital expenditures will range between 25 and 27 million. As we think about expectations for the second half of the year, we anticipate continued year-over-year revenue growth from both segments. As you'll see in our revenue guidance, we expect some leveling to occur in the second half of the year. mainly because the first half of the year included some non-recurring revenues that we did not expect to occur at the same levels. Specifically, this includes the $2.8 million of legacy resuscitation revenues and about $2 million of non-recurring software license sales and professional service projects delivered in the first half of the year from our scheduling and capacity management solutions, which we forecasted to be down in the second half of the year. Looking at adjusted EBITDA, we had a record first half of 2021, which was partially due to some of the non-recurring revenue items I just mentioned, and because we were delayed in making some meaningful investments in sales, marketing, and product development that we had anticipated doing earlier in the year. And this includes investments in the scheduling and capacity management businesses we recently acquired. One of the reasons for the delayed expenses is that we experienced a higher employee vacancy rate than expected, which created some short-term savings relative to our plan. We've been successful bringing on new employees, but the net additions to staffing that we factored into our previous guidance have not materialized according to our expectations. Our second half outlook assumes that these investments begin to ramp up, which will result in lower EBITDA relative to the first half of the year. We also expect certain expenses that were halted by COVID will also come back into our run rate, such as employee travel and trade shows. For context, our travel and trade show expenses before COVID were approximately $6 million per year. Finally, our forecast does not include the impact of any potential acquisitions that we may complete during the remainder of 2021. Now I'll wrap up with a few other updates. First, our forecasts assume continued improvement in sales and renewals, which we've begun to see in our bookings over the past two quarters. Our new sales bookings are up compared to the same quarter last year, which was at the height of COVID-19, and renewals are also performing better than last year, both of which are helping us achieve growth in a year with a known $38 million revenue decline from the legacy resuscitation business. While there continue to be signs of improving conditions, There remains a degree of uncertainty as we still see some delayed purchasing decisions, especially for products that are discretionary in our workforce segment. On the other hand, demand for our credentialing products has been growing and the provider solution segment had another strong sales quarter. Again, while we are seeing modest improvements, we realize that conditions could change due to COVID. And finally, like many companies, we've been operating for the past six quarters without significant business travel, and our employees have been working remotely. We are eager to reopen our offices in Tennessee, Colorado, and California later this quarter, and for our employees to have the opportunity to see their colleagues in person again. Because our remote working arrangement has been a success, we'll be adopting a hybrid work policy going forward meaning employees will be able to work from home or the office and with our larger virtual workforce we've evaluated our office space needs and determined that we will not be renewing several of our office leases when they expire over the next 12 months in fact we took this approach with two leases last year and two others already this year while reducing our office space needs will create expense savings We do expect having more employees living away from a city that contains an office will necessitate more travel by those employees than had in the past. We will continue to monitor our office space needs and make adjustments that we deem appropriate. Thank you, and that concludes my comments for today. Bobby, I'll turn it back over to you.
spk09: Thanks, Scotty. What I'd like to do is talk a little bit about our plan investments and kind of philosophy and approach to building the scheduling and capacity management business, which is right now the result of three recent acquisitions. And so kind of a little lesson from history, if we look back and think about what we've been able to do, creating the VerityStream application suite through four acquisitions over eight years. And if you think back six years ago, we took these for VerityStream, we took these four standalone companies, we combined them into a new business group, We essentially created a new platform, a fifth application set to migrate those customers to. And that's a multi-year journey. And it's a story of time and investment that's required to take these wholly separate assets and involve them into something that is market leading and more than the sum of their parts. And so, you know, we have a very successful playbook for doing that. And if you look at the kind of the five-year trajectory of VerityStream, and we're really excited to see it emerging out of that kind of storming and forming phase and into a market leading phase. And, of course, we hope to repeat that with our capacity management and scheduling business. We've recently acquired three businesses really during the pandemic, three of them just in the last, say, 12 months. We've appointed a leadership team. They've begun identifying where they want to invest. So we didn't acquire to cut. We acquired to innovate and invest. And so we're fortunate to have a team at VerityStream that has created a playbook, a detailed playbook on how to make this work. And we think we can do it now with our scheduling and capacity management business more quickly. But it is important to remind everybody that it was a journey. It required increasing investments in people. So, again, we didn't acquire and create synergies. Just the opposite. We acquired and invested, in some cases doubling the tech teams and doubling the sales teams. And then, you know, many years later, which is this last, say, 18 months, 12 months, we've begun to see real traction on what we've built in the VerityStream business, the credential stream application. And my goal is to repeat that playbook, almost play by play, study the timelines, try to do it faster. We've learned a lot of lessons. And take these three businesses that we've acquired, which are NurseGrid, ShiftWizard, and Ansauce, and turn them into a market-leading scheduling capacity management solution. And to do that will require investment. So that's why you see in Scotty's guidance kind of reserving the right to increase headcount, invest in sales and product development heavily in this area of scheduling capacity management. And hopefully, sometime sooner than three to five years, we'll begin to see market-leading innovations emerge in that area and market-leading products emerge in that area. And in fact, we have strategies already in place to achieve some early technical integration between the acquisitions that will give them each competitive advantage. But that's why it's important to really study the second half of the year, because while the three transitions are turning into just operational updates and more normalized business risk, we're kind of now entering the investment phase in this creation of this new business focus area of scheduling capacity management. So we're trying to reserve the right to increase our investments. in those people and products to repeat the playbook of VerityStream. So I couldn't be more excited about where we're positioned, and we expect to provide operational updates on the business from here forward, talk a lot less about transitions and transitional risk, and give you updates on our progress with NurseGrid, ShiftWizard, and Ansauce as they become kind of a unified product suite, and we introduce market-leading innovations in that area as well. So as we wrap up, I'd like to welcome our employees to our new hybrid workplace. Uh, we're kind of transitioning from this nomenclature of offices, I think over 11 or 12, uh, uh, leases that are now being reduced down to about four. Uh, and, and we're kind of recoining our offices to be become resource centers that our employees from all over the world can visit and leverage this kind of work anywhere approach, uh, coupled with an intense belief in the power of collaboration and human interaction. So we expect to have all employees travel more to gather, celebrate, plan strategic planning in some of these resource centers. But we plan to have fewer leases and more kind of resource centers and a much more mobile kind of work anywhere approach to HealthStream. We've been so successful throughout the pandemic of operating that In fact, none of our offices have been officially opened for over 14 months or maybe 16 months now, and I feel like our teams haven't missed a beat. And I know they're exhausted and working hard, and hopefully we've come up with new policies to reflect the flexibility that they desire but also generate the market-leading solutions that we desire as an organization to deliver. So I want to thank our employees for navigating these challenges and pushing us forward over the last 16 months. And their commitment to improving the quality of health care by developing the people that deliver care continues to be demonstrated consistently. And the challenge of pandemic seemed to have brought out the best in everyone at HealthStream. And so I'm excited to be the reporter on their progress and accomplishments, patents and awards, new work styles and new customers they're bringing in. It's all very exciting to recognize and be the person who can report on the progress of our now nearly 1,100-person team. Thank you. I'd like to turn it over for questions at this time.
spk03: Thank you, sir. The question and answer session will begin at this time. If you're on a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your touchtone phone. To withdraw your question, press the pound or hash key. We will take questions in the order that they are received. Please stand by for your first question. Your first question comes from Richard Close with Concord Genuity.
spk01: Yeah, thanks for the time and taking the question. Congratulations on the results. I'm just curious on the hiring, investing in hiring, and you guys discussing turnover as well. a little bit higher than we're expecting in the first half. Can you talk a little bit about the hiring environment, obviously specifically here in Nashville? I mean, I assume you guys are looking for technology people. It seems like a pretty competitive marketplace, a lot of tech moving into the city here with Amazon and eventually Oracle and whatnot. But Just curious in terms of if that's increasing the, you know, wages that you guys would typically bring on tech people here in Nashville.
spk09: Sure, sure. Glad to comment on that. And so you're right to observe that we're subject to the same macro forces that everyone seems to be discussing. And what I think is happening, and we look at our own workforces, everyone is kind of now raising their head up after 16 months of this new work style and And some just want a change for the sake of change. And we have people saying, you know, we love HealthStream, but we want to try something new. And, you know, we've had a lot of people leave and come back over the last decade. So we're encouraging people to find places that they really like. And so we are seeing an increased turnover rate. That said, we're the benefactor because I think we have this wonderful culture that people have read about and want to be a part of. And so we've been able to also win the hearts and minds of lots of new employees. It's kind of the net additions haven't been as high because of the turnover. And so it's just an interesting dynamic. We're getting all these new, highly energetic employees coming into the company, while some of our employees are also seeking new and exciting experiences for themselves. So we have been able to net add, meaning obviously more people coming in than going out. But it has been a little bit more tumultuous than in past really decades. And we think it's just a natural outcropping of kind of the nature of the last 16 months that people want to look at new and fresh horizons. That said, we think we have this wonderful attractive culture that people come to. Now, on the cost standpoint, we're talking about this. What's really fascinating is right now, if you take the last 100 that have left and the 100 we've added, we haven't seen a material increase in the cost of adding the 100 back, which means we're largely at market. in our job offers we've seen a few areas of pressure we've seen some people leave that are taking on more responsibility in new roles and they're they're telling us they're getting higher pay when they leave but we've been able to fill the positions they're departing from at similar salaries i do expect just broadly upward pressure on costs and compensation um But so far, we haven't seen significant changes for any given position of someone departing. We haven't been able to fill them in a reasonably tight window within the salary bands. In the tech work specifically, you're right. Nashville is kind of a booming tech hub with Oracle announcing a major campus expansion here in Middle Tennessee or in Nashville specifically. And I think, though, the tech workforce is evolving to keep up with it. The number of people moving to Nashville – because it's a great place to be, is improving. And so we've had lots of good applicants into our positions. Again, we need to slow down the people that are picking their head up to look at new opportunity. I do expect, I guess I would call it at this point, a slight upward pressure on compensation in some roles. But largely, I think when people are leaving, they're leaving to take on increased responsibility at a new workplace and therefore making more money haven't seen necessarily wage inflation in specific roles. That may change as we work through the cycles of what's happening in the economy here locally and across the country. But right now, I guess I'd characterize it as slight increases in costs on a per position basis.
spk01: Okay. And just a couple of questions maybe for Scotty. With respect to the comment on the $6 million travel and trade show expense in the pre-COVID world, you're talking about second half. Some of that's going to come back. Is there any way to ballpark that? I mean, are you going to be at half of that $6 million?
spk09: I don't know about the trade shows yet, but we were talking about travel. And we've budgeted essentially a very incremental return. So, for example, I think we have about $250,000 in the third quarter and about half a million in the fourth quarter. So you can see there kind of a growing run rate. You know, we could be way off. We could convene all of our employees in November, and that could cost more. But you see going from kind of nearly zero and zero, or the first half I think was sub-$100,000, the whole first half, and travel alone. Returning to now kind of our targeted budget would be around $750,000, $250,000 in the third quarter, $500,000 in the fourth quarter. So, you know, again, those are kind of budget placeholders, and we don't know exactly what the new normal is. Eventually, I expect travel budgets to exceed where they were because the new mobile workforce, we may require employees to commute in to one of these resource centers slash headquarters to have strategic planning retreats, and that could be more costly. but hopefully the offsetting reduced rent will help pay for that. So that's what we mean by kind of scaling it up in the second half. And, again, those are just kind of placeholder numbers, but I wanted to give you a sense for where we're headed or what we're thinking. And, of course, we'll tell you if we end up spending more or less than that, but that's kind of where our heads are right now.
spk01: Okay, that's helpful. And then Scotty, I think, mentioned – some sort of shift in expenses up into cost of services. If you guys could just go over that again. And was that something that happened in the second quarter? I'm just trying to understand why the gross margin was a little bit higher, 66-ish, if I'm not mistaken, in the first quarter, and then ticked down to the 65. Obviously, 65 is is great and all that, but was it that shift in expenses that, you know, was the primary contributor to that?
spk07: I'll let Scott handle that. Yeah, I'll say you nailed it on the head, Richard. That's kind of exactly what happened. There's kind of an allocation of expenses from G&A to cost of revenues. And what specifically was that?
spk01: Software, okay.
spk07: Software expenses, and it's, I think we kind of covered it as production environment related software licenses.
spk01: Okay, that's helpful. That's helpful. Thank you. I'll jump back in the queue.
spk06: Thank you.
spk03: Your next question comes out of Ryan Daniels with William Blair.
spk08: Yeah, good morning. This is Jared Haas on for Ryan. Thanks for taking my questions. Just wanted to stick with this theme of headwinds on the hiring and retaining front. And I imagine specifically that that's a similar theme within your client base in terms of hospitals having kind of the same issue around attracting or retaining talent as well. So just curious if there have been any changes from Healthstream's perspective, either thinking from a product development side or maybe on the marketing side with how you message your value proposition to hospitals that you're trying to help them deal with hiring issues or maybe provider burnout, some of those themes.
spk09: Yeah, I think it's a great point. I mean, we are positioned as being supportive of developing and retaining the workforce, and so we believe and try to demonstrate that our products and services result in higher engagement of employees, and that we also believe fundamentally that offering health systems that offer their employees kind of career development and new skills and capabilities and assessment tools will be favored employers. So, some of them are seeing that light and beginning to invest back in their employees through their continued development. We also see opportunities maybe around things that are focused on the psychological well-being and have some products in that category that are kind of newly offered related to helping employers, the hospitals and health systems and home health and continuum of care of providers that we have in our customer base build their relationship with their employees through their continued development. And so we do use that as a form of positioning, and we believe that our products have those impacts.
spk08: Got it. Yeah, that makes sense. And I think I just wanted another quick follow-up. And, Scotty, I think you mentioned in your prepared remarks, you know, kind of calling out an improvement both in bookings as well as renewals. I'm curious, would you kind of characterize that as sort of, market-based growth sort of along that theme of hospitals looking for solutions like this, or do you feel like that's more indicative of maybe some competitive takeaways or maybe a more competitive solution in the marketplace, just given all the investment that you've made over the past couple of years?
spk07: I think it's probably all of the above. I mean, I think we did experience some growth over last year, but last year, you've got to keep in mind, was in the beginning of covid in the second quarter of last year so uh the comparisons are are difficult to interpret because of that you know kind of covid factor but uh yeah we had some nice wins in the quarter we announced uh you know in a press release a nice american red cross win with prime health care uh so i think we're seeing you know some some good wins across the board but you know i think if you're looking at comparisons we're still kind of getting back into the pre-COVID levels of sales production.
spk08: Okay, thanks. That makes sense. I'll hop back in the queue.
spk03: Your next question comes from the line of Matt Hewitt with Craig Hallam Capital.
spk04: Good morning, and congratulations on the quarter. A few different topics I've got a couple questions on. First up, regarding the guidance, the revenue guidance for the year, I'm looking at the first half of the year. Your guidance essentially at the high end implies that it's basically flat, second half versus first half, so not seeing a lot of lift. Is that a function of where we're at with the pandemic and the Delta variant and everything that's going on and maybe hospitals not being able to hire at the pace? But as we look at next year, I would assume that hospitals are going to need to start hiring again and hopefully are able to find the employees again. So that in itself should drive some incremental growth. Is that a fair way to think about it?
spk07: Matt, I would probably say one of the factors that's going to result in some of the leveling is just those declines that we discussed. There's the legacy resuscitation that was 2.8 million. We know pretty confidently that's not going to be anywhere near that. It's going to be almost zero in the second half of the year. And then we also have some non-recurring, what we call, you know, one-time revenues from the scheduling and capacity management business that we just don't have enough, you know, history of kind of projecting some of those one-time software sales, which are almost immediate revenue recognition as they're delivered to the customer. So that's some of the kind of the change in some of our second half outlook. I think, you know, some of the factors that you mentioned more broadly speaking about customer, you know, and some of their challenges. I don't know if that's factored into the way we're projecting our sales production necessarily, but it could be something that either could be a detriment or a benefit to us depending on which direction and challenges they face.
spk04: Okay, fair enough. And then, Jane, it sounds like you had a really good quarter with the number of new additions. I'm just curious if you could update us on the pipeline there. Obviously, that's been... years in development and seeing that, um, starting to ramp is, is pretty exciting. So any update on there on Jane, that is, I don't know if you want to take that question.
spk07: Matt, I don't know if Bobby is on, but, um, I think, you know, just, just the kind of the story there is we continue to see, you know, you know, about one sale a week. That has been our objective. Um, Deal sizes vary. We had a nice win in Q1. I wouldn't say that we had a repeat of that in Q2, but we continue to gain traction. We'd like to see more adoption and penetration of it, but it's one of those products that I would put in a discretionary bucket. I mentioned that we still see delayed purchasing decisions from customers in that type of category. It's not mandatory. It's not required anymore. And so we still see some hesitancy in some of the buying decisions there. And I'd put that product in that category. But even with that as a challenge, we're still able to accomplish our objective of one sale a week.
spk04: Okay, that's great. And then one last one for me. As you were talking about some of the incremental expenses coming back, you talked about the travel given the new workforce environment. But I'm curious, as you start to think about – conferences, historically Healthstream has held a pretty big user event there in Nashville. Maybe not so much this year, maybe it will, but more likely in fiscal 22 if we get somewhat back to normal. Would you expect that? And what quarter would that fall in? And I only ask because it is typically a larger expense that kind of stands out. Thank you.
spk09: Hey, Matt, Bobby and Michael. Somehow I got booted. But that conference we actually stopped having pre-pandemic and went to smaller, more regionalized conferences or meetings of different scale and spread them out more over the year and across our different business lines and business solution groups. So we abandoned that singular large conference model even pre-pandemic and don't currently have any plans to return to it and have built into our marketing budgets and I guess I'd call smaller regional conferences and what we call user group meetings. So it kind of strategically shifted several years ago and don't plan to return to the single large conference model. Got it. Thank you so much. With regard to other costs, I wanted to kind of update my thinking on the cost of turnover and new positions because I don't want to understate it. I characterize it as slight increases in pay. I guess I'd change that to moderates. and want to think about it. In certain roles, different forms of compensation than we've had. So, for example, in our sales organizations, we're finding that other people are paying higher bases. We don't think that they're going to make more money because we have strong commission plans, but we have had departures in sales reporting higher base salaries than we pay at Healthstream. Again, our sales teams typically deliver great sales results, and their total compensation based on variables, on commissions, has always been really strong. So, We actually doubt they'll make more money going to new roles, but we have heard reports of that. And then I would just say I would upgrade from slight to moderate increased pressure on hiring everywhere else on costs. And it is true that we did discuss this of the last 100 hires. We have largely been able to fill most of those roles within a similar band of costs as we had previously had them staffed. And so that statement remains true. But I would upgrade my pressure on pay to go from slight to moderate. And I would say that in some areas we're experiencing maybe a changing nature of compensation, maybe less variable comp and more base seems to be where the market's headed and sales structure. So we'll see how that plays out. We've always think, again, our teams have been well rewarded in a total compensation based on really strong commission earnings. But we'll see where the market takes us on that. So I hope that helps just contextualize the questions around labor and labor force, because I don't want to understate it. There's a lot more turmoil in the market with people just generally getting up and looking for new experiences. We think HealthStream is going to be a net benefit from those trends, but still it's hard to ignore the amount of people that are looking for a kind of new trajectory in life.
spk04: Understood. Thank you.
spk03: Your next question comes from Steve Halper with Cancer Fitzgerald.
spk06: Hi. Good morning. Just a housekeeping question. You talked about $2 million of one-time software license. That was in the first half, correct? Can you give us what the impact was in the quarter?
spk07: Hey, Steve. Yeah, the $2 million in reference was a combination of software licenses and probably some larger professional services projects that had milestones completed in the first half. Looking at the split between Q1 and Q2, it was pretty evenly split, so almost a million in each quarter. Great. Thank you.
spk03: Again, if you'd like to ask a question, press star 1. Your next question comes from Vincent Colicchio with Barrington Research.
spk05: Yeah, Bobby, are you seeing any signs or pockets of caution on spending due to the new variant, or is it too early to see that?
spk09: It's too early. I mean, we've heard reports, of course, of the spikes, and we've heard that they're getting busier. What I would say is the larger health systems and hospital systems and university systems, they've learned to operate in the crisis mode. and have learned to resource better. And so it's not like the first few waves where all elective surgeries were shut down. And so while there is disruption with a surge or spike, I don't think it's the same as round one and two when there were surges that threw people out of operating mode and shutting down elective surgery. So while we have claimed we see some deferred purchasing, a little less focus on elective things, products from vendors, I just say in general, people are trying to define the new normal, and the new normal includes handling surges and patient cases related to COVID. That doesn't mean there won't be pockets of the country that are overwhelmed by it. I do think that will happen. Some are not as prepared as others to handle it. And so we will see some that will have to shift their full attention. But broadly, I'd say particularly the bigger health systems, the university health systems, are much more prepared to handle spikes in COVID cases.
spk05: And a couple of questions on Jane. You had said, I think, that Jane is largely used for nursing. Is it solely used for nursing? That's one clarification. And then what are some of the other opportunities you talked about with Jane?
spk09: Well, I think you just hit it. It is largely focused on nursing skills, nursing careers. Different departments of nursing help them transition from one department to another. There are other assessments and tools built into Jane, but expanding them to cover other types of positions, you know, all the way down to, say, home health aides would be kind of expansion opportunity. But in addition, expanding it to handle more of the other functionality that could be important, nurses reminding them of their schedule, There's just so many things we can do with Jane and the technology we've built around it as kind of an open framework that we can extend that, you know, adding new types of assessments in new categories for new types of employees would be kind of more immediate ideas for expanding Jane's capabilities. It is largely and most appropriate for the nursing workforce, which is representative of about 40-plus percent of the subscriptions in our HealthStream network.
spk05: Okay, that's my last question. Nice quarter.
spk09: Thank you.
spk03: There are no further questions at this time. I would now like to turn the conference back to management.
spk09: Thank you. Look forward to reporting all these operational updates in the near future, and thanks to our employees for delivering a great first half result.
spk03: This concludes today's conference call. Thank you for participating. You may now disconnect.
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