HealthStream, Inc.

Good morning, and welcome to the Healthstream's third 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 and answers after the presentation. I will now turn the conference over to Molly Condra, Vice President, Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you and good morning. Thank you for joining us today to discuss our third quarter 2021 results. Also in the conference call with me 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, everyone, and welcome to our third quarter 2021 earnings call. I think contact is important as we start the earnings call, so I'm going to give a brief update on our perspective on coronavirus. The coronavirus pandemic in the United States appears for the moment to be in retreat, and particularly in the markets where we practice and in the business where we operate. Since the start of September, daily cases have dropped by a third and daily hospitalizations have fallen by more than a quarter. And according to the CDC, approximately 58% of eligible adults in the US have been fully vaccinated. As of October 22nd, as that number rises, we are hopeful that progress towards beating this pandemic will continue. I shared some of those statistics to just think through the impact on businesses. And a meaningful part of the context is the long and medium and short-run impact of COVID on our business behaviors and therefore how we plan and our expenses and allocate our sales organization. So I want to speak to that for a bit. The long run impact of COVID on all businesses is still being determined, but we can already see some of the permanent changes that are taking effect inside of our company. Like many companies, for example, we have adopted a hybrid workplace approach officially. And this is from a company that was really an in-person company for most of our existence. And now we have a full-on hybrid workplace approach. In fact, all of our offices and resource centers remain closed at this time, but we expect open by year end. Offices will function as resource centers to employees, which is a little different than thinking of them as a place to work. And in those resource centers, we'll hold strategic planning meetings, events, and other special meetings, recognitions for employees, the things that help define a culture that are important. And we'll ask employees to travel for those events. So it will be a little different than in the past where work from an office will be elective. but travel for events might be required to be part of developing our culture as a company. We've learned new ways of selling that incorporate virtual technology to a greater extent, and our customers have embraced this approach as well. So while travel for our sales teams will pick up from the near zero levels of the last 16 months, I wouldn't anticipate that they would occur at the pre-pandemic level. I believe our travel expenses pre-pandemic were nearly $5 million a year, and I just don't see them getting back to that level. However, as we noted, the impact of COVID on our work style, we may see travel expenses go up for business-related, what I'll call cultural building and goal setting and performance management meetings by teams and team leaders and managers across HealthStream. And so it's an interesting dynamic where maybe sales business travel may go down, but because we're a fully remote workforce, we might have some mandatory meetings that are cultural development oriented, bringing on new employees, gathering employees to celebrate accomplishments. So travel expenses may go up in those more elective categories historically. So it's going to be an interesting dynamic to figure out how that all plays out and to what level each returns based on the new work styles. And so another impact that we're all assessing now across each company is the I guess what's been dubbed the great resignation. I think COVID has made many people, including health streamers, reevaluate their personal and work life. And for a variety of reasons, most of which are indirectly attributed to the events of the last 18 months or COVID, companies are seeing turnover at record levels. And these are companies of all types. Other CEOs I speak with are experiencing very similar turnover issues. And so Healthstream is no exception to that. But what's interesting is that as people look up, heads up from other industries, they find Healthstream an enticing place to work. And so we've experienced record levels of hiring in the last 12 months, but also very high levels of turnover. And the net impact of that is a nearly or only slightly positive headcount increase across our organization. And I think earlier in the year we had anticipated being able to have the net increases, net of turnover increases. to be much higher, maybe as much as 100 more employees than we've been able to achieve through our hiring in the first three quarters. And so that's resulted in lower expenses than maybe we had hoped to have. In other words, lower investment levels in people. We have had net hiring positives, but they're almost marginal compared to our expectations as we entered the year. And that is a direct impact of, I guess, what I'll call the great resignation, along with others that have written about it. And so again, it's this really strange dynamic where we've never had more people interested in working at Healthstream because they're reevaluating their work life from other places. And we've got these highly energetic new employees coming into Healthstream that are ready to start a new career. But also some of our employees are evaluating their work life at Healthstream and they're changing locations. What's really exciting to me is I've seen several of them already on the way back to Healthstream after six months away. And so the great designation is something we all have to work out. And the result has been higher turnover and lower expenses than we had originally planned. And so a little better financial performance attributable not necessarily to good things, but to things like turnover. And also some maybe longer run challenges that are created by not having the staffing levels that we had expected to have. And we kept every quarter trying to increase the hiring rates and, again, incredibly successful at hiring. But now what we need to see is the turnover rates slow down. And I'm hopeful that in the next quarter or two this will settle out a little bit and we'll continue to get hiring, head back in the right direction on hiring. So I want to talk about those short, medium, and long-term impacts on COLA. They create quite a challenge for forecasting, even though they're – because the nature of work has changed, the nature of travel will change. The nature of where people want to work and how they want to work is changing. And I think Healthstream will be in the long run a net benefactor of all these changes, the virtualization of the workforce. We've been highly successful at running our operations and building our business. But like all, you know, when major challenges occur like this pandemic, it creates different gaps in how you're operating and your learning curve and can result in operational challenges over time. So We're working through all those at the present time. So I'd like to spend a few minutes talking about financial performance and turn it over to Scotty and maybe some context for our financial performance. And first I'll hit just a few of the highlights. Since I ad-libbed so much, I'm a little off script, so now I'm back on. Top line revenues increased by 5% increase of adjusted EBITDA and 15% over the first nine months of last year. So revenues 5% adjusted EBITDA, 15% over the first nine months of last year. So again, solid financial performance again in the third quarter. The third quarter revenues were $64.1 million, which is 5% of the same period last year. This quarterly increase reflects a substantial growth that was necessary to offset and rise above the previously announced anticipated headline of the $9.2 million decline in the quarter in legacy resuscitation revenues. And so, again, we've talked about this for almost three years or more, this decline of a partnership and this legacy resuscitation revenues. So in the quarter, a negative $9.2 million, it's one of the last quarters of material impacts for these declines. But we were able to overcome that and deliver 5% growth from a mixture of organic and inorganic work of the last year. So fantastic to deliver growth in the face of such headwinds. Based on these results, we've updated our financial guidance for the full year. We now expect revenue for the full year 2021 to be in the range of $255.5 million to $257.5 million. So we've kind of lower, we've increased the bottom of the range. We have a little more confidence in the range and the higher end of the range. I believe one of the most remarkable things about this guidance is that we were projecting revenue growth despite an anticipated full-year impact of $38.4 million in revenue decline from the legacy resuscitation product. So we began the year knowing that we'd have a $38.4 million hole to fill, and I'm really proud of our teams. The types of growth we've delivered on lots of exciting new products, acquired products as well, has been really fantastic. So, again, I'm excited about that result. We also had a negative impact of $4 million of acquisition-related deferred revenue write-downs, so we overcame that as well. And I guess that revenue, the way deferred revenue write-downs happen, that will come back in over the course of the next 12 months into our revenues. That's a good thing to help put a little growth into the future. Additionally, we now expect EBITDA for the full year 2021 to be in the range of $51 to $53 million. That's up from our last expectation of $48 to $50 million that was announced last quarter. Now, some of that continued outperformance is based on our inability to hire. Again, we do have a net positive hiring, so we are net growing our headcount, just not at the levels we had expected. So I'll just kind of comment again that there's kind of this lag effect of COVID as we work through the great resignation. And, again, I want to emphasize really record-setting levels of hiring new, excited employees in the health stream. And the outcome is a net positive ad headcount, so we're not declining by any means, but we're also not adding as many as we had hoped. So some of that outperformance is attributable to that change in net hiring. There's some new factors that have helped contribute to the increase in adjusted EBITDA, and I'll comment on those. For example, year-to-date revenues benefited from legacy resuscitation and perpetual software sales, which we expect to be less impactful during the fourth quarter. So there's a little bit of leftover legacy revenue that was maybe more than expected, and a little bit of perpetual software sales from some of the acquired products that we're trying to move to SaaS and subscription selling hopefully soon in the next year. And so some of that will be not repeating in the fourth quarter. Additionally, the macro workforce trends, which I've covered in great detail, made it difficult to increase headcount as quickly as we had planned. And so we now anticipate that in spite of three quarters of trying, we're going to just say we expect that trend to continue through the end of the year. So we probably won't be able to make up all the hiring we had planned throughout the year in the remaining quarter. And our new guidance reflects that assumption. So we'll continue the headcount increase were projected, as I just mentioned, to be essentially flat or slightly up for the fourth quarter. So only a slight labor increase cost during the fourth quarter, and our new guidance reflects all these things that I've talked about. Now, I want to shift gears and talk a little bit about what we've talked about the last three years. We've talked about these key transitions, and the transitions were all defined by in an effort to create a higher growth and higher margin profile company that will be more profitable for shareholders. And the great news is this is, I believe, the last call which I'm going to talk about in detail, the transitions. And the reason for that is I feel that over the course of this year, we have really worked through the transitions. And the word transition implies some kind of maybe exceptional operational risk or business risk. And I feel we're through the exceptional period of risk on these transitions. In other words, each of the three transitions we've talked about has hit a milestone in my mind where I'm comfortable saying, you know, there are business risks associated with the growth of these new product lines and undertakings by the company, these transitions, but they're no longer existential risks, major risks to the company in the way that they might have been, say, 18 months ago when there were so many unknowns about these. So let's look at each of those real quick and put them to bed so that we don't have to talk about them anymore. And after Scotty presents the financials, I'm going to spend a little time talking about the new go-forward paradigm of talking about the company instead of this older paradigm of explaining these three transitions. So let's look at them one at a time. The first, of course, was kind of proving the market acceptance of the new resuscitation suite program with the American Red Cross. And the second was the establishment of a new functional area with the VerityStream SaaS-based application. As you remember, we had acquired several companies over the last several years, and we had launched a new set of applications for credentialing, privileging, and enrollment. And there's a lot of question. We launched new products about the market acceptance, and I'm here to declare that the market has accepted the new VerityStream SaaS-based application we call CredentialStream. And so... And the third is the technical viability of our new platform architecture known as H-Stream. So here we go. Let's put all three of them to bed. The market acceptance of a new innovative resuscitation solution has been established as evidenced by our sales of the American Red Cross suite to customers in each of the 50 states of the United States of America. So the program is established. The credential is accepted. The sales team are closing new business every week. And, you know, this concept that maybe the market wouldn't accept the second solution is gone now. We've moved material market share to the American Red Cross, and we'll continue to sell that product in the coming years and months under a long-term partnership with American Red Cross, and we'll continue to innovate. But it's no longer a question. The question we had two years ago was, will anybody buy it? Will anybody accept a credential, a professional credential from the American Red Cross? And I guess I'm here to say today, that has not only been accepted, it's been embraced, and the cutting-edge organizations are moving to this newer, more adaptable technology that we've introduced with American Red Cross, and it continues to win new business in the market. So I'm going to put that transitional risk to bed. The risk now is just how much can we sell, and then can we continue on a great trajectory with this partner? And I think the answer to both of those is I'm excited. It's going to be a great product into the future. The second... the product adoption of a market-leading SaaS-based credentialing, pillaging, and enrollment application. And I think now with nearly 440 customers under contract, and many of them are implemented and live, and many of them are referenceable accounts, I think we've established that this newer platform we built, which was the best of breed from our four acquisitions, is both accepted as customers migrate to it from the legacy platforms and as new customers selected in open RFP bids and competitive bids where I think we've built now the application set of choice in the industry as it relates to credentialing, privileging, and enrollment. So, again, the risk was we acquired four companies, we built a new product and tried to move customers to it, and it didn't succeed. I'm here to say that that level of risk is behind us. Of course, there's a normal market risk to competition, and can we continue with this leadership position, but with 440 contracts, customers migrating, and most importantly, the new RFPs being issued, we think we're going to win a disproportionate share. If an organization of scale is bidding out a privileging enrollment and credentialing services, we think our new credential stream platform is going to win the day. The third is the technical viability. We've been talking for quite some time now and hired a new CTO four years ago to lead the charge on building a new technical infrastructure. that will make all of our applications more inter-relatable, make data more portable across our application offerings, and allow us to do really wonderful new service and application development as the platform gets established. And so I'm here today to declare that the platform is real, it's operational, we're releasing new functionality at the platform level, and that platform level capability is being extended into our application sets at an increasing rate. I think the concept of, well, you've been building an R&D, this underlying platform, will it be viable? I guess I'm here to say today that it is a viable platform, and there's always more to build. There's a giant, a great vision in front of us of what we want to do with it. But I believe we're well along our way to having both a new platform underneath HealthStream that unifies many of our capabilities and gives customers more reasons to acquire our applications, and unifies us as a single platform company with multiple applications linking to it, and also makes our architecture more extensible to third parties. And so I'm here to declare, and I'll tell more detail about it, that the platform is real. We won't be talking about it as a transitional risk. We are selling in licenses. When someone acquires an application from Healthstream, we're embedding a license to the platform. And again, I'll talk more about what's exciting about that in a few minutes. So this concludes a nearly three-year journey of talking about the three transitional business risks. We can now start to talk about our new applications, the new markets we want to proceed with, and a new paradigm for talking about our company, which I'll cover after I turn it over to Scotty Roberts for a detailed look at the numbers. Scotty.