HealthStream, Inc.

Good morning and welcome to Health Stream's first quarter 2025 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers after the presentation. I will now turn the conference over to Molly Condra, Head of Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you. Good morning and thank you for joining us today to discuss our first quarter 2025 results. Also in the conference call with me today is Robert A. Frist Jr., CEO and Chairman of Health Stream, and Scotty Roberts, CFO and Senior Vice President of Finance and Accounting. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of Health Stream that 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 10K, 10Q, 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 of adjusted EBITDA and reconciling net income attributable to Health Stream is included in the earnings release that we issued yesterday and may refer to in this call. So with that start, I'll now turn the call over to CEO Bobby Frist.

Thank you, Molly. Good morning, everyone. Welcome to our first quarter 2025 earnings call. There is certainly a lot to talk about here on the call for the quarter. And before I hand it off to Scotty Roberts, our CFO, who's going to give us detail on the financial results, I want to do a couple of key things. First, is I want to talk a little bit about the company's strengths. As we enter a time of uncertainty, I think a company with an experienced management team that knows what they're building, that builds incrementally strong, and understands the market environment they're operating in and knows how to create value for customers, it's customer-based during these times, is the kind of company that people should want to invest in. And so I want to talk a little bit about those strengths and our growth trajectory. And then I also want to acknowledge a couple of items that are kind of a hitch in our step, some challenges that are, we think, temporary, that we're going to work our way through, that have resulted in us trimming our guidance, our in-year guidance a little bit. And we're going to talk about both those things in detail. It's an interesting period of kind of irony, but probably opportunity. And we're going to talk through that a little bit. You know, I've seen a lot of cycles in healthcare, and I can tell you why healthcare generates growth and profitability throughout those cycles. I've been doing this quite a long time. And the experience of our team that knows how to bundle and create value for customers in times of uncertainty, it's really a good time to rise and shine. The value of our core application suites in learning, credentialing, and scheduling, as well as our emerging H-Train platform, they get demonstrably better every quarter. And that is why we continue to add both wallet share and market share across the board, and why our bookings and sales pipelines are strong. That is also why we're forecasting both revenue and EBITDA growth on a -over-year basis, even amid some of the macroeconomic choppiness and recently addressed issues of technology scale with one of our products, Credential Stream. Let's talk a little bit about the macroeconomic headwinds. We are seeing them manifest in a couple of areas. In some areas, we have direct correlation where we can say, ah, you know, that's a challenge. In others, they're less direct, maybe indirect, but maybe anticipated is more an intelligent way to talk about the macroeconomic conditions that concerns that we may have. We need to factor into how we think about the next, you know, three or four quarters. You know, funding cuts, for example, particularly to federally qualified health centers, FQACs, and academic medical institutions seem to be impacting renewal decisions on a -to-have content, you know, on the -to-have content. And, you know, the good news is a lot of our content is mandatory, but we do have a program such as our Health Equity and Belonging content, which was a shining growth star, you know, last year, which is really not on our growth trajectory this year. And so, as we entered the year with the Health Equity and Belonging curriculum, you know, we have seen diminishing purchasing patterns of that. And that may also have to do with kind of the political correctness of the environment, or trying to be in alignment with that, and also the macroeconomic conditions that pressure, because it's more an elective type of content offering in our many content offerings. So, we do believe that some customers may be delaying some purchasing decisions as precautionary measures to protect their businesses against potential policy-related impacts, as the example I just gave. And supporting this belief, we saw a handful of medium-sized deals that are expected to close in Q1, pushed to Q2. And, you know, we're watching those very closely to determine, you know, why we think there might be a delay in closing those medium-sized deals. We do expect, still, those particular sales to close. They're all still in the pipeline. We're all still in active dialogue with the customers. And they are nice, we would call them medium-sized, kind of the one to three million dollar deals, or even bigger, two to four million dollar deals. And we think they're all viable deals, and they're all going to close here in Q2. But we're going to have to watch it really closely to see the timing of the close, because timing and delays have an impact about how we think about revenue in the year. And so, we do expect them to close. But the fact that they haven't closed and they didn't close in Q1 is just something we have to watch. You know, it's good news that many of those solutions help meet mandatory requirements. I did give the example of the health equity and belonging content libraries, which are a little more optional. But a lot of these are focused on their primary asset, their people, and their primary expense category. And, you know, developing their people to be more effective, retaining their people so they have lower turnover. And it's good news that many of these solutions are focused on these mandatory requirements, and they help organizations optimize their expense and their around labor, and their labor, their workforce. And so, I think being workforce-focused in a time of economic uncertainty is a good thing to be. And so, I think a management team that understands that environment and tweaks its programs to align with those messages will be in a stronger position. So, I think the next thing to talk about is, you know, we do have this ongoing demand for application suites, and current sales pipelines for learning, credentialing, and scheduling are all strong. And there's some irony to that, to have such a strong pipeline that see little delays that may affect the in-year revenue recognition. And, but it's interesting that it's almost an irony built into the quarter, because during Q1, we did land, sign, and are beginning to execute on one of the largest deals that we've done in our history. It's a $14 million deal that, where we bundled a tremendous value proposition for a large, one of the country's larger health systems, and it included some of our key products like our new competency suite, which we've talked about in prior calls. And so, it just does demonstrate that when you meet the need with this concept here of helping develop the confidence, cross-training people for other roles, you help retain the workforce with these development programs, that you can close deals. And so, again, a little bit of irony in the fact that we had a handful, I'd say, about four deals that we would call these medium-sized deals push, and then, yet, one of the largest deals in our history closed during the first quarter, a $14 million deal to a large health system, including our newer product bundles around competency development. So, we're really excited about that. So, amid this market turbulence, it is our diverse product offering, and the nature of that offering meets mandatory needs, and the fact that this major sale did close gives us that confidence to deliver growth on the year, despite, you know, some of these early indicators, like some of the elected content purchasing may be dropping off. And so, overall, we still feel really well positioned, but some revenue may be pushed into the next year. It's just this quarter, as we reflect on it, there's a lot of these kind of mixed blessings, and we've experienced a couple of those in other areas of operations, and we're going to talk about those, too. So, impacting our in-year outlook, you know, these mixed blessings, they stem from recent success in closing larger deals with larger and longer contract terms in our three-year average. And so, the result of that is that we secure a greater contract order value, but we spread it over more time. And so, as you heard in the story I just told, that these four deals that were kind of medium-sized and shorter-run recognition pushed, they haven't closed yet, but we think they will, yet we land this really big deal, it's a five-year deal, it spreads the revenue a little longer, and so, it's great reason for optimism. Of course, we'd rather close large deals that are over a longer period of time, and we just have to work that middle market and get those medium-sized deals that are shorter-run revenue recognition closed in this quarter, but that would represent a delay from our expectations. So, the overall size of that deal put us well over our Q1 bookings expectations. So, if you ask our internal team how we did, we would say that our contract order value and sales for the quarter exceeded our total expectation, but the average time the revenue and the time over which that value is spread is stretched. And so, again, it's kind of this weird thing of a long-term positive look at the sales pipeline, but some trepidation in it, some hesitancy to close. We'll just have to follow those four or five medium-sized deals and see if we bring them all in in Q2 as we now expect. So, we do want to acknowledge that some of this hesitancy and some other operational issues which we think are temporary, which we are addressing, particularly some technology scaling issues with credential stream, which we do feel we've quickly addressed, but, you know, those kind of scaling issues, if you have some blips on the radar with customers, you know, create some uncertain impact where you have to kind of wait and recover confidence of your customers, but we were able to put really good teams of people on the scale issues with the result of really great sales and building up a big implementation backlog, and then you have, you know, a little service quality delivery issues that, you know, persisted for four or five weeks, but put our teams on it. We feel like the issues have been addressed on this credential stream application, and as you'll hear in a minute, we still delivered the revenue growth on credential stream in the quarter. But again, in recognizing our experience, we've been doing this a long time, we know that sometimes those kind of service problems can have a lag effect on your expectations, and so we factored a little of that into our revised guides, but once again, I would say that we feel we've addressed the scaling issues that were the result of bringing on so many customers, and we had to kind of reconfigure some of our tech stack to expand, in this case, very technically, we took our server groups from a few to almost a dozen, and so we were able to scale, to handle volume, and redistribute load, and get back to a place where we think we have the stability we need to cover the growth that we were delivering. So, you know, when we shifted our full attention to optimization of product performance, it did slow our credential stream implementation efforts. As you can imagine, if you're in the middle of an implementation and you have some service timing issues, then it delays that pipeline a little bit. So again, and with the wisdom of experience, we think it's wise to expect those delays to play out in your revenue recognition a little bit, and so again, you can see that in our revised downward guidance. But the nature of the problem, we think, was temporary, and we feel we've resolved it and we're on the cred, you know, building the credibility side again with those customers. So that, but that shift in focus did have the effect of slower time to revenue, and, you know, you don't recognize revenue until the products are fully implemented, and so the way those two things work together had us resulting that we needed to push some of the revenue recognition into the future, maybe into Q1 of next year. And so again, those slight adjustments resulted in this revised downward guidance. As we think through, you know, those, and those are factored in, of course, to, you know, why we were, we trimmed our guidance expectations a little bit kind of overall. Slower time to revenue was one of the factors. Overall, we see a credential stream implementation backlog as representing a strong source of potential revenue acceleration. I mean, again, in an ironic situation, you know, we, while we did see that delayed purchasing of the medium-sized deals, we had a really strong closing quarter in the fourth quarter, and so we've got this great implementation backlog that we just need to get to, to get to revenue, and we're working through that. Of course, we have configured our company in different ways. We've assigned new people to try to work into that backlog, and so we can deliver revenue off of that really strong backlog of sold deals. It's one of our more successful products in our history from a growth perspective. So now we just have to do a better job of managing that growth and getting those customers live, which we'll do. You know, we've been doing this a long time and worked through a lot of different temporary challenges, and this is another one that we're going to tackle. Let's summarize. I'd like to just kind of take a pause, and for people new to HealthStream in these times, just kind of give a quick summary of our business structure and why we think we're well positioned. First and foremost, HealthStream is a healthcare technology company dedicated to developing, credentialing, and scheduling the healthcare workforce. So we're focused on people in healthcare, and we do that by delivering SAS-based solutions, each of which are becoming more valuable because the interoperability they're achieving through our emerging HealthStream technology platform. As you know, we've been talking about this for a long time, but we've declared this is the year of the platform, and what we mean by that is that the emergence of strategic and tactical and operational benefits of the platform as we see every quarter increased interoperability of our core applications, which brings that additional benefit to our customers. The company holds 20 patents for its innovative products. You know, we see our competitors emulating us and trying to catch up with our vision. The company holds these patents. We've won over 40 Brandon Hall Awards, which recognize excellence and innovation in the industry, and we sell our solutions on a subscription basis under contract that average three to five years, and actually that very statement reminds me to think about that ironic dynamic that occurred in Q1 where the three-year deals that were medium-sized are delayed in the pipeline, and yet the five-year, one of the biggest deals in history, did come in and get signed in the process of being executed. But that nature of three to five-year recurring revenue contracts makes our revenues predictable. In fact, 96% of our revenues are subscription-based. As I just mentioned, we've also started to open our sales channels directly to healthcare professionals and nursing students across the continuum of healthcare training. So we are profitable. We have no interest-bearing debt. We have a strong cash balance of $113 million, and we're solely focused on healthcare, and we work towards the mandatory needs and the workforce needs, which are the trending hot topics is how to be more effective managing, retaining, and developing your workforce. And so I think we're well positioned in this kind of environment where the CEOs of these health systems are worried about their labor. They're trying to figure out the best ways to retain and develop their people, and we think increasingly HealthStream's portfolio of solutions is the answer to that question. We have about, our target market is 12 and a half million healthcare professionals, which also now includes the nursing students in the United States, and those comprise the core addressable market for our staff solutions. Is this where health care is delivered is where HealthStream wants to be, and that's where these 12 and a half million people are, and they can be in skilled nursing facilities, long-term care facilities, acute care facilities. Those are the markets that we're going after with these workforce-oriented solutions. Let's take a pause now. Turn it over to Scotty. We'll hit the highlights. You know, we want to, I wanted to acknowledge that we did revise our guides downward, that we think the causes of that are temporary, that our vision remains strong, and we had some ironic occurrences in the quarter, winning the biggest deal in our history, but seeing a delay in some of the medium-sized deals, and we're just going to work through all this. We still put out a growth forecast, although revised downward a little bit, and of course, we're going to do everything we can as this quarter unfolds to get it back on track, and there's, you know, we'll work hard to see if we can do that, get back on track, and maybe get out of this revised downward guidance, but right now, that's where we sit. Let's turn it over to Scotty Roberts for his summary of financial results.

All right. Thank you, Bobby, and good morning, everyone. I have several topics to cover today, and I'll begin with our financial results for the first quarter, unless otherwise noted, the comparisons will be against the same period of last year. Our revenues were 73.5 million. They were up 1%. Operating income was 4.4 million, and it was down 23.1%. Net income was 4.3 million, and it was down 17.1%. EPS was 14 cents per share, down from 17 cents per share, and adjusted EBITDA was 16.2 million, and it was down 5%. We indicated in our last earnings call that we expected more of our revenue growth for the year would be concentrated in the second half of the year versus the first half, and this was reflected in the 1% growth for the first quarter. I want to reiterate that our revised revenue forecast is still second half weighted and is expected to build from quarter to quarter. I also want to call out some items that impacted the first quarter according to expectations. The first one is a large perpetual license sale of approximately 0.9 million in our legacy scheduling business that occurred in the first quarter of 2024. We've not actively been selling perpetual licenses for several years, but occasionally an existing customer will purchase an expansion license, which is what happened last year. Given our focus on selling subscriptions to our SAS application, Shift Wizard, as opposed to licenses to our legacy scheduling applications, we did not expect any license revenue in the first quarter of 2025, which was the case. The second one was caused by a large healthcare system bankruptcy during the second quarter of last year, which we've talked about on several calls in the past, and which was well publicized. We had approximately 600,000 of revenue from this customer in last year's first quarter, and we're not expecting any revenue from this customer this year. The full year revenue loss is about 1.6 million, and we'll see this variance begin to normalize into the fourth quarter of 2025. Finally, we also experienced lower revenues from our legacy products in credentialing and scheduling, which resulted in a $1.7 million decline in these products compared to last year. Attrition in both of these legacy product lines is negatively impacting the revenue growth rate. We believe our core business and Go Forward solutions are providing us with a solid foundation to achieve revenue growth and operating leverage. Now, let me highlight some of the solutions that help fuel our underlying growth, such as Credential Stream with 25% growth, Shift Wizard with 19% growth, and Confidential Suite with 12% growth. Absent the impact of the legacy products and the customer bankruptcy from the core business, the core business actually grew over 6%. Our remaining performance obligations were $613 million as of the end of the first quarter compared to $514 million for the same period of last year. We expect approximately 40% of the remaining performance obligations will be converted to revenue over the next 12 months and 68% over the next 24 months. Gross margin was .3% compared to .2% in the prior year quarter. Investments that we've made in our platform and SAS application suites resulted in higher labor costs for cloud hosting, software, and labor. The changes in our revenue mix, in particular, the lost revenues from legacy applications, including perpetual licenses, and the impact of customer bankruptcies contributed to the change in gross margin. Operating expenses excluding cost of revenues increased by 2.7%. Sales and marketing were up 3.2%. General and administrative were up 4.3%. And depreciation and amortization was up 4.1%. These increases primarily resulted from higher labor costs associated with additions to staffing levels, higher sales commissions associated with growth and revenues, increased investments in marketing initiatives, and higher software expense. Adjusted EBITDA was 16.2 million and was down 5%. And adjusted EBITDA margin was 22% compared to .4% last year. Now, moving on to the balance sheet, we ended the quarter with cash and investment balances of 113.3 million, up from 97.2 million last quarter. During the first quarter, we deployed 8.8 million for capital expenditures and paid .9 million to shareholders through our dividend program. Day sales outstanding improved to 37 days compared to 46 days last year, marking the third consecutive quarter that DSO was below 40 days. Our cash metrics were strong for the quarter, leading to new records for cash flows from operations and free cash flows. Our cash flows from operations were 27.1 million compared to 20.9 million in the prior year, an increase of 29.3%. Free cash flows improved by 5 million, or 38.3%, and were 18.2 million compared to 13.2 million last year. These improvements are a result of growth in billings over the prior year and improved cash collections. I would characterize that our balance sheet is strong, and it's been my experience that companies with strong balance sheets are positioned for long-term success, regardless of the economic environment in which they operate. With 113.3 million of cash and investments, a track record of generating positive free cash flows and no debt, we remain well positioned to deploy capital to improve shareholder value. We maintain a disciplined approach to capital allocation and how we prioritize our use of capital. Our utmost priority is making organic investments back into the business, which is evident by our annual capital expenditure and R&D plans. The second is pursuing acquisition opportunities, which we have a long track record of executing. The third is returning a portion of profits back to shareholders in the form of cash dividends. And finally, the fourth priority is that our board may authorize share repurchase programs, which we also have a successful track record of executing. From an M&A perspective, we maintain an active pipeline and continue to evaluate opportunities that align with our platform and product strategy. In respect to our dividend program, yesterday, our board of directors declared a quarterly cash dividend of .031 cents per share to be paid on May 30th to holders of record on May the 19th. We currently do not have an active share repurchase program in place, though the board continues to evaluate such programs as it deems appropriate. Now moving over to our financial outlook for the year, yesterday we announced a revision to our previously issued financial expectations. We now expect consolidated revenues to range between 297.5 and 303.5 million, and net income to range between 18.6 million and 21 million. We now expect adjusted EBITDA to range between 68.5 and 72.5 million. We continue to expect capital expenditures to range between 31 and 34 million. This guidance does not include assumptions for any acquisitions that we may complete during the year. Earlier, Bobby outlined the key aspects impacting guidance and why we are confident in our ability to grow through them. That wraps up my comments for this quarter's call. Thanks for your time this morning, and now I'll turn it back over to you, Bobby, for some additional updates.

Thanks, Scotty. We do have kind of now the normal business updates. We've talked about some of the challenges in the quarter. A little bit of delay in the implementation pipeline, so time to revenue was deferred. We talked about some delays we saw in the sales pipeline, but the irony of landing on our biggest deal is history. But the net effect of that is a lengthening of the average time to revenue to implement and then to close those sales and so pushing things a little bit out. And therefore, we have discussed the revised downward guidance. Although, again, I think on the whole, it's a little over a point and a half change in the big picture. We think it's a wise adjustment based on all the things we talked about in the macro conditions. That said, I think we should import through our core businesses real quick and talk about what's normal and what we're also excited about. So let's go through each of scheduling, credentialing, and learning briefly and talk about some of the developments during Q1. First, we'll talk about ShiftWizard, which is our core product in scheduling. It continued to deliver strong revenue growth. You know, as Scotty just announced that revenues for ShiftWizard have eclipsed the legacy product and sauce and the second quarter of 2024 has continued to be our top performing product in scheduling. So ShiftWizard revenues grew 19% over the first quarter of last year. In the first quarter, sales were both from competitive takeouts like St. Hammy Parish Hospital and from growth within existing customers like Children's Wisconsin and Hospital for Special Care, among others. This revenue growth was offset in the overall scheduling application suite by an unexpected non-renewal of an ANSOS customer. So some continued challenges in the legacy application ANSOS, which we've discussed this over many quarters. You know, the good thing about that problem is it does continue, but it is also finite. I mean, eventually we'll have customers either migrated or they'll choose to stay where they are or in the worst case, we may lose them to market, but either way, it's a finite problem and it's getting smaller as the quarters progress. So let's take a look now to the credentialing application suite and our primary application credential stream. It also had a productive quarter despite some of the issues I mentioned earlier. Revenues on credential stream grew 25% over the first quarter last year. These results included sales from both new customers like BayCare Medical Group and customers expanding like Prisma Health and Duke Medical Center. And customers who chose to migrate from our legacy credentialing applications like Ridgeview Medical Center and Door County Medical Center, all of which closed in the first quarter. So again, just kind of the normal course of business, you see some migrations from legacy applications, some new wins in the market and overall put up 25% year over year growth in the quarter on the credential stream application. And as I mentioned, though, we do have some client recovery to do. We had some performance issues due to scale and I feel like we've put those behind us, meaning we have good stability, we've expanded our server capacity and we're working on that client recovery confidence now. As I previewed our prior call, we also hosted our annual credentialing user group conference, which is really fantastic. It's called Thrive 25 and we did that at our corporate office and in a hotel in Nashville. It was really an energizing event. And the highlight for me was hearing customers talk about how they use credential stream to reduce the time it takes to get providers credentialed, privileged and enrolled and generating revenues to the organization. I mean, if you think of the purpose of the credentialing applications is to keep the bad actors out by verifying the order they say they are and to grant them the privileges they need to do practice at the hospital. But ultimately, our software should help optimize the timed revenue on these positions. We should help onboard them in an efficient way, vetting out the bad ones, of course, that don't meet the criterion and protecting the end consumer by that vetting credentialing and privileging process. But really, what's important to hospitals is does our software help manage the time from when you hire a doctor to when they can be productive and get them seeing patients and generating revenue. And we think the answer to that is yes. And we're working hard to prove that. We think that we can affect positively the timed revenue on newly hired physicians by accelerating credentialing and privileging process. And so, some of that came out in the case studies at our Thrive 25 conference that provider timed revenue was a topic and we heard customers share stories about their success using credential stream to achieve that outcome of shortening timed revenue on physicians. So again, these workforce issues, sometimes you need to talk about how they relate to the economic well-being of the organizations we serve. In this case, it's getting the right physicians in surgery or seeing patients productively and so that their services are billable. To do that, you have the credential, privilege and enroll them in insurance programs. And our software, we think, is the best in the market at doing those things. So, we think this year will continue the growth and we'll work through these temporary issues and deliver continued results. And we did see some of that growth that I talked about in Q1. That brings us to our learning application suite. And it's a broad suite. It's a market-leading suite. We continue to innovate. We talked about those innovations last quarter. And I'm going to highlight a few of them now. One of the unique components of our learning application suite, we actually built through acquisition. It's our continuing medical education management programs. And these are kind of the secondary programs that are used specifically for hospitals that are accredited to develop their own content and issue credits for those contents. We have the best software in the world, we think, in helping them manage that uniquely healthcare dimension to building accredited content. And our cloud CME products just are having a great, successful run. And think of these as add-on modules of the core learning system. And we both did three acquisitions in this space over the years. But we continue to see really great success, high renewal rates, adding new customers, but also this module that helps manage continuing medical education and an accreditation process at hospitals is kind of one of those unique workflows in healthcare that makes us defensible kind of a moat around our learning business because it's not just an LMS, a learning management system. It's a learning management system that has modules that manages the continuing medical education accreditation process. And so we're really excited to see those acquired products be so successful with high renewal rates, and it creates that differentiation overall for our learning suite. We call our learning application suite, which the foundation of that is our learning management system. So we added sales for that product set, that module of learning, the continuing medical education modules. And we just continue to invest in that area and further integrate it with our core applications and to our platform. So we're just excited that that area kind of within the learning area, that area is both unique for us and uniquely successful right now in the market. So we're proud of the teams delivering those results. Let's talk a little bit about some some of the newer solutions in learning that insights plus, which is our new reporting and analytics capability. It's based on our platform technologies. We've seen it continue to grow. It now has over seventy four hundred users across five hundred and fifteen organizations. Those that the growth of insights plus, which is a purchase system, it's driven by significant data engineering and product development work we've done on our new data stack in the H-Stream platform. So our insights and insights plus reporting engines that are tied to our learning application suites are robust, expanding, and we're experiencing good sales velocity on insights plus, which is kind of an analytics suite in learning. It kind of gets that learning efficacy, something that you need to measure. We've got to invest in learning. You want to understand its return on investment and insights plus. We think is the best in the industry at helping health systems understand their return on investment in learning. And so it's great to see a new platform based data centric reporting and analytics tool set be selling well as an add on module to the learning application suites. I think, you know, now is the time to shift recognition as we wrap up this call to some long serving and some relatively new members of leadership, particularly on our board of directors. We have been fortunate to have outstanding board members. But today I want to highlight and thank one of them in particular. After 27 years of service as a board member, Dr. Williamstead is choosing to not stand for reelection this year. We were excited to point out that when he joined our board 27 years ago, we had 41 employees and one point four million in annualized revenue. And so Dr. Stead has been on our board overseeing the creation of a company that generates nearly 300 million in revenue. That's what we expect this year now and employees, 1100 people were proud of his strategic contributions over the years. He's also handing us off in a really good position because he waited till we found essentially his replacement on the board. And so in addition to congratulating Dr. Stead, we want to welcome our our new board member, Mr. Charles Beard Jr., who joined our board of directors and is now a member of our audit committee. He's standing for election this year's annual shareholder meeting and Charles brings a wealth of experience to our board. And so you guys can all be excited if you're on this call listening. You know, he was the co-founder and chief operating officer of Guidehouse, a global consultancy. He has he serves on the board of directors of Fresh Del Monte. He serves on the board of directors, importantly, of Innova Health System. And so we're really excited. He brings this really incredible background in technology, governance, security, and of course, health care expertise. So fantastic new ad with Charles Beard as we look for your vote to support him in joining our board of directors here. He's active on the board now, and I think that'll be affirmed here in the upcoming election. He's standing for election at this year's annual shareholder meeting. So we're delighted to have Charles join the board and we're grateful for Dr. Bill Stead's contribution over the years guiding us strategically and tactically. We couldn't be more proud of his contribution. So thank you, Dr. Stead, and welcome, Charles. As we wrap up, you know, I just want to kind of think through in times like this with so much uncertainty just in general, I think it's really good to find a management team that knows who they are, knows where they're going, understands the environment they're operating in and makes adjustments to that environment. And and so, you know, our downward reflection here in our guidance is part of that. Again, we'll do everything we can to make that not come true, but we think that was the wisest thing to do. We think we achieve value by the way we approach our customers, focus on their core assets, their people. And in particular, we think it's a good time for bundling value that addresses real economic or mandatory requirements of these organizations. And you see that in our competency suite. We hope to emulate that strategy in other areas with bundling value to get more velocity in sales. So if you're if you're already a shareholder, we look forward to and we're inviting you to our annual shareholder meeting. It takes place virtually Thursday, May 29th at 2 p.m. Notifications of the meeting and access to the proxy statement 10 K and shareholder letter were sent out on April 14th. So we encourage you to vote your shares and participate in the future of our company. And if you're not a shareholder, we welcome you on the journey. Times like this warrant companies with strong balance sheets that build strong products and navigate the challenges they face directly and take them on. And ultimately, of course, as we've done for nearly 35 years, we'll overcome these and get to the next growth plateau for the company, the next growth plane. Thank you for listening today. We'll now turn it over to questions from our analyst community.

Thank you, sir. The question and answer session will begin at this time. To ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Matt Hewitt of Craig Halem Capital Group. Your line is now open.

Good morning and thank you for taking the questions. I apologize in advance if this has been answered. I've been hopping between a couple of calls. But maybe first up, you noted in the press release that that you're seeing a little bit of hesitancy by customers to purchase, you know, elective type applications. If you looked at your portfolio of across the board, how much of your portfolio would you quantify or qualify as being required or government mandated versus elective? And, you know, I assume it's over 50 percent falls in that prior bucket that mandated versus and required. Is that is that a safe assessment?

We do. We think most of the majority of our products are tied to some kind of theme of requirement. They're not always legal requirements, but I'll give you two examples. And some are requirements, but some are requirements to achieve certain quality standards. So, for example, credentialing is a requirement to maintain accreditation. And you need to be an accredited hospital to be a credible hospital. And so the credentialing process is mandatory. Of course, our product is not mandatory, but the credentialing process and privileging process is an essential part of operation. So broadly speaking, we're meeting a need that is considered mandatory. Another one that's not quite legislated, but is one of our top products from a revenue generation standpoint would be our resuscitation suite. And so, again, while it's not a legal requirement to train your staff on accreditation, I don't think you could achieve accreditation. And in fact, it's become essentially a gold standard. I don't think you can get a job at a hospital as a physician or a nurse without having demonstrated confidence in resuscitation. And the demonstration comes as achieved through a couple of different programs in the industry that are the most high quality programs. And of course, one of them is the American Red Cross, the one that we represent the market most vocally. And so while, again, it's not a mandatory, it kind of has become a gold standard. And I really don't think you can get a job without flashing a current credential in resuscitation skills and confidence. So, and that being one of our largest single revenue lines within our content selling universe. So probably our biggest singular product across the content selling we do is that resuscitation product and it is mandatory. Of course, we have the market leading content product set. We call them SafetyQ and CompliQ that help meet OSHA federal safety standards. So that's another example of requirement. And we have another bundle in our Jane products that delivers continuing education that are required by more than half of states for licensure maintenance. And so you can see in these four that I've given that there is an element of requirement. And then, of course, thematically, everything we're doing is related to the workforce, which I think is the single biggest cost item on the income statements for our customers and managing them effectively is a priority. So I think we're well aligned. You know, you can't say that 100 percent of our products are mandatory, but kind of categorically, the space we operate in has a high set of requirements. State, as we mentioned, state licensure, federal like OSHA accreditation requirements like to be accredited. We talked about the Cloud CME products, which helps maintain ACME accreditation. And so these standards that are propagated in the industry, our products help meet them. So I don't know if definitely the majority, probably, I would say 80 or 90 percent are tied thematically to forms of requirement like we talked about. And then a meaningful number like like the OSHA libraries, it is a requirement to do annual OSHA safety training. That's a kind of a federal requirement in these clinical settings. So I think a strong a strong mix, certainly the majority. And you can almost draw a line to forms of requirement for almost all of our products. We did bring up one that was clearly optional and also now kind of under a lot of scrutiny is diversity, equity and inclusion programs, as you can probably imagine, are not the hottest topic now in health care. And so our health equity and belonging solutions that we have seen a drop off. And you know, you can probably directly attribute that to the political environment. And so, you know, clearly not required. And in some ways, there's probably a movement against that kind of elective content. And we have seen a drop off in it. So that's a quick scan of the nature of the products we sell.

That's incredibly helpful, Bobby. Thank you. And then maybe just to follow up, and I apologize if I missed this, but regarding the noted the largest or one of the largest contracts in your history, was that a renewal or was that a Greenfield win? And if it was, in fact, a renewal, I'm assuming you saw an increase versus the last time they signed. What what all was added? You know, that's obviously an opportunity to cross sell and upsell. And what else was included if, in fact, it was renewal? Yeah,

no, it was in great news. And I probably can't believe I didn't say this. That was new business. And so this is a big health system where we didn't really have a footprint. By way of example, they did not use our learning management system at all. And of course, our learning system is infrastructure for the competency suite. And so effectively, with this bundle, tens of thousands of their employees are now going to be using our learning system. But the central theme was our competency suite, which is a bundle of a lot of products that focus on developing clinical staff competence. And they found it being exactly the right time effectively, though, because of the way we bundled there, be displacing half a dozen competitors that have this product or that product, but we put it together as a suite. And so, again, a highly effective bundling of products to create good share. And it does represent an exciting new customer to Healthstream. And through kind of coming through a slightly different door than would be traditional, like leading with a primary software cell like learning, we sold the competency suite with learning bundled into it.

Well, congratulations on that. And thank you very much for taking the questions.

Somewhat related to your question, I'll just add a little color, because we did talk about a handful of deals. I think there's about five that we considered important deals that were medium sized and shorter term to revenue did push. But the nice thing about those five and so they're kind of a bellwether, we're going to watch them this quarter and hope and expect they come in. But right off the front end, and we talked about whether it's mandatory or not, was a very large pending win in resuscitation. And where a health system is of good size is we believe in contracting or we know they're in contracting phase to switch their vendor to American Red Cross. And so of the five deals, we hope that that is the first one to resolve itself and come in. And so we'll watch these five deals to see if these are related to macroeconomic additions, these delays where we pushed out of Q1 and Q2. But it also comes to that theme is that we believe that by switching that institution will save money. So our program is, we believe, both stronger clinically and and less expensive operationally. And so there is a good incentive for them to sign that deal and execute on it. So building on the theme that we were just asked by Craig Hallam, Matt Hewitt, one of these five deals has that kind of feel of compliance, but it also is focused on the workforce and it also we think will save money for hospitals. So the message is well timed as well. So we'll see what happens in report on that next quarter.

Sounds like a plan. All right. Thank you.

Thank you. Our next question. Comes from John Penny of Canaccord Genuity. Your line is now open.

Good morning. This is Richard Close. Bobby, just can you talk a little bit about the legacy? And you mentioned, I guess, Shift Wizard is, you know, more revenue than Ansof now. And just talk a little bit about what is left on the legacy products. And, you know, what do you expect the timeline is for that, you know, just sort of run off?

Yeah, fair enough. There's definitely a category on our tracking sheet of legacy products. They include Ansof, Morrissey and Healthline. And by definition, when we say legacy, we mean they're supported products. So we're still adding features and capabilities, although not quite as a fast to pace as a growth product or a mature product in our classification system. So legacy means they're still expected to generate revenue. However, we're not selling any new ones, except we note occasional exceptions when a customer that is on a legacy product expands, we'll accommodate the expansion by selling them more of the legacy. But in general, our sales teams, over 200 people, are not selling legacy products. So obviously, we do not expect growth from legacy products. And in fact, as you pointed out, there are kind of three outcomes for legacy products. And they're the biggest ones are Ansof, which we talked about a lot, Morrissey and Healthline. And I want for the customers to hear those are supported products. We do quarterly releases of enhancements. And so that points out some of the complexity in talking about this. As they exist, they are great customers. And some of these products are beloved products, meaning they like their legacy product. And they're both supported and and we're passing them and fixing them and making them better, not at the same rate as the end products, the SAS products like credential stream and shift wizard. But some of the difficulty in reporting around this is there's kind of three outcomes for legacy products. And and maybe this changes someday. But the first is the customers can choose to stay where they are, in which case we expect to service them, generate some profits and EBITDA from that customer. And so in this bucket of legacy there and until we decide to and we have not decided this to sunset those products, there is a logical outcome that many years from now, many of these customers could be still on that product. And if they're on that, they're not doing the two other options, which is our preferred option now and for the last 18 months is they migrate to one of the SAS applications. And so we're encouraging but not requiring those migrations. Of course, that's a great outcome. If we can get them to migrate, we think at this point they get a better product. We get a slight lift in revenue because the better products, more robust, has more modules and more capabilities. And so migrating customers is, of course, our goal. And we have a team of people working on migration. But that conversion rate has gone up and down. Some choose to stay where they are. And so we don't have a clear objective of migration. And of course, the third thing that happened is the worst thing is we could lose that customer. They don't migrate and they don't stay, but they go in the market and buy something else. And so some of these lost accounts report are that where we lose the account. We can either keep them where they are or migrate them. And because there's three outcomes, it's a little harder to tell what our expectations are because it has an order of operations like mass where our first preference is they migrate to our SaaS application. Our second preference is they stay happy customers of their beloved legacy application. Our third option is the worst is they decide they don't want either of those and we lose them to the market. And so we can report on the losses as we did this quarter across these legacy applications. I think there's about one point seven million. Maybe Scottie can verify that number. But we can't say the desired outcome or time frame because, you know, again, we could be four years from now and still have a nice profitable business on legacy applications. So, you know, I guess you could say there could be an internal debate each year about whether we should change the status of these legacy products to the category we call sunset. And once we're in a sunset mode, we notify customers of some end date, usually a year or two out where we'll stop support. And then it forces the decision to either migrate or leave. And we have not done that. And so it does give us a little bit of a challenge to to talk about this issue, because with three variables, you can't really say exactly, you know, where everything's going to land. And again, two of the three options are good. Like if they stay happy legacy customers, that's fine. They're you know, they're profitable and we service them well and they like their product. If they migrate, they're probably more profitable and and we can sell them more modules. They have more capabilities. And so our goal is to build shift wizard and credential stream to a place where it's just self-evident that it's both the best market decision and the best opportunity to to enhance their business, improve their outcomes, to go ahead and make that migration decision. And we have dozens of successful migrations, of course, every that we've reported on in every quarter, there are some migrations we report on the losses. We have not quantified the total value of the legacy products because we don't want to give away the competitive information about what you know, where people target. And and so we just haven't been able to put numbers forth. But we do, of course, talk about our losses, which we think is the material, an important part. I did point out it's a finite problem. I mean, we are not selling new legacy customers. And so there's really these three options exist. But and so that's as much color as I can give. We will report our losses as they occur. But the way you characterize the remainder is they're either staying where they are or they're migrating. And both of those are good outcomes for the company. You saw in the quarter, the 25 percent growth of credential streams, some of that, and I named by account some of migrating customers, plus the newly acquired customers delivered that growth.

Yeah, I guess my concern is that, you know, you're you're seeing really good growth in those newer products, like you just said. But, you know, one of the attractiveness of the newer products and the, you know, the core learning management system is, you know, it's a platform play. You know, you have good visibility. And then with this legacy, it just reduces the visibility. Or how do you think about visibility? Yeah,

yeah, that's fair. Going forward,

that's just sort of hard.

Yeah, it does create obviously confusion and lowers our overall blended growth rate when we have those losses. We did report, you know, six percent if you if you factor out those. So we gave a little visibility and kind of the organic growth of each of the three core go for it. Applications, we have reported that in all cases, the go for it. Applications are larger in scope, size and revenue than the legacy application. So, you know, that we're the legacy business are not bigger than the the go for it. And it's our hope that this is the year the platform. So the ability to demonstrate the value of interoperability will be even a more compelling reason to choose to migrate. And so we're working hard on making that a reality, particularly in the second half of the year, where we expect things like feature parity of all these systems with the go for it. Applications have feature. They exceed in features, actually the capabilities of legacy platforms. So we're getting closer, Richard, to a time where we could make the decision to quantify it and essentially force the decision by reclassing the products as sunset products. Since we haven't done that, it makes guidance on a little confusing and apologize for that. But I think it's still the right decision because we love our legacy applications. Customers, some customers love them. And staying on them is just fine with us until it's so compelling that they move to the full suite, the suite of suites. You know, there should be so much benefit to learning credentialing and scheduling that you buy them together someday. And that's our goal as we enter the second half this year and next year. You know, I'm sorry that it's vague. We did try to we will talk about the losses so you can see the offset. We will. We have talked about the organic growth rates of the newer products, which are, you know, they're really exciting levels. Credential stream is 25 percent and and will quantify the losses. And we also this quarter, we bundled up the legacy products and told the organic growth rate factoring out those those legacy products, non-renewals. And so I think we're trying to get as much color as we can. But I think until we declare them sunset, it'll be hard to give a time frame. And so I guess I'll just apologize. Yeah, I appreciate that. And but I still think it's the right business. So I kind of apologize for the optics. If you dig in deep enough, you can see the growth rates of the exciting go for products. I think also every quarter, the legacy problem gets smaller and it gets smaller relative to the success of the other products. So, you know, in the next several quarters, it just continues to be a shrinking problem, even in forecasting, because, you know, relative to our other growth, the category is never going to get bigger and everything else is growing. So eventually it overtakes itself. Well, I appreciate that. Thank you.

Thank you. Our next question comes from Vincent. Chloe Chio of Barrington Research. Your line is now open.

Yeah, Bobby, are you seeing any pushback on pricing in the current environment?

We always have, we think, good pricing. And I think Vince, we're getting better at what I would call bundling. I mean, we're realizing that our portfolio is really nice and broad and that, you know, installing a set of selling content against complex content providers, selling content plus applications plus the secondary application and bundling is a better strategy. We see that with the competency suite. We'll emulate that more. And so that allows us to get more breadth and penetration and adoption and more competitive displacement, displacing competitors by bundling. And so I feel good about our pricing. Another thing related to pricing is in the last really 18 months, we've been able to make it a normal due course process to add contract escalators and renewals. And so another element of pricing is a change for our company is to include pricing escalators. They're not quite CPI level. Kind of, you know, we target three to five on annual price escalators on our products. And so all three of our core products, all the contracts we've been signing on now, all of them, and we staged it. We first released escalators in learning about a year ago. We released escalators in credentialing and now in scheduling. So all three primary products as a really a couple of months ago, all contracts go out with pricing escalators. Ironically, that gives the customer something to negotiate and allows us to maintain a little bit more pricing control of the base of the product prices. So that's been interesting, dynamic. Most software vendors in health care and maybe across industries already had price escalators. So adding those have helped us. So another part of our future growth is just a little bit of built in inflationary offset with small pricing escalators built into our contracts.

And I know you're looking to get more active in the acquisition market. Are you seeing any impact from the economic uncertainty and valuations?

I'm not sure of that yet. I would say this. We in the last quarter or two, we did bid on a couple of deals. We were not the prevailing bidder. You know, we have a management team that is willing to pay a nice sum for a good business that we think fits, but not a ridiculous sum. And so I don't know if that's a dynamic. We think things are still overpriced, but we did make a couple of bids that were not successful and didn't chase them. And so we are seeing more deal flow. We're getting more books to look at. And when we find a management team that wants to be a part of Healthstream, that wants to be part of our growth story, that is a nice premium. We want those owners to do well. They built good companies, but we're not going to chase things. There's just too much still cash on the sidelines and too much chasing. I think some of our competitors did that for a while and paid really high multiples and sitting on a lot of debt. And we're debt free with 113 million in cash, with the strongest free cash flow generation in our history in the last quarter. And so, yeah, we're going to be active, but we're still the same somewhat conservative management team. So we have to hunt a little longer to find deals that we think both fit strategically and have the right economic return opportunities. So our discipline that now we're more active looking, we have there definitely bigger pipelines to look at, but our consistent either diligence or conservative approach says we haven't been successful in two of the competitions, but more to come. We're we're peeing up lots of opportunities and we'll find the right ones here in the coming quarters. Thank you, Bobby.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Robert Frist for closing remarks.

Thank you to all of our health streamers. Welcome to our new board member, Charles Beard. Thank you to Bill Stead for his 27 years of service and excellent strategic guidance. 1100 employees working hard in one boat rowing in the same direction through troubled waters. We're going to get there. So thank you to those. And then Cheryl, if you're thinking about investing, you know, I think sometimes in tough economic times, you know, finding a good, consistent management team that knows where they're going and what they're building is a good bet. And so maybe maybe these times present investing opportunities for those of you that think HealthStream is one of those, which which I do believe myself. So thank you all. See you on the next earnings call and we'll keep our chins up and keep making incremental progress. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.