Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Healthstream incorporated third quarter 2019 earnings Conference call. At this time, all participants are not listen only mode.

So to speak of presentation, there will be a question and answer session.

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When I look to hand, the comp and Steve Speaker today, Mollie Condra, Vice President Investor Relations and Communications. Please go ahead Madame.

Thank you and good morning, Thank you for joining us today to discuss our third quarter 20, Nike result.

So when the conference call with me are property first Juniors, CEO and chairman of Healthstream and study, Robert CFO and senior Vice President.

I would also like everybody. Good at this conference call may contain forward looking statements regarding future events and the future propose the downstream that involve risk and uncertainties that could cause actual results to differ materially from those projected in the forward looking statement.

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 FCC, including forms 10-K and 10-Q.

So at this time I'll start I will turn the call over to Bobby Frist.

Thank you Molly good morning, everyone welcome to our third quarter 2019 earnings call.

On our third quarter performance was inline with expectations with our expectations and revenues were up 4% over the same quarter last year adjusted EBITDA up 3% over the same quarter last year supported by strong cash flows from operations and a record low days sales outstanding we ended the third quarter the cash balance of approximately 273 mills.

I am so strong balance sheet.

In a minute Scotty will elaborate more fully on financial result, so I'm going to dive into some the operational update.

Start today I want to provide updates with regard to the three business transaction transitions that we introduced and discussed in previous calls all three transitions are designed to move us towards being a higher margin more profitable company in the coming years.

We're about nine months into what I described as a 36 month journey. So we're about nine months or about 25% through these migrations and I'm pleased to report, we're making steady progress on all of these transitions during the quarter. For example, the contracted 48, new accounts for our newer substation offering.

We increased new Verity platform subscriptions by 50% over the last quarter and we added approximately 434008 stream subscriptions and support of our south to past migration or strategy.

If we could continue to progress on these three transitions, we expect to cross the 60% gross margin level at this time in 2020.

We're kind of excited that we expect to see some of those transitions start to play out in the gross margin line by the middle of next year.

So let's look at each one a little more detail first we have transitioned our sales and marketing efforts from the legacy resuscitation products to our new resuscitation offering which includes the American Red Cross Resuscitation suite program and the enough Sony and skills program launched earlier this year.

Since there are no new sales or the legacy resuscitation products, we expect revenue from those legacy products to continue declining sequentially each quarter through year end 2019 and throughout 2020.

So we're projecting sequential declines in revenues throughout 2020 on the legacy resuscitation products.

Specifically, we anticipate revenues from legacy products to decline an additional 800000 in the fourth quarter two approximately 12.6 million. This a little bit lower than we had thought last quarter, but our new forecast puts us at about 12.6 million on legacy resuscitation products.

We anticipate revenues from legacy Russ resuscitation products to be zero, a in the first quarter of 2021.

As a reminder, the new Red Cross Resuscitation suite program is comprised of basic life support advanced life support and pediatric advanced life support competency driven development curricula. It brings an updated highly adaptive competency based solution to health care professionals. It offers certification health care professionals success.

Lastly, demonstrating proficiency of lifesaving resuscitation knowledge and skills in fact, the program as lie for several accounts and the first health care professionals have achieved that certification through the program.

I'm pleased to report strong shells momentum of our new resuscitation offering and just looking back at the history of launch we announced in January 15.

This year and in that first quarter, we had six new accounts during that launch quarter in the second quarter. We had 15 new accounts, an additional 15 accounts and we just announced 48 additional accounts in the third quarter together through the first nine months of the year. Therefore, the 69 account.

It's totaled over 22.3 million in contract order value assigned.

For our new recertification offerings.

These new contracts are from a mix of hospitals and health care facilities from across the continuum of care, including new and transitioning customers.

You're not expecting material financial contributions for 2019 from these contracts because many of these customers are running off their legacy resuscitation product licenses.

We have a solid shells pipeline are encouraged by the market's reception to the newer substation offering that we believe is more innovative more effective than more cost efficient and legacy solutions to support that we've approved on a recruiting new sales representatives specifically in this solution area.

So that's an area of investment from.

Second transition involves adoption and migration to our new SaaS based verity platform in the first quarter of 2018, we announced the launch a verity our new SaaS based platform for managing Credentialing, and privileging and health care organizations as of the ended the third quarter 2019, new customer accounts for the Verity platform grew over 50%.

Now to approximately 155 contracted customers. This rate means that on average over for new customers per week were contracted during the third quarter.

So it's an exciting time as we fill or building momentum around the new technology platform, both signing customers to migrate and a brand new customers.

So the 155 customers are a nice balance of customers migrating and and brand new and they're also taking advantage of the the privileging technologies that are built into the platform.

Given the high quality of the new platform and our history of successfully migrating existing customers to improve solutions. We anticipate continued progress in terms of new sales and migrations of legacy customers.

The migration journey is one that require several years to fully accomplish.

Third and I want to talk about a third transition that we've talked about the third transition that involves our customers upgrading to the H. stream platform, which is a central technology working behind the scenes that powers all activity and the Healthstream ecosystem again, it's an evolving technology platform and its nascent but effect.

Of an active and some of our new solutions are directly powered by the new age screen technology.

And the third quarter, we added approximately 434008 stream subscriptions, bringing our cumulative total up to approximately 2.78 million subscriptions at the end of the third quarter. That's up from 2.34 million contracted subscriptions at the end of the second quarter of 29 King.

Healthstream platform as a service capabilities are enabling new functionality, even in some of our most established applications such as the Healthstream learning system.

Healthstream learning center customers have up who have upgraded to eight stream now enjoy an advanced manager interface no known as my team initial reception to the upgrade continues to be positive and has exceeded our expectations with over 81000 managers across 700 organizations actively using the new my team technology.

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And again my team has an extension of capabilities of the old Healthstream learning center, so when a customer upgrades to age stream they get new capabilities in their older legacy applications. The the Healthstream learning center, such an exciting way an upgrade path for the Healthstream learning center when customers adopt my team.

So we expect to see continued adoption of eight Freeman over the next couple of years and we're excited about the progress in the last two quarters specifically.

I want to remind everyone that these three business transitions, we describe them as multiyear journeys, we don't want anyone to have the perception or concept that these are be done or finish. The next six months in fact, I opened by saying that what kind of nine months into a 36 months transition.

In each one may take a little plus or minus 36 months, but we think we'll see financial benefits to these migrations over the course, the coming years and be through the bulk of these three transitions within 36 months again were nine months into the 36 month journey began its a characterization is not precise but we want you to all.

Understand these are not short term migrations. These are things are going to take us a couple of years to work our way through but again, we're encouraged by the early returns.

As we announced in September our board of directors appointed Scotty Roberts's, CFO and senior Vice President following his service as our interim CFO since February . So we're excited to have them serving as the company CFO . He's an exceptionally talented and can competent executive they bring 17 years of experience tells train and public financial reporting and all our.

Operations, including accounting and finance Scotty makes a strong addition to the company's executive team serving as our top financial leader at this time I'll turn it over to Scotty to provide a more detailed look into the financial metrics for the third quarter 2019. He's also going to give us a little bit of outlook for the rest of the year and enters guidance.

Thanks, Bob and good morning, as a reminder, that discussion of our financial results today are free for continuing operations only.

Comparisons are against the prior year third quarter and less.

Our financial highlights for the third quarter are as follows a.

Our revenues were up 4% to 62.5 million.

Operating income was down 20% to 3.7 million.

Income from continuing operations was up 14% 3.5 million.

Our EPS from continuing operations were 11 cents per diluted share compared to nine cents per diluted share in the prior year.

Adjusted EBITDA from continuing operations was up 3% to 11.5 million.

Now, let's review our results in more detail.

Revenues from our workforce solutions segment totaled 51 million for the third quarter at around 4% over the prior year.

During the quarter, we experienced organic growth and our platform and content subscription revenues and our topline also benefited from the private I'm acquisition.

These improvements were partially offset by unexpected decline from the legacy resuscitation business.

Legacy resuscitation revenues decreased by 10% or one point sixmillion.

And were 13.4 million compared to 15 million in the prior year.

Through the first nine months of this year, if recognize 46.3 million of revenues from these products.

The year over year growth rate at 14%.

Whatever opportunities for Backfilling, the declining revenue from the legacy products, it's the marketing and selling or new recertification offering.

Since the launch of the Nuveras solicitation offering in January of this year, it's sold over 22 million of total contract value.

It's most contracts averaging five years enlink.

Revenues from other workforce products grew organically by 5%.

This growth rate it squeeze revenues from the legacy resuscitation products and the problem acquisition.

The problem acquisition.

1.9 million of revenues in during the quarter.

Revenues from our provider solutions segment were 11.4 million and grew by 6%.

Revenue growth is primarily coming from sales with the new security platform subscriptions.

And professional services for client implementations.

Compared to last year writer solutions license and subscription revenues were up 1.1 million were 13%.

Professional services revenues were down 500000 were 22%.

Our gross margins improved to 59.4% compared to 58.1% in the prior year.

This improvement occurred because of the declining revenue from the low margin legacy resuscitation products.

This is being replaced by contributions from some of our other higher margin products.

If we look out over the next year, we anticipate our gross margins should begin to show improvement over historical levels.

It's over the past three years have ranged between 57 and 59%.

We believe there are three three key drivers that can improve our gross margin profile.

Centered around the transition area as Bobby mentioned.

The first opportunity for margin improvement from the decline and lower margin legacy resuscitation products and our ability to convert customers through our new resuscitation offering.

Second is the adoption of the new there any platform solution.

And the third is our continued growth of eight stream.

We are successful with these transitions as we have been over 2019 to date, we anticipate our gross margins can improved to 60% by this time in 2020.

Our operating expenses, excluding cost of revenues were up 11% across the following categories.

Product development expenses increased by 9% sales and marketing expenses increased by 5%.

Depreciation and amortization increased by 19% and DNA expenses increased by 11%.

The higher operating expenses compared to last year or the growth and staffing levels, which were up 12%.

The incremental operating expenses from the proper them acquisition.

As well as higher depreciation associated with the relocation of our corporate office earlier this year.

Although operating income declined by 20% or adjusted EBITDA grew by 3% to 11.5 million from 11.1 million in the prior year third quarter.

Now, let's review the balance sheet and cash flows.

Our cash and investment balances increased by 11 million and ended the quarter at approximately 173 million.

And our working capital was 123 million.

Cash flows from operations improved to 52.5 million year to date compared to 29.8 million here today in the prior year.

An increase of 76%.

This increase resulted from improved cash collections and lowered the guest though.

An incremental cash flows generated from operations.

Dsos for the third quarter was a record level of 40 days compared to 46 days in the prior year.

For capital deployment, we incurred 3.1 million of capital expenditures during that quarter, which brings our capital expenditures for the year, So approximately 27 million.

As a matter of practice, we maintain an active business development pipeline as indicated by the problem acquisition.

And to minority investments, we completed earlier this year, we ended the quarter with strong balance sheet and access to capital, including 173 million in cash and investments and a $50 million line of credit facility, which support our business development activities.

Now, let's turn to our financial guidance.

Dissipate that consolidated revenues were range between 252 and 256 million.

Revenues from their workforce solutions segment, ranging between 207 and 210 million.

In revenues from the provider solutions segments, ranging between 45 and 46 million.

We are increasing our operating income guidance range to be 12.5 to 14 million.

And our non-GAAP operating income guidance range to be 14.7 to 16.2 million.

Which excludes the $2.2 million thought rent expense incurred during the second quarter.

We anticipate that capital expenditures will approximate 33 million for the year.

In the annual effective income tax rate to range between 23 and 25%.

This guidance does not include the impact of any other acquisitions that we may complete during 2019.

That concludes my comments and I will now turn the call back over to Bob. Thank you started before we go into Q and a I'd like to make a few closing remarks.

And one thing that's interesting that's happening actually today and the yesterday there is unique convergence of the three business transitions that that we mentioned earlier in the script in Philadelphia at the National Association of medical staff services or Nams.

French we're we're demonstrating some new and innovative new technology that integrates several pieces of our story. It's the automated integration of the Red Cross certification with hospitals Medical staff Credentialing records through the new Verity platform is being demonstrated so now when health care professionals successfully complete the Red Cross certification.

Requirements the record of their certification is transferred automatically through an integration with their verity Credentialing system.

That saves the medical staff losses hours of time and paperwork the bridge between our workforce development platform and our provider solutions business segments is made possible via eight stream. The stream technology. For example is used to log in to the program and into the mannequins and so when certification is complete or the transaction result.

It's an issue of a credential, which is automatically transfer into the new Verity platform and again and long history of this these medical staff offices and Credentialing offices would have to research and acquire that data in very manual processes, even sometimes asking for a fax copy of the credential to enter ended the credentialing system and now.

We're demonstrating that live on the on the exhibited for today.

As someone completes the physical certification on the man again, the certificate Pops up in chosen a verity platform. So it's a very expire exciting leverage of the age stream a technology platform.

As it used to log into the the Indonesian mannequins, a flowing of the credential from essentially the learning network into the Credentialing platform a verity that's being demonstrated at the Nams conference for the medical Snap services, that's where the Credentialing process is managed so that's really an interesting bridge that incorporates many elements of what's new and.

Exciting about Healthstream and I think it's being well received on the floors the exhibit floor today.

As a reminder.

The first three year, we announced that our addressable market now includes approximately 10 and a half million employs a these are health care professionals, which is comprised of approximately 5.2 main employs an acute care space and 5.3 million employees more broadly defined continuum of care market, we define a continuum of care as ambulatory services, including physician offices.

Health and human services, including favorable health facilities, and post acute care, including skilled nursing facilities was an expanded market comes greater growth opportunities. For example, we announced a new strategic alliance with Medline in October with over 23000 employees Medline as a global health care distributor and solution provider that's particularly.

And across the continuum of care with a strong foothold in the post acute care space through our new alliance with Medline. The companies will champion and expand Healthstream specialized workforce development programs, including the compliance or Central's program and professional development program and these programs drive clinical development and meet compliance.

Requirements and those clinical settings, we've already seen a number of new opportunities created and the first contracts have been signed as a result of our new Medline partnership. So we're excited to have them help us take these solutions into the continuum markets as we define.

In the fourth quarter on November 12, 13 will welcome clients of our provider solutions to thrive 19, which is the second annual Verity National user Group Conference. This event will be held in Scottsdale, Arizona, where clients can connect learn and collaborate with peers thought leaders and the Verity team special learning opportunities are also.

So offered in the pre conference on November 11, we look forward, it's exciting events, which will kick off at about three weeks from now and where we anticipate over 300 clients will be in attendance.

In May we launched our new corporate social responsibility program, which we call streaming. Good. This program was developed and launched by employees from the ground up and we're excited about the opportunities to contribute to the communities, we work and we serve and we work with them.

For our first year, we're focused on supporting the American Cancer Society I'm pleased to report that last week, we held an exciting event for this worthy cause healthstream posted a relay for life event in Nashville outside of our new capital view corporate office to raise funds and awareness for the American cancer Society companywide employees are participating.

Streaming good and it's gratifying to start to see the positive impacts. This program is having in our local communities and on behalf of American Cancer Society, just want to congratulate all employees and encourage all of our 800 and nearly 850 employees to be actively involved with these programs and our new social responsibility program I couldn't be more Ics.

On about our initial events.

At this time I like to turn it over for questions from the Investor community.

Thank you as a reminder to ask a question you need to press star one on your telephone to withdraw your question press the pound Keith Please standby, we compile the Q1 day roster.

Our first question comes from Ryan Daniels with William Blair. Your line is now open.

Yeah. Good morning, guys. Thanks for taking the question Bobby a follow up for you on the legacy Resegmentation solutions have you had the opportunity to look back at those clients that are running off the legacy solution, let's say over the next 12 months into determine how many of those are actually converting to the new healthstream solution versus.

Perhaps re upping with the legacy so kind of whats your sales conversion or sales capture rate those clients roll off.

Yeah, Ryan we haven't into a reported that where the blend of the 48 new accounts in the fourth quarter was a nice mix is fairly well balanced from a conversions.

Two brand new account. So we felt really good about that and of course, our team is acutely aware to aware of and watching all customers as they come up for renewal make sure. We're in the hot but we have not disclosed our conversion rate and I don't think thats necessarily a.

Healthy metric for the competitive dynamic remember, we do maintain partnerships with both entities.

And we want to represent and sell it market. The American Red Cross is on stages, we program, but we also need to maintain healthy relationship with the Oh, the legacy partner aren't you I partners as well.

Okay, That's fair and then.

I know the last quarter the year had some requirements CMS mandated I think that kick in in November the requirements of participation for nursing homes. So bad in tandem with the new Medline partnership do you expect a kind of a bolus of new contract signings over the next month or soda to meet that demand or as much of that already been.

And put in place because the the conditions are participation actually start in a few weeks.

Hi, This is Scott I think our expectation that as most of the customers that have.

Adopted the advocates product.

I've done that in the past couple of years than some of the changes in regulation, although they were hurt mandated by the government some of the penalties enforcements will kick in for another year or so.

Thank you it gives us a little more runway that kind of approach customers to try to.

Pitch our products for them, but I don't think there'll be a bolus, let you indicated that will occur.

Okay, and then just any thoughts on capital deployment I know you know the balance sheet is very healthy, especially with the low dsos and with.

The strong free cash flow building up again, so I mean any thoughts on potential uses of cash going forward and that reaches nearly $200 million here towards yearend. Thanks.

Yeah, I mean, we're constantly examine how do we tried to communicate even in the script that we maintain an active.

Pipeline of all sorts, including minority investments and acquisitions, we did complete one acquisition earlier in the year I'm. We're trying to teach them up we have made a few beds on acquisitions, where we weren't the prevailing better. So we also kind of and we know our limits and absolutely again, it's an active program that we're investing and to find opportunities for.

Inorganic growth also organic growth, though minority investments content development, our deployment of capital increase as we just finished our five year plan with our board, we're increasing our capital allocations towards a content development and program development. So we're pretty excited about that we've gotten great results, where we've chosen to invest and.

A fully kind of vertically integrated product, where we have platform content and data and we own all three pieces, so probably see a slight uptick in investment capital deployment into what I guess I'll call content or program development. The there's a lot of solutions were a bit building for example around the resuscitation suite that.

That are complementary to to the programs that we've built our that Red Cross has built so we're excited about that as well. So overall, we're going to do our best to thoughtfully deploy the capital and and have an active pipeline minority investments M&A activity and increasing.

Going into content and programming.

Okay, great. Thanks for the color.

Thank you and our next question comes from Matt Hewitt with Craig Hallum Capital. Your line is now open.

Good morning, Thank you for taking the questions.

Good morning warning.

Just a couple of follow ups first regarding the long term care market I'm your relationship with Medline.

How are those facilities currently attempting to meet the new regulations. The requirements for participation regulations is that something that some of these facilities are trying to do internally or do you know, obviously I would think that that the verity platform is a much simpler way, but what other options do they have out there.

Yeah.

Well see out the pro overtime a platform actually abacus platform that is really the acquisition. We made a program that came with the App abacus platform, which is kind of a longstanding market leader and helping them prepare for all form of mandate and quality audit process and quality management and.

What's happening is there's some increased regulation around relating that to staff competent people, which is one of the the business hypotheses under which we acquired program and what we're seeing now as we're combining our content bundles like Medline for example helps us position the abacus platform and these new content bundles together.

Entities into this vertical him so they're very prominent in the vertical these are products help them differentiate their overall product offering to those organizations and they've helped us over the years position them and now have a more complete tool kit that help introduce.

To the market what do they do otherwise I guess, a lot of pen and paper. There are few competing products to the abacus platform that are offered by competitors of Medline for example.

There are competing educational products offer by competitors of healthstream into the market.

And there's a lot of kind of traditional pen and paper that needs to be displaced and made more efficient as well. So typical competitive landscape, but we're really proud to be aligned with medline. We think there the strongest in the market and they're going to help us carry. These these solutions, which we think are also the strongest in the market to these.

Customers.

Understood. Okay, and then shifting gears regarding the legacy recess attention program. So as those roll off you enter 2021, I think you had said that you'll be at zero for the legacy revenues at that point.

Well the the access fees be accounted for a because there's gonna be some customers. That's still are gonna be using the legacy platform, but you know our Q why is going to be basically paying you a legacy euro.

Access fee, if you will will that.

Be accounted for and another bucket or.

If you are saying zero, but essentially there's going to be some revenues there just to help help us understand that a little bit.

Yeah sure. It's another bucket and so we've we've communicated you know the prospect to counter 60 men revenue from the legacy products as its own based on its own a legacy contracts on wind down agreement and show that that's that 59 million winding down.

We announced the argue I partners agreement, which is a separate revenue stream, which of the access fees, where they do the sales and marketing.

And will facilitate the connectivity and that will be growing but it'll be dependent upon kind of customer choice and their own success selling and contracting with hospitals that are on our learning platform. For example, and so the sequence of events would be that a customer as using our learning platform and and a and.

Joining the benefits of that they want to maintain their older. What we would call legacy solution, but they want to maintain that somebody contract for that with our Q I partners and then our ops teams will help make sure that it works for the customer and the Archrock partners organization would pay offs and access fee, which would show.

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And it's be is.

But it'd be very low because it's a subset of the contract by so we're no longer contracting for the products, we no longer sell the products, we no longer market. The products. That's all on the the access partner as we call them out RQ I partners.

Okay. That's very helpful. Thank you maybe one last one of them I'll hop back into queue regarding your E. Each stream of subscriptions.

You launch the product in Q3 of 18, and it's ramped very very quickly its almost 60% of the the last fully implemented in contracted subscriber numbers for the built the way you reported that previously how quickly do you get that other 40% is that going to ramp on in the next year I'm off.

Or do you expect it that that rate of of conversion to maybe slow as you get closer to that hundred percent.

Yes, it should first of all as I've articulated east of the three transitions I think are kind of 36 month transitions and that kind of arbitrarily picked a you know January wanted to start date, even though some things started before that and some will go longer than 36 months, but just to characterize all the three I think the bulk of the.

The migrations transitions and movements will be complete within 36 months and again starting January one of 19. So were nine months then.

36 month transition so I would I would say that a couple of years are left and and whether you know 100000 migrate or or or 434000 isn't this quarter is largely dependent on when these accounts are coming up for renewal. So if you have a couple of big enterprise accounts talk renewal might be a high number it's a bunch of smaller accounts come up for renewal on that.

Platforms would be a lower number and then to the extent that we do renew them. A you know they'll count into the eight stream subscriptions, where they're upgrading their old contracts include eight stream and other products that's from us.

And remember as well that.

Contracting for this kind of new operating system is kind of step one and then receiving benefits and capabilities from a step two and some of the most tangible and an obvious benefits are for customers that choose to stay with and renew our learning platform as well they get this upgrade to my team.

There are other benefits that we can roll out with eight stream and will be articulating them in the coming months in quarters to both customers and to the market, but that's how we're achieving this migration that you'll remember that our average contract for kind of three three plus years and so a third of the accounts would come up for know each year.

Summit entered longer term renewals an app. So again I think I think about 24 more mansion will be through the bulk of these migrations.

Understood all right. Thank you very much.

Thank you and our next question comes from Richard close with Canaccord Genuity. Your line is now open.

Great. Thanks for the questions just a little bit on gross margin I'm, obviously, you're you're targeting or.

Based on your statements I'm, 60% by the Middle of next year as you think about the transitions here what do you think margins.

We'll be you know out maybe two or three years have you thought about that in terms of like what maybe a long term target is considering these transitions.

Okay richer now you know that I've never guided beyond a year, but this is one that I think I can touch on because there's kind of a natural.

Fallout from the roll off of the resuscitation products and the growth in the newer Red Cross substation Sweet program and our newer stuff patient products that so I think I can I can say that by this time next year, we'll feel like will cross across that 60% of the gross margin level at my expectation has sustainably and then as.

The legacy products drop off even faster by Q on a 2021, we think we'd see a a much more aggressive move up in the gross margin. So just for now just for now I will ballpark and say that we should cross through 65% gross margins against approximations long run.

And so on a copy out it with all that but but it's just natural migration of the switch out of.

The legacy revenues for the new that gives me the confidence to say that in addition to the other migration we've talked about the fast to pass strategy and the Verity migrations. All those together you know I think.

You know, we'll be looking at 65% kinda gross margins by Q1 of 2021 and it was even some upside to that into the future, but but I'll just I'll leave it at that for now to give you a little bit more sense for the way, we're thinking about it 60% by the third quarter next year, 65% by the first quarter or so.

2021.

Okay. That's great. Thanks for that insight there and then with respect to the most recent corridor.

And then.

In the updated guidance I'm with respect to the operating expenses I think on all the wine.

As a you did considerably better than what we were forecasting and it just any thoughts there in terms of you know maybe how you're trending in terms of product development sales and marketing.

And then the GE in a in terms of are there were there any thing is really to call out that.

Maybe you didn't do as much hiring or things along those lines that led to the better operating expenses from the quarter.

Yeah, let's talk about that little bit that's a good question. So we're just talking about that before the call started actually and we had a very ambitious hiring plans. We did end up adding a net new of about 80 plus employees in the air So we did grow our workforce.

A good chunk of that maybe a third of that are so as to the acquisition of profit on but there's also some organic net new hiring of probably 50 or so people across the rest of the company. So we did achieve some really good growth as we had planned to in our headcount. However in our modeling in our guidance, we had assumed even higher levels and.

And so we were not able to hire to our desired outcome and that resulted in lower expenses a them, we had and therefore kind of outsized earnings in Q3, two what we had hoped so hats had we've been able higher everyone. We had hoped to Ah, we probably would have had a little lower earnings and this existing quarter.

So I think probably the single biggest variable is is setting our hiring expectation internally and then how close do we get to achieving them and and I would say this year. We underachieved, we're not aggressively trying to correct that meaning I didn't tell our teams go out and get five had hunting firms and get all these positions filled so we're we're kind of fighting the natural.

Battle for talent in our markets, including National which is heating up and and we're doing it diligently, but we're not overinvesting like creating a huge costs of rapid recruiting we're taking our time trying to get the right people I think we're doing well at that but the net effect is yes, we're we're behind kind of where we thought.

I thought we would be from a head count standpoint, and that has been a persistent story now for probably a year.

But I don't want to get the sense that were not growing our headcount, we did add and technology, we did add and sales net new ads and sales net adds in almost every area of the company. So we're getting things done, but I'm I'm. We're not we haven't yet you know rip the court and said look fill all these jobs instantly and <unk> as you know that cost a lot of money to.

I do that through recruiter. So we're kind of what we're doing our best organic recruiting and that's resulting in a little bit lower for cash and therefore higher operating income in Q3, we're gonna do our best in the fourth quarter to authorize a lots of project work and contracts to to make up for that deficit in hiring so that we can deploy capital in cash and.

Expenses into product development product design things that are extensible and some things capitalizable. So we're going to try to amp up Q4 a bit.

Essentially invest the money, we would have invested in Hadnt head count and don't know if we'll be able to fully offset the hiring shortfall again, it's important I know that we did add on that new 80 employees. So we're not we're not shrinking of the employee head count.

But we did we were more aggressive earlier in the year and our expectations for higher.

Okay and [noise].

About a year ago, you talked about Oh transition to I believe it was the zoo or and ADW as a any update there in terms of where you stand in that process, maybe the positive associated with that that you think you'll will accrue.

Through and then maybe an update on the expenses associated with that is that oh coming in lower than anticipated or no above expectation.

It's about it expectations.

No I think it's going to take I think I'd characterize that as as a as a 24 month migration is about 27, much if I think I'll describe another migration. This one is more at hand, and its managed with a thorough process, but as our past strategy grows up we're increasingly moving all.

Opens up into those two environments, you mentioned Azure and HW asked and and that does result in duplicative cost where our legacy platform HL C is all a fast.

You know, it's a great architecture, but it's it's hosted in a managed hosting environment and a couple of Q1 data centers across the country and so we are having duplicative costs, but I would say, we're going to bear those duplicative costs for the next and I'll go ahead, just a line this with the other two migrations because there are hundreds and hundreds and hundreds of of Healthstream managed servers and these tier one data centers.

And it's going to take us time to get each of our applications moved and we're not in any particular hurry because it's a good stable growing model and platform and again a lot of a new platform technologies are being built in so we don't have all the functionality in the new platform to switch or some of the legacy.

Platforms over and so I guess I would say that they're at our budgeted expectations for costs in the model nothing exceptional either way and that we're going to take our time, probably next 27 months, so I'm going to get US. The same time on is the other three transitions to get us over to the cloud fully.

Again, all of our apps just to be clear our Oh, our SaaS applications that are web hosted in liver multi tenant architecture, so they're modern architectures, but as far the actual hosting environment managed hosting versus outsourcing JW <expletive> and up and Azure. The Microsoft platform. We're gonna, we're going to take our time on that.

Out and manage those costs now to your point, though if you look out 30 months from now.

When those migrations are complete we will have a lower cost structure because there's a.

I I think some of our server facilities have over 345 hundred servers, and then that would go away and where you know the capital to refresh them would also go away, but lets called out of 27 month journey as well.

Okay and would that be included in that sort of 65% type of gross margin or.

That.

Yeah, we snack right now.

Yeah Weve the.

Those costs are in our thinking as we look out and as I've mentioned. This is a 27 month migration that those kinda duplicative costs are in our assumptions and we still think we can see a move to cross the 60% threshold by this time next year and then a more rapid moved by Q1 Q2 of the next year to step 65% area.

Okay. We will have three most that's a cost yeah. Thank you.

Great. Thanks.

Thank you as a reminder to ask a question you'll need to press star one on your telephone.

Next question comes from Frank Sparacino with first analysis. Your line is now open.

Hi, guys I'm just one for me.

On the talent side of things given we havent talked too much about that recently Bobby.

Yes, I see there's some new money and startups are coming into the space on hiring side.

But any thoughts just in terms of.

Where you're at today in terms of the talent portfolio products and.

Your thoughts going forward, there probably in terms of the market opportunity in and how you sort of balance that maybe with some of that the other initiatives you have.

Yeah. Thanks, a 'em, we haven't talked about in a while I've shakes up global I'd say, we're retrenching to what we're best that that'd be a fair characterization, the learning and development dimensions.

Tools like our checklist tool been good winners we put those in the talent management bucket. The learning center with its refreshed my team and to the new kind of initiative management capabilities with building into the platform. We're really excited about probably a a slight move away from some of the other areas like compensation like the full talent suite.

Yeah and and so.

Probably a de emphasis on what I call the secondary and tertiary components of talent management, and a doubling down on what I'll call performance management and learning and then even within learning Theres new innovations coming in we're right on top of them around for example, using video based education and training and providing new products that give the capability.

I used to manage essentially your own kind of you tube for your health system.

Tied into your learning platform and so we have some exciting momentum around this new video based platform is connected to our learning platform.

And so yeah overall characterization would be.

We're kind of doubling down on what the core is from our perspective, it's kind of learning and performance management, we're probably moving away from the secondary and tertiary services like compensation management.

And recruiting for example, the Ats moves we made several years ago, probably de emphasizing those overall and then the emerging technologies like the new video based platform really excited about should we think we can continue to differentiate ourselves and what I'll call learning development and performance management.

Thank you.

Thank you.

I'm not showing any further questions at this time I would now like to tend to call back over to Rob expressed any further remarks.

Well. Thank you everyone for participating congratulations to the employees on their great efforts for our social responsibility program and helping raise over $20000 American cancer Society.

Great Great effort, there, we look forward reporting to all investors on the three key transitions again next quarter will actually be it'd be sometime before together again.

Around February and we're proud that we've made good progress on each of the three key transitions and migrations, we talked about and I guess, we identified a fourth is the move into these these full cloud hosted solutions as a almost a four transition to think about thank you all look forward to our next report.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.