Q3 2022 HealthStream Inc Earnings Call

October 25, 2022

I would also like to remind you that this conference call may contain forward looking statements regarding future events and the future performance of help stream that could involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward looking statements.

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.

<unk> Form 10-K, 10-Q, and our earnings release.

Additionally, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure.

A table, providing supplemental information on adjusted EBITDA and reconciling to net income attributable to help stream is included in the earnings release that we issued yesterday and they referred to in this call.

So with that start I'll now turn the call over to CEO Bobby Frist.

Good morning, everyone. Thank you Mollie.

I'm looking forward to our third quarter 2000 to 2022 earnings call.

We will start with reviewing some of the highlights each of the financial metrics highlighted in our earnings release showed growth in the third quarter. We delivered record top line revenue in the third quarter of $67 3 million, which is up 5% compared to Q3 of last year and based on our guidance. We expect revenue next quarter it increased by 6% when compare.

To Q4 of last year.

So it's fun to be back on offense.

The higher growth rates here in the second half than the first half.

Operating income was $2 4 million, which is up 33% and adjusted EBITDA was $12 7 million up 2% all compared to the same period last year.

Net income was $3 7 million, which is up 144% from $1 5 million and EPS was <unk> 12, compared to five both compared to the same period last year and both due in part of the successful sale of a company in which we held a minority equity interest.

Concurrent with our financial progress health teams ecosystem continues to expand.

Extreme subscriptions are now at 535 million, which represents an additional 50000 subscriptions since last quarter.

The support we're providing to health care organizations is driven by our vision to improve the quality of health care by developing the people that deliver care.

With that in mind I want to take a moment to ground everyone in the core dimensions of our business.

First and foremost how stream as a health care technology company dedicated to developing Credentialing and scheduling the healthcare workforce through SaaS based software solutions we.

We sell these solutions on a subscription basis under contracts, which averaged three to five years in length that means our revenues are recurring and fairly predictable we are profitable and we have little to know that.

We're also fortunate to be solely focused on one of the more recession resistant markets around health care, which is comprised of about $10 9 million workers the way we define our audience.

As health care professionals are the end users of our SaaS applications and software solutions.

We are led by a seasoned team of executives who have a proven track record of generating strong earnings and cash flows through both organic and inorganic means we have developed internally innovative patented solutions such as game and we've created new application suites, such as credential stream through acquiring and integrating other companies.

At our Investor Day program held last month, we reminded everyone that health streams emerging platform a stream is central to many of the most exciting developments in the company. Today. For example, eight streams identity management capabilities will enable interoperability that gives us levers between various proprietary and third party applications.

Our platform strategy will enable us to build increasingly powerful ecosystem, which we believe will create new business opportunities and also new ways for health care professionals to participate in our ecosystem.

Given these developments and our confidence in the ongoing evolution, we announced medium term financial objectives during our Investor day.

And I want to reiterate those objectives today.

From a revenue standpoint, we are targeting to grow 7% to 10% on average per year over the next three years, which will be a mix of organic and inorganic growth.

We are working to deliver gross margins of 65% to 68%.

Over the same time period.

Third we aspire to deliver higher EBITDA margin of 21% to 24% over that period.

Remember these are not guidance their objectives, but inform our strategic planning process. Unlike guidance. For example, these objectives include inorganic growth, which is less predictable obviously than our subscription organic growth.

Later in the call, we'll talk about our three application suites that focus on learning credentialing scheduling, but for now I'd like to turn it over to Scotty Roberts for a deeper dive into the financial results.

Alright, Thank you Bobby and good morning.

Let's start with the financial highlights for the quarter.

And unless otherwise noted comparisons are against the same period of last year.

Revenues were $67 3 million.

We were up 5%.

Operating income was $2 4 million up 33%.

Net income was $3 7 million at 144%.

Earnings per share was <unk> 12 per share, which was up 140%.

And finally, adjusted EBITDA was $12 7 million and was up 2%.

Workforce solutions revenues came in at $54 1 million and were up 6% and revenues from our provider solutions came in at $13 $2 million and were up 2%.

Third quarter's consolidated revenue growth rate of 5% was in line with our expectation and was an improvement over the 2% growth rate during the first half of the year.

This is indicative of a steady progression with a new sales, particularly since the height of the pandemic and getting past the legacy resuscitation runoff and some other comps that were pulling down the growth rate earlier in the year.

And through the first nine months, we've experienced an improvement in bookings compared to last year.

Which is also contributing to our revenue growth in the second half of the year.

Our forecast for the fourth quarter anticipate consolidated revenue growth will be and there will be approximately 6% Bobby mentioned earlier.

Gross margin was 65, 3% compared to 64, 8% last year.

Mid 60% margins are already in line with our medium term objectives by the after mentioned earlier.

Revenues from partner products, which we pay royalties increased during the quarter, resulting in a slight decline in gross margins compared to the first half of the year.

Operating expenses, excluding cost of revenues were up 5% or $1 8 million over last year's third quarter.

The increase in expense was primarily referring to sales marketing and product development categories.

Sales and marketing increased by 11%.

Due to a combination of increased staffing levels higher sales commissions and travel.

Our business travel expenses have been steadily increase well.

Over $400000 this quarter compared to about 100000.

Third quarter of last year.

Customer related increase along with the return of many industry trade shows and events.

And we expect travel will remain at the current rate through the end of the year.

And the investments that we've made in sales and marketing are leading to positive results and bookings are up year over year sales pipelines are increasing and our closure rates are improved improving compared to the past couple of years.

Our product development expenses also increased by 11% which is.

Net of labor costs that were capitalized for software development.

Well capitalized labor cost increased about $1 million over the prior year quarter.

General and administrative expenses declined by 9% and there were two primary drivers behind this reduction.

First help stream adopted a hybrid worked placed policy last year, and it's been going well for our employees and for the company.

We reduced our office space footprint over the past couple of years. Some satellite office leases came up for renewal.

We decided not to renew.

That reduction in office leases, resulting in expense savings of over $550000 in the third quarter is expected to result in about $1 1 million in savings for the full year.

We will continue to evaluate our office space needs in light of our new model and have recently decided to market approximately one third of the space in our Nashville headquarters for sublease.

Additionally, impacting G&A, we did not have about $150000 of transit service costs from the acquisition that we had in the third quarter of last year.

And during the third quarter, a minority investment that was held for over seven years was sold and resulted in the recognition of a $2 $7 million pre tax gain which.

Which increased net income by $2 1 million.

And increased earnings per share by 7%.

The proceeds that we received were approximately $3 5 million.

Adjusted EBITDA was $12 7 million and was up 2% over last year's third quarter.

For clarification gain from the sale of the minority interest that Chuck mentioned is excluded from our calculation of adjusted EBITDA.

Switching to the balance sheet metrics, we ended the quarter with cash and investment balances of $51 8 million, which is up by $12 6 million last quarter.

During the quarter, we deployed $6 million of cash for capital expenditures.

We did not have any share repurchases this quarter.

DSO was 38 days compared to 40 days last year.

On a year to date basis cash flows from operations were $43 $1 million.

Compared to $36 $4 million last year and free cash flows were $24 1 million.

Compared to $17 3 million last year.

For our share repurchase program as I said, we had no repurchases this quarter and we have approximately $1 $9 million remaining under the plan, which expires in March of 2023.

Unless earlier terminated by the company.

Now, let me provide a review of our guidance expectations as we closed out the year.

With one quarter remaining we are updating our guidance ranges as follows.

<unk> consolidated revenues to range between $265, five and $267 5 million.

Adjusted EBITDA is expected to range between 50 to $53 5 million and capital expenditures are expected to range between $25 five and $26 5 million.

For the fourth quarter, we expect revenues to grow approximately 6% over the same period last year.

We also expect adjusted EBITDA to improve over the fourth quarter of last year.

We're pleased that our revenue growth is expected to accelerate from two 1% in the first half of 2022 to five 5% in the second half.

Despite this positive direction. The primary reason that we've lowered our revenue guidance range for the year. This data underperformance from scheduling.

During the second half of the year, we decided to curtail our sales of legacy installed software and favorites with subscription based SaaS solutions.

We also adopted a conversion strategy intended to transitional customers away from install scheduling software.

And at the SaaS based schedule installations, we.

We believe these decisions will benefit customers the company and shareholders over the long term.

That's all I have for today. Thank you for your time and Bobby I'll turn it back over to you.

Thank you Scotty.

Let's turn to brief overview of each of our three application suites. Those are learning credentialing and scheduling I'll hit some highlights from each remember each of these application suites are made up of a subscription based SaaS applications. They are specifically designed for the health care workforce and each of them is increasingly powered by and connected to and informed by our <unk>.

Technology platform, and our H dream platform strategies that I discussed earlier.

First let's look at learning, which is well established and encompasses a broad range of solutions our flagship product in this set of solutions that help stream learning center, which is the most adopted and utilized learning management system in health care Health care Learning Center <unk> Learning Center continues to be the market leader in the acute care space and has a growing presence of it.

Continuum marketplace, including in ambulatory surgery centers and skilled nursing facilities.

Learning also includes a proprietary market, leading safety and compliance solution known as safety Q with.

With <unk>, our customers can positively impact your <unk> programs by utilizing the interactive learning content and proprietary national benchmarks only available through our platform.

Safety <unk> added 31000 subscriptions in the third quarter.

Turning to the diversity of our ecosystem over 75 marketplace partners utilize our learning channel to enhance and deliver their products. Examples include American Red Cross <unk> and <unk> and many others in the past year. We've added approximately 35, new products from our marketplace partnerships.

Let's turn our attention towards Credentialing, which is the product of acquisitions that occurred from 2012 to 2019.

We took the absolute best features of each company's products that we acquired and we combine them to form the new software SaaS application suite, we call credential stream.

We believe credential stream is the best Credentialing solution on the market for assessing enrolling onboarding credentialing and privileging positions.

Allows our customers to positively impact their revenue cycle by minimizing the time between hiring a physician and get reimbursed for that physicians work.

Our customers appreciate the return on investment by Credential stream provides.

Sales of credential stream remained very strong in fact, they remained so strong that the backlog for implementing new sales remains substantial and as you know we do not recognize revenue until the solution is fully implemented.

Generally we are both selling and implementing three customers per week.

We're working on automating even more of this fairly complex implementation process, which will benefit customers and our company.

I mean, obviously, if we can help that ratio a little bit and when three deals a week and implement for we can work our way into the backlog instead of both just kind of growing together.

So we are working on that finally, let's talk a little bit about scheduling, which was formed through three acquisitions all of which were completed in 2020.

And as we described this journey it will be a journey like.

Credentialing, but we have a clear vision, we have a solid set of hypothesis to test, which we can deliver value and why we believe we can deliver some of the best scheduling system on the market, but it's going to take us time to develop those things and get them in the marketplace.

So we're running the same playbook and scheduling that we successfully ran and credentialing.

Only with scheduling we already have a promising SaaS solution and ship Wizard, which is outperforming our sales expectations. We plan to continue enhancing ship Wizard with the best elements from our other scheduling assets.

All in our discussion are scheduling by highlighting the continued viral growth of our nurse grid application for.

So the first from the time, we acquired it in early 2020 to now nurse grid continues to be the number one application for nurses in the Apple's App store.

Perhaps more impressive is that the monthly active users for nurse grid has more than doubled since we acquired it over 425000 nurses log into nurse grid every month manage their calendars swap shifts with their colleagues and generally plan the professional and social agenda with their peers, we do not believe that this level of engagement.

And satisfaction exist in any other nurse centric application on the market today, and we look forward to evolving our uses of it and the opportunity provided by it overtime.

They tuned for more on the future of that product.

I want to close today by pointing out the consistent steady growth of our ecosystem. The third quarter alone 55000, new subscriptions to our learning center application were contracted.

87700 American Red Cross certifications were issued.

30000, more nurses became monthly active users on nurse grid and approximately three new contracts per week were signed for credential stream.

They are just these are just a few of the metrics that show our dynamic growth of our solutions throughout the company I believe our platform strategy supports continued growth and innovation and I look forward to reporting on those in the coming months.

Now I'll turn it back over to the operator, so we can head into quality to our Q&A sessions.

Thank you Sir.

<unk> and answer session will begin at this time.

You are using a speakerphone, please pick up the handset before pressing any numbers.

Should you have a question. Please press star one one on a push button telephone.

Questions will be taken in the order that they are received please standby for your first question.

Okay.

Our first question will come from Richard close of Canaccord Genuity.

Line is open.

Yes, good morning, thanks for the questions.

I just wanted to clarify on the workforce implied.

For the changing guidance there.

So thats.

So we related to not.

Selling the license software or the old products and it's just on the scheduling side.

It is coming from the scheduling side and the biggest characterization.

One of the elements would be that there was also as we mentioned in the prior quarter a little bit of churn in the legacy software business, which we're trying to convert the SaaS business. So I'd say, it's just in general a few variables in our projections for the scheduling business.

Okay, and then on the provider solutions or the Credentialing product I guess, we should call it.

With respect to.

The growth fits at like two.

Two to three per cent.

I think if you look at the third quarter. The implied guidance is down 1% year over year to up 3% and I know you hit on this with the implementations.

But.

What do you think the long term growth rate is in the Credentialing business.

Well, we've tried to provide these objectives to try to get at that answer kind of universally across our application sets the puts and calls as you will.

And we provided the <unk>.

Objectives.

Which should inform our planning process and therefore kind of each of these application suites.

What our goals are to grow 5% to 7% organically and that's all the ins and outs. So for each of the businesses somewhat different maturities that have a little more churn.

Our high growth, but have implementation backlogs so in Asia, and then in the scheduling business.

Very new to that whole process of both retaining our legacy customers and introducing the SaaS subscription model and.

And migrating customers so for different reasons.

Different slightly different puts and calls, but we do project growth from all of them and and collectively we are communicating that our objective for growth is 5% to 7% organic.

Over the next three year period.

And then in addition for the first time, we've committed to this concept, although ours history would indicate with over 18 acquisitions that will also have an inorganic component that should push again, our objective on our guidance, but our objective in the way we plan.

Over time, the inorganic growth should contribute another 2% to 3%. So we've guided to 7% to 10% are we have provided our objective of 7% to 10%.

And there are some variables in there like acquisitions that are less predictable as I mentioned.

But instead of addressing it on each application suite, because as we've talked are at different stages and for different reasons.

I will just say collectively we believe we'll be targeting that 5% to 7% organic growth.

Okay.

Staying on Credentialing, Bobby you talked about the ROI that you are delivering for our customers.

There was the article I think last week that I stumbled across that.

By class.

<unk> talked about the different vendors and the Credentialing area and maybe called into some questions in terms of the.

Maybe value proposition a verity stream.

So.

Do you have any comments related to that.

I think they've got more research to do we really are convinced that we're both gaining market share by displacing competitors because our solution is better.

We have some more work to do to describe the value proposition.

But we're confident in all of the components of our software being best of breed, especially when put together as a continuum of products that that does shorten times revenue for physicians. We believe we have the most comprehensive suite that handles from the Onboarding process, all the way to the privileging process so enrolling in insurance.

During the privileging and Credentialing process. We think we are where we think we're the best at it. So at an enterprise level. We are very confident of our value proposition and I imagine that overtime. Those klas rankings will work themselves out because that's the feedback we also get from our customers and.

And you're signing three per week.

That's three what we call new logos a week.

And those are coming from somewhere so yeah, we feel really good now are in our market. We're focused on the acute care market and some of the other credentialing vendors focus on say the insurance market, where theyre credentialing their position for insurance purposes, and Thats not our strength our focus as you know for all of our application suite or on the workforce, where theyre employed which in many cases, especially.

Credentialing is in the acute care market.

Okay, well, thank you very much effort season, who they're calling and how they're getting their data I don't know.

Glass is an important function, but but our customers are speaking with their choices each week.

That is fair I just wanted to.

Your thoughts on that so I appreciate that.

Congratulations thank.

Thank you.

One moment please.

Question.

Our next question will come from the line of Ryan Daniels of William Blair <unk> Company. Your line is open.

Hi, Good morning, this is Jack Nellix filling in for Ryan.

Thanks for taking my question.

Looking at your targeted growth objectives over the next few years can you speak to your thoughts around the underlying assumptions or growth levers across each of the three core product offerings and with that how are you thinking about the composition of that organic growth between new logos and.

Same client expansion.

Yes.

A little bit difficult because theres. So many solutions that's meant we've broken down into these three categories and as we talk near each has slightly different maturity stages, but emerging as market leaders in the first two and and a great vision and direction for the third area, which is the scheduling areas. So and we have incredible assets in that area. So.

First of all I'll characterize it.

It's largely inorganic and organic growth strategy at that base level of our targeted objectives.

We grow by adding subscribers cross selling and Upselling. So we have a really good account management model that shows.

The customers the other applications, we have once they get into the ecosystem with one of the other increasingly one of the levers we're hopeful for and expectant of is that cross selling will occur more frequently as the applications become more integrated as they lever of the core integrated technology of data stream platform and so we think there'll be growth.

<unk> value proposition to each suite.

As they become more interconnected through the H stream technologies and again, we're fairly early in that journey, but a lot of exciting milestones along the way for example in Investor Day, We announced our developer portal, which is really a symbolic shifts to becoming a paas architecture. It means that we're beginning to make the functions of our ecosystem avail.

On an API basis, which ensures greater interoperability between and among our applications and also the ERP in larger systems of our customers. So the launch of our developer portal, we think is a great.

Kind of symbolic moment.

The shift to become offering platform as a service capabilities, which means we're going to be more integrated more leverage more.

And should ultimately facilitate better cross selling and more reasons. If you have for example, our learning system there should be competitive advantages to also buying our credentialing system.

We're kind of evolving that hypothesis instead of just being kind of best of breed in three areas that each of those areas can lever the other two.

As they develop and mature using the <unk> technology. So we're really excited about that.

We've been adding to the sales team so whenever we come up with our targets we tried to figure out.

Our marketing programs are getting better at finding opportunities both in our existing ecosystem and new customer acquisition outside the ecosystem for any given product so cross selling better account management.

Organic growth levers between applications that show more kind of benefit to customers.

Are all examples of why those we have those objectives, which would show higher growth rates and say, we've been able to deliver through parts of the pandemic and in the first half of this last year. So for all those reasons were.

We're excited that those are our objectives again, we cant say there our guidance, we'll do guidance every February and it may be a little above or below those ranges on a given year, but over the three year period, that's the expectation expected profile of our company and it kind of inherent in that is.

As you can see a boost in our in our gross margin profile again.

And so we also believe that our product mix.

And the new types of products are building have an inherently higher gross margins say, our long history of St partnered products and so the product mix should continue to favor higher margin organic products over the next three years and so we're excited about that as a force for earnings as well.

Yeah.

Great. Thank you.

And can you talk a little bit about the level of visibility looking out into 2023 at this point in the year, given any headwinds that might still persist in the health CIS.

System end market.

Yes, Scott if you could refresh yourself from our investor deck, when we set our percent subscription revenues.

No. It was really high and I think I know the number I just want aside from the deck.

And while he is making sure we have that number.

I would say just in general of course were SaaS based.

Target three to five year contracts.

For the majority of our products and it gives us a lot of visibility now the fourth quarter is an important selling season, but the good news is we feel really on track with solid pipelines through the end of the third quarter and so a lot of the revenue set up for say the second half of next year as determined by the sales cycles.

The fourth quarter.

Because some of those products get implemented and implementation starts revenue rec and so we need to have a strong fourth quarter to feel really good about second half of next year that said the first nine months of the year feel on track and a huge percentage of our base revenues are already under three to five year contracts. So we have a very high visibility into into next year.

So Scott any any additional comment.

Yes, I think Bob you are trying to.

Highlight what kind of the mix of our revenues arent at roughly 95% subscription base.

What you're asking.

Visibility.

Thanks.

Generally speaking we have a fairly predictable revenue stream, because it's mostly subscription base.

One chart I'd, probably point you to the Investor day, Slide deck, where you get a sense of what our remaining performance obligations or you can see kind of how that behaved over the past.

Four to five years, you can get a sense of how much revenue youre looking for visibility.

What's currently under contract that might give you another indication.

Thank you Scotty.

Thank you.

Yeah.

Thank you.

One moment please for our next question.

Our next question will come from Vincent collateral of Barrington. Your line is open.

Okay.

Yes, Bobby.

The backlog in credential stream, you said, it's been growing nicely.

Is there any churn from that backlog from clients being frustrated with the pace of implementations.

That's really funny.

That was literally just texting that question to the GM that runs that area of the president.

And my answer is I'm waiting for the extra filing I don't think.

There's very much churn or loss at all and even in the legacy platforms, they're largely we've kept that customer base intact. Both the acquired customer base and we're getting I'm really excited about the new product that they can migrate to so we're not only winning new logos.

A meaningful number of those wins are our.

Transitions.

Probably half our transitions and half are brand new logos.

But the three week, because I think the new logo number so hope that provides clarity, but no we're not seeing churn in the base business.

Of any material measure and credentialing.

And the automation.

Pos of potential.

Any sense on the timeline there have you identified and sort of what you can do and mapped out how long it will take.

The team has a roadmap they've been working on it and by the way just the sales rate has gone up and implementation rate has gone up so we have gotten better even in the last year at implementing so it's just interesting as we get better at implementing we're getting we're selling more.

I'll take that problem.

That said they've also that all of us.

Thought out and well executed roadmap for improving the implementation cycle. For example, we've begun to seed the market with certain functions pre purchase that really those seeded function are only valuable in the context of a fully implemented system and so the customers are beginning to experiment with the new platform.

But also do some of the pre implementation work before they even buy the software, which is really amazing and so we see really a smart approach to trying to figure out how to take what's really complex migration. So if you think about these credentialing systems are integrated with as many as 60 upstream and downstream applications.

And so when we go in and win sometimes we're replacing as many as four vendors with our suites and those vendors are fairly integrated but theyre not integrated as well as we are with each other or is flexible powerful as we are so you got to remember this is a complex process also requires the customers to adopt some of our.

Our framework, which will have tremendous long term benefit for example, the customers adopt our privileging library, which is a form of.

<unk> proprietary data we provided them.

Instead of each hospital system, having a proprietary privileging library to grant privileges against.

When they move to credential stream, they adopt our privileging model and <unk> databases in our privileges as written and so we're getting we will have the ability kind of unique in the industry to provide insights into the credentialing profile of customers through the use of common datasets, which we have created an AUM.

So I'm really excited about the overall model and you have to remember this is a big enterprise and important system. That's enterprise critical has to be done with great precision.

And we're doing that and we're doing an increased rate and we'll come up with clever ways to get customers to try and implement and work through some of the change management issues before they even buy the software.

A cycle that maybe you should take a year, we're finding ways to shorten it down to nine months in six months and I think we can do even better in the next year. So yes, there is a roadmap.

The process is improving.

But it is a complicated process that requires change management on behalf of customers and we're getting better at coaching them through that process.

Will you continue to hire.

Salesforce has come a long way salespeople in Q4 and.

Overall, there has been any change in the labor market in terms of availability and inflationary pressures.

Inflationary pressures or there were really.

Working hard on our retention and development strategies, we think we have an incredible culture and lots of reasons for people to want to be a part of this exciting journey to <unk>, So where we are.

Overall fuel, we're managing through all of those variables fairly well.

Actually I would say really well last quarter.

We increased our net head count by five people so.

Stabilizing right now.

Size of our workforce.

With.

New hires offsetting attrition just by a little bit.

So it's kind of a net growth in employees, but it's much lower than I'd say.

Largely filled a lot of the seats and sales that we need and so we don't have big holes in the sales organization like maybe a year ago or even six or seven months ago. So.

Now, we've got to ramp them up to speed make them all more effective as they learn the upstream we're announcing products, but I think largely I feel fairly well staffed at this point and managing expenses as you can tell pretty well now we have some tradeoffs occurring for example, or reducing our office footprint.

While increasing say some areas in compensation.

Other areas of inflationary growth.

As a result of that too.

<unk> bar, we've engaged in a study of our pricing models.

<unk>, where we can work in se.

Automated pricing escalators in our contracts.

So we have a lot of work to do and a lot of areas to handle the inflation and workforce issues, but I feel our teams are taking the right steps to deal with both.

Thank you for answering my questions.

Okay.

Thank you.

And again to ask a question. Please press star one one on your telephone.

One moment, please for our next lesson.

Our next question.

And we have a follow up from Mr. Richard close of Canaccord Genuity. Your line is open.

Yes, thanks for the follow up question.

I was curious on the decision with respect to the legacy scheduling was that just made during the third quarter. I know you had maybe some softness in churn in legacy in the first half of the year, but just the decision not to.

Offer those going forward.

That did occur early in the third quarter. After a kind of we had talked about in the second quarter call that we had had some softness in selling I think we just decided look lets just stop and let's also focus on migration strategy. So we're also creating programs to incentivize the migration towards the SaaS application. So both we made it.

<unk> decision early in the third quarter to stop selling the license software it wasn't selling very well anyway. As you know which is not our model the old installed software model. So that was okay, but instead of counting on some of that in our budget. We just said look let's just stop selling it and Meanwhile, we launched and are in the process of creating.

Benefits to migrating and we're focusing our sales organization and our account management teams on both showing those benefits and providing the right incentives to get people to consider migration.

So of course, we're maintaining and supporting all of the legacy platforms to keep the customers engaged while also connecting them to new benefits.

And also now giving them formal reasons to want to migrate so I'd say, yes in the third quarter. Both of those are active changes the active migration program and the decision to stop trying.

And the sale.

Well the installed software.

That's helpful and then with respect to the Credentialing is there any more.

Metrics, you can provide or just maybe commentary with respect to like when someone signs a new credential deal.

You know what.

The timeline to go why is there an average that you can talk about.

I would tell you.

Confident that our teams that run those areas have really good both probably white papers and ROI analysis and what we're trying to do is find a way to post those on our website. So you can see kind of the what we would call kind of the time to revenue profile or at least the implementation cycle.

We'll find a way to put some of that out for you guys. Because there's things that we use in our sales process frankly.

When we explain the implementation cycles and the time to revenue so theres kind of two things going on there and I am confident we have white papers and research on or at least sales and marketing materials on both of them will.

Tried to point you to them, but they are generally publicly available and because of that.

That would be yeah, yeah, that'd be great and final question, maybe for Scott, obviously, very solid free cash flow generation through the first nine months.

Is there some sort of target we should be thinking about Scott in terms of.

Free cash flow as a percentage of adjusted EBITDA or anything.

You sort of target there.

Probably less than that.

What I guided for but I think obviously, we're trying to do our best to keep moving that metric up as quickly as possible.

Last two years.

Fairly flat around $17 million to $18 million, that's good to see that this year, where we're seeing some benefits come through improving that metric, but obviously our goal is to continue to improve and generate as much free cash flow as possible.

Well think about the metrics to provide that.

Into next year.

Addition, Richard I'd say right.

Right now we have a very active program in kind of a leadership based initiative too.

Really make sure that our capitalized software development in our capital allocation strategies are going into our growth areas of our business. So so for example, we're making sure that our product management teams and our company has created classification system.

There, we know our legacy products and our growth products and we can carefully calibrate how much capital in our approach to maintaining the older software versus developing new software. So.

You would expect us to have those programs, we do I'd say, we're getting more expense more more focused on it and more experienced in managing software development pipelines and making sure our capital allocation, which turns into capitalized software costs. We can really get good leverage out of them in the future and making sure we're putting money into the right products at the right ratio.

So.

So in addition to the kind of what Scotty mentioned I think managing our capital allocation process, we're getting better and better at it mhm alright. Thank you very much.

Yes.

Thank you.

And Im seeing no further questions in the queue I would now like to turn the conference back to Robert a frist junior for closing remarks. Thank you everyone for participation questions from analysts and those who follow our story to see our exciting developments and look forward to reporting the next quarter and everyone. Thank you to our employees for delivering these really outstanding.

Ending results that are driving us back on offense as I say and not on defense anymore. So, let's keep up the great work and I look forward reporting year end results I think sometime in February we will see you guys then.

This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

[music].

Good morning, and welcome to health screens third quarter 2022 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 would now like to turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead Ms contract.

Thank you good morning and thank.

You for joining us today to discuss our third quarter 2022 results.

Also on the conference call with me today is Robert a Frist, Jr. CEO and chairman of Gulfstream, 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 could involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward looking statements.

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.

Adding forms 10-K, 10-Q, and our earnings release.

Additionally, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure.

So with that start I'll now turn the call over to CEO Bobby Frist.

Good morning, everyone. Thank you Mollie.

We're looking forward to our third quarter 2000 to 2022 earnings call.

Based on our guidance, we expect revenue next quarter to increase by 6% when compared to Q4 of last year.

So it's fun to be back on offense and have a higher growth rates here in the second half than the first half.

Operating income was $2 4 million, which is up 33% and adjusted EBITDA was $12 7 million up 2% all compared to the same period last year.

Net income was $3 7 million, which is up 144% from $1 5 million and EPS was <unk> 12 cents compared to five both compared to the same period last year and both due in part and the successful sale of the company.

We held a minority equity interest.

Concurrent with our financial progress health teams ecosystem continues to expand.

Extreme subscriptions are now at 535 million, which represents an additional 50000 subscriptions since last quarter.

The support we're providing the healthcare organizations is driven by our vision to improve the quality of health care by developing the people that deliver care.

With that in mind I want to take a moment to ground everyone in the core dimensions of our business.

First and foremost health stream as a health care technology company dedicated to developing Credentialing and scheduling the healthcare workforce through SaaS based software solutions we.

We sell these solutions on a subscription basis under contracts, which averaged three to five years in length that means our revenues are recurring and fairly predictable.

Comparable and we have little to no debt.

Also fortunate to be solely focused on one of the more recession resistant markets around health care, which is comprised of about $10 9 million workers. The way, we define our audience. Those health care professionals are the end users of our SaaS applications and software solutions.

We are led by a seasoned team of executives who have a proven track record of generating strong earnings and cash flows through both organic and inorganic means we have developed internally innovative patented solutions such as Jane and we've created new application suites, such as credential stream through acquiring and integrating other companies.

At our Investor Day program held last month, we reminded everyone that health streams emerging platform Ace stream is central to many of the most exciting developments in the company. Today for example, H dreams identity management capabilities will enable interoperability that gives us leverage between various proprietary and third party applications.

Our platform strategy will enable us to build increasingly powerful ecosystem.

Which we believe will create new business opportunities and also new ways for health care professionals to participate in our ecosystem.

Given these developments and our confidence in the ongoing evolution, we announced medium term financial objectives during our Investor day.

I want to reiterate those objectives today.

From a revenue standpoint, we are targeting to grow 7% to 10% on average per year over the next three years, which will be a mix of organic and inorganic growth second we are working to deliver gross margins of 65% to 68%.

Over the same time period.

Third we aspire to deliver higher EBITDA margin of 21% to 24% over that period.

Both.

Later in the call we will talk about our three application suites that focus on learning credentialing scheduling, but for now I would like to turn it over to Scotty Roberts for a deeper dive into the financial results.

Alright, Thank you Bobby and good morning, let's see.

Start with the financial highlights for the quarter.

And unless otherwise noted comparisons are against the same period of last year.

Revenues were $67 3 million.

At 5%.

Operating income was $2 4 million up 33%.

Net income was $3 7 million at 144%.

Earnings per share was <unk> 12 per share which was at 140%.

And finally, adjusted EBITDA was $12 7 million and was up 2%.

Workforce solutions revenues came in at $54 1 million and were up 6% and revenues from our provider solutions came in at $13 $2 million and were up 2%.

The third quarter's consolidated revenue growth rate of 5% was in line with our expectation and was an improvement over the 2% growth rate during the first half of the year.

This is indicative of a steady progression of new sales, particularly the height of the pandemic and getting past the legacy resuscitation runoff and some other comps that were pulling down the growth rate earlier in the year.

Through the first nine months, we've experienced an improvement in bookings compared to last year.

Which is also contributing to our revenue growth in the second half of the year.

Our forecast for the fourth quarter anticipates consolidated revenue growth will be and there will be approximately 6% Bobby mentioned earlier.

Gross margin was 65, 3% compared to 64, 8% last year.

Mid 60% margins are already in line with our medium term objectives, Bobby also mentioned earlier.

Revenues from partner products, which we pay royalties increased during the quarter, resulting in a slight decline in gross margins compared to the first half of the year.

Operating expenses, excluding cost of revenues were up 5% or $1 8 million over last year's third quarter.

The increase in expense was primarily referring to sales marketing and product development categories.

Sales and marketing increased by 11%.

Due to a combination of increased staffing levels higher sales commissions and travel.

Our business travel expenses have been steadily increase well.

Over $400000 this quarter compared to about 100000 in the third quarter of last year.

Customer related site visits increased along with the return of many industry trade shows and events.

And we expect travel will remain at the current rate through the end of the year.

Our product development expenses also increased by 11%, which is net of labor costs that were capitalized for software development.

Well capitalized labor costs increased about $1 million over the prior year quarter.

General and administrative expenses declined by 9% and there were two primary drivers behind this reduction.

First health stream adopted a hybrid worked placed policy last year, and it's been going well for our employees and for the company.

We've reduced our office space footprint over the past couple of years. Some satellite office leases came up for renewal.

We decided not to renew.

That reduction in office leases, resulting in expense savings of over $550000 in the third quarter is expected to result in about $1 1 million in savings for the full year.

We will continue to evaluate our office space needs in light of our new model and have recently decided to market approximately one third of the space in our Nashville headquarters for sublease.

Additionally, impacting G&A, we do not have about $150000 of transit service costs from the acquisition that we had in the third quarter of last year.

And during the third quarter, a minority investment that we've held for over seven years was sold and resulted in the recognition of a $2 $7 million pre tax gain.

Which increased net income by $2 1 million and increased earnings per share by 7%.

The proceeds that we received were approximately $3 5 million.

Adjusted EBITDA was $12 $7 million and was up 2% over last year's third quarter and for clarification gain from the sale of the minority interest I. Just mentioned is excluded from our calculation of adjusted EBITDA.

Switching to the balance sheet metrics, we ended the quarter with cash and investment balances of $51 8 million, which is up by $12 6 million last quarter.

During the quarter, we deployed $6 million of cash for capital expenditures.

It did not have any share repurchases this quarter.

DSO was 38 days compared to 40 days last year.

On a year to date basis cash flows from operations were $43 $1 million.

Compared to $36 4 million last year and free cash flows were $24 1 million compared.

Compared to $17 3 million last year.

For our share repurchase program and as I said, we had no repurchases this quarter and we have approximately $1 $9 million remaining under the plan, which expires in March of 2023.

Unless earlier terminated by the company.

Now, let me provide a review of our guidance expectations as we closed out the year.

With one quarter remaining we are updating our guidance ranges as follows.

Consolidated revenues to range between $265, five and $267 5 million.

Adjusted EBITDA is expected to range between 52, and $53 5 million and capital expenditures are expected to range between $25 five and $26 5 million.

For the fourth quarter, we expect revenues to grow approximately 6% over the same period last year.

We also expect adjusted EBITDA to improve over the fourth quarter of last year.

We're pleased that our revenue growth is expected to accelerate with two 1% in the first half of 2022 to five 5% in the second half.

Despite this positive direction. The primary reason that we've lowered our revenue guidance range for the year is data underperformance from scheduling.

During the second half of the year, we decided to curtail our sales of legacy installed software.

Rest of subscription based SaaS solutions.

We also adopted a conversion strategy intended to transitional customers away from installed scheduling software.

And at the SaaS based schedule installations.

We believe these decisions will benefit customers the company and shareholders over the long term.

That's all I have for today. Thank you for your time and Bobby I'll turn it back over to you.

Thank you Scotty.

Let's turn to a brief overview of each of our three application suites. Those are learning credentialing and scheduling I'll hit some highlights from each.

For each of these application suites are made up of a subscription based SaaS applications. They are specifically designed for the health care workforce and each of them is increasingly powered by and connected to and informed by our <unk> technology platform and our H Dream platform strategies that I discussed earlier.

First let's look at learning, which is well established and encompasses a broad range of solutions our flagship product in this set of solutions that help stream learning center, which is the most adopted and utilized learning management system in health care Health Care Learning Center Health stream Learning Center continues to be the market leader in the acute care space and has a growing presence of the.

Continuum marketplace, including in ambulatory surgery centers and skilled nursing facilities.

Learning also includes a proprietary market, leading safety and compliance solution known as safety acute with.

With safety <unk>, our customers can positively impact your <unk> programs by utilizing the interactive learning content and proprietary national benchmarks only available through our platform.

Safety <unk> added 31000 subscriptions in the third quarter.

Turning to the diversity of our ecosystem over 75 marketplace partners utilize our learning channel to enhance and deliver their products. Examples include American Red Cross Epsco and <unk> and many others in the past year. We've added approximately 35, new products from our marketplace partnerships.

Let's turn our attention towards Credentialing, which is the product of acquisitions that occurred from 2012 to 2019.

We took the absolutely the best features of each company's products that we acquired and we combine them to form the new software SaaS application suite, we call credential stream.

We believe credentials trained as the best Credentialing solution on the market for assessing enrolling onboarding credentialing and privileging positions.

Laos, our customers would positively impact their revenue cycle by minimizing the time between hiring a physician and getting reimbursed for that position to work.

Our customers appreciate the return on investment by Credential stream provides.

Generally we are both selling and implementing three customers per week.

We're working on automating even more of this fairly complex implementation process, which will benefit customers and our company.

I mean, obviously, if we can help that ratio a little bit and when three deals a week and implement for we can work our way into the backlog instead of both just kind of growing together.

So we are working on that finally, let's talk a little bit about scheduling, which is formed through three acquisitions all of which were completed in 2020.

And as we described this journey it will be a journey like and.

Credentialing, but we have a clear vision, we have a solid set of hypothesis to test, which we can deliver value and why we believe we can deliver some of the best scheduling systems on the market, but it's going to take us time to develop those things and get them in the marketplace.

So we're running the same playbook and scheduling that we successfully ran and credentialing.

Only with scheduling we already have a promising SaaS solution and shift Wizard, which is outperforming our sales expectations. We plan to continue enhancing ship Wizard with the best elements of our other scheduling assets.

I'll end, our discussion of scheduling by highlighting the continued viral growth of our nurse grid application for the first from the time, we acquired it in early 2020 to now nurse grid continues to be the number one application for nurses in the Apple's App store.

Satisfaction exist in any other nurse centric application on the market today, and we look forward to evolving our uses of it and the opportunity provided by it overtime.

Tuned for more on the future of that product.

I want to close today by pointing out the consistent and steady growth of our ecosystem and the third quarter alone 55000, new subscriptions to our learning center application were contracted.

87700 American Red Cross certifications were issued.

30000, more nurses became monthly active users on nurse grid.

Approximately three new contracts per week were signed for credential stream.

They are just these are just a few of the metrics that show our dynamic growth of our solutions throughout the company.

Believe our platform strategy supports continued growth and innovation and I look forward to reporting on those in the coming months.

Now I'll turn it back over to the operator, so we can head into quality.

Our Q&A sessions.

Thank you Sir.

<unk> and answer session will begin at this time.

You are using a speakerphone, please pick up the handset before pressing any numbers.

You do have a question. Please press star one one on your push button telephone.

Questions will be taken in the order that they are received please standby for your first question.

Yeah.

Our first question will come from Richard close of Canaccord Genuity. Your line is open.

Yes, good morning, thanks for the questions.

I just wanted to clarify on the workforce implied.

For the changing guidance there.

So thats.

So we related to not selling the license software or the old products and it's just on the scheduling side.

It is coming from the scheduling side and the biggest characterization or one of the elements would be that there is also as we mentioned in the prior quarter a little bit of churn in the legacy software business, which we're trying to convert the SaaS business. So I'd say, it's just in general a few variables in our projections for the scheduling.

Business.

Okay, and then on the provider solutions or the Credentialing products I guess, we should call it.

With respect to.

The growth.

Two to three per cent.

I think if you look at the third quarter. The implied guidance is down 1% year over year to up 3% and I know you hit on this with the implementations.

But.

What do you think the long term growth rate is in the Credentialing business.

Well, we've tried to provide these objectives to try to get at that answer kind of universally across our application sets the puts and calls as you will.

And we provided the.

Objectives.

Which should inform our planning process and therefore kind of each of these application suites.

What our goals are to grow 5% to 7% organically and that's all the ins and outs. So for each of the businesses summit different maturities and have a little more churn some are high growth, but have implementation backlogs. So Anita and then in the scheduling business, we're very new to that whole process of both retaining our legacy.

Customers and introducing the SaaS subscription model.

And migrating customers so for different reasons. They all have different slightly different puts and calls, but we do project growth from all of them and and collectively we are communicating that our objective for growth is 5% to 7% organic.

Over the next three year period.

Over time, the inorganic growth should contribute another 2% to 3%. So we've guided to 7% to 10% are we have provided our objective of 7% and 10%.

And there are some variables in there like acquisitions that are less predictable as I mentioned.

But instead of addressing it on each application suite, because as we've talked are at different stages and for different reasons.

I'll just say collectively we believe we will be targeting that that 5% to 7% organic growth.

Okay.

Staying on Credentialing, Bobby you talked about the R O y that youre delivering for our customers.

There was the article I think last week that I stumbled across that.

By class.

<unk> talked about the different vendors in their credentialing area and.

Maybe called into some questions in terms of the.

Maybe value proposition a verity stream.

Do you have any comments related to that well.

Well I think they've got more research to do we really are convinced that we're both gaining market share. This by displacing competitors because our solution is better and we probably have some more work to do to describe the value proposition and but we're confident in all of the components of our software being best of breed, especially when put together as a content.

Our products that that does shorten time to revenue for physicians.

We believe we have the most comprehensive suite that handles from the Onboarding process, all the way to the privileging process so enrolling in insurance.

The privileging and Credentialing process, we think we are where we think we're the best at it so at an enterprise level, we're very confident of our value proposition and I imagine that overtime. Those klas rankings will work themselves out because that's the feedback we also get from our customers.

We're signing three per week.

That's three what we call new logos a week.

And those are coming from somewhere so yeah we.

We feel really good now are in our market, we're focused on the acute care market and some of the other credentialing vendors focus on say the insurance market, where theyre credentialing their position for insurance purposes, and that's not our strength our focus as you know for all of our application suite is on the workforce, where theyre employed which in many cases, especially in credentialing is in the acute care market.

Okay, well. Thank you very much happened season, who they're calling and how they're getting their data I don't know.

<unk> class is an important function, but but our customers are speaking with their choices each week.

It's fair I just wanted to.

Here your thoughts on that so I appreciate that.

Congratulations thank.

Thank you.

One moment please.

Question.

Our next question will come from the line of Ryan Daniels of William Blair <unk> Company. Your line is open.

Hi, Good morning, this is Jack Nellix filling in for Ryan.

Thanks for taking my question.

Same client expansion.

Yes.

A little bit difficult because theres. So many solution sets, but we've broken down into these three categories and as we talked in our EBIT slightly different maturity stages, but emerging as market leaders in the first two and and a great vision and direction for the third area, which is the scheduling areas. So and we have incredible assets in that area. So.

First of all characterizing it.

It's a largely.

Inorganic and organic growth strategy at that base level of our targeted objectives.

We grow by adding subscribers cross selling and Upselling. So we have a really good account management model that shows.

The customers the other applications, we have once they get into the ecosystem with one of the other increasingly one of the levers we're hopeful for and expectant of is that cross selling will occur more frequently as the applications become more integrated as they lever of the core integrated technology of the midstream platform and so we think there'll be growth.

<unk> value proposition to each suite.

As they become more interconnected through the H stream technologies and again were fairly early in that journey, but a lot of exciting milestones along the way for example in Investor Day, We announced our developer portal, which is really a symbolic shifts to becoming a paas architecture. It means that we're beginning to make the functions of our ecosystem avail.

Kind of symbolic moment.

The shift to become offering platform as a service capabilities, which means we're going to be more integrated more leverages ball.

And should ultimately facilitate better cross selling and more reasons. If you have for example, our learning system there should be competitive advantages to also buying our credentialing system.

We're kind of evolving that hypothesis instead of just being kind of best of breed and three in three areas that each of those areas can lever the other two.

As they develop and mature using the <unk> technology. So we're really excited about that.

We've been adding to the sales team so whenever we come up with our targets we tried to figure out.

We've had to backfill some sales team through the pandemic, we had more turn over in many areas of the company, including sales. So we think we're getting back up to par on our sales team, which again has resulted in a stronger sales pipelines are our marketing programs are getting better at finding opportunities both in our existing ecosystem and new customer acquisition Alpha.

The ecosystem for any given product so cross selling better account management.

Organic growth levers between applications that show more kind of benefit to customers.

<unk> are all examples of why those we have those objectives, which would show higher growth rates and say, we've been able to deliver through parts of the pandemic and in the first half of this last year. So for all those reasons were.

We're excited that those are our objectives.

We can't say there our guidance, we'll do guidance every February and it may be a little above or below those ranges on a given year, but over the three year period, that's the expectation expected profile of our company and it kind of inherent in that is.

As you can see a boost in our in our gross margin profile again.

And so we also believe that our product mix.

And the new types of products for building have an inherently higher gross margins and say our long history of St partnered products and so the product mix should continue to favor higher margin organic products over the next three years and so we're excited about that as a force for earnings as well.

Yeah.

Great. Thank you.

And can you talk a little bit about the level of visibility looking out into 2023 at this point in the year, given any headwinds that might still persist in the health system and market.

Scott if you could refresh yourself from our investor deck, when we set our percent subscription revenues, where I know it was really high and I think I know the number I just want aside from the deck.

While he is making sure we have that number.

I'd say just in general of course were SaaS based we target three to five year contracts.

The majority of our products and it gives us a lot of visibility now in the fourth quarter is an important selling season, but the good news is we feel really on track with solid pipelines through the end of the third quarter and so a lot of the revenue set up for say the second half of next year as determined by the sales cycles of the fourth quarter, because some of those products.

Get implemented and implementation starts revenue rack and so we need to have a strong fourth quarter to feel really good about the second half of next year that said the first nine months of the year feel on track and a huge percentage of our base revenues are already under three to five year contracts. So we have a very high visibility into into next year. So Scott any any additional.

Comment.

Yes, I think Bob you are trying to hide.

Highlight what kind of the mix of our revenues arent at roughly 95% subscription base.

I think what you're asking.

Yes.

<unk> ability.

Thanks, Joe.

Generally speaking we have a.

Fairly predictable revenue stream, because it's mostly subscription base.

One chart I'd, probably point you to the Investor day, Slide deck, where you get a sense of what our remaining performance obligations or you can see kind of how that behaved over the past.

Four to five years, you can get a sense of how much revenue youre looking for visibility that's kind of what apparently under contract that might give you another indicator.

Thank you Scotty.

Thank you.

One moment. Please for our next question. Our next question will come from Vincent collateral of Barrington. Your line is open.

Yes, Bobby.

The backlog in credential stream, you said, it's been growing nicely.

Is there any churn from that backlog from clients being.

Frustrated with the pace of implementations.

Really funny.

I was literally just texting that question too.

The GM that runs that area of the president and and my answer is I'm waiting for tax reform and I don't think.

There's very much churn or loss at all and even in the legacy platforms, they're largely we've kept that customer base intact. Both the acquired customer base and we're getting them really excited about the new product that they can migrate to so we're not only winning new logos.

A meaningful number of those wins are.

Our.

Transitions.

Probably half our transitions and half are brand new logos.

But the three week is I think the new logo number so hope that provides clarity, but no we're not seeing churn in the base business.

Of any material measure.

And Credentialing.

And the automation.

Possible potential.

Any sense on the timeline there have you identified sort of what you can do and mapped out how long it will take yes. The team has a roadmap they've been working on it and by the way just the sales rate has gone up and implementation rate has gone up so we have gotten better even in the last year at implementing so it's just interesting as we get better at implementing we're getting we're selling more.

I'll take that problem.

That said, they've also had a well thought out and well executed roadmap for improving the implementation cycle. For example, we've begun to seed the market with certain function pre purchase.

That really does ceded functions are only valuable in the context of a fully implemented system and so the customers are beginning to experiment with the new platform, but also do some of this pre implementation work before they even buy the software, which is really amazing and so we see really a smart approach to trying to figure out.

Was it really complex migration. So if you think about these credentialing systems are integrated with as many as 60 upstream and downstream applications.

And so when we go in and win sometimes we're replacing as many as four vendors with our suites and those vendors are fairly integrated but they're not integrated as well as we are with each other or is flexible powerful as we are so you got to remember this is a complex process also requires the customers to adopt some of our framework.

Which will have tremendous long term benefit for example, the customers adopt our privileging library, which is a form of <unk>.

Our proprietary data we provided them instead.

Instead of each hospital system, having a proprietary privileging library to grant privileges against.

When they move to credential stream, they adopt our privileging model and <unk> databases in our privileges as written.

So we're getting we will have the ability kind of unique in industry to provide insights into the credentialing profile of customers through the use of common datasets, which we have created an AUM.

So I'm really excited about the overall model and you have to remember this is a big enterprise and important system. That's enterprise critical has to be done with great precision.

And we're doing that and we're doing an increased rate and we'll come up with clever ways to get customers to try and implement and worked through some of the change management issues before they even buy the software.

So a cycle that maybe you should take a year, we're finding ways to shorten it down to nine months in six months and I think we can do even better in the next year. So yes, theres a roadmap.

The process is improving.

It is a complicated process that requires change management on behalf of customers and we're getting better at coaching them through that process.

Will you continue to hire.

And your sales force has come a long way salespeople in Q4 and.

Overall, there has been any change in the labor market in terms of availability and inflationary pressures.

Inflationary pressures or there were really.

Working hard on our retention and development strategies, we think we have an incredible culture and lots of reasons for people to want to be a part of this exciting journey at <unk>. So where we are overall fuel we're managing through all of those variables fairly well.

Actually I'd say really well last quarter.

We increased our net head count by five people.

Stabilizing right now.

Size of our workforce.

With you.

The new hires offsetting attrition just by a little bit.

So it was kind of a net growth in employees, but it's much lower than I would say.

Largely filled a lot of the seats and sales that we need and so we don't have big holes in the sales organization like maybe a year ago or even six or seven months ago. So.

Now, we've got to ramp them up to speed make them all more effective as they learn the upstream upstream products, but I think largely I feel fairly well staffed at this point and managing expenses as you can tell pretty well now we have some trade offs occurring for example, or reducing our office footprint.

Increasing say some areas in compensation.

Other areas of inflationary growth.

As a result of that to just as a sidebar we've engaged in a study of our pricing models.

Where we can work in say.

Automated pricing escalators in our contracts.

So we have a lot of work to do and a lot of areas to handle the inflation and workforce issues, but I feel our teams are taking the right steps to deal with both.

Thank you for answering my questions.

Okay.

Thank you.

And again to ask a question. Please press star one one on your telephone.

One moment, please for our next lesson.

Our next question.

And we have a follow up from Mr. Richard close of Canaccord Genuity. Your line is open.

Yes, thanks for the follow up question.

I was curious on the decision with respect to the legacy scheduling was that just made during the third quarter I know you had maybe some softness.

Churn in legacy in the first half of the year, but just the decision not to.

For those going forward.

Yes that did occur early in the third quarter. After a kind of we had talked about in the second quarter call that we had had some softness in selling I think we just decided look lets just stop and let's also focus on migration strategy. So we're also creating programs to incentivize the migration towards the SaaS application. So both we made it.

Active decision early in the third quarter to stop selling the license software it wasn't selling very well anyway. As you know which is not our model the old installed software model. So that was okay, but instead of counting on some of that in our budget. We just said look let's just stop selling it and Meanwhile, we launched and are in the process of creating.

Benefits to migrating and we're focusing our sales organization and our account management teams on both showing those benefits and providing the right incentives to get people to consider migration.

So of course, we are maintaining and supporting all of the legacy platforms to keep the customers engaged while also connecting them to new benefits.

And also now giving them formal reasons to want to migrate so I'd say, yes in the third quarter. Both of those are active changes the active migration program and the decision to stop trying sell the installed software.

Okay. That's helpful and then with respect to the Credentialing is there any.

Metrics, you can provide or just maybe commentary with respect to like when someone signs a new credential deal.

You know what.

The timeline to go live.

Average that you can talk about.

I'll tell you why im.

Confident that our.

The teams that run those areas have really good both probably white papers and ROI analysis and what we're trying to do is find a way to post those on our website. So you can see kind of the.

What we would call time is the time to revenue profile or at least the implementation cycle.

We'll find a way to put some of that out for you guys. Because there's things that we use in our sales process frankly.

When we explain the implementation cycles and the time to revenue so theres kind of two things going on there and I am confident we have white papers and research on on or at least sales and marketing materials on both of them will.

We will try to point you to them because they're generally publicly available and so that would be yeah, yeah, that'd be great and final question.

Sure maybe for Scott, obviously, very solid free cash flow generation through the first nine months.

Is there some sort of target we should be thinking about Scott in terms of free.

Free cash flow as a percentage of.

The adjusted EBIT.

Anything that you are sort of target there.

Probably nothing that are.

What I guided for but I think obviously, we're trying to do our best to keep moving that metric up as quickly as possible I think for the past two years.

Fairly flat around 17 to 18 million. So thats good to see that this year, where we're seeing some benefits come through improving that metric, but obviously our goal is to continue to improve and generate as much free cash flow as possible.

We'll think about the metrics to provide that.

If we go into next year and in addition, Richard I'd say.

Now we have a very active program in kind of a leadership based initiatives too.

Where we know our legacy products and our growth products and we can carefully calibrate how much capital in our approach to maintaining the older software versus developing a new software. So I mean, you would expect us to have those programs. We do I'd say, we're getting more expense more more focused on it and more experienced in.

Managing software development pipelines, and making sure our capital allocation, which turns into capitalized software costs, we can really get good leverage out of them in the future and making sure we're putting money into the right products at the right ratio. So.

So in addition to the kind of what Scotty mentioned I think managing our capital allocation process, we're getting better and better at it.

Alright, Thank you very much.

Yeah.

Thank you.

And I am seeing no further questions in the queue.

Now I'd like to turn the conference back to Robert a frist junior for closing remarks. Thank you everyone for participation questions from analysts and those who follow our story to see our exciting development I look forward to reporting next quarter and everyone. Thank you to our employees for delivering these really outstanding results that are driving us back on offense as I say and not on defense anymore.

So, let's keep up the great work and I look forward reporting year end results I think sometime in February we will see you guys then.

This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

Q3 2022 HealthStream Inc Earnings Call

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