HealthStream - Earnings Call - Q2 2021
July 27, 2021
Transcript
Speaker 0
Good morning and thank you for standing by. Welcome to the HealthStream's Second Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Molly Condra, Vice President, Investor Relations and Communications. Ms. Condra, you may begin.
Speaker 1
Thank you, and good morning. Thank you for joining us today to discuss our second quarter twenty twenty one results. Also in the conference call with me today are Robert A. Frist, Jr, CEO and Chairman of HealthStream and Scotty Roberts, CFO and Senior Vice President. I would also like to remind you that this conference call may contain forward looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward looking statements.
Information concerning those risks and other factors that could cause the results to differ materially from those forward looking statements are contained in the company's filings with the SEC, including Forms 10 ks, 10 Q and our earnings release. Additionally, we may reference measures such as adjusted EBITDA, which is a non GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call. So with that in mind, at this time, I'll turn the call over to Bobby Frist.
Speaker 2
Thank you, Molly. Good morning, everyone. Welcome to our second quarter twenty twenty one earnings call. A lot to cover today, but I think first, context is important. And I wanted to remind everybody that as the nation moves forward through the pandemic, it's clear that this long journey has grown bumpier in the recent rise of the Delta variant, which causing a thirty six percent increase in the number of hospitalizations.
According to the CDC, nearly half of adults in The U. S. Have been fully vaccinated. And as that number rises, we at HealthStream remain hopeful that progress toward beating the pandemic will continue. But we must keep in mind that it's our customers that are ones on the front lines responding to this new spike in the cases.
And as we start today's call, I can tell you our commitment to helping them improve the quality of healthcare has never been stronger. We're trying to align our interest and energies with our hospital customers and our continuum customers. I'd to comment on financial performance for the quarter and the first half of the year. We remain laser focused on growing the company, which is why we were able to deliver another strong quarter with top line revenues increasing 7% and adjusted EBITDA increasing 20% over the same period last year to a record $14,500,000 And based on those results, we have updated our financial guidance. We want to hit that early in the conference call.
We now expect revenue for the full year 2021 to be in the range of $253,000,000 to $257,000,000 For context, the midpoint of the new range is $5,000,000 higher than the midpoint of the previous range. I believe one of the most remarkable things about this guidance is that we are projecting revenue growth despite a 38,400,000 decline in revenue associated with our legacy resuscitation products from 2020 to 2021 and a $4,000,000 to $4,300,000 negative impact of acquisition related deferred revenue write downs. So our teams have done a great job both organically and through acquisitions of backfilling the revenue challenges I just articulated. Additionally, we now expect adjusted EBITDA for the full year 2021 to increase to be in the range of 48,000,000 to $50,000,000 And that's compared to a range of 40,000,000 to $44,000,000 that was announced just last quarter. There were some unique factors, however, that helped contribute to the record setting adjusted EBITDA in the first half of the year, which are not expected to repeat during the second half of the year.
For example, in the first half of the year, there wasn't much travel at all. And we do expect and have projected a return to travel expenses. Now not at the full level pre pandemic, but we do expect to see travel begin to recover for HealthStreamers across the country. And so we'll begin to see travel expenses come into the modeling as a return in the second half of the year. Additionally, macro workforce trends have made recruiting, retention, and hiring much more complex.
Basically all those are more difficult in the last, say, six months as the macro trends support everybody picking up from the pandemic and looking around to see if there's new opportunities. And no exception to HealthStream. We've both been, it's been a detriment and a benefit to HealthStream, this trend of everybody looking for something new. So catch up on our planned hiring. We were definitely behind our plan in hiring in the first half of the year which resulted in improved EBITDA.
But we need to reserve the right to catch up on hiring. We need to get the people in place that we had planned to have in place in the second half of the year. And so we're doing everything we can. And our new VP of HR and our recruiting teams are doing a great job adding new people. But our turnover has increased.
So second half of the year we expect additional costs in personnel that we were unable to net add in the first half of the year. We did have net add but just not where we planned to be. And finally, we're committed to increasing our investment in our newly acquired scheduling businesses, making it into one business or one focus area in the 2021. And we'll talk a bit about that here at the end of the conference call. But our new guidance reflects all three of these things, example, and captures them in the guidance ranges I provided above.
So I'd take a moment to comment on our financial goals for 2022 because in the last earnings call, for the first time, we looked forward beyond 2021. As you know, we had expected 2021 to be one of our toughest years with a $38,000,000 decline in one of our product lines. But as you can tell, we found a way through that in the first half. And so we wanted to get some view into 2022, at least our goals for 2022. And so here's what I can say about those now.
Building on anticipated results now for 2021, our goals for 2022 are, first, to deliver organic high single digit revenue growth rates. And for us that's probably 7% to 9%. Second, to achieve approximately 65% gross margin profile, which is fantastic because we have been delivering on that in the last two quarters, that 65% gross margin profile, which was the point of several of our transitional business work we've been doing the last three years that we've been talking about. And so essentially we feel we've achieved that, that general approximate level of gross margin profile which is a meaningful improvement from our historical gross margin profile. And we expect to be able to continue to deliver that at 65% approximately into 2022.
And third, we want to deliver adjusted EBITDA margins of 17% to 21%, which is an increase over our previously stated goal of 15% to 20%. So a little bump in our expected, taking off the bottom of the range essentially and bumping it up a little bit on our expected EBITDA margins into 2022 up to 17% to 21%. And that would be an improvement over our historical norms which hover in the 17% to 18%. So we hope to be able to at least maintain historical but hopefully have some upside to that in this new range of 17% to 21% EBITDA margins into 2022. Remember these are goals so they're short of guidance, meaning the models are all in flux.
And we want to have targets out there. We want people to understand that we're working to be a growth oriented company, improve our profitability profile and establish what looks to be now slightly higher EBITDA margins as well. So we'll state those as goals, not guidance for 2022. But we thought we'd give some context as we look forward. It's not only the contributions of our long standing product portfolios that give us confidence, but it's the market's enthusiastic response to our newer solutions that have given us the confidence to put forward those kind of objectives and goals for 2022.
And it's the market's embrace of our resuscitation solution from the American Red Cross and many of our other exciting innovative products that are contributing to our growth with their unique outcomes driven approaches. So I want to talk a bit about one of those. We've talked pretty extensively and we'll talk more about the American Red Cross Resuscitation Suite. But today I want spend a minute on Jane. So Jane is one of these new products.
It was first of its kind in the market. Jane is an AI driven clinical development solution that uses natural language processing powered by IBM Watson. Watson. And that's a mouthful, but basically it is a cutting edge solution for helping assess the competency profile of staff and give them individualized intelligent plans on how to improve not only their knowledge of their work but their critical thinking ability. So Jane is truly a state of the art kind of breakthrough expert system.
It's kind of like a digital coach, particularly focused And Jane has been recognized industry wide with six prestigious awards from Banden Hall in the last year and a unique approach through its newly awarded patent. So we couldn't be more excited about the position of our Jane application set. And so a bit of business progress as well. In 2020 when we first began offering Jane at scale, our goal was to average one sale of Jane per week. And as we reported last quarter, we did achieve that throughout 2020.
So I believe it was about 52 sales of Jane that were in the books last year. But this year we continue with good momentum. In the second quarter, for example, we have 23 new sales, so more than one a week during the second quarter alone. So it's good to see that new product gaining some traction in the market. And as customer utilization grows and Jane's capabilities expand, we look forward to updating you on how Jane is changing the industry.
It's a really exciting product. And it's more than just a singular product. It's kind of a framework that we can attach more and more capabilities to. So we're excited about Jane. An important part of our strategic and tactical focus now and in the last several years has involved these key transitions.
We've articulated these three transitions. And we use the word transition kind of in a way to infer risk, that we were transitioning our business to achieve higher margins and we articulated a story of three transitions over the last three years. And each of them had some, what I guess I would characterize as major business risk. And the great thing about today is I believe we've crossed an inflection point where the major business risks, what I kind of coined the existential risks, the threat to our business, is gone. We're really in the phase now where we're trying to assess what's the opportunity behind each of these transitions.
In other words, I think we're through some of the questions. For example, when we launched the Red Cross Resuscitation Suite program, would it be accepted? We're beyond acceptance We're in all 50 states, hundreds and hundreds of contracts, system adoption. And so we're just beyond the kind of the existential threat of launching new product and it fails in the market. Now the question is how good can it be?
And it's a better place to be right now. In addition, the product adoption of VerityStream. So we built a new platform, the VerityStream platform called CredentialStream or Application Set. And we launched it. We were excited about it, but you never know how that's going to go.
And now, again, with over 400 contracts on VerityStream, the new credential stream platform, I think the acceptance of the market or the market adoption and acceptance of it as a cutting edge platform, we're kind of beyond questioning that. Now it's just a matter of how much market share can we get. And our teams are really excited that they seem to be winning really well in the market with the new CredentialStream SaaS based application. And then finally, this third transition, I'm trying to retire the word transition and just give you operational updates from here forward, but the third transition was about the hStream platform. And while it's still an immature platform, it is starting to be the interconnection kind of tissue between all of our application sets.
And we've proven that some of the core functionality of the platform works. For example, the Red Cross Resuscitation Suite program takes advantage to use the identity management and login infrastructure in the PAS architecture. So we know it works, and we're excited to kind of pass this point of talking about as a transitional risk. And it's just starting to provide more normalized operational updates on these three business initiatives now that I'll call them. So a little more detail on each of those, but I've covered some already.
But on the Red Cross Resuscitation Suite we thought we'd share a few milestones on it. As I mentioned, we're in all 50 states now. So again, product adoption not a question anymore. And in fact, we've amassed well over half a million subscriptions at this point for the new product, which is really quite staggering that we've been able to move that much market share to the American Red Cross Resuscitation Suite program really in a very short time period, since its launch in February. So we continue to be excited about the product.
And in fact, as we think about it, what's really great, too, is that the portfolio around resuscitation has also expanded. And so in February 2020, we announced an additional product called the STABLE program. And it's a leading neonatal education program around stabilizing neonates and resuscitation as a component of it. And this highly expected program is now available online exclusively through HealthStream. And we've had strong sales in the second quarter adding to our thousands of subscriptions for the STABLE program.
And again, this is in the portfolio of resuscitation. So not only have we found success with American Red Cross Resuscitation Suite Program, but the complementary products that can be built around, surround, and supportive of that program are beginning to gain traction in the market. And so organizations like Akron Children's Asperis Healthcare, and Ascension Health are adopting the STABLE program, which is really fantastic to see. So I'm pleased to see diversification of that portfolio area of our company as well as success as the core product, which again American Red Cross. So I've talked a bit already about the operational update on VerityStream, but I thought a little more color would be useful.
During the 2021, in fact, 42 new customer accounts contracted for the VerityStream application suite, is called CredentialStream. And that brings our cumulative total to well over 400 accounts. These accounts represent a mix of new customers and existing customers who are choosing to migrate from our legacy credentialing and privileging platforms to the new VerityStream application suite. And so some of these customers that we contracted in the second quarter are name brands that people may represent in high quality health systems like Centara Health, Shand Healthcare at the University of Florida, and even Mercy Health System has selected the CredentialStream application set. And importantly, it's good to know that all of our new customers, including the ones I just mentioned, are coming on to the enterprise solution, the CredentialStream Enterprise solution.
So it's our top solution and the one that we built as a result of studying and building from the acquisitions we've made over the last, say, eight years. So we're excited to be gaining traction with that application set. And then finally, the hStream platform is getting exciting now. We think of it as connective tissue, almost like an operating system that can help us improve data mobility between applications that HealthStream offers, help us improve portability of data about the people in our ecosystem. And so it was exciting to see that we added 180,000 net new hStream subscriptions by embedding some access to those technologies into the contracts that we're signing, the new contracts we're signing.
So that brings our cumulative total to 4,520,000 subscriptions to the hStream technologies, capabilities, and solutions, which we're really, really excited about. At this time I'd like to turn it over to Scottie Roberts for a more detailed look at the financials, and then we'll swing back around at the end and talk about the investments we wanna make and some of the strategy and philosophy around our relatively new, we call it the third leg of our stool, but our relatively new scheduling and capacity management business. So Scotty, I'll turn it over to you.
Speaker 3
Okay. Thanks, Bobby, and good morning, everyone. I'd like to begin my discussion with the highlight of the quarter, which is our achievement of a new record adjusted EBITDA of $14,500,000 which is after setting the previous record of $13,600,000 during the first quarter. Having set back to back records of adjusted EBITDA, we're raising the full year guidance to now range between 48,000,000 and 50,000,000 which is up from the previous range of 40,000,000 to $44,000,000 Before I go over the updated guidance in more detail though, let me first speak to the results for the quarter. Revenues were $64,800,000 which is up 7% over last year and included balanced growth within both segments.
Revenues for 2021 were impacted by $1,200,000 reduction associated with deferred revenue write downs, which was primarily from acquisitions that we completed during the fourth quarter of last year. Operating income was $3,400,000 or down 20%. Net income was $2,400,000 or down 29% and EPS was $08 per diluted share, down from $0.11 per diluted share in the prior year. While these GAAP based financial measures experienced declines, our non GAAP performance measure adjusted EBITDA improved to $14,500,000 which was up 20%. Both of our business segments are contributing to the revenue growth over the prior year.
Workforce Solutions revenues were $52,200,000 and were up 6.7% and revenues from Provider Solutions were $12,700,000 and were up 8.5%. We overcame a nearly $10,000,000 headwind from the legacy resuscitation business during the quarter and delivered year over year growth of 7%. Revenues from recent acquisitions and organic growth from both segments contributed to this year over year improvement. Workforce revenues included $1,000,000 of legacy resuscitation in the quarter and also benefited from some nonrecurring software license and professional services from our scheduling and capacity management products. When you exclude revenues from the legacy resuscitation business, our consolidated revenues grew by 28%, which was comprised of 13% organic and 15% from acquisitions.
Our gross margin was 65%, which is consistent with our objective to be in the mid 60% range for the year. As our revenue mix has shifted away from the legacy resuscitation products, revenues from higher margin products are backfilling the top line and providing improved economics to us. We're on track to maintain gross margins in the mid 60% range for this year and expect to continue doing so for next year. Operating expenses, excluding cost of revenues, were up 16% or $5,400,000 This increase reflects investments in our core business and the incremental expenses associated with businesses that we acquired over the past year, including the costs for integration and transition services, which are expected to conclude by year end. Additionally, we began classifying software expenses related to our production environments under cost of revenues while they had historically been classified as a G and A expense.
Our EBITDA margins improved as well coming in at 22.4% compared to 20% last year. Now switching to the balance sheet and cash flows. Our cash flows from operations improved to $24,300,000 this year compared to $13,500,000 last year. DSO for the quarter also improved to forty three days compared to forty seven days last year. Our free cash flows year to date were $11,600,000 compared to $4,600,000 last year.
And we ended the quarter with cash and investment balances of $55,100,000 which was down slightly for the quarter, while working capital improved by over $6,000,000 Capital expenditures incurred, includes capitalized software development, $6,900,000 for the quarter and are $11,200,000 year to date. Now let's go over our updated financial expectations for 2021. We are increasing our revenue ranges and now forecast consolidated revenues to range between 253 and 257,000,000 with workforce revenues forecasted to range between 203.5 and 206,500,000.0, and provider revenues forecasted to range between 49.5 and 50,500,000.0. We also raised our adjusted EBITDA range to be between 48,000,000 and $50,000,000 We continue to anticipate that capital expenditures will range between 25,000,000 and 27,000,000 As we think about expectations for the second half of the year, we anticipate continued year over year revenue growth from both segments. As you'll see in our revenue guidance, we expect some leveling to occur in the second half of the year, mainly because the first half of the year included some nonrecurring revenues that we do not expect to occur at the same levels.
Specifically, this includes the $2,800,000 of legacy resuscitation revenues and about $2,000,000 of nonrecurring software license sales and professional service projects delivered in the first half of the year from our scheduling and capacity management solutions, which we forecasted to be down in the second half of the year. Looking at adjusted EBITDA, we had a record 2021, which was partially due to some of the nonrecurring revenue items I just mentioned. And because we were delayed in making some meaningful investments in sales, marketing, and product development that we had anticipated doing earlier in the year, and this includes investments in the scheduling and capacity management businesses we recently acquired. One of the reasons for the delayed expenses is that we experienced a higher employee vacancy rate than expected, which created some short term savings relative to our plan. We've been successful bringing on new employees, but the net additions to staffing that we factored into our previous guidance have not materialized according to our expectations.
Our second half outlook assumes that these investments begin to ramp up, which will result in lower EBITDA relative to the first half of the year. We also expect certain expenses that were halted by COVID will also come back into our run rate, such as employee travel and trade shows. For context, our travel and trade show expenses before COVID were approximately $6,000,000 per year. Finally, our forecast does not include the impact of any potential acquisitions that we may complete during the remainder of 2021. Now I'll wrap up with a few other updates.
First, our forecast assume continued improvement in sales and renewals, which we've begun to see in our bookings over the past two quarters. Our new sales bookings are up compared to the same quarter last year, which was at the height of COVID nineteen, And renewals are also performing better than last year, both of which are helping us achieve growth in a year with a known $38,000,000 revenue decline from the legacy resuscitation business. While there continue to be signs of improving condition, there remains a degree of uncertainty as we still see some delayed purchasing decisions, especially for products that are discretionary in our workforce segment. On the other hand, demand for our credentialing products has been growing and provider solutions segment had another strong sales quarter. Again, while we are seeing modest improvements, we realized that conditions could change due to COVID.
And finally, like finally, like many companies, we've been operating for the past six quarters without significant business travel, and our employees have been working remotely. We are eager to reopen our offices in Tennessee, Colorado, and California later this quarter and our employees and for our employees to have the opportunity to see their colleagues in person again. Because our remote working arrangement has been a success, we'll be adopting a hybrid work policy going forward, meaning employees will be able to work from home or the office. And with our larger virtual workforce, we've evaluated our office space needs and determined that we will not be renewing several of our office leases when they expire over the next twelve months. In fact, we took this approach with two leases last year and two others already this year.
While reducing our office space needs will create expense savings, we do expect having more employees living away from a city that contains an office will necessitate more travel by those employees than had in the past. We will continue to monitor our office space needs and make adjustments that we deem appropriate. Thank you. And that concludes my comments for today. Bobby, I'll turn it back over to you.
Speaker 2
Thanks, Scotty. What I'd like to do is talk a little bit about our plan investments and kind of philosophy and approach to building the scheduling and capacity management business, which is right now the result of three recent acquisitions. And so kind of a little lessons from history if we look back and think about what we've been able to do creating the VerityStream application suite through four acquisitions over eight years. And if you think back six years ago, took these for VerityStream, we took these four stand alone companies. We combined them into a new business group.
We essentially created a new platform, a fifth application set to migrate those customers to. And that's a multiyear journey. And it's a story of time and investment that's required to take these wholly separate assets and evolve them into something that is market leading and more than the sum of their parts. And so we have a very successful playbook for doing that. And if you look at the of the five year trajectory of VerityStream, we're really excited to see it emerging out of that kind of storming and forming phase and into a market leading phase.
And of course we hope to repeat that with our capacity management and scheduling business. We've recently acquired three businesses really during the pandemic, three of them just in the last, say, twelve months. We've appointed a leadership team. They've begun identifying where they want to invest. So we didn't acquire to cut, we acquired to innovate and invest.
And so we're fortunate to have a team at VerityStream that has created a playbook, a detailed playbook on how to make this work. And we think we can do it now with our scheduling and capacity management business more quickly. But it is important to remind everybody that it was a journey. It required increasing investments in people. So again, didn't acquire and create synergies.
Just the opposite, we acquired and invested, in some cases doubling the tech teams and doubling the sales teams. And then many years later, which is this last say eighteen months, twelve months, we've begun to see real traction on what we've built in the VerityStream business, the credential stream application. And my goal is to repeat that playbook, almost play by play, study the timelines, try to do it faster, we've learned a lot of lessons, and take these three businesses that we've acquired, which are NurseGrid, ShiftWizard, and An and turn them into a market leading scheduling and capacity management solution. And to do that will require investment. So that's why you see in Scotty's guidance kind of reserving the right to increase headcount, invest in sales and product development heavily in this area of scheduling capacity management.
And hopefully sometime sooner than three to five years we'll begin to see market leading innovations emerge in that area and market leading products emerge in that area. And in fact we have strategies already in place to achieve some early technical integration between the acquisitions that will give them each competitive advantage. But that's why it's important to really study the second half of the year. Because while the three transitions are turning into just operational updates and more normalized business risk, we're kind of now entering the investment phase in this creation of this new business focus area, schedule and capacity management. So we're trying to reserve the right to increase our investments in those people and products to repeat the playbook of VerityStream.
So I couldn't be more excited about where we're positioned. And we expect to provide operational updates business from here forward, talk a lot less about transitions and transitional risk, and give you updates on our progress with NurseGrid, ShiftLizard, and ANSOS as they become kind of a unified product suite. And we introduced market leading innovations in that area as well. So as we wrap up I'd like to welcome our employees to our new hybrid workplace. We're kind of transitioning from this nomenclature of offices.
I think over 11 or 12 leases that are now being reduced down to about four. And we're kind of recoining our offices to become resource centers that our employees from all over the world can visit and leverage. This kind of work anywhere approach coupled with an intense belief in the power of collaboration and human interaction. So we expect to have all employees travel more to gather, celebrate, plan, strategic planning in some of these resource centers. But we plan to have fewer leases and more kind of resource centers and a much more mobile kind of work anywhere approach to HealthStream.
We've been so successful throughout the pandemic of operating. In fact, none of our offices have been officially open for over fourteen months or maybe sixteen months now. And I feel like our teams haven't missed a beat. And I know they're exhausted and working hard. And hopefully we've come up with new policies to reflect the flexibility that they desire but also generate the market leading solutions that we desire as an organization to deliver.
So I want to thank our employees for navigating these challenges and pushing us forward over the last sixteen months And their commitment to improving the quality of healthcare by developing the people who deliver care continues to be demonstrated consistently. And the challenge of pandemics seem to have brought out the best in everyone at HealthStream. And so I'm excited to be the reporter on their progress and accomplishments, patents and awards, new work styles and new customers they're bringing in. It's all very exciting to recognize and be the person who can report on the progress of our now nearly 1,100 person team. Thank you.
I'd like to turn it over for questions at this time.
Speaker 0
Thank you, sir. The question and answer session will begin at this time. Your first question comes from line of Richard Close with Canaccord Genuity.
Speaker 4
Yes. Thanks for the time and taking the question. Congratulations on the results. Just curious on the hiring, investing in hiring. And you guys discussing turnover as well a little bit higher than you're we're expecting in the first half.
Can you talk a little bit about the hiring environment, obviously, specifically here in Nashville? I mean, assume you guys are looking for technology people. It seems like a pretty competitive marketplace, a lot of tech moving into the city here with Amazon and eventually Oracle and whatnot. But just curious in terms of if that's increasing the wages that you guys would typically bring on tech people here in Nashville?
Speaker 2
Sure, sure. Glad to comment on that. So you're right to observe that we're subject to the same macro forces everyone seems to be discussing. What I think is happening, and we look at our own workforce, is everyone is kind of now breaking their head up after sixteen months of this new work style. And some just want change for the sake of change.
And we have people saying, you know, we love HealthStream, but we want to try something new. And we've had a lot of people leave and come back over the last decade, so we're encouraging people to find places that they really like. And so we are seeing an increased turnover rate. That said, we're the benefactor because I think we have this wonderful culture that people have read about and want to be a part of. And so we've been able to also win the hearts and minds of lots of new employees.
It's kind of the net additions haven't been as high because of the turnover. So it's just an interesting dynamic. We're getting all these new highly energetic employees coming into the company while some of our employees are also seeking new and exciting experiences for themselves. So we have been able to net add, meaning obviously more people coming in than going out. But it has been a little bit more tumultuous than in past really decades.
And we think it's just a natural outcrop thing of kind of the nature of the last sixteen months that people want to look at new and fresh horizons. That said, we think we have this wonderful attractive culture that people come to. Now on the cost standpoint, we were talking about this. What's really fascinating is right now if you take the last 100 that have left and the 100 we've added, we haven't seen a material increase in the cost of adding the 100 back, which means we're largely at market in our job offers. We've seen a few areas of pressure.
We've seen some people leave that are taking on more responsibility in new roles and they're telling us they're getting higher pay when they leave. But we've been able to fill the positions they're departing from at similar salaries. I do expect just broadly upward pressure on costs and compensation. But so far we haven't seen significant changes for any given position of someone departing. Haven't been able to fill them in a reasonably tight window within the salary bands.
In the tech work specifically you're right, Nashville is kind of a booming tech hub with Oracle announcing a major campus expansion here in Middle Tennessee or in Nashville specifically. And I think though the tech workforce is evolving to keep up with it. Number of people moving to Nashville because it's a great place to be is improving. And so we've had lots of good applicants into our positions. Again we need to slow down the people that are peeking their head up to look at new opportunities.
I do expect, I guess I would call it at this point, a slight upward pressure on compensation in some roles. But largely I think when people are leaving they're leaving to take on increased responsibility at a new workplace and therefore making more money. Haven't seen necessarily wage inflation in specific roles. That may change as we work through the cycles of what's happening in the economy here locally and across the company, across the country. But right now I guess I'd characterize it as slight increases in costs on a per position basis.
Speaker 4
Okay. And just a couple of questions maybe for Scotty. With respect to the comment on the 6,000,000 travel and trade show expense in the pre COVID world, and you're talking about second half, some of that's going to come back. Is there any way to ballpark that? I mean, you going to be at half of that $6,000,000 or Yes, it's very Also, just
Speaker 2
I don't know about the trade shows yet, but we were talking about trap. And we budgeted essentially very incremental returns. So for example I think we have about $250,000 in the third quarter and about $05,000,000 in the fourth quarter. So you can see there kind of a growing run rate. We could be way off.
We could convene all of our employees in November and that could cost more. But you see going from kind of nearly zero and zero or the first half I think was sub-one $100,000 the whole first half in travel alone. Returning to now kind of our targeted budget would be around $750,000.250000 in the third quarter and 500,000 in the fourth quarter. So again those are kind of budget placeholders and we don't know exactly what the new normal is. Eventually I expect travel budgets to exceed where they were because the new mobile workforce we may require employees to commute in to one of these resource centerheadquarters to have strategic planning retreats and that could be more costly.
But hopefully the offsetting reduced rent will help pay for that. So that's what we mean by kind of scaling it up in the second half. And again those are just kind of placeholder numbers but I wanted to give you a sense for where we're headed or what we're thinking. Of course, we'll tell you if we end up spending more or less than that. That's kind of where our heads are right now.
Speaker 4
Okay, that's helpful. And then, Scotty, I think mentioned some sort of shift in expenses up into cost of services. If you guys could just go over that again. And was that something that happened in the second quarter? I'm just trying to understand why the gross margin was a little bit higher, 66 ish, if I'm not mistaken, in the first quarter and then ticked down to the 65.
Obviously, 65 is great and all that. But was it that shift in expenses that was the primary contributor to that?
Speaker 3
Yep. So you nailed it on the head, Richard. That that's kinda exactly what happened. There's a kind of allocation of expenses from g and a to cost of revenues.
Speaker 4
And what specifically was that? Software. Okay.
Speaker 3
Software expenses. And it's I think it we kinda covered it as production environment related software licenses.
Speaker 4
Okay. That's helpful. That's helpful. Thank you. I'll jump back in the queue.
Thank you.
Speaker 0
Your next question comes out of Ryan Daniels with William Blair.
Speaker 5
Yes. Good morning. This is Jared Haas on for Ryan. Thanks for taking my questions. Just wanted to stick with this theme of headwinds on the hiring and retaining front.
And I imagine specifically that that's a similar theme within your client base in terms of hospitals having kind of the same issue attracting or or retaining talent as well. So just curious if there have been any changes from HealthStream's perspective, either, you know, thinking from a product development side or maybe on the marketing side with how you message your value proposition proposition to hospitals that, you know, trying to help them deal with, you know, hiring issues or maybe provider burnout, some of those themes?
Speaker 2
Yeah, I think it's a great point. I mean we are positioned as being supportive of developing and retaining the workforce. And so we believe and try to demonstrate that our products and services result in higher engagement in employees and that we also believe fundamentally that offering health systems that offer their employees kind of career development and new skills and capabilities and assessment tools will be favored employers. So some of them are seeing that light and beginning to invest back in their employees through their continued development. We also see opportunities maybe around things that are focused on psychological well-being and have some products in that category that are kind of newly offered related to helping employers, the hospitals and health systems and home health and continuum of care providers that we have in our customer base, build their relationship with their employees through their continued development.
And so we do use that as a form of positioning, and we believe that our products have those impacts.
Speaker 5
Got it. Yeah. That makes sense. And I think I just wanted another quick follow-up. And, Scotty, I think you mentioned in your prepared remarks you know, kind of calling out an improvement, both in in bookings as well as renewals.
I'm curious, would you kind of characterize that as sort of, market based growth sort of along that theme of hospitals looking for solutions like this? Or do you feel like that's more indicative of maybe some competitive takeaways or, you know, maybe some you know, a more competitive solution in the marketplace just given all the investment that you've made over the past couple of years?
Speaker 3
I think it's probably all the above. I mean, it's you know, I think we we did experience some growth over last year, but last year, you gotta keep in mind, was was in the beginning of COVID, the second quarter of last year. So the comparisons are are difficult to interpret because of that, you know, kind of COVID factor. But, yeah, we had some nice wins in the quarter. We announced, know, in our press release, nice American Red Cross win with Prime Healthcare.
So I think we're seeing, you know, some some good wins across the board. But, you know, I think if you're looking at comparisons, we're still kind of getting back into the pre COVID levels of sales, production.
Speaker 5
Okay, thanks. That makes sense. I'll hop back in the queue.
Speaker 0
Your next question comes from the line of Matt Hewitt with Craig Hallum Capital.
Speaker 6
Good morning and congratulations on the quarter. A few different topics I've got a couple of questions on. First up, regarding the guidance, the revenue guidance for the year, I'm looking at the first half of the year, your guidance essentially at the high end implies that it's basically flat second half versus first half. So not seeing a lot of lift. Is that a function of where we're at with the pandemic and the Delta variant and everything that's going on and maybe hospitals not being able to hire at the pace?
But as we look at next year, I would assume that hospitals are going to need to start hiring again and then hopefully are able to find the employees. So that in itself should drive some incremental growth. Is that a fair way to think about it?
Speaker 3
Matt, I would probably say, you know, one of the factors that's gonna result in some of the leveling is just those declines that we discussed. Just the legacy resuscitation that was 2,800,000. We know pretty confidently that's not gonna be anywhere near that. It's gonna be almost zero in the second half of the year. And then we also have some nonrecurring, what we call, you know, onetime revenues from the scheduling and capacity management business that we just don't have enough history of kind of projecting some of those onetime software sales, which are almost immediate revenue recognition as they're delivered to the customer.
So that's some of the of the change in some of our second half outlook. I think some of the factors that you mentioned more broadly speaking about customer, you know, turnover and some of their challenges. I don't know if that's factored into kind of way the way we're projecting our sales production necessarily, but it could be something that either could be a detriment or a benefit to us depending on which direction challenges they face.
Speaker 6
Okay, fair enough. And then, Jane, it sounds like you had a really good quarter, with the number of new additions. I'm just curious if you could update us on the pipeline there. Obviously, that's been years in development and seeing that starting to ramp is pretty exciting. So any update on there, on Jane, that is?
Speaker 3
I don't know if you wanna take that question. I don't know if Bobby is on, but, I think, you know, just just the kind of the story there as we continue to see, you know, you know, about one sale a week. That has been our objective. You know, deal sizes vary. You know, we had a a nice win in q one.
I wouldn't say that we had a repeat of that in q two, but we continue to gain traction. We'd like to see more adoption and penetration of it, but it's one of those products that I would put in that discretionary bucket. And so I mentioned that, you know, we still see delayed purchasing decisions from customers kinda in that type of category. It's not mandatory. It's not required.
And so we still see some hesitancy in some of the buying decisions there. And I'd put that product in that category. But even with that as a challenge, we're still able to accomplish our objective of one sale a week.
Speaker 6
Okay. That's great. And then one last one for me. As you were talking about some of the incremental expenses coming back, you talked about the travel given the new workforce environment. But I'm curious, as you start to think about conferences, historically, HealthStream has held a pretty big user event there in Nashville.
Maybe not so much this year, maybe it will, but more likely in fiscal 'twenty two if we get somewhat back to normal, would you expect that? And what quarter would that fall? And I only ask because it is typically a larger expense that kind of stands out. Thank you.
Speaker 2
Matt. Bobby Mac. Somehow I got booted up. But that conference we actually stopped having pre pandemic and went to smaller more regionalized conferences or meetings of different scale. And and spread them out more over the year and across our different business lines and business solution groups.
So we abandoned that singular large conference model even pre pandemic and don't currently have any plans to return to it. And have built into our marketing budgets I guess I'd call smaller regional conferences what we call user group meetings. So we kind of strategically shifted several years ago and don't plan to return to a single large conference model.
Speaker 6
Got it. With Thank you so
Speaker 2
regard to other costs, I wanted to kind of update my thinking on the cost of turnover and new positions because I don't want to understate it. I characterize it as slight increases in pay. I guess I'd change that to moderate when I think about it. In certain roles different forms of compensation than we've had. So for example in our sales organization we're finding that other people are paying higher bases.
We don't think that they're going to make more money because we have strong commission plans. But we have had departures in sales reporting higher base salaries than we pay at HealthStream. Again, our sales teams typically deliver great sales results and their total compensation based on variables on commissions has always been really strong. So we actually doubt they'll make more money going to new roles. But we have heard reports of that.
And then I would just say I would upgrade from slight to moderate increased pressure on hiring everywhere else costs. And it is true though, did discuss this of the last 100 hires. We have largely been able to fill most of those roles within a similar band of costs as we had previously had them staffed. And so that statement remains true. But I would upgrade my pressure on pay to go from slight to moderate.
And I would say that in some areas we're experiencing maybe a changing nature of compensation. Maybe less variable comp and more base seems to be where the market's headed and sales structure. So we'll see how that plays out. We've always think, again, our teams have been well rewarded in a total compensation based on really strong commission earnings. But we'll see where the market takes us on that.
So I hope that helps just contextualize the questions around labor and labor force. Because I don't want to understate There's a lot more turmoil in the market with people just generally getting up and looking for new experiences. We think HealthStream is going to be a net benefit from those trends. But still it's just it's hard to ignore the amount of people that are looking for kind of new trajectory in life.
Speaker 6
Understood. Thank you.
Speaker 0
Your next question comes from the line of Steve Harper with Cantor Fitzgerald.
Speaker 2
Hi, good morning. Just a housekeeping question. You talked about $2,000,000 of one time software license. That was in the first half. Correct?
Can you give us what the impact was in the quarter?
Speaker 3
Hey, Steve. Yeah. The the $2,000,000 the reference was a combination of software licenses and probably some larger professional services projects that had milestones completed in the first half. Looking at the split between q one and q two, it's pretty evenly split, so almost a million in each each quarter.
Speaker 2
Great. Thank you.
Speaker 0
Your next question comes from line of with Barrington Research.
Speaker 2
Yes are you seeing any signs or pockets of caution on spending due to the new variant? Or is it too early to see that? It's too early. I mean, we've heard reports, of course, of the spikes, and we've heard that they're getting busier. What I would say is the larger health systems and hospital systems and university systems, they've learned to operate in the crisis mode and have learned to resource better.
And so it's not like the first few ways where all elective surgeries were shut down. And so while there is disruption with a surge or spike, I don't think it's the same as round one and two when there were surges that threw people out of operating mode and shutting down elective surgeries. So while we have claimed we see some deferred purchasing, a little less focus on elective things, products from vendors, I'd just say in general people are trying to find the new normal. And the new normal includes handling surges in patient cases related to COVID. That doesn't mean there won't be pockets of the country that are overwhelmed by it.
I do think that will happen. Some are not as prepared as others to handle it. And so we will see some that will have to shift their full attention. But broadly, I'd say particularly the bigger health systems, the university health systems are much more prepared to handle spikes in COVID cases. And a couple of questions on Jane.
You had said that I think that Jane is largely used for nursing. Is it solely used for nursing? That's one clarification. And then what are some of the other opportunities you talked about with Jane? Well I think you just hit it.
It is largely focused on nursing skills, nursing careers, different departments of nursing to help them transition from one department to another. There are other assessments and tools built into Jane, expanding them to cover other types of positions you know, all the way down to, say, home health aides would be kind of an expansion opportunity. But in addition, expanding it to handle more of the other functionality that could be important versus reminding them of their schedule. There's just so many things we can do with Jane and the technology we've built around it as a kind of an open platform, open framework that we can extend, that adding new types of assessments in new categories for new types of employees would be kind of more immediate ideas for expanding Jane's capabilities. It is largely and most appropriate for the nursing workforce, which is representative about 40 plus percent of the subscriptions in our HealthStream network.
Okay. That's my last question. Nice quarter. Thank you.
Speaker 0
There are no further questions at this time. I would now like to turn the conference back to management.
Speaker 2
Thank you. Look forward to reporting to all of you these operational updates in the near future. And thanks to our employees for delivering a great first half result.
Speaker 0
This concludes today's conference call. Thank you for participating. You may now disconnect.