HealthStream - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the HealthStream's Q2, two thousand and twenty-three earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers after the presentation. I will now turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.

Mollie Condra (VP of Investor Relations and Communications)

Thank you. Good morning. Thank you for joining us today to discuss our quarter 23 results. Also with me is Bobby Frist, CEO and Chairman of HealthStream. I would also like to remind you that other factors close to result materially from the adjusted as a doc, which is a non-GAAP, providing supplemental image to the conduct of HealthStream in the earnings release issued yesterday to refer this call. With that, I'll start. I'll turn the call over to CEO, Bobby Frist.

Bobby Frist (CEO and Chairman)

Thank you, Mollie. Good morning, everyone, welcome to our Q2 2023 earnings call. Mollie, you were breaking up just a little bit, I think I heard the handoff correctly, and maybe someone will text me if I'm also breaking up. Look, some quarters you move the company forward more than others, and this was one of those solid prints, as they say, or a good quarter. We're pleased to report our results to you now this morning. In the Q2, in fact, we achieved record revenue and record adjusted EBITDA. I'd like to start by highlighting those strong financial metrics. Top line revenue reached $69.2 million in the quarter, which was up 5% over the same period of 2022.

We also delivered solid profitability with $15.3 million of adjusted EBITDA, which was up 17% over the same period of 2022. In just a minute, I'll describe some of the key customer wins in each of our ning, credentialing, and scheduling application suites that help drive these results. I need one second because I see lots of texts flying in. I got to make sure I'm not breaking up. Okay, it says I sound clear. I'm going to come back here. Perfect. Before we dive into some business updates, let's take a moment to refresh everyone about our business overall, which is also helpful to anyone who's new to HealthStream.

First and foremost, HealthStream is a healthcare technology company dedicated to developing, credentialing, and scheduling the healthcare workforce through SaaS-based solutions, each of which are becoming more valuable, we believe, because of the interoperability they are achieving through our H-Stream technology platform. We sell our solutions on a subscription basis under contracts which average 3 to 5 years in length. That means our revenues are recurring and predictable. We are profitable, and we have little to no debt. We are solely focused on healthcare and more specifically, the healthcare workforce. We define our addressable market as the 11.2 million healthcare professionals working in the United States in healthcare organizations. In the Q2, HealthStream subscriptions also achieved a new high water mark of 5.6 million subscriptions, adding approximately 68,000 subscriptions.

Even in the face of macroeconomic concerns and inflation and recession, we are confident that HealthStream will continue to provide results in line with our guidance range, which we just reiterated in our earnings release. Overall, a fine print and good results. I'm proud of the team and what we're able to achieve. Now, I want to highlight each of our three primary application suites of learning, credentialing, and scheduling. Of course, we call them application suites because they're more than just a singular module, like a learning module. It includes a breadth of services and capabilities in each area, a complete suite of capabilities, learning, credentialing, and scheduling. Let's highlight some of the wins and maybe some indicators of how we're achieving the results we achieved in the quarter.

As a reminder, our flagship application in the learning area is the HealthStream Learning Center, which is a learning management system. For credentialing, the flagship application is CredentialStream, which onboards credentials, privileges, and enrolls physicians. For scheduling, it is ShiftWizard, which is a software application that helps schedule, empower, and engage the healthcare staff. We believe that each of our SaaS solutions is best in class, and the wins I'm about to describe kind of reinforce that belief. The HealthStream Learning Center is the most utilized learning management system in healthcare and continues to add new customers. In the Q2, for example, a Midwestern health system with approximately 2,000 employees chose our HealthStream Learning Center over 6 LMSs, one of which was a major ERP vendor. The customer clearly recognized the value of our integrated ecosystem.

The only prior purchase from HealthStream was a small revenue cycle library. With the addition of the HealthStream Learning Center, they also added SafetyQ, one of our compliance products, several clinical content libraries, the Red Cross Resuscitation Suite, and our checklist application. This customer win, which included multiple competitive takeouts, illustrates the value that health organizations place on an integration solution suite.... that only HealthStream is bringing to market currently. With this win, revenues at this customer grew from $8 per person per year to $80 per person per employee immediately, a 10x increase. Of course, this is the kind of story we like to see more of, but increasingly, we're getting better at positioning our solutions together, in this case, a suite of products and services related to employee development and winning a contract kind of altogether.

In this case, as I mentioned, our partnerships of our ecosystem displaced many competitors in that takeout. Our credentialing solutions also enjoyed a successful quarter, both in terms of competitive takeouts and conversions from our legacy solutions to Credential Stream. In the Q2, we contracted 38 new customers for Credential Stream, representing approximately 50,000 new subscriptions collectively. These new customers included many highly respected health organizations like Rush Health, University of California Davis Health System, and Augusta Health. Additionally, and this is fun, HealthStream's Credential Stream application was rated as the number 1 credentialing software in the prestigious G2 online site. Overall, strong quarter for our credentialing suite. In the Q2, revenues from ShiftWizard grew 19% over the prior year quarter as customers continued to report high customer satisfaction. Among our many new customers was the Children's Hospital of Wisconsin.

Other customers, like the University of Florida Health System, transitioned from our AndSauce product to ShiftWizard. As we continue to increase investment in ShiftWizard, it is only going to become more powerful and more differentiated in the marketplace. As the power of hStream-driven interoperability continues to emerge, we believe that each of our three discrete application suites will come together to form an enterprise suite of workforce solutions that represent a value proposition that is unique in the market today. We believe difficult to replicate, takes a long time to build, and we're finally seeing some of the initial benefits of these integration opportunities. In the second half, after we hear from Scotty Roberts, I'm going to highlight some of the advances as it relates to our platform technology and how it's empowering some of these opportunities.

I'll turn it over to Scotty Roberts to take a look at the numbers and circle back and talk about some of our platform advances. Scotty?

Scotty Roberts (CFO and SVP)

All right, thanks, Bobby. Good morning. Let's begin with the financial highlights for the Q2. Unless otherwise noted, the comparisons will be against the same period of last year. We delivered another solid quarter of financial results, with many of our key financial metrics improving over the prior year, which resulted in new records for revenue and adjusted EBITDA, as Bobby mentioned. Our results were as follows: revenues were $69.2 million, up 5%. Operating income was $4 million, up 36%. Net income was $4.1 million, up 34%. EPS was $0.13 per share, which was up 30%. Finally, adjusted EBITDA was $15.3 million and was up 17%.

Our revenues for the Q2 were a record high of $69.2 million and were up $3.6 million, or 5%, compared to last year's Q2. Organic revenue growth was 4%. The two acquisitions that we completed last year, Cloud CME and EADS, contributed to the remainder of the growth. Revenues from subscription products accounted for 96% of total revenues. Our subscription revenue came in at $66.5 million, or an increase of 6%, while revenues from professional services were $2.7 million, and they declined by 15%. Gross margin was 65.9%, compared to 66.1% last year. Margins were somewhat impacted by increased royalties and cloud hosting costs, both primarily driven by revenue growth and changes in revenue mix.

Operating expenses, excluding cost of revenues, were up $1.2 million, or 3%, over last year's Q2, of which approximately half of the increase came from the two acquisitions that we completed last year. Sales, marketing, and product development expenses all experienced year-over-year increases, while G&A expenses declined compared to last year. Sales and marketing expenses increased by 4%, which most of this increase was associated with higher sales commissions, which is consistent with the growth in revenues. Our product development costs also increased by 4%, which is net of labor costs that were capitalized for software development. Capitalized labor costs increased approximately $700,000 over the prior year quarter. These increases reflect our continued investment towards our single platform strategy and our suite of applications and content offerings.

Additionally, part of the increase includes the incremental costs associated with the two acquisitions we made last year. G&A expenses declined by 5% due to reductions in several areas, including lower bad debt charges, outside recruiting services, professional service fees, and other infrastructure-related costs. Our effective tax rate for the Q2 was approximately 8%, compared to 15% last year. Positively impacting the tax rate was approximately $600,000 in deferred tax benefits, resulting from the re-measurement of our deferred tax liabilities upon the enactment of a new law in Tennessee that changed the income apportionment rules. The apportionment change is expected to reduce our future taxable income in the state as well. Finally, our adjusted EBITDA was $15.3 million, which was up 17%, and adjusted EBITDA margin was 22.2% compared to 20% last year.

Let's move over to the balance sheet metrics. We ended the quarter with cash and investment balances of $56 million. During the quarter, we deployed $6.2 million for capital expenditures and returned one and a half million to shareholders through our dividend program. DSO increased to 50 days compared to 45 days last year. While we've had certain customers delay payments a little longer than usual, we've generally still been successful in obtaining payments. Year to date, our cash flows from operations declined by two and a half million versus last year, coming in at twenty-five and a half million, and free cash flows were $10.8 million compared to $15 million last year.

Cash flows from operations and free cash flows were both impacted by higher income tax payments, which were $2.6 million this year compared to just $0.4 million last year. This increase was primarily due to changes in the federal tax law that requires capitalization of research and development expenditures rather than being immediately deductible. Our free cash flows were impacted by higher payments for capital expenditures and an increase in DSO that I just mentioned. As announced in February, our board of directors adopted a dividend policy under which we intend to pay a quarterly cash dividend on our common stock at a rate of $0.025 per share per quarter. We paid the first two quarterly cash dividends in April and June, returning one and a half million dollars back to shareholders.

Yesterday, our board of directors declared a Q3 dividend and intends to declare another cash dividend in the Q4. As for our guidance expectations, we are reaffirming the financial expectations that we previously announced in February 2023. To recap, we expect consolidated revenues to range between two hundred and seventy-seven and a half million and $283 million. Adjusted EBITDA is expected to range between fifty-seven and a half million and sixty and a half million, and capital expenditures are expected to range between $27 million and $29 million. While our guidance includes the acquisition of EADS, which occurred late last year, it does not include assumptions for any acquisitions that we may complete during the remainder of the year. Let me share a few other thoughts about our expectations for the second half of the year.

We anticipate quarterly revenues to grow sequentially and generally expect steady performance across most of our product offerings. Some of the products we expect to continue driving top-line growth include Jane, our AI-enabled clinical judgment and assessment solution; Credential Stream, our market-leading credentialing, privileging, and enrollment solution; ShiftWizard, our innovative SaaS-based scheduling application; and My Clinical Exchange, our solution for nursing and medical student onboarding and clinical placement. As for expense expectations, we anticipate certain categories to increase in the second half of the year. One of those areas is our staffing. We currently have over 40 positions we're working to fill, thus we expect our labor costs will be higher than they were in the first half of the year.

We also have several trade shows slated for the second half, and that our marketing spend will increase about $1 million in total over the next 2 quarters. That concludes my comments for this quarter's call. Thank you for your time this morning, and I'll now turn it back over to you, Bobby.

Bobby Frist (CEO and Chairman)

Okay, Scotty. Thanks. Great financial results. Good work by all the HealthStreamers to deliver them. I'd like to dive a little bit into the future state of the company and give some insights into the developments happening related to our hStream technology and our hStream platform, and our hStream positioning in the marketplace. Let's dive in. One encouraging development was the growing early momentum we saw in customers' use and adoptions of the APIs available in our developer portal, which we launched in the 4th quarter of 2022. The portal provides access to a modern, scalable, secure architecture with a growing collection of shared services, platform-level applications, and APIs.

In my view, the portal, when we launched it, was kind of the symbolic beginning of a journey we've been on for many years, but the launch of the HealthStream platform, technology, and architecture. For our customers, the APIs offer meaningful extensibility of our applications. We believe the extensibility increases the stickiness of our applications as customers begin to rely on functionality from our applications to power other applications that use in their organizations. At the end of the Q2, 40 healthcare organizations, including large health system customers, a global publishing company, a market-leading EHR vendor, and several health tech startups, had chosen to open an account on the developer portal, where we collectively enabled 145 developers to have access to the 8 robust APIs currently available in the developer portal.

The portal is essentially a window into the emerging platform capabilities and gives access to these APIs to exercise and take advantage of those capabilities. A couple of examples of use. For large partners and customers, we saw organizations using our user student API to automatically register new staff directly from their HRS system into the HealthStream Learning Center. Here we see tighter and stronger integrations between core applications like the HealthStream Learning Center and core important systems like the HRS system at the hospitals. Well, one large health system that was a customer centralized their learning records from health, you know, with HealthStream by using our learning API to bring records in directly from a video system they were using to educate their staff into the HealthStream Learning Center transcript.

Here we have organizations using the API to add data that otherwise wasn't created in our learning center into the transcript, the educational transcript. What this does, it reinforces the HealthStream learning transcript as the single source of truth for the longitudinal history of the training and development for employees. As they use our APIs to connect outside systems into ours, we become more authoritatively the learning transcript of record for the healthcare employees. We think these are just a couple of great examples of the APIs creating interoperability that benefits our customers and adds market differentiating value to our platform and applications. I also believe in the second half, we'll start to see some commerce directly tied to these platform-level capabilities. We already see, as I mentioned, some health tech startups poking around on our developer portal.

We think they'll integrate some of our capabilities into their applications that they take to market separately. I would expect that some of those services will be licensable services. I believe in the second half of the year, we'll derive our first direct from-platform revenue, which will be exciting. It'll be very small, I don't wanna overstate it, but it'll be exciting, kind of a differentiated moment for our company as the platform itself begins to show some financial opportunity. Another benefit of an hStream subscription for a customer, is the customer's ability to participate in what we call a collaborative purchasing process. Through the collaborative purchasing process, facilities within a larger health system can coordinate and pool their purchasing power in order to create greater volume discounts on the HealthStream products that they want and need.

The collaborative purchasing process has been around for a while, and it's mostly in use in some of our larger accounts. In March, we launched a significantly enhanced collaborative application through the software that we use to operate the collaborative purchasing process. For the first time, participants are accessing their collaborative application using their hStream ID, which is the identity management service that exists in the hStream platform. This benefits both HealthStream and the customer, since we now know who the participants are and what role they play in the purchasing process. We can better match the participants with the products that are most valuable to them. In other words, as Eddie Pearson, our former president, used to say, "We get the right solution to the right person at the right time," or something like that.

Another great feature of the collaboratives is that they use gamification to engage purchasers in the process. As facilities add their purchases together, they can see the volume discount of their purchase increase, the discount level increase, and therefore, the product price they're going to pay decrease in real time. The automated platform interface enables this by connecting directly to our price book, which is held in our Salesforce infrastructure. We've kind of gamified and organized around a budget cycle, the purchase process, where they can review and purchase an aggregate demand inside the health system across multiple products. This is exciting technology. We expect to complete around 18 purchasing collaboratives this year, the last 10 of which will run on the new application, which is a significantly enhanced, kind of software architecture that empowers this purchasing process.

In March, in fact, the first collaborative that utilized the collaborative application took place. On a dollar basis, this top 10 customer purchased 42% more in this collaborative on the new application suite than they did in the prior year. In addition, we gathered a lot of information about who is reviewing what products, who's buying what products, and so we had direct insight into the kind of the organizational purchase process and product review process that we've never had before. We're really excited about this HStream collaborative capability. It's a benefit of being on the HStream platform.

When your license with HealthStream includes a subscription to hStream, which increasingly our products include a subscription to hStream, it includes the right to participate in collaborative purchasing, you get, of course, access to the collaborative software, which is the applications that I just mentioned. We're excited about this. We hope to expand this program beyond 18 core accounts. We have, in fact, added a few this year, we've moved some executive talent to lead this initiative and expect to sign more and more accounts up to use this budget-aligned, technology-enabled purchasing process. We're just really excited about it. I think that's a prime example of the network effect in action. You know, we're able to bundle products, incentivize purchasing, do it automatically using software. It's, it's a win-win-win for everybody.

For the partners that are featured in the collaborative, you know, they got more orders. For the customer, they were able to see their discount, as they placed more orders, grow, and their discount grow, or their discount be greater as their order size increased. Of course, for HealthStream, we got to present the collective of many of our products and services, which is part of our power, is the completeness, in this case, of our learning offerings. Win, win. It's kind of a rare situation in business, but in this case, I believe that's what it does. It makes our ecosystem stronger from all directions. Those are my updates on our developer portal. We'll have more in the next quarter. I'm excited about how that's evolving.

Not only does the power of the platform power up our own applications, as we've talked about in the past, our new license verification service, for example, being incorporated into each application suite, it also enables capabilities like the collaborative purchasing process that I just mentioned. Of course, we'll be excited as small startups and large ERP vendors begin to tap into our platform directly to add capabilities to their application suites, and we hope that someday that will drive economic benefit as well as interoperability. Great. Well, a few more updates as we wrap up, and then you're gonna have to stay around for the exciting conclusion of this, which is I'm gonna have to read that opening disclosure statement again because it's a little bit blurred. You can stay for me to read through that as well.

A couple other updates. On June fifth, HealthStream announced the addition of Dr. Alex Jahangir to our board of directors. Dr. Jahangir is a nationally recognized physician executive with extensive experience leading academic medical centers, specifically at Vanderbilt. He also is an investor, owner, and founder of a biotechnology company, and he was the head of our Metropolitan Public Health Department during COVID-19 pandemic, and was featured nationally for our city's response to that. We're really pleased to add Dr. Jahangir to our board of directors. He's currently the vice president for business development, vice chair of orthopedic surgery, and director of orthopedic trauma at Vanderbilt University Medical Center, as well as the executive director of the Vanderbilt Trauma, Burn, and Emergency Surgery Patient Care Center. We're pleased to have someone of Dr.

Jahangir's caliber and national visibility on our board of directors, where he'll also serve on our nominating governance committee. We enthusiastically welcome Alex to our board of directors. As we reach the close of the portion here, I wanna remind you about our new dividend policy. We just made the second payment under this policy about a month ago, and just yesterday, our board approved what will be the third installment of quarterly payments under the plan, which we pay on September 29th. We are pleased that our strong balance sheet and our strong operational performance puts us in a position to return value directly to shareholders through the company's Q1ly cash dividend program. Over the course of the year, we expect the new dividend policy to return approximately $3 million to our shareholders. Halfway through the year, we're on track to meet that goal.

If you are interested in a highly recurring revenue, profitable, SaaS, PaaS, healthcare technology company, that for 2023, expects to deliver steady growth and is determined to share some of its profits and its gains directly with shareholders in the form of a dividend, maybe HealthStream is the stock for you. I wanna remind you of one other exciting event happening here in Nashville, Tennessee, where we're headquartered. On September 18th through the 22nd, the city will be hosting what we're calling the Nashville Healthcare Sessions, which we believe will be one of the most dynamic healthcare conference weeks of the year. The reason I say week, is because over 12 organizations are coordinating their healthcare conferences during the Nashville Healthcare Sessions week, and board members of the Nashville Healthcare Council will be actively helping each of these organizations launch their healthcare conference.

If you come to our city, you can participate in over a dozen different healthcare conferences during Nashville Sessions. They'll be open for participants to register across these conferences. Again, we're calling the week the Nashville Healthcare Sessions week, and we're gonna kick off that event with I'll be interviewing Sam Hazen, the CEO of HCA, and we look forward to that opportunity to present Nashville's healthcare community to the world. You should all come and listen in and see where healthcare is headed by hearing from the leaders of the healthcare industry here in Middle Tennessee. Hope you're gonna join us for that. Now, before I turn it over to the operator, I'm gonna flip back, and I am gonna read the opening statements.

I would like to remind you that this conference call may contain forward-looking statements regarding future events, which I certainly did, and 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 these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K, 10-Q, and our earnings release. Additionally, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to net income, attributable to HealthStream, is included in the earnings release that we issued yesterday and we may refer to it in this call. I'll now turn the call over to the operator for Q&A.

Operator (participant)

Thank you. At this time, we're going to start the Q&A session. If you're using a speakerphone, please pick up the headset before pressing any numbers. Should you have a question, please press star one one on your push-button telephone. If you wish to withdraw your question, you can press star one one again as well. Your questions will be taken in the order that they are received. Please stand by for the first question. The first question that we have today is coming from Matt Hewitt of Craig-Hallum. Your line is open.

Matthew Hewitt (Senior Research Analyst)

I don't know who she called?

Bobby Frist (CEO and Chairman)

We can hear you, Matt. You're on.

Matthew Hewitt (Senior Research Analyst)

Okay, great. Yeah, she cut out there. Thank you. All right. Well, first up, I'm wondering if you could give us an update on the customer landscape. Obviously, a year ago, the great resignation, you had a lot of people coming and going from your customers. I'm just curious where that sits today. One of the things, I guess, that's ancillary to that, but the wage growth that hospitals are seeing may be part of that, helping to attract and retain talent, but how does that impact your selling model?

Bobby Frist (CEO and Chairman)

Well certainly, healthcare is still experiencing turnover, a lot of job shifting, I don't think some of the challenges for labor persist. I think some of the larger health systems have gotten a better handle on how to manage, and they've started to respond by the kind of, essentially, the travel industry by raising benefits. I think in some ways, there's a little fatigue in the travel industry. Nurses are getting a little tired. They sure they made more money, but hopping around place to place, and there might be a little more appeal for specifically the nurses to, you know, find a home and a team they can be on, and I think that favors positively hospitals.

Not only are they reacting with, you know, improved benefits, and they realize they have to recruit more and pay more attention to the needs of their staff, I do think they're doing a better job recruiting and retaining talent a little bit. Costs are definitely higher. That affects their budgets, and I think they're beginning to adapt to the realities of higher wages overall. You know, realizing that if they don't offer higher wages, they're gonna pay even more for the temporary staff that comes in to fix them. I think it's kind of a little bit of an enlightened employer. I do think that positions us well for some of our solutions. Our clinical pathways programs can be used to cross-train nurses to get them ready from one department to another.

I think that our onboarding solutions are timely, like in our credentialing suite. We think our credentialing suite is essential in reducing the time to making doctors from a new hire to when they're productive. We think that we're the best in the market at shortening that cycle of the steps necessary to get them ready to see patients and essentially bill for services. The credential privilege enroll process through our integrated suite is definitely a winner in the onboarding of new docs. I think overall, they're gonna be gaining efficiencies, and seeking efficiencies in how they operate, over time. Now the environment is still, you know, a tough selling environment. Our margins have always been historically thin, at the large organizations that we sell to.

The, you know, while they're more enlightened about the need to invest in workforce solutions, they're still tight. You know, it's still, it's not an easy market. It's a lower margin, high volume market, and we have to respect that. I think the way we respect that is that we try to have the best solutions, for example, for a lot of mandatory requirements, and we help them meet those requirements at the lowest price possible. I think, you know, if you have to comply with certain federal laws, you know, the objective is to have full compliance and exceed compliance, but do it efficiently.

I think a lot of our solutions, like SafetyQ and ComplyQ, as a product category, for example, help them get out of the business of meeting the regulations on their own, offload that to us at an efficient, low price, and it's good for our business and good for them. They can focus on the patient, and we'll focus on lowering their compliance costs, but helping them achieve, you know, perfect compliance. You know, that's a little bit about the environment and shifts and the attitudes in the workforce. I hope I got at some of the heart of your question.

Matthew Hewitt (Senior Research Analyst)

You did. Thank you very much. Shifting gears a little bit, obviously, congratulations on the big win, with the Midwest Health System. I'm curious, it sounds like there was numerous competitive displacements there. How much of that was a function of them looking to have the, the quote-unquote, one throat to choke, versus you coming in, having the best solutions for all of those and basically simplifying their internal processes?

Bobby Frist (CEO and Chairman)

Well, look, it's a little bit of both because there is a good amount of, say, brand loyalty. For example, if you picked a clinical education partner, maybe that's because you experienced their content when you were in nursing school, and so now you want to use their brand. You know, to shift someone to, say, our partner in the ecosystem, from maybe an established partner they've used in the past, is can be some work, even if the products are equal or better or lower cost. I think it really was, in this case, the aggregate value, which gave more value in more categories than many existing vendors, and it resulted in almost a package replacement, which, obviously, I'd love to see more of that.

When you look at our investor deck from last year, we gave examples of several accounts that had built from 8 to $80 or 8 to $100 per person, per year, over a decade. What was fun about this one I talked about today was it happened in, you know, over the course of the sale process, over 60 days. Essentially, I would say four competitive products were displaced, in addition to putting our LMS infrastructure in. They liked the concept of, kind of, in this case, around their developmental efforts for employees having one throat to choke, as you said, I think, or one place to go. We did create consolidation of their purchasing model.

You know, in addition, we believe that in most categories, our product offerings from our partnerships, like the American Red Cross, in this case, was one of the switches they made, is superior to the market alternatives, which ironically, are also available in our marketplace. Here, though, they chose what we believe is a lower cost, more efficient model for resuscitation training, for example. So that was just one of 3 or 4 displacements. So I think our sales teams are getting a little better at presenting the packages and showing the power of this, you know, of what we call our HealthStream ecology.

Matthew Hewitt (Senior Research Analyst)

That's great. Maybe one last one, then I'll hop back in the queue. Regarding Jane, obviously there's a lot of excitement, a lot of talk about AI, in the press, media, and elsewhere right now, and you've got a platform that, you know, has been in the market for a while. I'm just curious, are you seeing increased interest and adoption of Jane, or any updates there would it be appreciated? Thank you.

Bobby Frist (CEO and Chairman)

Jane is still early stages, and it has components of AI and machine learning. We're enhancing it. It's beginning to make a real difference in the organizations that adopt it. It is kind of a premium product. It's a little bit more costly. It's a little bit foreign from, say, the minimal required education programming. This is a real investment in your workforce to invest in Jane. When you do, you get insights into your workforce that you would never have otherwise. We believe it's one of the very best, essentially expert systems that allows an organization to differentiate the clinical thinking and the clinical reasoning and the clinical actions of their staff.

What that means is, we believe these Jane scores that are beginning to be delivered, are really can be used to differentiate competence and quality, not just knowledge. You know, a lot of products in the market can tell you who tests well and who knows the most, who can explain something really well scientifically, but almost none of them get at what Jane does, which is, how well do they act? If an expert were in the room, the expert would do A, B, C. When your nurse is in the room, does that nurse do A, B, and C, or something different? That's what Jane is really good at teasing out. We're excited about it. Again, it's a premium product.

The other power of where we're going is that we're getting better at organizing what we call our curated, our core data sets. While we're new to AI, and we're making progress with Jane, and for the early adopters, they're seeing a real difference in it as an instrument to develop and differentiate their staff skills, competency, and capabilities. You know, long run, I think our ability to execute on this AI mantra is, will be derived from the strength of the data that we're ingesting into our network. I think we're getting more and more insights into the workforce, more and more data about the workforce, you know, longitudinal histories, 10 years of educational programming. I think we're getting better at collecting information about their skills, competencies, credentials.

I think the future is bright for us as we look and examine and have pilots more and more on how to leverage AI into the HealthStream framework. Jane is certainly our first foray, and right now, our strongest. As Scotty Roberts pointed out, it is growing nicely and has many implications for healthcare as it really differentiates competence of the staff and not just knowledge of the staff. We're really excited about the future of AI, our growing data sets, and Jane specifically.

Matthew Hewitt (Senior Research Analyst)

That's really interesting. Thank you for that detail, and congratulations on the strong quarter.

Bobby Frist (CEO and Chairman)

Thank you.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. Our next question will be coming from Richard Close of Canaccord. Your line is open.

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Yeah, thanks. Congratulations. Can you hear me okay?

Bobby Frist (CEO and Chairman)

We got it, Richard.

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Great. Bobby, just on the collaborative that you were talking about, you mentioned one client purchased 42% more. I'm just curious if you can put that into perspective. Are you saying that client's total revenue to HealthStream will be up 42% year-over-year, or is that something different?

Bobby Frist (CEO and Chairman)

Yeah, that would be different.

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Don't want to misunderstand what you're saying.

Bobby Frist (CEO and Chairman)

Sure, sure. Yeah, I should have and will provide more information. That customer is a large enterprise customer for us. They buy many things that are not in the collaborative. For example, their base contract for technologies like the HealthStream Learning Center is not in the collaborative. They didn't extend it or anything in that purchase process. What it was a bundle of educational products that they didn't want to necessarily purchase centrally. They wanted to understand across, say, their dozens of hospitals, what the demand was for, say, I'd say, 15 or 20 products. We were able to feature 15 or 20 products, some of which are only relevant for, say, a small department in each hospital, some of which are relevant for the whole organization.

Essentially, what it allowed them to do was add on, you know, 10 or 15 products into the collaborative, allow all of their dozens of hospital leaders and heads of departments to review them in 30 days, then place orders, then aggregate the orders into, kind of a single order, so they could see the demand for that product, and then, purchase. Over a 90-day window, they reviewed 15 products and purchased many of them, and the purchases on those products were up 42% over the prior year. It does not imply that the revenue from that account will go up 42%. It implies that for that set of products, the order value, which again, those are sometimes are multiyear commitments, so they wouldn't even be 40% growth on those 15 products in a year.

It would be, let's say they extended 10 products, added 5 new products, for 3 years, then that 40% order value would be spread over 3 years. I hope that gives some clarity, but nonetheless, it's very exciting because both they purchased products they'd never purchased before, and they extended products, and they bought more of existing products, across that library of offering. They did it in a focused 90-day way, and it was kind of a gamified process, and orders were up 42% in total dollar value.

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Okay, that's helpful. Then maybe on the commerce side of HealthStream, obviously exciting, from that perspective that you expect something possibly in the second half of this year, albeit likely small. As you think about that going forward, though, you know, over the course of several years, how do you think that the commerce side of HealthStream has the potential to impact margins? Maybe that's for Scotty, but I'm just curious on the margin impact. Then, if there is license fees associated with that in terms of, is the revenue, should we think of that revenue as one-time revenue or recurring in nature?

Bobby Frist (CEO and Chairman)

Let me give an example of how it could become recurring, and we don't really know yet. The first thing is, it's a future state, but

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Mm-hmm.

Bobby Frist (CEO and Chairman)

... let me talk it through a little bit. We have talked about one of our platform services that I do think itself can generate revenue. It's our license verification service. In the platform, we, as we've mentioned, we built a capability that allows an organization to verify that a license is current, and it's driven by API, so it's easy to incorporate. Let's say, for example, you're a small startup company, and you store nurses' licenses in your application that you sell or that the market uses, and you want a way to know whether the license of that nurse is current. Our future state would be, you know, you don't have to be a customer of the HealthStream Learning Center to benefit from that service. You don't have to buy our CredentialStream.

You could just directly pay us to check our connected HealthStream Platform, which is connected, in this case, to over 2,000 endpoints to check the license. You could pay us a small fee to ping our service and get back a flag that would say, "Current or expired license." You know, the idea here would be that maybe in the future, 500 different startup companies that store licenses for nurses want to add a verification capability to their application, and they might license that service directly. It's my hope that several of the capabilities of our platform will end up becoming, revenue-generating services, in the future.

I do want to reemphasize this is a future state, but as I noted in our developer portal, which is the window into those services, we've already got a couple of startups that have registered their developers to look in there and see how it may be applicable to what they're doing. In addition, as I mentioned, we had a large ERP vendor, one of the largest in the world, having some of their developers in there. Maybe they may be one of our, what is currently viewed as a competitor, would go in there and license the license service, and use it to validate licenses in their HRS system or their ERP system, as such. Again, this is a future state, and currently, that license service is plugged into our own learning center.

Soon, we'll be checking licenses before we schedule in our own scheduling system. We're using these functions in our own applications to enhance them, but the point is they may become licensable objects themselves. Right now, we don't want to get too excited about it because it's undefined, but we're beginning to see the early signs that people might have an interest in that, or organizations might, and that they could generate revenue. We'll leave it at that for now, and then the next few quarters, I hope to be able to give examples of where that's maybe either actually starting to occur or be incorporated into the value prop of other people's platforms. That's what we mean by a platform.

The platform powers our own applications, the platform differentiates our own applications, and the platform may power other people's applications.

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Okay, that's helpful. Just maybe going back to Matt's question, you know, the new win on the learning system, obviously positive, but, you know, you talked about 6 firms that you beat out, including an ERP vendor. You know, last quarter, I think you mentioned 2 lost accounts, and, I'm just curious, you know, any updates and perspectives on the competitive environment in learning? Has there been any meaningful changes?

Bobby Frist (CEO and Chairman)

No, I don't think so. I think all the major players have a learning architecture. There's a lot of question over how appropriate that architecture is for the learning environment and the mandatory training environment in hospitals. For example, there's a lot of initiative around self-directed learning. You know, I think self-directed learning is wonderful. You know, I think targeted learning through Jane, that helps you pick a career path and maybe develop skills in another area that's more directly needed. If you want to move from the OB to ER department, maybe Jane is going to be better than a generic learning platform, where you kind of purchased a content library from a third party. Jane is much more intelligent about identifying, you know, what you might need. Then the completeness of our ecosystem.

Sometimes an ERP LMS, which is, I think, you know, not as powerful as ours or specific to the needs of healthcare, at all levels, including, for example, when the Joint Commission walks in, our LMS prints out a report that we know meets the needs of that Joint Commission audit. You know, sometimes if you're the CEO, the CFO, and you're just trying to aggregate vendors, and you may, just take the, what I would consider a less capable LMS from an ERP vendor, that does happen. We, you know, we lose that occasionally.

That said, I think generally when you hear, like, this story we just told, the power of the collective offerings of the best content brands in the industry, the capabilities like differentiating true competency as HealthStream as a partner, you know, favors our learning architecture, our learning systems, our learning products like Jane, over generic learning architectures from competing LMSs. That said, you know, there's dozens and dozens of competitors. Some even have bigger budgets and in some ways, maybe more features. Now, the question is, are those features relevant to our customers? You know, the fact that does international currency exchange may not be, or a currency conversion in an LMS, may not be something relevant to U.S. hospital systems.

I think, you know, our features are focused on the known needs of our customers, and we feel competitive and because of those reasons. This was an example where the aggregate value of our partnerships, our capabilities, that resulted in kind of a wholesale switch to HealthStream.

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Okay, thank you. I'll jump back in the queue.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. Our next question will be coming from Vincent Colicchio of Barrington. Your line is open.

Vincent Colicchio (Managing Director and Senior Equity Analyst)

Yeah, Bobby, gross margins were down year-over-year in the first half. I'm curious, what should the second half look like in terms of year-over-year comparisons?

Bobby Frist (CEO and Chairman)

I'll let Scotty take that one, and then I'll chime back in if it's needed.

Scotty Roberts (CFO and SVP)

Sure. Hey, Vince, how you doing?

Vincent Colicchio (Managing Director and Senior Equity Analyst)

Good.

Scotty Roberts (CFO and SVP)

You know, I think margins, you know, we're still aiming for that mid 60%, 65%-66% range. We kind of teeter, you know, a few basis points quarter to quarter. I mentioned on the call, you know, a couple factors that influence margins, continue to be revenue mix changes, so royalties, obviously, and then cloud hosting costs, as we continue to expand our credential stream application, for example, and grow that revenue stream, you know, some of the costs start to filter through. Just, you know, revenue mix also, we didn't mention it on the call, but we've mentioned it on prior calls. You know, reductions in revenue from our legacy applications, one being the scheduling application called ANSOS.

still see some, a little bit of attrition there that's pulling down, you know, revenue and obviously influencing margins a little bit. some of that is, you know, obviously shifting over to the Shift Wizard solution that we also spoke about, also there's just, you know, pure attrition going on, too. I think net-net, you know, I think we're still aiming for that, you know, 65%-66% range.

Vincent Colicchio (Managing Director and Senior Equity Analyst)

A follow-up on that. On the ANSOS, is the attrition stabilizing? What's the trend there? Do you expect it to get better, you know, going forward?

Bobby Frist (CEO and Chairman)

I think as we described in the last call, it's a, you know, it's a challenging situation. I think, you know, we're converting them as best we can. We announced one today, the conversion from an ANSOS customer to Shift Wizard. We're developing the capability of Shift Wizard to meet the full needs of the large enterprises, we have more development to do. It's kind of a known quantity that we acquired a company that was a legacy platform and that we would experience some attrition. I think we continue to experience that. That said, I think we're getting better as a company at trying to move those accounts into our own application called Shift Wizard, and retain them as customers. I expect the attrition to continue and be a drag.

That's why we're hitting this, you know, 4.5%-5% growth rate. I think without that, we would be delivering better growth rates. As you heard in the call today, Shift Wizard grew 17% over the prior year, same quarter. You know, the promises in the future of these new SaaS applications, and I think that, you know, in general, we kind of entered the market with ANSOS with a known risk, and we're experiencing that risk, but it's a known and quantifiable drag on growth that we're just gonna manage through as we build out the Shift Wizard application.

Vincent Colicchio (Managing Director and Senior Equity Analyst)

One follow-up on Jane. Are you seeing, what does the competitive landscape look like there? Are you seeing similar products or no, as of yet?

Bobby Frist (CEO and Chairman)

State the question again. Yeah, I think I shared my excitement for Jane, but what was the question?

Vincent Colicchio (Managing Director and Senior Equity Analyst)

Are you seeing a competitive product emerge? What does the landscape look like?

Bobby Frist (CEO and Chairman)

I have not. I have not. I, you know, I may be missing something. I'm sure there's a startup somewhere that's building something. we believe Jane, because of the data sets it's based on, that were unique in industry when we acquired the company that had built a 20-year history of assessing competence in this way, gave us the infrastructure we needed to build a true expert system, using that data to train it. I just think at the time, that was a unique asset in the market, and we think we've turned into a unique asset in HealthStream. you know, it is a premium product, so I think rate of adoption could go up if price was a little lower. We're gonna be working with that and thinking about it.

Right now, we want to just keep tuning the product to get it where we want it, because we think it's a differentiated product.

Vincent Colicchio (Managing Director and Senior Equity Analyst)

Nice quarter. Thank you.

Bobby Frist (CEO and Chairman)

Thank you.

Operator (participant)

Thank you for your question. One moment while we prepare for the next question. Our next question will be coming from Ryan Daniels of William Blair. Your line is open.

Jack Melick (Equity Research Associate)

Hi, good morning. This is Jack Melican for Ryan. I guess a little bit more into the weeds here. Deferred revenue was flat year-over-year and looked to be down more sequentially this quarter than compared to the prior year period, which would indicate negative billings growth, if my math is right. I get there are plenty of nuances that impact the reliability of billings as a forward indicator, but do you mind walking us through the details that might impact deferred rev and other related metrics, and how that would or would not triangulate to visibility over the next few quarters? Thank you.

Scotty Roberts (CFO and SVP)

Hey, Jack, interesting question. I'll try to give you a few thoughts. I probably can't explain it the way you're asking, but, yeah, I would say that billings for us, tend to fluctuate, and, that's in timing and the nature of billings. we have kind of a good variety of options for our customers, to help, you know, kind of smooth the payments to us. annual billings is very prominent for us. Those tend to happen, at least for us, seasonality-wise, in the Q1. we also have, you know, a good mix of, you know, monthly billings, quarterly billings, and some semiannual. how they influence deferred revenue at any given point in time tends to also fluctuate.

If you look back at Q1, that's where we typically see the increase. Just year-over-year, you know, contracts renew, new contracts come in, billing terms often change as well. We've started to see more of a trend towards quarterly billing, which generally would have flushed through the balance sheet most likely by the end of a reporting period, versus annual billings, which tend to sit on the balance sheet a little bit longer.

Jack Melick (Equity Research Associate)

Okay, great. I appreciate the detail there. I guess, switching gears a little bit, looking at professional services, I get that it's a smaller chunk of the business, but I can't help but notice that its growth has been lagging overall subscription revenue and actually negative over the last few quarters. My assumption here would be that these two would sort of increase in lockstep, but that doesn't seem to be the case. Is there a reason that the direction of this relationship isn't more clear? I guess more broadly speaking, is there anything you believe is worth highlighting as it relates to this segment of professional services and its longer-term outlook? Thank you.

Bobby Frist (CEO and Chairman)

Yes, yes, great question. It is intentionally being dropped. I am a believer that, you know, we should minimize implementation fees and pro services and build a subscription business. In some cases, we even intentionally decided to reduce or lower or the fees associated with the initial implementation cycles, try to get to implemented software as fast as possible and move on to subscription recognition. I love that the fact that I believe, Scotty, our number is about 95% of our revenues are subscription, therefore predictable. This 5%, if I could find a way to eliminate it, I probably would. If I could slightly increase our subscription price and eliminate implementation fees, I would do it.

We've had a conscious effort to, you know, on the biggest implementations, there's just a lot of people involved, and so you do need to charge something. In general, we're really trying to get it to where these services can be turned on and configured remotely without travel and on-site. My vision is that the pro services would be a, you know, intentionally diminished. We'll probably get to a point like here, where it's so small and not growing that it's not a material part of our financials. We do not have ambition to grow pro services. In fact, it's just the opposite.

I'm trying to reduce the time to implementation, make it simpler, get applications online by self-configuration that don't require implementation services and get to the paying monthly subscriber. That's what we want. I would say it actually is a positive kind of hidden it. I know it's down year-over-year, but in my mind, that's a positive thing. It means that a higher percentage of our revenues are subscription-based. I don't know if Scotty wants to add anything to that, but.

Scotty Roberts (CFO and SVP)

Yeah, Bobby, I think your explanation is exactly right. It's more of an intentional shift towards product mix and how we deliver the services.

Bobby Frist (CEO and Chairman)

Like I said, I think it's Jack, we're talking to. You know, there are some so large scale that you just, if you put 10 people on something for 4 months, you need to charge something for it. My goal is, if we can find a way to implement them in 2 months and have it self-configured, we would do that, and there would be no pro services fee. Just directionally, you asked the question, is it a business we're trying to grow? The answer is no.

Jack Melick (Equity Research Associate)

Yeah, makes sense. I really appreciate the insight there.

Operator (participant)

Thank you. One moment. We have a follow-up question. That follow-up question will be coming from Richard Close of Canaccord. Your line is open.

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Yeah, I'll keep it quick and save my other follow-ups for later. Bobby, just clarification on ShiftWizard. You just mentioned 17% growth. For some reason, I thought you said 19% in the prepared remarks.

Bobby Frist (CEO and Chairman)

Scotty, can you clarify? I may have misspoke. Let's check.

Scotty Roberts (CFO and SVP)

Yeah, I think it was 19%.

Bobby Frist (CEO and Chairman)

19%.

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Okay.

Bobby Frist (CEO and Chairman)

Okay, good. Well, that's better than 17, but they're both solid numbers. Yeah, thanks for asking, Richard. I guess it turns out it's 19% year-over-year.

Richard Close (Managing Director of Digital and Tech-Enabled Health Equity Research)

Okay, great. I'll follow up with you on my other questions. Thanks.

Bobby Frist (CEO and Chairman)

Okay, great. You know, just one kind of closing comment related to the whole ShiftWizard and Saas. It's definitely one of the more challenging parts of our business. You know, we've talked about it. We've formed it quickly over 24 months with 3 acquisitions. Some of the acquisitions had a legacy component. We knew what we were getting into, kind of hot water. You know, that acquisition gave us a roadmap, some paying customers. What we have done, which is relatively new, is the team and the leader that helped us really get CredentialStream into the market leading position, as evidenced by our G2, recent recognition as the leading credentialing system in the industry.

You know, the team and specifically the person, Michael Souza, that helped us get there, is now in charge of building the ShiftWizard application suite, the whole scheduling area. We're installing those best practices and lessons learned. I think in year prior, I said we had gotten the playbook from Michael Souza and delivered it to other executives to try to deliver on it. Now we actually have the executive that made it happen, making it happen in scheduling as well. We're excited about that and expect to see some gains from that experience being applied to this challenging set of this opportunity set, is what I guess I would say.

Hopefully, the early returns will start coming in, you know, later in the year on the leadership team we put in there.

Operator (participant)

There are no more questions in the queue, so this concludes the Q&A session. I would like to turn the call back over to Bobby Frist for closing remarks. Please go ahead.

Bobby Frist (CEO and Chairman)

Thank you all for listening in. We're looking forward to the next quarter. Don't forget to come to Nashville for the Nashville Healthcare Sessions. You'll see HealthStream participating as well. An opportunity to say hi to all the people that are changing healthcare for the better. Thank you to all the HealthStreamers that made it happen, and we look forward to the next earnings call, where we'll update you guys on the hStream platform, the portal technologies, and our customer. Hopefully, what will be another strong quarter of customer wins and great stories. We'll talk to you guys soon. Thanks.

Operator (participant)

This concludes today's conference call. Thank you all for participating, and enjoy the rest of your day. You may now all disconnect.