HealthStream - Q4 2022

Transcript

Operator (participant)

Good morning, and welcome to HealthStream's fourth quarter and full year 2022 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the company, we will open the conference up for question and answers after the presentation. I 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 Communication)

Thank you, and good morning. Thank you for joining us today to discuss HealthStream's fourth quarter and full year 2022 results. Also in the conference call with me today is Robert A. Frist Jr., CEO and Chairman of HealthStream, and Scotty Roberts, CFO and Senior Vice President of Finance and Accounting. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of 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 the net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call. With that start, I'll now turn over to CEO Bobby Frist.

Robert A. Frist Jr. (CEO and Chairman)

Thank you, Mollie. Good morning and welcome to our fourth quarter and full year 2022 earnings call. We do have a lot of developments to cover in the morning, so we'll, let's first look at quick view of financial performance, move into in-depth discussion of operational enhancements we've made to begin 2023. I'll turn it over to Scotty Roberts for a more detailed look at financials. I do wanna kind of reiterate the fundamentals of who we are and where we're going. I'll start with that and then exciting news around starting a cash dividend policy to share as well. First, the financials. Each of the financial metrics highlighted in our earnings release, we did show growth in both the fourth quarter and the year when compared against the same periods last year.

For the full year of 2022, we delivered a record high amount of top line revenue of $266.8 million and a record adjusted EBITDA of $53.4 million. In 2023, we expect to eclipse both of these high water marks due in part to our streamlining of the company around our single platform strategy, where we used to be organized around two business segments, Workforce Solutions and Provider Solutions. We are now organized and managed as one operating company, unifying our work to enhance and leverage our hStream technology platform. We call this our One HealthStream approach or initiative, and we're gonna talk a little bit more about that in the rest of the script here. Before we go further, I wanna cap 2022 and start 2023 by grounding everyone in our business.

First and foremost, HealthStream is a healthcare technology company dedicated to developing, credentialing, and scheduling the healthcare workforce through SaaS-based software solutions, each of which are becoming more valuable because of the interoperability they're achieving through our hStream technology platform. We sell our solutions on a subscription basis under contracts which average three to five 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. The 10.9 million healthcare professionals working in the United States are the end users of our SaaS solutions and the target for our core applications. We are led by a seasoned team of executives who have proven track record of generating strong earnings and cash flows through both organic and inorganic means.

I'm pleased that our executive leadership continues to evolve along with our business. Today, we're announcing new executive positions. The individuals filling those positions are familiar to you all and have shown themselves capable of driving growth through innovation. For example, as part of our One HealthStream approach, we are consolidating our credentialing and scheduling solution groups into one group that'll be internally known as Enterprise Application Solutions. Michael Sousa is being promoted to Executive Vice President of Enterprise Applications to lead this new group. It's kind of like a new group in a product family based on the similarities of the product lines. Having joined HealthStream in 2004, Michael has already distinguished himself as the executive leader of our enterprise sales department and more recently, as the President of VerityStream.

As many of you know, VerityStream is the brand we have used to refer to our credentialing business up to this point. Now we will drop the VerityStream brand in favor of operating as One HealthStream. We believe the consolidation of credentialing and scheduling into enterprise applications will benefit customers as they receive a more integrated set of workflow solutions, and we are pleased to have one of the top SaaS solution executives in healthcare leading this new group. We have also formed a new group called Digital Network Development to focus on business to professional solutions. This group is innovative and new and exciting in their direction. It's being led by established HealthStream executive, Scott McQuigg. We have a deep history of serving institutional customers through our B2B business model.

The growth of NurseGrid and the footprint of myClinicalExchange, both acquired businesses through our M&A program, have shown us that we have a lot to offer the individuals who would like to become our customers as well. With that opportunity in front of us, Scott and this new group take on the opportunity to turn subscriptions into subscribers, and we expand our business to professional offerings. Considering Scott's many accomplishments at HealthStream and his prior entrepreneurial successes, he is uniquely qualified to grow professional audiences, user engagement, and monetization strategies in this newly defined solution group. Scott will serve as Senior Vice President over our new Digital and Network Solutions Group. Our alignment around One HealthStream means organizing our company to achieve future growth and investing in areas where we see potential for growth and see key growth drivers.

Our philosophy has always been to invest in the innovation necessary to deliver technology solutions that help improve the quality of healthcare. Streamlining around One HealthStream is the next step in that journey. We believe the realignment announced today positions us to deliver strong financial growth and market-leading innovations going forward. This can be seen in the 2023 financial outlook described in our earnings release and the longer-term financial goals discussed during our September 2022 Investor Day presentation. As the macroeconomic forces of inflation and recession add challenges and uncertainty on the global scale, we are confident that HealthStream will continue to deliver strong and growing profits. First, let's look at a detailed look at the financials, and I'll call on Scotty Roberts to do that, our CFO.

Scotty Roberts (CFO and SVP of Finance and Accounting)

All right. Thank you, Bobby, and good morning. I'll start with the financial highlights for the fourth quarter and then speak to our financial outlook for 2023 and share how the operational changes we've made will impact our financial reporting beginning in the first quarter of 2023. Unless otherwise noted, comparisons are gonna be against the same period of last year. Our revenues were $68.5 million and were up 7%. Operating income was $3.1 million, up from an operating loss of $0.5 million. Net income was $2.5 million, up from a net loss of $0.4 million. EPS was $0.08 per share, up from a loss per share of $0.01, and adjusted EBITDA was $13.6 million and was up 13%.

As a quick reminder, last year's fourth quarter included $2.4 million of stock compensation expense associated with a stock grant to over 1,000 employees that was facilitated through a contribution of personally owned shares from our CEO. Despite being fully funded personally by our CEO, GAAP requires this transaction to be accounted for as a compensation expense of the company. This resulted in lower operating income and net income in last year's fourth quarter compared to this year. Now let's go back to our financial results. Our Workforce Solutions revenues were $55 million and were up 8%, and revenues from Provider Solutions were $13.5 million and were up less than 1%. Revenues from Provider Solutions were impacted by lower professional service revenues compared to last year, while subscription revenue increased by 5%.

After delivering a consolidated growth rate of 2% in the first half of the year, we finished with an overall growth rate of 6% in the second half. A steady progression of revenue from new sales, particularly from our learning and development solutions, along with a mid-year acquisition, contributed to this year-over-year improvement. Gross margin was 65.7% compared to 64.3% last year. After adjusting for the impact of the CEO stock grant accounting treatment, gross margin for last year would have also been 65.7%. Operating expenses excluding cost of revenues were flat, although last year's fourth quarter included a portion of the $2.4 million of stock compensation expense from the CEO stock grant to employees, which I mentioned earlier.

Aside from the reduction in stock compensation expense, we experienced year-over-year increases in sales, marketing, and product development expenses, which were mostly offset by reductions in G&A. Sales and marketing expenses increased by 7% due to a combination of growth in staffing levels, higher sales commissions related to a higher level of sales bookings, and increased travel versus the height of the pandemic. Our business travel expenses have been steadily increasing over the past several quarters, and they approximated $300,000 this quarter compared to just under $100,000 in the fourth quarter of last year. For the full year, travel was up approximately $1 million, and we expect travel to continue to trend upwards in 2023.

The investments that we've made in sales and marketing resulted in an improvement in our sales bookings during the fourth quarter compared to the first three quarters of the year. They were notably higher than last year's fourth quarter. We had several key wins, including some large multiyear contracts across our portfolio of applications. Some of the larger deals, specifically for the credentialing and scheduling enterprise applications, typically have a longer cycle time to revenue generation than our learning applications. We expect these subscriptions will begin to materialize into revenues later in 2023. Product development increased by 3%, which is net of the labor costs that were capitalized for software development. Capitalized labor costs increased approximately $1.2 million over the prior year quarter, resulting from investment towards our single platform strategy and suite of applications.

General and administrative expenses declined by 12%, which came from several areas, including lower bad debt charges, reductions in outside recruiting services, reductions in our leased office facilities, and other infrastructure-related costs. In last quarter, I mentioned that we decided to market about one-third of the space in our Nashville headquarters for sublease, this process is still underway. Our adjusted EBITDA came in at $13.6 million, was up 13% over last year's fourth quarter, the adjusted EBITDA margin was 19.9% compared to 18.7% last year. Now let's move over to the balance sheet metrics. We ended the quarter with cash and investment balances of $53.9 million. During the fourth quarter, we deployed $6.1 million of cash for capital expenditures, we did not have any share repurchases this quarter.

DSO was 42 days compared to 41 days last year. For the full year, cash flows from operations were $51.2 million. We're up 21% compared to $42.4 million last year, and free cash flows were $26.1 million compared to $17 million last year and we're up 53%. On December 31st of 2022, we acquired substantially all the assets of eeds, a North Carolina-based healthcare technology company offering a SaaS-based continuing education management system for healthcare organizations. The consideration we paid for eeds consisted of approximately $7 million in cash and was subject to customary purchase price adjustments. The transfer of consideration occurred in January. In our history, our capital allocation approach has included a combination of investing internally, acquiring complementary businesses that fit our model, and returning value to shareholders through share repurchases.

As announced yesterday, we introduced another means of returning value to our shareholders. Our board of directors adopted the dividend policy under which we intend to pay a quarterly cash dividend on our common stock. We believe our history of steady and consistent profitable growth, along with positive cash flows, provides us the opportunity to return value to shareholders via cash dividends while continuing to invest in both organic and inorganic growth initiatives. The board declared a quarterly dividend of $0.025 per share, which will be payable on April 28, 2023 to shareholders of record as of April 17, 2023. As I already mentioned, we did not have any share repurchases this quarter, and there's approximately $1.9 million remaining under our current plan, which expires next month unless earlier terminated by the company.

Since 2020, we have deployed over $48 million towards share repurchases at an average price of $21.75 per share. Now let's move over to our guidance expectations for 2023. We expect consolidated revenues to range between $277.5 million and $283 million. Adjusted EBITDA is expected to range between $57.5 million and $60.5 million, and capital expenditures are expected to range between $27 million and $29 million. Our guidance does not include assumptions for any acquisitions that we may complete during the year, but does reflect the recently completed acquisition of eeds, which is expected to contribute between $1.6 million to $1.8 million of revenue during the year.

Our objectives for growth include generating cross-sell and up-sell opportunities across our customer base, increasing the revenue per subscriber, and growing the number of subscriptions to our hStream platform. We believe our workforce-centric ecosystem of solutions positions us well for continued expansion and growth. With the most adopted learning application in the healthcare industry, combined with a wide array of cost-effective content offerings that address our customers' needs for training, continuing education and compliance, we anticipate another solid year of performance. In addition, migrating customers from legacy products to our SaaS solutions, specifically within our credentialing and scheduling application suites, is a top priority and will be another driver for growth. We expect to maintain our gross margin in the mid 60% range for the year, which is consistent with our medium-term objective of 65%-68%. Now looking at our expense assumptions.

Over the past several years, we've made investments to scale our product development, sales and marketing teams, and we expect modest incremental investments in these areas for 2023. We plan to increase the relative level investment towards our single platform strategy, our scheduling application suite, and by expanding our business to professional footprint, while somewhat stabilizing our investments in our learning and credentialing application suites. A meaningful portion of our capital expenditures over the years has been associated with capitalized software development. We expect the allocation this year will be similar. As I mentioned earlier, travel costs in 2022 were up and they're expected to gradually increase on a year-over-year basis to approximately $2 million for the full year. We anticipate certain costs will be impacted by the inflationary conditions that continue to persist.

As it relates to the organizational changes we announced yesterday, we expect to record severance charges in the first quarter of approximately $800,000, which has been taken into account with the guidance being provided. We anticipate that our forecasted adjusted EBITDA margin will increase to the 21% range, which is also consistent with our medium-term objective of 21%-24%. We expect our effective tax rate to be between 25% and 26%. I would also like to note that given some recent changes in how research and development expenditures are treated for income tax purposes, I expect that our cash tax payments will also increase during 2023. We have a long history of leveraging M...

our M&A program to drive growth and expand our product portfolio. During 2022, we acquired two more companies, CloudCME and eeds, to round out a set of solutions that are unique to healthcare CME administration. As we highlighted during our Investor Day presentation last year, one of our growth strategies is to pursue opportunities through M&A. We'll remain disciplined in order to find the right strategic fit at an appropriate valuation that we believe will create return. With a healthy cash position, no debt, access to a $65 million revolving credit facility, and our free cash flows, we are well-positioned to support our capital allocation strategy for the year. Before turning it back over to Bobby, I wanna read something to you that we began including in the management discussion and analysis portion of our periodic reports this time last year.

It first appeared in our 2021 annual report on Form 10-K, and we have repeated it in our quarterly filings since. It reads, "We are in the process of more completely unifying the company under a single platform strategy that will serve as the foundation for the entire enterprise. By enabling our applications through our common technology platform known as hStream, we believe that standalone applications, which already provide a powerful value proposition, will begin to leverage each other to more efficiently and effectively empower our customers to manage their businesses and improve their outcomes." I wanna highlight this part in particular.

As we continue to achieve this goal of orienting multiple applications in relation to a single technology platform, distinctions between our current reporting segments of Workforce Solutions and Provider Solutions may become less applicable or even obsolete in terms of how we operate and report on the company's business." Now, I read you that excerpt from our filings because we've reached an inflection point and are now operating as a single platform company. We're as One HealthStream, as you heard Bobby say earlier. This is reflected in the way we run our business across the board, including in terms of technology, operations, accounting, our organizational structure, compensation, performance assessment, and resource allocation. It is something you've heard us talk about since we began reporting the subscription count for hStream in February of 2019, and more recently on our Investor Day call in September of last year.

Today, our operations are aligned with our vision, and we celebrate that fact. To reflect the way we now operate and organize ourselves as a single platform company, it's necessary to begin reporting accordingly. From 2023 forward, our financial outlook and results will be provided on a one-segment basis. The results from prior periods will be provided on a two-segment basis, given that we operated two segments, Workforce Solutions and Provider Solutions, during the period those results were generated. As our single platform approach advances, we look forward to determining new metrics that we may report in order to give you insight into our business and its growth. With that, I will wrap up and wanna say thanks for your time this morning, and I'll turn it back over to Bobby.

Robert A. Frist Jr. (CEO and Chairman)

Thank you, Scotty, for that detail. Got lots to pick up on operationally, so let's get started. My comments at the start of the call were about positive aspects associated with streamlining our business according to our One HealthStream approach. I also want to pause and acknowledge the most challenging part of our realigning our business, that is the elimination of 33 positions from our base of over 1,100 employees. With consolidation comes the need to eliminate overlapping roles, that is driving the efficiency measures we announced to our employees yesterday afternoon. We do not take this decision lightly, we wish all of our HealthStreamers, past and present, all the best moving forward.

As I mentioned previously, we will continue to invest in our business and employee base and continue to channel those investments where we believe they'll be most likely to help recognize our vision of improving the quality of healthcare by developing the people who deliver care. With that, I want to quickly mention some of the successes we achieved to end 2022. For each of our learning, scheduling, credentialing, and now our platform solutions, I will highlight a win that I think characterizes where our business is heading. First, for the HealthStream Learning Center. It is the most utilized learning management system in healthcare and continues to add new customers. In the last month of the year, Ardent Health Services purchased our HealthStream Learning Center to support their workforce enterprise-wide.

We recently issued a press release about our partnership with Ardent Health, which I encourage you all to read if you haven't already. Second, we believe that our SaaS scheduling solution, known as ShiftWizard, is the best-in-class solution of its kind, and it will only become more valuable to customers as it begins to integrate with other applications through our hStream technology platform. In December, Prime Healthcare, another enterprise-wide customer of our HealthStream Learning Center, also became an enterprise-wide customer of ShiftWizard, our SaaS scheduling solution. One reason this is noteworthy is because half of Prime's facilities converted from our legacy installed scheduling products, while the other half purchased scheduling solutions from us for the first time. As a result, we welcome Prime Healthcare as an enterprise-wide customer of both the HealthStream Learning Center and now ShiftWizard.

Our credentialing solutions also enjoyed a successful end of the year, both in terms of competitor takeouts and conversions from our legacy solutions to CredentialStream, which is the best-in-class solution for enrolling, credentialing, and privileging physicians. In March of 2022, Spectrum Health signed an enterprise contract for CredentialStream. In the fourth quarter of 2022, after merging with Beaumont Health and forming Corewell Health, they decided to extend the CredentialStream contract to all of Beaumont Health, replacing one of our top competitors in the process. This extension more than doubled the value of the original enterprise contract. As a forward-thinking health system, they are motivated to use CredentialStream's powerful technology to drive process and privilege standardization enterprise-wide, while also accelerating optimal efficiency and effectiveness as a foundation for the newly combined entity, Corewell Health.

In terms of platform solutions, the hStream platform, the transaction that I would like to highlight is a new type of sale for us. Less than three months after releasing our hStream Developer Portal, we were able to provide Kaiser Permanente's Northern California region in an API-only deal that allows them to monitor and validate their entire workforce. Being able to sell APIs as a product is representative of our platform strategy becoming a very tangible reality, and we look forward to more of these sales in the future. We believe these wins illustrate the value our customers see from our ability to provide enterprise-wide solutions, and we believe that those solutions will become more valuable as the hStream technology platform enables interoperability across multiple applications. We continue to innovate across the company, which is helping us to create market-leading products.

At the end of the fourth quarter, our innovation was recognized with five prestigious Brandon Hall Product Awards. They include awards for our SafetyQ compliance program, our quality management tool called abaqis, our HealthStream customer community, and two, our American Red Cross Resuscitation Suite, which included an award for best advance in education delivered through technology. Thank you to our employees that have worked to make these HealthStream products stand out above the rest and to earn these national recognitions and awards. On January 3, 2023, we also announced the acquisition of eeds. With this acquisition, we expanded our ecosystem with an innovative, SaaS-based continuing education management system for healthcare organizations. eeds represents the third acquisition in the specialty area that we completed within a 13-month period, making us a market leader in this niche area of healthcare technology.

Importantly, we believe that the acquisition of Rievent Technologies, CloudCME, and eeds, which are all CME application management businesses, showcases how our platform is well-positioned to empower new solutions that add to our growing ecosystem and marketplace. We plan to begin utilizing our well-established M&A program to enhance our ecosystem by bringing new and expanded offerings to our customers. Apart from the operational updates related to our One HealthStream approach, we also announced in our earnings release that Eddie Pearson, HealthStream's President and COO, will be retiring from his current role at the end of the second quarter this year. At that time, he plans to continue serving the company in a multi-year, part-time leadership position that we are gonna call Executive in Residence. Eddie has played a significant role in transforming the company during his 16-year tenure.

When he joined the company in 2006, there were 200 employees and $27 million in revenue. Contrasting that to today's employee count of 1,100 individuals and annual revenues of $267 million helps provide context for the magnitude of growth Eddie has helped the company achieve. The good news is that Eddie will still be at HealthStream in an important role where employees can learn from him and benefit from his years of experience and wisdom. As we draw closer to the date of this transition to his next role at HealthStream, there'll be much more said regarding Eddie's numerous contributions and legacy as President and COO. Before we move to questions, I want to discuss one more piece of exciting news, our new dividend policy.

We are pleased that our strong balance sheet, including our reliable free cash flows, puts us in a position to return value directly to shareholders through the company's first-ever quarterly cash dividend. Over the course of the year, we expect our new dividend policy to return approximately $3 million to shareholders. We believe their new dividend program highlights the fact that HealthStream is a profitable technology company that has both the discipline and the resources to return cash to our shareholders while also pursuing our organic and inorganic growth strategies. If you're interested in a profitable, highly recurring revenue, SaaS, PaaS, healthcare technology company that for 2023 expect to deliver steady growth and is determined to share some of its gains directly with shareholders in the form of a dividend, maybe HealthStream is the stock and the company for you.

I'd like to turn it back over to the operator for to begin our Q&A.

Operator (participant)

Thank you, sir. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one one on your push-button telephone. If you wish to withdraw your question, please press star one one again. Your questions will be taken in the order that they are received. Please stand by for your first question. Our first question comes from the line of Matt Hewitt with Craig-Hallum. Your line is now open.

Matt Hewitt (Senior Research Analyst)

Good morning. Thank you for all the details and the update. Maybe first up, Bobby, could you describe what the sales environment is like? Obviously, the last couple of years has been pretty challenging. Hospitals reluctant to maybe bring in new software, given some of the challenges they were facing with COVID. It seems that that's freeing up. Now you've got some issues on the hiring and retention side at hospitals. Maybe just a little bit of color on what you're seeing from the customer side.

Robert A. Frist Jr. (CEO and Chairman)

Yeah, I think the probably the simplest way to say it is that our products are well aligned with business needs, but the larger customer base is under a lot of financial duress.

I think, 2022 is probably one of the most difficult financial times for take acute care hospitals in a long time. You know, result of the shift in how they operated, the running out of COVID support funds. I think just in general, there's several exceptions of strong operators that are generating solid growth and profits. I'd say on the whole, the target customer base is still under stress, financial stress. Particularly in the second half of 2022, I kind of saw that. The good news is that I still think our solutions are both aligned with the areas they need to invest in and/or are required to invest in, say, OSHA safety training.

In many cases, we also are the low-cost provider of that high-quality service, so we should be the selected vendor when they make those choices. I feel that our products are now getting in a position where their capabilities are market leading and very innovative. I feel well-positioned, but I don't wanna underemphasize that, you know, the typical hospital CEO is still under a lot of pressure when investing and deploying capital or cash or operating cash flow into really anything. We're a bit cautious on our overall growth for the year. Some of it related to long implementation cycles, and some of it related to the sales cycle still. I would see, I see a much higher. I like our pipeline. They feel strong.

We just have to see how well the deals close. We've got this, essentially 4%-6% top-line growth range on us for the year, as we see how this all plays out. It's an interesting dynamic 'cause we're well-aligned, but our customer base is under kind of stress. I think we have good price points to entice them and a great sales team, and we've got a strong pipeline. We just have to see how well we can convert it. Of course, implementations for scheduling, major enterprise adoption of scheduling and credentialing are rather long implementation cycles, so the timed revenue is a bit delayed. We talked a little bit about second half being a growth period.

Matt Hewitt (Senior Research Analyst)

That's really helpful. Maybe, a follow-up, getting a little more specific. With the Ardent win, obviously, congratulations there. Maybe if you could provide a little bit of detail on how long was that deal in the pipeline? You know, who were they or what were they using, prior to converting over to hStream and the Learning Center? How long was that deal in the pipeline? How long did it take to get to close that one, given some of the challenges that the customers are facing? Thank you.

Robert A. Frist Jr. (CEO and Chairman)

Well, sure. Well, that one moved along fairly well over the course of a year, from, you know, initiation of discussion with. They were gonna look to the market to see what was available. They were on a competing application suite, and so it was a change for them to move to us. Fortunately, we had previously, a year prior, convinced them to move on to the Red Cross application suite and connect to that program through the hStream platform. They already had hStream licenses in place for a lot of their employee base. It kinda shows how the model works. Like, we connected to them their existing platform, their existing learning architectures to the hStream platform. We were able to sell the Red Cross program. They liked the program.

It proved effective, and it also saved them money over their prior programs. We introduced the learning system as a better way to manage the administration of the Red Cross program. Over the course of the year, we won them over. With them already having licenses to the hStream, you know, core technology, it made it more economical to just add on the learning center application. It was a bit of a process, but it was also essentially an upsell because they had already adopted parts of our technologies, including the hStream platform itself.

Matt Hewitt (Senior Research Analyst)

That's great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Richard Close with Canaccord Genuity. Your line is now open.

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

Yeah, congratulations, thanks for the question. Bobby, maybe just to build on some of the comments you just made to Matt's question. With respect to revenue growth in the first half, should that be somewhat flattish and then seeing most of the growth in the second half of the year? Just curious on that.

Robert A. Frist Jr. (CEO and Chairman)

Fair question. I don't think it's gonna. We do think more in some areas of the business will matriculate in the second half, that said, like, the learning platform is going live at Ardent, and we'll get to those revenues sooner, for example. No, I think the year will show growth. I haven't looked at its quarterization in the last 24 hours, so I can't quite remember the ups and downs on it. Scotty may comment a little bit on it, the overall growth, you know, we have at 4%-6% and probably a little bit more weighted to the back half based on our current dialogue. It doesn't mean no growth in the first couple of quarters, I don't think.

Maybe Scotty could comment and clarify the quarterization a little bit better.

Scotty Roberts (CFO and SVP of Finance and Accounting)

Yeah. I think, Richard, it won't be quite as dramatic as last year, where we had a 2% first half and a 6% second half kinda growth rate. I think it'll be a little bit more balanced than that, but would expect, just given some of the kind of the way revenue stream flows in, you know, over time, that the second half will be a little more pronounced than the first half, but probably not as big of a gap as we saw last year.

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

Okay. you know, considering you guys just posted 6.5% growth, I guess, in the fourth quarter. You would gauge that, you know, for the year, the 4%-6% is baking in some conservatism just basically because the current environment is uncertain.

Robert A. Frist Jr. (CEO and Chairman)

Well, there's definitely a little of that, but I don't know if I'd call it conservative. It is our best estimate.

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

Mm-hmm

Robert A. Frist Jr. (CEO and Chairman)

... based on all the variables. It really is. I don't think we're trying to be overly conservative or overly aggressive. It's just kind of when we looked at our pipelines, how they're converting, we looked at our fourth quarter sales, obviously very important to have some nice big wins there, to know how they'll roll in. I think in the sense that the macro conditions are still tough, you know, it's hard for us to get beyond that range right now, is what I'm thinking. I don't characterize it conservative.

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

Mm-hmm.

Robert A. Frist Jr. (CEO and Chairman)

I think it really is what we think is our accurate view of how things will play out this year, of course. Without trying to over-engineer it to be conservative or aggressive. I think it's a careful study. The good news is we waited to get the year-end sales numbers in. You know, as you know, a lot of our growth for this year is based on how the contract flows were of the last two quarters of last year.

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

Mm-hmm.

Robert A. Frist Jr. (CEO and Chairman)

The growth numbers are largely a projection of how the sales of the fourth quarter and third quarter of last year will matriculate into this year.

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

Okay, that's helpful. When I think about something like the CloudCME acquisition earlier or mid-year, I guess, and then the eeds here recently. You know, not huge from a revenue contribution, but how easy or hard is the process in terms of plugging those offerings into the platform, and then just like, you know, cross-selling that into your significant base? Is that something where, you know, it, the sales process is relatively easy? You know, just any thoughts on that front.

Robert A. Frist Jr. (CEO and Chairman)

Yeah. It's a great opportunity to kind of talk about the platform a little bit more and create more clarity on it. How to best think about it for the next, say, 12 months. The first thing to remember, the actual platform itself, the technology of the platform is growing and maturing, as reflected in the actual release of our hStream Developer Portal and in our first set of publicly available, licensable APIs and the Kaiser deal we just announced. We're really excited about that. And each time we add to that platform, the actual technology capability of the platform, things will get faster, easier and better.

That said, on a maturity curve, I would say that the platform technology is fairly new and immature, meaning there's like so much in front of us that's opportunity to create leverage. A more constructive way to think about hStream, I think, for the next 12 months is maybe the way you would think of, say, an Amazon Prime. It's a, it's a license that includes access to some technologies, but also a lot of other benefits. For example, the way Prime bundles in, you know, your free audio and video, the hStream license bundles in 300 free industry-sponsored courses with our learning system. We are selling lots of licenses to hStream when it's bundled with learning, for example. Because of the maturity level of the platform, not all of our applications are technologically leveraging the platform.

We're still in the early stages of rolling out some of the core functions of the platform, like the common ID. Even of our, of our own application suites, not many of them leverage the hStream ID infrastructure, which is the common infrastructure that we're now aggressively deploying. The good news is that particular part of the technology, the hStream ID, is mature and ready to go. Now it's just a matter this year of incorporating it into each product like CloudCME and Rievent and NurseGrid and ShiftWizard. We need to get all of those actually utilizing the hStream ID. This year should be a year of great progress in deploying that common identifier across all of our application suites.

Again, the tools are built and now we're in the kind of almost our own internal implementation cycle. I don't wanna over or underrepresent. My excitement for the platform is very high. It's well-positioned to include a value, a bundle of services in the license, which includes things like free courseware, a discount program, and also, as in the case of Kaiser, some direct access to APIs and functionality that they can pay for. I don't wanna underestimate it or overestimate it. This year will be mostly about connecting our own platforms, our own applications, the next year, that will allow us to report more metrics about, you know, revenue per subscriber, per application that are connected to that application.

Another way to think of it is, we've sold a lot of subscriptions to hStream, and now we're gonna convert them into subscribers. Subscribers are those that view direct benefit from the platform. I hope that kind of discussion just helps frame it up, that the portal is real, the APIs are growing. I expect new APIs to be delivered to the portal, you know, every quarter. Increasingly, internally, our applications are being hardwired to the platform, and each time we hardwire something to the platform, it improves interoperability and functionality. We're in the process of example right now of wiring the license API service into each. For example, won't it be great when you schedule a nurse in ShiftWizard and it checks their license validity in the background through the API?

That's a service we would expect in the second half of the year. Those are just examples to clarify where we are on this platform journey. We are clearly at an inflection point where the platform is manifesting in our business, both directly, as an example, the Kaiser license, and another large customer is using the APIs to power one of their own internal mobile applications, for example. We're beyond the R&D stage, but we're not to the fully deployed stage. And, Richard, to your point, cross-selling, interoperability, like our sales team, I hope every quarter can demonstrate some new functionality. Like, oh, the licenses earned in the learning system appear in the credentialing system, and therefore, there's more benefit to owning both of those from us directly instead of thinking of them as separate SaaS applications.

I know you kind of prompted a question around interoperability and cross-selling, it's a great opportunity to ad-lib a little bit and update everyone on the hStream platform technology, the hStream licenses that we're bundling when we sell applications. The good news is we can sell a license to the hStream platform because it includes a mixture of services and benefit programs and technology. Then a pretty detailed update on the progress for the technology itself. I hope that helped. If I didn't get to your question exactly, just fire it at me again.

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

No, that's fine. It actually got to a couple questions I had in my back pocket here. My final question, if I can ask another one.

Mm-hmm.

-is on the Digital Network Development business. Just, if maybe you could, you know, describe that a little bit better, exactly what that is and how we should think about understanding the financial opportunity longer term there?

Robert A. Frist Jr. (CEO and Chairman)

Scott, you wanna take that for a second?

Scotty Roberts (CFO and SVP of Finance and Accounting)

Sure. Yeah, Richard, this new solution group, being led by Scott McQuigg, as Bobby mentioned on the call, is kind of forming a solution group around the individuals, versus the businesses that we've traditionally done work with over the years. Trying to target that audience more discreetly and specifically. An example of applications that we already have as assets are NurseGrid and myClinicalExchange, both from prior acquisitions. Continuing to invest in those technologies to get more of the footprint directly with the individuals, our end users in healthcare. That will play out over time. Obviously, just kind of paying more attention to it as we head into 2023. As time progresses, I think we'll see some more opportunities arise out of that.

I think just trying to, like I said, get more footprint in that area is our objective for this year.

Robert A. Frist Jr. (CEO and Chairman)

Richard, just building on that. We kind of coined this internal phrase of turning subscriptions into subscribers. If you think of the, you know, 5.4+ million subscription licenses that we sold to hStream, Scott McQuigg's new job is to try to find those individuals as individual consumers over time. For example, we have lots of through a few visionary statements out there that, again, haven't occurred, but they're in front of us under Scott McQuigg's leadership. For example, when a doctor is going through the credentialing process and they need some CME to finish their credential report to show that they've gotten all the CME required for their license maintenance, they may be short a class.

In the new model, we would present them with opportunity to enter their credit card and purchase that class that they're short 'cause we'd know what it was, and we'd be able to recommend it out of our massive library. That would result in a direct transaction in that case with the physician that was originated because they're in the credentialing process at a health system. This monetization of the individuals is an opportunity. I'd say it's a long-run opportunity, but we're beginning to put a little bit of emphasis on it because it allows us to look internally at all the channels and figure out where we might be able to catch an individual as a customer as well.

We have two applications, myClinicalExchange, that are already onboarding professionals as individuals and getting them an hStream ID as an individual. The other thing this implies, as an example, is more of a lifetime journey for people when they, when they become in HealthStream's ecosystem. Our goal is to, when they're not employed, let's say you're between employment, you work somewhere on the HealthStream Learning Center, you leave for a year, you work somewhere else on the HealthStream Learning Center. First thing is to make that transcript portable. That will happen in this technology. The second thing is, between employment, maybe that doctor or nurse wants to check their record, and they're not, a customer through the business use of our software. They, as an individual, they wanna log in with their hStream ID.

The long run vision here is to keep all those individuals themselves as interacting with our e-ecosystem and find if there's financial opportunity there. I would just say we're very, very early to that. I don't expect financial impact, certainly not in the first half of this year. But it's a long run important part of our vision that the platform enables us to think of those individuals as lifetime consumers at HealthStream. We've taken a senior executive early and put him on in charge of thinking of that journey of those individuals. We've moved some of our applications that we call direct to professional applications with CME, which NurseGrid is, for example. NurseGrid is growing, you know, thousands of nurses a week organically. It's doubled its traffic.

Monthly active user number is double when we bought it. All of those nurses are electively, individual consumers of the HealthStream ecosystem. They're downloading the app of their own choosing, and they're using it as a social networking and scheduling management app as individuals. Now we'll think, like, maybe that's a channel for those individuals to begin their journey at HealthStream, whether or not they're in a health system that uses one of our core applications like our HLC. It's gonna be a long journey. I don't expect financial impact in the short run, but we wanted to go ahead and break it out because it's a unique set of business opportunities and challenges, and put it under the leadership of Scott McQuigg, who has a history of building businesses of that nature.

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

Okay. That's very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Jared Haase with William Blair & Company. Your line is now open. Jared Haase, your line is now open. Please check your mute button.

Jared Haase (Equity Research Associate)

Good morning, everyone. Thanks for taking our questions. You know, I guess you talked a lot about, you know, some of the sort of product experience synergies from having, you know, the interoperability across the single platform. You know, in the release, you also mentioned sort of branding and contracting being consolidated as part of this single platform strategy as well. Maybe just a clarification. You know, that's something you think can actually benefit the top line growth profile over time, just in terms of maybe speeding up sort of time to revenue or having a more cohesive message to the market, or do you think of it as more just kind of beneficial to the bottom line in terms of sort of those operational efficiencies? Thanks.

Robert A. Frist Jr. (CEO and Chairman)

Oh, gosh. I hope it's both. You know, we're early to making these changes, obviously, and some of them were position changes. I do think, I mean, obviously, for a while, and of necessity, we operated a separate wholly owned company, and it had its own infrastructure and its own thought, and it had to be built out and become market-leading, the VerityStream company, led by Michael Sousa. In a way, it was kind of a hedge to all the other things that were going on in the company to separate that out and let it be focused on and get it to where it is. You know, as of, you know, really yesterday, we're folding those teams in, we're delayering the brand, so the VerityStream brand will go away.

Customers, a lot of customers of VerityStream, the 600 new customers of VerityStream that bought the VerityStream product called CredentialStream, you know, may or may not have paid attention that it was a HealthStream product. Now it'll become crystal clear, right? It'll be part of HealthStream. All those customers will have a better appreciation as part of the HealthStream vision, part of the HealthStream company. I think that it should benefit both from the operational side and someday from a customer retention, recognition, and hopefully cross-selling as well. You know, it's a little early to tell, but I would expect that operating off of a single master services contract, for example, will make it easier to buy when everything has a very similar structure legally.

We're making that move to eliminate separate MSAs. The VerityStream organization had its own master contract. It'll result in streamlined operations. For example, tier one customer support for a lot of the company will be centralized now instead of having separate tier one data centers or support centers for scheduling and credentialing. I think we'll get operational synergies, and in the long run, let's say, you know, 24 months, we should see it help in the cross-selling and brand recognition for HealthStream and the brand appreciation.

Most importantly, as the applications become more interoperable, which is we're kind of at the dawn of that period, we want them to know, like, you know, there's a reason to buy HealthStream Learning and HealthStream Credentialing because of how they work together. Again, we're not quite there yet. I tried to describe the maturity of where we are on that journey earlier, but we're getting closer and it's time to declare it now. We're gonna clean up branding and contracting initially.

Jared Haase (Equity Research Associate)

That makes a lot of sense. I think maybe just a related follow-up, but specific to the guidance. You're looking at the 100 basis points of EBITDA margin expansion that's embedded in the 2023 outlook. I'm curious how much of that is, would you say, is directly related to some of the operational efficiencies that you announced in tandem with this inflection point of the single platform? How much of that sort of margin expansion is reflective of the natural embedded earnings growth coming from the top line organic growth profile?

I guess, in other words, trying to sort of gauge how much to read into the 100 basis points of margin expansion, as kind of normalized, you know, margin opportunity relative to maybe 2024 and beyond if we think about a longer term model.

Robert A. Frist Jr. (CEO and Chairman)

I'll let Scotty address that. I mean, it's obviously a little bit of both contributing. Clearly, when you delayer parts of your business where you have duplication of leadership, you know, it creates some a more immediate financial leverage. It certainly is important to the impact. I also think just structurally it represents a the long-term vision to continue to move that gross margin and EBITDA margin up. That's reflective of, you know, a lot of our new products just generally have a higher gross margin profile than in our past. I think the answer is gonna be it's a combination of both, but I'll let Scotty maybe chime in a little bit.

Scotty Roberts (CFO and SVP of Finance and Accounting)

Jared, I think without trying to get into specifics of quantifying it, I think that we do expect some of those, you know, synergies to flow through to improve adjusted EBITDA. You know, we're also planning to look for increasing investment in some areas where we need to, like in the hStream platform, and I think I mentioned our scheduling application and then this new area that we just mentioned on Digital Network Development.

You know, we see some costs coming out of the out of the equation, but, you know, we're planning to reintroduce some, you know, new positions in the year as well to kind of, you know, offset some of that savings. There will be some savings that flow through. I did mention that, you know, in the first quarter, we expect to have a severance charge, related to the employee departures, and that's about $800,000. There's gonna be a little give and take, throughout the course of the year, again, you know, we do expect some margin improvement, just through the organic, growth of the company as well.

Jared Haase (Equity Research Associate)

Back in the queue, and congrats on all the updates. Thanks, guys.

Operator (participant)

Thank you. As a reminder, to ask a question at this time, please press star one one on your touchtone telephone. Our next question comes from Vincent Colicchio with Barrington Research. Your line is now open.

Vincent Colicchio (Managing Director and Senior Equity Analyst)

Yeah, Bobby, I'm curious, will there be any meaningful changes in how the sales force is organized and operates?

Robert A. Frist Jr. (CEO and Chairman)

Not now that. Nothing is immediately planned. We've kind of built out the sales force the way we like it last year and, you know, it's broken between account management strategies. I do think there'll. Well, as I said, I'm thinking through. I think that as a result of merging in VerityStream, things like the account management teams will take on slightly new, probably account assignments. We'll think of them again as one set of customers instead of two set of customers. I think there'll be a little of that. Structurally, you know, we have a certain number of account managers. We have a certain number of specialists, and those components and structures remain the same.

We also have what we call BDRs that generate the leads and process incoming leads off of marketing. The way our mechanisms work between marketing and sales is similar. I do think, you know, obviously, for example, the VerityStream sales team was in the market with a VerityStream brand. Like, hey, we're VerityStream, we have the CredentialStream product, and as you guys know, as part of our Provider Solutions segment. You think about all that, like, Provider Solutions, there's VerityStream, there's CredentialStream, and now they'll be entering the market as One HealthStream sales force. The VerityStream teams will carry in a HealthStream business card instead of a VerityStream business card, again, providing more leverage to the brand and visibility to the company.

In that way, there'll be some changes around semantics and positioning. Structurally, you know, BDRs for business development, processing marketing leads, account management infrastructure is similar to the same, maybe some reassignments and the specialized sales teams that go into target buyers like the chief medical officer for credentialing or the chief nursing officer for a lot of our learning products like the Red Cross Resuscitation Program, all that remains very similar. The branding and positioning will I think further the HealthStream position in the market.

Vincent Colicchio (Managing Director and Senior Equity Analyst)

How did it perform in the quarter versus your expectation?

Robert A. Frist Jr. (CEO and Chairman)

Well, I mean, I gave those four examples to show, I think, how we're emerging. You saw Prime Healthcare go from being just a learning customer to being a learning and now an enterprise scheduling customer. I think, you know, it would be our plan to continue that journey to show that in these three application areas, we are the best of breed. To show they're increasingly interoperable and increasingly leverageable. They improve efficiencies when you have more than one of our applications. I hope and expect that it'll cross them and become more a part of the story. You know, if you look at our past, we're more individual SaaS applications and sometimes sold under different brands even.

Now in the present and future, it's entering the C-suite as HealthStream and showing about how these things can work together. Again, we're early, just the quarter end is showing, quote, "how they work together," and not all of our applications are connected technologically to hStream. This is the year for that. Our leadership team has been reorganized around that with the addition of Kevin O'Hara, the Senior Vice President, to lead in the platform as a product. We have a really great release schedule of new capabilities of the platform really every quarter from here forward. I expect cross-selling should pick up, Vince.

Vincent Colicchio (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

Thank you. I'm currently showing no further questions at this time. I'd like to hand the call back over to Robert Frist for closing remarks.

Robert A. Frist Jr. (CEO and Chairman)

Well, I was so glad to get to the part where I could kind of ad-lib and answer your questions because there was so much change in the quarter from the dividend to Eddie Pearson's, I guess I'll call it semi-retirement, to, you know, the structural changes and the branding changes that I was told to say on script. You probably got a little sense that I was reading, reading, and so I kind of was. It was fun to get to your questions and answer them. We're obviously excited about the future, and trying to get to that as soon as we can. Our expectations are steady, a steady ship, with returning some to shareholders, and we appreciate all of you guys following our story and publishing on it.

Thanks, and we look forward to reporting our next quarter earnings. Thanks to all of our employees making all these great things happen. Congratulations on the Brandon Hall Awards. We'll see you guys next quarter. Thanks, everybody.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.