HealthStream, Inc. (HSTM) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the HealthStream Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mollie Condra, Vice President, Investor Relations and Communications. Please, go ahead, ma'am.

Thank you and good morning. Thank you for joining us today to discuss our second quarter 2020 results. Also on the conference call with me are Robert A. Frist Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause 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. So with that start, at this time, I'll turn it over to Bobby Frist.

Thank you, Molly. Good morning, everyone, and welcome to our second quarter 2020 earnings conference call. In our last conference call on April 28, we stated that the number of confirmed COVID-19 cases in the U.S. was projected to soon reach over 1 million. And that actually happened the following day on April 29. Since that time, the number has more than quadrupled, now exceeding 4 million and the number of deaths in the U.S. is now approximately 150,000. The CDC reports over 500 of those deaths were healthcare workers. At HealthStream, we've never been more resolute in our mission to support the U.S. healthcare workforce, the heroes who are literally putting their lives at risk to provide care to others. I want to start this call the same way we started our last call, by acknowledging and sincerely thanking healthcare workers the world over. Thank you. Unfortunately, many of the ways we characterized the pandemic in our April call continue to apply. The impact of COVID-19 has been widespread, rapidly evolving and generally characterized by uncertainty. In attempt to contain the spread of COVID-19, authorities have implemented measures that have resulted in quarantines, travel bans and restrictions, shelter-in-place orders, the promotion of social distancing and limitations on business activity among other actions. While many cities and states have elected to gradually lift some of these restrictions, the results have been discouraging, as summer has progressed with 44 of the 50 states currently experiencing increasing rates of infection. Several with record high levels of hospitalizations and deaths. These measures in the pandemic have continued to cause significant economic downturn in the U.S. and globally. Directly relevant to our business is the adverse impact the pandemic is having and will likely continue to have on the healthcare industry. Our business is focused on providing workforce and provider solutions to the healthcare organizations along the continuum of care, such that an adverse impact on the healthcare organizations is likely to result in an adverse impact on our company. We do not believe that COVID-19 had a significant negative impact on our revenue during the first six months of 2020, but we expect it will in the remainder of this year and potentially next, due to lower expected sales volumes, as customers delay or defer buying decisions. As you know, in a multi-year subscription model, such as ours, decreased sales volumes in the current period generally lead to negative revenue impact in future periods and that is what we currently expect. Customers are showing receptivity to a shift from on-site visits to virtual meetings and product demonstrations and there continues to be interest in our product offerings, but sales will continue to be impacted, while the budgets of healthcare organizations are impacted by COVID-19. The extent and duration of this impact continues to depend on the extent and duration of the pandemic. It all starts with our customers, healthcare organizations who are being adversely affected by COVID-19 on a number of levels clinically, financially and operationally. For much of this year, significant sources of revenue from services such as elective surgeries were grounded to a near halt due to restrictive measures, including core teams and shelter-in-place orders. Although, many organizations are now allowing some elective surgeries, the recent surge is jeopardizing any financial comeback. On July 1, the American Hospital Association reported that hospital financial losses for the full year 2020, net of CARES Act funding, are projected to be $323 billion. Losses from July 2020 through December 2020 are expected to grow by a minimum of $120.5 billion, adding to the $202.6 billion in losses from earlier this year. Driving the losses are lost revenue due to declining volumes of both inpatient, 19.5% average decline, and outpatient services, 34.5% average decline, as well as absorption of additional cost for PPE and other COVID related operating expenses. Many hospitals are reporting they did not think that they would recover to pre-COVID-19 baseline volume levels by the end of 2020. According to Becker's Healthcare more than 260 hospitals and health systems have furloughed workers in recent months and dozens of others have implemented layoffs. Becker's Healthcare also reported on July 9th, that only 6,700 hospital jobs were added in June after seeing 161,000 jobs lost in April and May. And of course, this is relevant to us because our products are subscription based so we have to watch these numbers closely. One consequence of hospitals reduction employees may prove to be fewer number of employees contracted with us in their renewal contracts as they gradually come up for renewal. Unfortunately, it is unknown how long conditions associated with the pandemic will persist or whether they will deteriorate further. In light of these adverse developments experienced by healthcare organizations, we are continuing to monitor the ability or willingness of our customers to pay for our solutions in a timely manner, implement solutions they have purchased from us and renew existing or purchase new products or services from us. So all three of those dimensions are the things that we monitor essentially weekly across our customer base. Scotty will speak to cash collections and implementation delays during the CFO report, but I would like to go ahead and talk about sales and renewals. Both continue but at a slower pace and with the uncertainty as to when customers and prospects will broadly return to pre-COVID levels of buying decision making. This should come as no surprise given what our customers are dealing with during this time. In fact many customers are not allowing -- are still not allowing sales representatives on-site until COVID-19 can be better controlled. While we have been able to close deals across all of our solutions' sales teams, we are experiencing person decisions being put on hold temporarily or deferred to later in the year. Given the uncertainty surrounded the adverse impact of COVID-19 is having on the healthcare industry and our business, we shared with you in our last conference call that we have taken certain expense management measures which have had a positive impact on our financial results in the second quarter. These actions include indefinitely postponing and potentially foregoing increases to base salaries including executive based salaries, limited hiring on critical positions, limiting the company's 401(k) match, requesting key vendors of ours to allow payment term extensions without penalty. We are continuing to monitor developments regarding COVID-19 pandemic and may undertake further expense management initiatives if we deem them necessary. Despite COVID-19, business continues. It is important to note that our direction and strategy remain the same. The pandemic and its consequences necessarily slow the rate at which we might proceed otherwise, but we are making progress along the same business strategy. I therefore want to provide an update with regard to the three business transitions that we introduced and discussed in previous calls. All three transitions are designed to move us towards being a higher margin more profitable company in the coming years even though the impact of pandemic is likely to extend these transitions longer than we had previously thought. First, we've transitioned our sales and marketing efforts from the legacy resuscitation products to a new simulation suite of offerings and expanding suite as well. As a reminder, the new Red Cross Resuscitation Suite program is comprised of BLS, ALS and PALS competency-based development curricula. We launched them in January of 2019. It brings the curriculum brings an updated highly adaptive competency-based development solution to healthcare professionals. It offers certification to healthcare professional successfully demonstrating proficiency and life-saving resuscitation knowledge and skills. Our customers' focus has necessarily shifted in the last several months to respond to developments related to COVID-19 and treating COVID-19 patients. We have continued to see some new sales. In the second quarter for example, Ardent Health Services signed for the Red Cross enterprise-wide for the 30 hospitals and 180 clinics. We had organizations throughout the continuum of care contract for these solutions as well including the Minimally Invasive Surgery of Hawaii and strategic behavioral health organizations. Given some customers' preference to proceed with training and implementation our team created an innovative studio where virtual instruction could be provided. Customer feedback on our ability to accommodate their preference to stay on schedule using virtual training as a component of their implementation has been positive development where they've rated these experiences on average of 4.5 out of 5. In February, we announced the expansion of our resuscitation offerings with a stable program a leading neonatal education solution. This highly respected program is now available online exclusively through HealthStream. We're encouraged to see buying activity during the second quarter of this wonderful program. Additionally, the stable program further diversifies our portfolio of simulation offerings. The second transition involves the adoption and migration of our new VerityStream platform. In the first quarter of 2018, we announced the launch of VerityStream, our new platform for managing credentialing and privileging in healthcare organizations. During the second quarter of 2020, 30 customer accounts were contracted for the VerityStream platform, bringing our cumulative total to 258. These customers represent a mix of new customers and existing customers who chose to migrate from our legacy credential and privileging platforms to the new VerityStream platform. The sales success realized in the last half of 2019, created an implementation backlog, resulting in longer implementation cycles for our customers and our time to revenue for VerityStream. Some of the customers we contracted in the second quarter include Bon Secours Mercy Health, PeaceHealth and Phoenix Children's Hospitals to name a few. The third transition involves our customers upgrading to the hStream platform, which is the essential technology working behind the scenes that powers all activity in the HealthStream ecosystem. In the second quarter, we added approximately 87,000 net new hStream subscriptions, bringing our cumulative total to approximately 3.5 million subscriptions. I want to remind everyone that these three business transitions all represent multiyear journeys. In fact to provide perspective, last quarter I said that we were about 15 months into a 36-month journey. Given the unknown associated COVID-19, especially it's duration, it is hard to predict with certainty how much time will be added to the journey. But at 18 months in, I can say we continue to make real progress on all three transitions. At the end of these journeys we still expect a higher margin more profitable company. In fact in Scotty's report, you see a reflection again of an improvement in gross margins. I'll let Scotty tell you more about that. We are fortunate to have entered the pandemic with a solid balance sheet no debt in the $50 million credit facility that remains fully available to us. Rather than being in a liquidity crisis we believe that we are well-positioned to continue allocating capital to invest in the future of the company. For the time being that means maintaining capital investments in product development and pursuing an active M&A strategy. I believe last quarter we said we were pausing our M&A program briefly. And so this is the official re-announcement that while we always maintain relations and evaluate opportunities, we're going to work to be more active again in our M&A strategy at this time -- and in our investment strategy. At this time, Scotty Roberts will provide a more detailed discussion of the financial metrics for second quarter results along further comments with how we view our financial outlook for 2020 given the COVID-19 pandemic.

Thank you, Bobby, and good morning to everyone listening in today. I'll begin with the highlights of our second quarter financial results and then cover the COVID-19 impact further. For the second quarter, revenues were down 5% or $3.2 million to $60.6 million. Operating income was up 90% to $4.3 million. Net income was up 43% to $3.4 million. Our EPS was $0.11 per diluted share compared to $0.07 per diluted share in the prior year and adjusted EBITDA was up 2% to $12 million. Revenues from the Workforce Solutions segment totaled $48.9 million for the second quarter and are down 7% versus the prior year. This decline was primarily influenced by the expected reduction in the legacy resuscitation products, which decreased by 31% or $4.8 million and were $10.7 million this year, compared to $15.5 million in the prior year. We anticipate revenues from these products will continue declining and will approximate $8.5 million in the third quarter and $6 million in the fourth quarter and then become zero, thereafter. Revenues from all other Workforce products increased by $1.3 million and included a $1.8 million or 5% increase from our platform and content subscriptions. But this was offset by a decline of $0.5 million in professional services. Revenues from the Provider Solutions segment were $11.7 million and grew by 3% over the prior year. This growth came primarily from the December 2019 acquisition of CredentialMyDoc, while revenue growth from the new VerityStream product contributed as well but on a smaller scale. The implementation backlog we mentioned last quarter has begun to improve. The contributions to revenue from the backlog were not significant this quarter. Our gross margins improved to 62.1% compared to 58% in the prior year, which marks the third consecutive quarter that our gross margin has exceeded 60%. This improvement is primarily a result of the reduced revenues from the low-margin legacy resuscitation products and revenue contributions from other higher-margin products. Operating expenses excluding cost of revenues were down 4% or $1.4 million from the prior year. And the prior year did include stock grant over 800 of our employees that was facilitated by our CEO and that resulted in a $2.2 million stock compensation charge. We experienced lower operating expenses resulting from cost control measures and precautions in response to COVID-19 such as travel restrictions, freezes to employee salaries and lower trade show expenses due to event cancellations. We estimate the impact of our cost control measures benefited the second quarter by approximately $1.7 million. Offsetting these favorable expense items though were approximately $1.1 million of expenses related to the CredentialMyDoc and NurseGrid acquisitions, which were not present in the prior year. These factors led to our operating income improving by 90% to $4.3 million and adjusted EBITDA improving by 2% to $12 million. The impact of the $2.2 million stock compensation charge in the second quarter of 2019 had a more positive impact on the growth in operating income for the second quarter of 2020 than it did on the growth in EBITDA and cash flows. Our cash and investment balances ended the quarter at approximately $144.5 million, which is up from $142 million last quarter. And working capital was approximately $106.2 million. Cash flows from operations were $13.5 million compared to $36.6 million in the prior year. Our days sales outstanding were 47 days, which is the same as in the prior year, but rose from 44 days in the first quarter of 2020 as we've been experiencing slower payments from customers as a result of COVID-19. While our cash balances increased by $2.5 million during the quarter, our cash flows from operations were impacted by lower collections compared to last year which is due to the decline in legacy resuscitation revenues and billings as well as lower new sales, some implementation delays and slower payments caused by the financial strain that COVID-19 is having on our customers. Our capital expenditures during the quarter were approximately $4.3 million and are $8.3 million year-to-date. We remain strategic in our approach to capital deployment during these uncertain economic conditions. And continue to seek opportunities for capital investments that align with our initiatives and business principles such as new product development and enhancing our hStream capabilities. Last quarter, we announced the authorization of a share repurchase program of up to $30 million of our outstanding common stock. To-date we have repurchased approximately $10 million pursuant to the program. The repurchase program will terminate on the earlier of March 12, 2021 or when the maximum dollar amount under the program has been extended. We may suspend or discontinue making purchases under the program any time and we plan to closely monitor factors such as market conditions, our liquidity, working capital and cash flow projections when making decisions regarding the program. Now I'd like to provide some details on how the COVID-19 pandemic has impacted our financial results and operations thus far and our outlook going forward. As a reminder, we decided to withdraw our 2020 financial guidance last quarter because of the uncertainty about the extent, timing and duration of the COVID-19 pandemic may have on our operating and financial results. We continue to believe that the extent timing and duration of COVID-19's negative impact on our operating results and financial condition will be driven by many factors including the length and severity of the COVID-19 pandemic and the impact of the pandemic on economic activity particularly with respect to healthcare organizations. As a result of the unpredictable and evolving environment related to the COVID-19 pandemic, at this time we cannot reasonably quantify the impact that the pandemic will have in our operating and financial results in 2020. Due to this continued uncertainty we are not reissuing 2020 guidance at this time. During the first quarter, the pandemic began causing unprecedented disruption across the country as infections were spreading in major cities, schools and universities closed, unemployment rates rose to their highest level since the 1930s, states that were implementing shelter in place orders and many companies began working from home. Many healthcare providers were restricted from performing elective surgeries and procedures, were experiencing rising costs and even furloughing their employees. Now four months later, after attempts to lift shelter in, place orders and reopen businesses, the rate of infection seems to be growing faster each day and many of these trends are not showing signs of improvement. While many pharmaceutical companies are developing and testing vaccines and medications to treat this disease, the time line for a possible vaccine and antiviral drug or other successful treatment is difficult to predict. Until meaningful progress is made on this front, the social and economic impact may continue to stagnate or deteriorate further. As Bobby mentioned earlier, the projected financial losses in the hospital segment of healthcare are projected to exceed $300 billion in 2020. This negative outlook is likely to have a downstream effect on other segments of healthcare and service providers within the healthcare industry. Through the second quarter, the impact of COVID-19 did not have a material negative impact on our revenues, operating income or EBITDA. Although, we don't anticipate this will continue to be the case. Our subscription revenues are mostly generated from sales that occurred in prior periods and from renewals of existing contracts. Because of the contractual nature of our subscription revenues, which are generally for multiyear contracts, we have not experienced significant declines resulting from COVID-19. Since March, we've been monitoring the impact that COVID-19 is having on our customers and how it impacts our sales activities, implementations and collections. While we have been able to achieve new sales and renewals, our bookings are lower compared to both the prior year and versus our sales targets for this year. Because our customers are under financial strain, they have become more focused on managing their expenses including reducing discretionary expenses rather than taking on additional spend. In some cases, they have also reduced their workforce through layoffs or furloughs. Additionally since mid-March, our sales teams have not been able to travel and conduct on-site meetings with customers or attend trade shows, although they have been successful conducting virtual meetings and remain in active dialogue with customers. As a result, we are seeing delays in purchase decisions of our products, especially for products our customers view as discretionary to them. Also, if the layoffs and furloughs made by our customers become permanent, we may experience declines in subscriptions and revenues upon renewal of their contracts. While we have experienced a negative impact from implementation delays related to COVID-19, these delays have not been consistent across products or across customers. Our Provider Solutions business segment has in some instances been more sensitive to implementation delays than our Workforce Solutions segment, as a result of complexities associated with implementing certain of the solutions offered through the Provider Solutions business segment. As I mentioned earlier, our DSO increased to 47 days this quarter and our cash flows from operations were down compared to the prior year for the reasons previously stated. While we have experienced slower collections, we did not experience any material bad debts or customer bankruptcies this quarter. If our customers' financial condition continues to deteriorate, we expect it will negatively impact our cash flows. On the expense side, last quarter we began implementing expense control measures, such as freezing salary increases to all employees including executives. We deferred hiring most of new budgeted positions. We restricted employee travel and rescheduled trade shows and customer conferences. As a result of these cost control measures, our operating expenses for the quarter were favorable compared to prior year by approximately $1.7 million. We view these cost reductions as short-term benefits to our operating performance. And we expect at a minimum then to extend into the third quarter but could be even longer. We're not sure if and when these expenses will return to normal run rates. We also believe the cost control measures taken to date are prudent and are prepared to take additional cost-saving measures should the circumstances deteriorate further. We think it's important to responsibly manage expenses and maintain adequate access to capital while striking a balance to pursue investment opportunities for growth and innovation. To support these objectives we maintain a strong balance sheet including $144.5 million of cash and investments and full access to a $50 million line of credit facility, which remains untapped. We continue to make internal investments. And have several new products in development that are moving forward. We also continue to evaluate M&A opportunities and minority investments. And while we did not have much share repurchase activity in the quarter, the plan remains active. We believe these initiatives remain in the long-term best interest of shareholders and the company, though we will continue to evaluate them in connection with COVID-19 related developments and adjust them if necessary. That concludes my comments for today. Thanks for your time. And I will now turn the call back over to Bobby.

Thank you, Scotty. I'd like to close up with a few quick remarks here. First I'd like to let everyone know we remain focused on the safety and well-being of our 900 employees. We required our entire workforce across the country to begin working remotely, from home on March 16th. And we continue to work remotely to-date. Our employees are doing a really fantastic job in working from home, as all operations are continuing smoothly. So I wanted you to know a great sense of accomplishment in our employees keeping our operations smooth and current. I credit their outstanding abilities and commitment and the strong culture we built at HealthStream. An important foundation of our culture is our constitution, which includes the values that we call our employees to reflect in their work with customers and each other. One such value is our streaming good value. Our constitution states as good corporate citizens we strive to create a positive social impact, on the communities we serve including our own workplace environment. We believe every employee has the responsibility to enact good works for others. During the second quarter, I believe our value of streaming good was realized company-wide in at least a couple of important areas. First, beginning in February of this year our customers began using our proprietary technology platform to offer and deliver COVID-19 training and education courses, to their staff as they began to prepare for the COVID-19 patients. In March, as we previously reported, we made available to all caregivers, free of charge, a curated library for proprietary content and to our customers, the bundle of cross-training courses to further their staff's preparation to develop safe and effective care to COVID-19 patients. To-date there have been over 2.3 million courses completed across our platform which includes the self-authored COVID-19 courses and this free library of resources. It's really an outstanding impact by our organization, and our efforts, and some of our partners that contributed to these pre-resources. We believe we're having a positive impact. And clearly, one thing we see is the individual healthcare workers are seeking to self-educate, beyond even what their organizations require, and as they enrol in these COVID-19 courses. Nurses comprised the largest number of those taking these courses, and the area within the hospitals with the highest utilization of the emergency room and emergency departments. I thought you'd find that interesting, which is obviously where the crisis is. It's gratifying to see our customers use these solutions in this way, and at this scale to prepare and mobilize the healthcare workforce. Our value of streaming good has also been demonstrated with our strong commitment to social justice and racial equality. During the second quarter as everyone knows, the pandemic was the only major health line and headline in the news. The events spark from the death of George Floyd included nationwide protest and renewed national dialogue on race and diversity. Our employees created a group called Stream Forward. It is actively developing new initiatives to further support our commitment to diversity, equality and inclusion to employees in all other communities that we serve. We consider the nation's healthcare providers our customers to be one of those communities, while we already have several course offerings related to diversity and cultural competency. We are currently looking to add quality content to this important area, for our customers. We believe there is significant need in this area. And we look forward to sharing updates with you on our programs, with this effort in mind. Both of these developments related to our employees streaming good, is made possible by the strong culture we built. I'd like to ask Mollie Condor to tell you a little bit more about that. And share some news with you.

Thank you, Bobby. During the second quarter Bobby Frist challenged employees in a virtual town hall meeting, to go to comparably.com and provide a review of our company, comparably.com is a publicly facing site where employees rate their companies. So over 530 reviews were submitted, which included over 11,500 ratings. I was pleased to see that we scored an A, in work culture, where 97% of HealthStream employees call their work environment positive. And 99% of them say they look forward to interacting with their team every day. Last week, comparably.com announced their national Best Places to Work Awards. I'm pleased to tell you that HealthStream was recognized with two awards, the top CEO for diversity, where Bobby Frist ranked number 22, out of the top 25 CEOs and top CEO for women where he ranked number 37 out of the top 50s. These awards were based on over 60,000 companies' employee responses. Our employees were honored that our company's CEO was recognized in this way as he was listed alongside many other CEOs from some of the nation's largest companies, including companies like Amazon, Google, Microsoft and ADP. So with that in mind, I'll turn it over to Bobby to close.

As we continue working remotely HealthStream's employees are rising to the occasion as we battle against the pandemic. I began this call by thanking healthcare workers, and I'd like to end this call by thanking HealthStream employees for the great job, they're doing in supporting those healthcare workers on the front line. Thank you all. At this time, I'd like to turn it over to questions for the investor community.

Thank you. [Operator Instructions] Our first question comes from Ryan Daniels of William Blair. You may proceed with your question.

Hey, good morning. This is Jared Haase in for Ryan. Thanks for the questions. Just wanted to ask one about the hStream subscription metric. So it looks like that was up sequentially from the first quarter, but at maybe a slower rate than what we had seen in recent periods. So, could you maybe just talk a little bit more about the dynamics there. Should we just think about that more as just kind of slower new additions on its clients and health systems are sort of balancing other priorities at the moment in the short run versus maybe churn related to layoffs and things like that already starting to flow through the platform?

Yeah. I think it's a little hard to discern the exact reason, but definitely a lowering in velocity of migrations or say switching from the older platform to the new one is an element of it. There would be some churn in the number as well as, since it's a net number, but I think that's maybe less significant than – there is a group of variables all grouped together. I don't know how to tease out the difference in the COVID impact, which would be more forward-looking than the migration. So what I would say is that maybe implementations have slowed and there's some churn in the number as well. I don't know, if that helps but those are – both variables are part of the number obviously it's in that number.

Yeah absolutely. No that is helpful. Thanks for that. And then yes maybe just a quick follow-up. So just you obviously you talked a little bit about the challenges that persist in the selling environment implementations and that sort of thing. I was hoping maybe we could just dig in a little bit just on the trend line that you saw over the balance of the quarter. Maybe how things shaped up in the June time frame, and how things have continued to progress in July maybe relative to where we were back in the March-April time frame, when all this kind of started.

Yeah. It is really interesting. As Scotty mentioned that, we're kind of – we're below our prior year sales velocity from a contract order value standpoint. We're also obviously below our targets for this year as we sit here at the midpoint of the year. We feel like a lot of that is delayed decisions meaning our sales team and we look at the absolute value of the pipelines. The pipeline still looks strong. There's still – no one has said, we're absolutely not going to do this. It feels more like deferrals to me. But you just – you don't know. All we do know is that, we're behind our goals and we're behind last year. But again when we assess the total pipeline it feels like the opportunities are still in the pipeline across – broadly across our solution sets. So with an abundance of caution, we're essentially re-forecasting and projecting a negative impact on sales velocity through the remainder of the year. In the last month of the quarter, we saw some good signs. As we mentioned, clients seem more willing to take virtual meetings to get more accustomed to it virtual trainings on implementations. We did see a catch-up in the backlog of implementations for VerityStream. And so we're seeing some positive signs. Also, we announced the system-level purchasing of the Red Cross solution by Ardent Health, and we thought that was a good sign of vitality. And so it's very regional as well. That's another comment worth noting. We have a strong presence across all states in the country, particularly strong in Texas and Florida. And so, one kind of concern now is that Texas and Florida two of the most impacted states in the last say month, and so trying to figure out if their operations will be consumed now. And we have spoken to some CEOs and senior officers and actually have some on our Board that operate inside big health systems. And one thing, they see is a little different in the last month than say three months ago, was there's a bit more time to prep after watching what's happened in the east -- northeastern parts of the country. They're trying to maintain some sense of operating at redline consistently while maintaining some elective surgeries. And so, it seems to me that no one is fully shutting down the elective components of their health systems, at least not right now. And I view that as a different dimension to the problem than say, 90 days ago, where the initial reaction was to stop all elective surgeries. So, as you can tell, it's a mixed bag of impact, which results in uncertainty in the withholding of guidance. But, we did see some signs of life enterprise level purchasing, increased receptivity to virtual meetings and in the pockets of the company to return to some purchasing in general, and catch up on implementation backlog. So, I hope that helps characterize it. We're trying to keep our pulse and our finger on the pulse very closely. Scotty talked a little bit about cash collections. And we feel pretty good about that, although they're again down from the prior year.

Yeah. That is -- that’s very helpful. Thanks for all that color.

Yeah.

Thank you. Our next question comes from Matthew with Caraig-Hallum. You may proceed with your question.

Good morning and thank you for taking the questions. I guess I want to follow-up a little bit on the Ardent Health contract. Obviously, the situation with COVID and you talked about some of the challenges that you're facing, yet you're able to sign a pretty notable win. Could you talk a little bit about the sales process, maybe what made this one unique? And is that something that you could replicate with other hospitals and health systems?

Well, we're doing what we can to highlight the benefits of this new program, that's exciting. We think it uses a superior learning methodology. We're trying to make sure that it's economically beneficial as well. And so, organizations have budget in this area historically, because it's -- well, it's not a mandate, a legal mandate to do this kind of training. It's become a best practice and a standard to make sure that everyone has these skills. And so, we think we have a very innovative comprehensive solution that is economically viable, and that can be part of the variable decision as well. And so for all those reasons, we still have, as I mentioned, we really have good pipelines in lots of areas of our business that product being one of them. Getting everyone to sign is a different thing than getting them to review the opportunity and then getting them implemented is yet another challenge, given they could get swamped in operations and not be implementing new systems. But, like you, we were encouraged by that time, because it seemed to be the right financial decision, the right quality improvement decision, and the right initiative for their organization at this time.

Understood. Thanks, and then maybe one separate question. You pointed out in the press release and then you addressed it on the call here today, the lower travel and conference related expenses. Obviously, we don't know where the virus is going to go from here. But as you look out, maybe over the next six to 12 months, is it your expectation that those expenses will stay at this lower level? And has it almost created if you will, a new normal or even once we're past the pandemic, where many of these types of situations could end up, being conference calls or being Zoom meetings or what have you versus going back to the face-to-face?

Yeah. They -- so, first of all, on the continuation. I guess in this call, we provided some clarity that that expected savings run rate was about $1.7 million from those specific containment measures we took, would persist at least into the third quarter. We can't project much further beyond that, because if some opportunity presents to travel again, we might seize it. And the reason for that is that we have a very strong account executive management program, and we're really working hard to become trusted advisers to the organizations as they train and develop and retain their critical workforce, and so that trusted adviser role we think is often best played out in person. And we'd like to see the ability some day for our people to travel again. And so, we don't know the new normal. I would say, there is because of the rapid adoption of the virtual tools, there's a lot more familiarity and receptivity to that type of meeting. So I will imagine that as we enter next year, the new normal will result in an increased utilization of those technologies in the sales process, the relationship building process. And you're right, we may not return fully to the travel levels that we had in the past. But I would expect travel to return. Hopefully if we can get through some of the pandemic and get some vaccines out there people have a little more confidence in travel. But it is -- I have no ability to forecast or predict that. I would just say through Q3, we expect to maintain our prohibition on travel and we'll announce again soon thereafter about how we're handling Q4 and Q1 based on then current conditions. There will be a new normal though that will probably result in less travel eventually once travel begins again.

Okay, great. Thanks.

Thank you. Our next question comes from Richard Close with Canaccord Genuity. You may proceed with your question.

Great. Thank you. Congratulations on the recognition you mentioned at the end. With respect to the gross margin, obviously, strong performance there, I think you said three quarters above 60%. I'm just curious if you can breakout maybe not specifically, but through some commentary. How much do you think that is from the ramp down of Laerdal versus maybe the other higher margin products that you mentioned? And are these products -- higher margin products just mostly the new resuscitation products or any others that you can talk about?

Yes. Certainly the primary dynamic is the roll off as you saw I think about a $4.9 million decline year-over-year or quarter-to-quarter of the legacy resuscitation products that are some of the lowest margin products in our portfolio. So clearly the loss of those revenues is going to change the gross margin. That said, there are many initiatives small and large that contribute to the blended improvements and we've talked about some of them. A lot of them won't manifest for longer time periods. For example the VerityStream migrations eventually consolidating to one platform will definitely have a lower cost to operate a single platform than five platforms, so we anticipate as we mentioned hopefully a constant improvement, may bounce down a little bit quarter-to-quarter but kind of a steady profile improvement of our gross margin capabilities as an organization. But you're right to point out the primary dynamic is both the new sales of the Red Cross Suite where we enjoy a little better margin and the drop-off of the legacy resuscitation products.

Okay. And then with respect to renewals, I guess based on the commentary that you really haven't seen a negative impact from COVID yet on revenue, some on bookings or sales. As we think about renewals, is there anything to note in terms of renewals, in terms of the layout as you go from first quarter to fourth quarter? Are most renewals -- do you have a greater percentage of renewals that maybe come up in the second half? And then once a renewal is signed, and let's say they signed for a lower number of employees does that immediately go into effect, or is there some sort of slower ramp down?

Yeah. If they were to renew and sign a new contract, it usually is at the end of term and so it usually would result in a shift to the new economic conditions whatever they would be. So if there's a lower count, it'd be a lower census billing at that time. From a renewal pattern standpoint, historically I think we've articulated our contracts range between three and five years. I know it's a broad range, but it's important though it is not a one to two year cycle, which would mean roughly one-third of our base would come up each year. It's relatively -- there are some bigger accounts, the top 10 accounts factor that maybe sometimes they'll lump the couple in one period or if we skip the year with a light, relatively light renewal of a top 10 customer. But in general they're pretty well distributed. If there was a slight weighting, it would be to the second and fourth quarters where we tend to get slightly increased sales. So over time result in a slightly higher renewal period in the second and fourth periods. But in general, it's fairly well distributed both across large accounts and across time. Maybe a slight modeling of a higher renewal periods in the second and fourth quarter. And then -- and so that's probably the best I can characterize it. It's fairly well, I mean the network is broad enough that it's fairly well distributed. We might have an anomaly where say two of our top 10 customers come up in the same quarter every once in a while, but it might be once every 24 months instead of heavily weighted to any given quarter or period. Q – Richard Close: And then just thoughts on M&A. I know a good amount of M&A over the last three, four years or so have been on the Provider Solutions side. Obviously, you had the NurseGrid and Workforce here recently. But as you think about M&A and reengaging as you mentioned beginning now, I guess this quarter from the pause is there a preference? I mean is the Provider Solutions fully flushed out now so you'd be focusing more on adding on the Workforce or just any thoughts in and around that?

Yes sure. It is interesting. We're finding through the hStream infrastructure, there are lots of logical extensions to how we define our ability to impact the workforce engagement, workforce retention, workforce development. Of course, maintaining the credentials and privileges is a certain area of expansion as well. So I think in general, as we get more and more of our organizations migrating to the hStream platform it opens up our definition of how to extend our model in logical not tangential but logical business extensions. And so idea here is moving to one over time, one common infrastructure that allows us to extend where credential improvising was just the first logical extension. And some of the themes of course needs to relate to the healthcare workforce needs to relate to the retention engagement development and management of them or their workflows. So we think there are a lot of interesting ways to extend the model. Right now, for example in Workforce, our investments are focused on content development and investment in companies that bring us some content assets where we can co-own to help improve our margins. We've mentioned that in prior calls. In fact, we did make a small minority investment in the quarter. We'll be talking about that coming. It's very small but it's indicative of the type that was into kind of a content asset. And so maybe more of those software applications that extend functionality that touch on the workforce. We're really excited about what we've done with NurseGrid and how it may ultimately complement our e-portfolio tool set that we're building. And so I guess you just have to wait and see but we have a lot of exciting ideas on how to extend this model as it relates to the U.S. healthcare workforce their management development retention and just in general their workflows. One slightly new dimension to the model is this NurseGrid application. It's the business to professional direct. So as we think about having millions of people in a network, they've mostly been consumers through their organization. So their organization has been our primary customer that employs them. I think in the next several years, you'll start to see us have the end user as a customer as well and so watch for that NurseGrid is kind of the beginning of that concept. Q – Richard Close: Great. And my final question is about a year or so ago, you guys talked about and this might be with the hStream, but I think moving from the hosting aspect of your business, I forget whether it was Azure or Amazon which one you were using. But there was some duplicate hosting costs. Can you just talk about when -- is that still ongoing or when that would be expected to end?

Yes. That would be one of the longer-term say 24, 36-month improvements in gross margin. Right now, we're having to invest and ramp-up in all areas both unfortunately the hosted environments that are -- they are still full web SaaS-based but we manage them ourselves. And the pure SaaS PaaS environments in Azure and Amazon's web services we use actually both of those. So right now, those duplicative costs are going to be in the model and probably persist for at least another year. Q – Richard Close: Okay. Great. Thank you so much.

Thank you.

[Operator Instructions] Our next question comes from Vincent Colicchio with Barrington Research. You may proceed with your question.

Yes. Bobby, I'm curious, have you seen a significant increase from last quarter to now in terms of a portion of your client base looking for better payment terms?

I'll let Scotty kind of characterize that, because he's been dealing with that. But in general, it hasn't been as much as I thought kind of overall. But maybe Scotty if you could comment a little bit on customers and their request for payment modifications?

Yes. Vince, it's been there. We definitely have received requests from customers, but it's not been widespread across our customer base. It's been concentrated to a smaller group and it's -- sometimes it's customers that are national accounts size customers, sometimes it's small customers. So it's not something we're seeing every day, but we have been very accommodating to customers to kind of hear their story, listen to their concerns, and try to work with them the best we can. But it's definitely had a slight downside to the collections in the quarter, but some of those are accommodations we had made and some of them are just customers continuing to slow pay, because of the conditions that they're working within.

Okay. Thanks for that. And one more Bobby. Wondering are you seeing better pricing in the M&A market, or is -- are things reflecting sort of the overall equity market?

I think they're reflecting the overall equity market. I haven't seen any material changes yet. A lot of businesses are still assessing, I mean, some obviously were immediately impacted by COVID where they just -- some types of business, but a lot of the businesses we look at are subscription businesses. It's a little hard to tease out the short, medium and long-term impacts on our businesses. So they're holding on to their valuations from what I can tell now as best they can. The next couple of quarters, I think could re-synthesize the market to multiples, but don't know until we get there.

Thank you.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Robert Frist for any further remarks.

Thank you all for participating in our second quarter earnings conference call. Look forward to reporting the third quarter and updating you on our business conditions. Thank you to all HealthStream employees for delivering an amazing work result and financial result and kind of hunkering down with us to get through this tough time. Appreciate their contributions to overall to our success and forward momentum. See you guys on the next earnings call. Thanks. Bye.

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