Ladies and gentlemen thank you for standing by and welcome to HealthStream's Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] It is now my pleasure to introduce Vice President, Investor Relations and Communications Mollie, Condra.

Thank you and good morning. Thank you for joining us today to discuss our Third Quarter 2020 Results. Also in the conference call with me today are Robert Frist, Jr., CEO and Chairman of HealthStream; and Scott A. Roberts, CFO and Senior Vice President. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning 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 to that start, I'll turn it over to Bobby Frist.

Thank you, Molly. Good morning, everyone, and welcome to our Third Quarter 2020 Earnings Call. I'd like to start this morning by commenting on some exciting news. On October 12, we announced our acquisition of ShiftWizard. It's a Raleigh, North Carolina-based healthcare technology company. It's a really exciting company. It provides award winning SaaS-based enterprise class solution for scheduling and workforce management to healthcare providers and healthcare organizations. Really excited to welcome ShiftWizard's customers and employees to HealthStream effective October 12. Really exciting day for that in this new capability to HealthStream. The additional ShiftWizard expands our growing portfolio of solutions for nurse and staff scheduling, which began earlier this year with the acquisition of NurseGrid. We believe the complementary positioning of ShiftWizard and NurseGrid will enable integrations that yield even smarter schedule management and enhance the nurse engagement. Together, ShiftWizard and NurseGrid create a solid footprint in emerging area for the company -- the area of enterprise nurse and staff scheduling. I look forward to sharing our progress on that front in the coming months, and in a moment Scotty Roberts will provide more details about the acquisition. Let's back up a little bit and shift to the broader healthcare landscape and healthcare news. Just come contextual for all of these results are of course an update on the COVID and we're in a tough time right now. The number of confirmed COVID-19 cases in the United States more than doubled since our last earnings call. There are now over 8.6 million cases and over 226,000 deaths, which include over 1,700 healthcare workers. At HealthStream, we continue on our mission to support the U.S. healthcare workforce, the heroes who are literally putting their lives at risk to provide care to others. One way we live this mission during the…

Hi, good morning to [ph] everyone listening in today. The discussion of our financial results will be for continuing operations only and comparisons will be against the prior year third quarter unless otherwise stated. For the third quarter, revenues were down 3% or $1.6 million to $60.9 million. Operating income was down 16% to $3.1 million. Income from continuing operations was down 24% to $2.6 million. EPS from continuing operations was $0.08 per diluted share and was down from $0.11 per diluted share in the prior year. And adjusted EBITDA from continuing operations was down 3% to $11.1 million. Revenues from the Workforce Solutions segment totaled $49.2 million for the third quarter and were down 4% or $1.8 million compared to the prior year. Revenues from the legacy resuscitation products declined by $3.7 million while revenues from all other workforce products increased by $1.9 million or 5%. This increase was comprised of $2.6 million or 7% from growth in platform and content subscriptions that was offset by declines in professional service revenues of $0.7 million or 43%. Revenues from the American Red Cross Simulation Suite Program, which includes both subscriptions and simulation equipment also contributed to the third quarter revenue growth. -Revenues from the Provider Solutions segment totaled $11.7 million for the third quarter and grew by 2% over the prior year. This growth came primarily from the December 2019 acquisition of CredentialMyDoc. Our gross margin improved to 61.7% compared to 59.4% in the prior year. The improvement in gross margin was due to changes in revenue mix, including growth in higher margin products in the Workforce Solutions segment and less revenues from the low margin legacy resuscitation products. We are pleased to have achieved and exceeded the targeted gross margin of 60% that we set forth earlier this year.…

Thank you, Scotty. Before we get to questions, I'd like to take a few minutes to highlight how well HealthStream employees are managing our operations while working remotely due to the pandemic. Whether it is selling without travel, supporting customers using virtual technologies or closing an important acquisition, they have not missed a beat. Their commitment to our vision and to our customers is a testament to their outstanding character and abilities. It truly serves as a sign of a thriving culture that they've built across HealthStream. One example of our culture is the incredible involvement in our corporate social responsibility program, which we call Streaming Good. Undeterred by the pandemic, our employees were able to hold a virtual relay for life event in September, which engage hundreds of our employees and raise money for the American Cancer Society. Our employees have also demonstrated a strong commitment to social justice and racial quality. They have created an employee-led group called Stream Forward that is actively developing new initiatives to further support our commitment to diversity, equity and inclusion to employees and to all the communities where we serve. As an example, they have developed in our launching a new course called managing unconscious bias which we are providing free to customers. As we continue working remotely, HealthStream employees are rising to the occasion as we battle against the pandemic. I'd like to end this call by thanking all HealthStream employees for the great job they're doing and supporting the healthcare workers on the front line. I know it's appreciated by the frontline workers, we hear from them and I'm appreciative of our employees making this all happen. At this time, I'd like to turn it over for questions from the investor community.

Thank you. [Operator Instructions] Your first question comes from the line of Ryan Daniels with William Blair.

Hi, good morning. This is Jared in for Ryan. Thanks for taking the questions. I was just curious, obviously appreciate that it continues to be a tough environment to sell into. I was hoping to just get a little bit more color kind of on the sales cycle activity in sort of the demand environment and maybe some of the trends over the course of the third quarter and then if you started to see any of that change maybe more recently here to start the fourth quarter, just as we've obviously seen coronavirus cases start to pick back up and that sort of thing.

Yes, sure. A couple of ways to characterize it. We did share a little that earlier in the call. First on the, say, the resuscitation suite products really encouraged by the velocity and volume of the new sales there. Our teams have adapted the virtual selling and virtual implementing very important to not just sell but be able to get these products alive. I believe we announced 57 new accounts in the 90-day period. So good trajectory and velocity on the Red Cross resuscitation suite program. Some of the bigger purchases of elective products which we're really excited about I think the industry changing are getting deferred and pushed forward. I don't think we're losing those opportunities. I think they're getting pushed forward as they've dropped in priorities as hospitals execute COVID strategies and adapt their operations. We have seen some of the sales of more elective products get pushed in the future but again, the pipeline remains strong. They're just deferred, delayed or not taking calls on those topics at this time. I think where the products line up directly with the current needs, we've seen a huge surge in use of our platform for the COVID-related courses and hopefully as well in the DEI Diversity Equity Inclusion courses so we see great utilization of our platform and network during this time but related to the sales pipeline some deferral are taking some of the deals and pushing them forward. I think we also talked about the VerityStream velocity and momentum. I believe it says 47 or near 50 new accounts in the quarter as well. So really good velocity of new closings on the credentialing privileging platform with some big account wins and we round off a few of those on the call to show acceptance and adoption of the new platform. That said, across our broader suite, we see some deferral decision makings on some of the elective say continue education programing. We have our new Jane AI platform, which we think is industry changing. We've seen some good uptake of it, but some of the bigger deals got pushed as they got pushed forward in time. I hope that helps to characterize it. It's a complicated time because we're adopting and adapting our sales methodologies. Customers are adopting and adapting their implementation methodologies and they're re-prioritizing the order in which they buy things, and we've seen a little of that and the deferred pipeline is being pushed into the future.

Now that makes. That's helpful color and then maybe just I'll tack on one quick modeling related question. It looks like -- I appreciate the gross margins were up year-over-year and it sounds like most of that was due to kind of product mix and that sort of thing. It looks like it was down just a little bit sequentially from the second quarter. Just curious if there is any kind of unique dynamics to call out there that's more just kind of revenue mix driven or anything worth calling out from a gross margin perspective for the third quarter.

Yes, it's going to be a revenue mix issue, maybe a little more than expected in some product categories like the old legacy products I think performed a little better in the quarter, than maybe we had forecasted earlier as they run off to zero in Q1 of next year. So I think it's going to be a product mix that has a margin mix implication but Scotty do you do want to add anything to that?

Yes, probably, just the other factor would be the supplemental payroll payment that we mentioned that was taken as a charge in the third quarter that would have been disbursed throughout the P&L but would have had an impact on the increase in cost of goods sold as well.

Okay, great, thanks for that color.

There are no other questions? Back to the operator.

Yes. I'm showing our next question comes from the line of Matt Hewitt with Craig-Hallum.

Good morning. Thank you for taking the questions. Maybe first up on ShiftWizard, you look over the last few years, you've got NurseGrid, you've got credentialing now you're adding ShiftWizard. As you look out over the next, call it three to five years, how do you see or what's your vision for taking these different programs, applications and combining them, how do you see this playing out?

Sure, so we're pretty excited about it. I think if you think of our origin as a company in learning and development right we're very strong, we have a great learning platform it's highly penetrated in the market and it's a strong SaaS application. Then we move strongly through three or four acquisitions into credentialing and privileging and then created a new platform to begin to move those customer to that so credentialing and privileging kind of being a second leg of growth opportunity and defining our capabilities and opportunities. Now I think scheduling being a third so NurseGrid and ShiftWizard together we think can feed one another's growth and create a third confidence, a third leg of the stool, if you will, of our capabilities in scheduling and kind of schedule management. We're really excited about how those two play together because it's kind of taking the B2C application roll that nurse seem to really appreciate helping nurses schedule through the NurseGrid app and bringing it next to and hopefully connecting it to the B2B enterprise management capabilities of ShiftWizard that was noted gaining market share and had a really great platform very excited about that. One way to think about is these three areas are now competencies, evolving competencies of the Company and we're working our best and hardest to connect them all through the hStream platform technology. Now this will take time, but what it will do is allow us to leverage data across the application suites for example nurses are probably the largest consumers of all three of those application sets learning and development and we're really strong in nursing development and training. Credentialing and privileging is more physician and provider, but over time there may be services that can target the nursing core and then…

Thank you. That's really helpful. Shifting gears, the number of hStream subscribers accelerated sequentially was up almost 10% versus Q2. Is there anything to read into that or was that maybe some customer decisions have gotten deferred in the second quarter, they came back now and have signed contracts and is there some type of a backlog that you have built up because of the pandemic or was this just more contracts that were up for renewal and it was an unusually large quarter of that?

Yes, it was a little more of the latter, but it's also the fact that multiple platforms are connecting to hStream and adding users in new ways. For example, as we sell those new VerityStream platforms that includes access to certain hStream through their contracts access to some of the hStream benefits and the hStream platform so we're adding new users through more connectivity as we get more of these applications tied to some of the functionality of hStream or some of the benefits that come with licensing the hStream platform. There are more ways to feed it and grow it but in addition, it's tied largely right now to the renewal cycles and so if we have a larger set of renewals up and they move from the older platform in the new contracts and new platform. So there's a little bit of a mix of both, but I'd say it's weighted towards the renewal cycles.

Understood. All right, thank you. Then maybe one last one here, quick. I'm not sure if this is right for Bobby or for Scotty but the $1.9 million. I completely appreciate it. I think it's important to recognize your employees during this time, but is there a tax benefit or is there a reason why you would just be a one-time here, we're going to give you this payroll boost or versus doing a normal like pay raises that were foregone earlier this year? Was there a difference?

Yes, it's a little tricky. They're both communicated to employees what's happening and why we're doing it and explained to you guys as well. So here's our whilst being approached. We asked our employees and executives to forgo their base merit rates as we call them that's generally a little better than cola and so that as a run rate expense has been eliminated and we didn't want to put those back in because they, of course, has a compounding effect as we enter next year and we're uncertain about next year. Well we look at our financial performance in the short run and realize that we could afford to have the one-time payment without increasing the base run rates so essentially we'll enter next year with a lower base rate, which I think is protective of the future, but we were able to financially afford to kind of get some of that hard-working recognized by our employees that are doing such an incredible job during COVID. In other words, treating it as a one-time expense I think was the right thing to do for the quarter. A lot of this incredible work is done by our teams. We've had restrictions on hiring and lower the merit increase. We took that away this year. So we're trying to manage our run rate expenses and keep them from compounding given the uncertain future but also recognize the excellent work in the quarter so we made it a one-time expense.

That makes sense. All right. Thank you.

Thank you. Our next question comes from the line of Steve Halper with Cantor. Your line is now open.

Hi, just two questions. Going back to ShiftWizard, how should we think about the necessary investments that you need to make there and what sort of timeline to get that onto the hStream platform and narrow the losses and really start to crank up the contribution from that business?

Great question. These two NurseGrid and ShiftWizard were both kind of growth stage relatively low revenue compared to the rest of the organization but nice growth opportunity and we do have a lot of technical work to do there to get it to leverage hStream platform, but we're going to be able to grow up before that type of curve occurs [ph]. So the real short-term investments will be in sales and marketing. Both those organizations had very small or relatively small sales efforts even though they were gaining ground and market acceptance so growing monthly active users for NurseGrid, which has by the way, continued to grow since the acquisition and new customer acquisition for ShiftWizard through their award winning platform. Steve, I think the key is going to be in the short run. We're going to try to double, triple the sales organizations, maybe I think cumulatively probably had four people across both orgs probably take that up to 10 to 12 by year-end. As you can tell it's a meaningful investment has long-term benefit, but short term hits. There will be increased technology investments as well. We've already started to make some of those NurseGrid and then over time, we'll have to increase those investments to essentially reconnect those platforms to the hStream. I can't give you that yet, but we'll be working on that plan with our CTOs across the company to come out with a good investment plan, but I do think we can increase their growth philosophies by adding salespeople in the short run because their products are really wonderful products that have been well received by the market. Just limited reach because they are smaller companies. We're going to try to give them more reach.

I appreciate that. Just switching back to Q3 trends in terms of bookings and the impact on 2021. Can you sort of identify sort of what changed from Q2 to Q3 because I'm assuming Q2 was pretty soft as well? It's just, do you have one more quarter of the current environment to say with some certainty, yes now, it's going to impact 2021 or did something specifically change?

That's a great question. Generally, as Scotty pointed out the fourth quarter is a pretty big sales quarter. I think what we saw in the third quarter is some of the bigger, I guess, I'll call them elective deals got pushed into the fourth quarter and maybe even into the new year as hospitals weigh their budgets. The interest though we didn't see go down. There is definitely a 90-day injection of kind of a no-talk zone where everyone was figuring out like they wouldn't accept salespeople into their places. We weren't really all spooled up to do the virtual demos and sell products and implement them virtually. There's definitely kind of I think of it as an injection delay where the pipelines all kind of got pushed to 90 days. I think you're right. I think fourth quarter, we're going to learn a lot about which how much normalcy has been achieved back in the health systems as far as purchasing patterns and so we weren't able to reinstate guidance yet, but I hope that again fourth quarter is a little more heavily weighted for the year so given those uncertainties we just have to get through this fourth quarter and see how it lands. We are projecting, kind of what I guess relative budget shortfalls and what we call new order value or contract guidance for the fourth quarter, just to be conservative. The pipelines are there but again at the end of the third quarter, we start to see some of the, I guess, I'll call them elective deals get pushed forward and so we are going to have another 60 days of uncertainty. I think once we get that in we'll have a better sense for what next year is going to look like.

Great, thank you.

Thank you. Our next question comes from the line of Vincent Colicchio with Barrington Research.

Bobby, what does pricing look like on some of your contract renewals?

I'd say it's holding steady. We haven't really commented on that but we're getting better bundling services that have some discounting to them, but in general, I think that's a strength of an ecosystem when you can bundle up some value and add it. But in general, I would say the unit pricing on some of the core products is maintained and they're also competitive meaning they're already competitive with the market and the price points where we are entering. So I feel pretty good about our pricing positioning.

Do you have any data on how employment trends -- how employment levels are trending with your client base?

That's a great question. I haven't seen any updated data in a quarter or so. We are going through a little phase where there were some furloughing and we've seen a lot of that return. I think about 200 organizations announced some form of furloughing and layoffs. That said, some of these systems came through some of the bigger ones and added people. Also, there is the secondary markets or the ancillary or we call the continuum of care markets, the pre and post-acute markets have seen a growth in payroll like the home health market so those companies are growing. The blend of all of that I think we're adding healthcare workers across the board. There is a little scare there for 90 days to 100 days with furloughs and financial viability concerns but it feels to me like we're going to see employment growth in these spaces again.

Thanks.

Thank you. I'm showing no further questions so with that, I'll turn the call back over to CEO, Robert Frist for any closing remarks.

Thank you for participation in the call. Thank you to our employees for the incredible results in the last -- really this entire year has been amazing to watch them transition to work from home and bring customers along the journey. We'll see you guys in the next earnings call which will be in February and look forward to exciting news even between now and then as we wrap up the year. Take care, everyone.

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