HealthStream, Inc. (HSTM) Q2 2021 Earnings Report, Transcript and Summary

Welcome to HealthStream’s Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. please be advised that today's conference is being recorded. [Operator instructions] I'd now like to hand the conference over to your speaker today Mollie Condra, Vice President, Investor Relations and Communications. Ms. Condra, you may begin.

Thank you and good morning. Thank you for joining us today to discuss our second quarter 2021 results. Also in the conference call with me today are Robert A. Frist Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President. I'd 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 risk and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K, 10-Q and our earnings release. Additionally, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call. So with that in mind, at this time, I'll turn the call over to Bobby Frist.

Thank you, Mollie. Good morning, everyone and welcome to our second quarter 2021 earnings call. A lot to cover there, but I think first contact is important and I want to remind everybody that as the nation moves forward through the pandemic, it's clear that this long journey has grown bumpier in the recent rise of the Delta variant which is causing the 36% increase in the number of hospitalizations. According to the CDC, nearly half of adults in the US have been fully vaccinated and as that number rises we at HealthStream remain hopeful that progress towards beating the pandemic will continue, but we must keep in mind that as our customers are customers are one on the front lines responding to this new spike in the cases. We started today's call, I can tell you that our commitment to helping them improve the quality of healthcare has never been stronger. We were trying to align our interest in energies with our hospital customers and our continuing customers. I'll comment on branch performance for the quarter and the first half of the year. We remain laser focused on growing the company, which is why we were able to deliver another strong quarter with topline revenues increasing 7% and adjusted EBITDA increasing 20% over the same period last year to a record $14.5 million and based on those results, we have updated our financial guidance. We wanted to hit that early in the conference call. We now expect revenue for the full-year 2021 to be in the range of $253 million to $257 million. For context the midpoint of the new range is $5 million higher than the midpoint of the previous range. I believe one of the most remarkable things about this guidance is that we are projecting revenue growth despite a $38.4 million decline in revenue associated with our legacy resuscitation products from 2020 to 2021 and a $4 million to $4.3 million negative impact of acquisition related deferred revenue write-downs. So our teams have done a great job both organically and through acquisitions of backfilling those -- the revenue challenges I just articulated. Additionally, we now expect adjusted EBITDA for the full-year 2021 to increase to be in the range of $48 million to $50 million and that's compared to the range of $40 million to $44 million as announced just last quarter. There were some unique factors however that helped to contribute to the record-setting adjusted EBITDA in the first half of the year, which are not expected to repeat during the second half of the year. For example, in the first half of the year, there wasn’t much travel at all and we do expect to have projected return to travel spend. It was not at the full level of pre-pandemic, but we do expect to see travel begin to recover for HealthStreamers across the country and so we'll begin to see travel expenses come into the modeling as returned in the second half of the year. Additionally, macro workforce trends have made recruiting retention and hiring much more complex [ph] those are more difficult in the last say six months as the macro trends support everybody peeking out from the pandemic and looking around to see if there's an opportunity and no exception how should we both then, it's been a detriment and a benefit to HealthStream this trend of everybody looking for something new. So catch up on our planned hiring, we were definitely behind our plan in hiring in the first half of the year which resulted in improved EBITDA, but we need to reserve the right to catch up on our need to get the people in place that we had planned to have in place in the second half of the year and so we're doing everything we can and our new VP of HR and our recruiting teams are doing a great job adding new people, but our turnover has increased. So second half of the year we expect additional costs in personnel that were unable to net add in the first half of the year. We did have net add, but just not where we plan to be and finally we're committed to increase our investment in our newly acquired scheduling business making it into one business or one focus area in the second half of 2021 and we'll talk a bit about that here at the end of the conference call, but our new guidance reflects all three of these things for example and captures them and that guidance ranges are provided above. So I'll take a moment to comment on our financial goals for 2022 because in the last earnings call for the first time we looked for beyond 2021. As you know we had expected 2021 to be one of our toughest years with a $38 million decline in one of our product lines, but as you can tell, we found a way through that in the first half and so we wanted to get some view into 2022 where we started goals for 2022 and so here's what I can say about those now. Building on anticipate results now for 2021 our goals for 2022 are first to deliver organic high single-digit revenue growth rates and for us that's probably 7% to 9%; second, to achieve approximately 65% gross margin profile, which is fantastic because we have been delivering on that in the last two quarters at 65% gross margin profile, which was the point of several of our traditional business work we've been we've doing in the last three years that we've been talking about and so essentially we feel we've achieved that general approximate level of gross margin profile is a meaningful improvement from our historical gross margin profile and we expect to be able to continue deliver that 55% approximately into 2022. And third, we want to deliver adjusted EBITDA margins of 17% to 21% which is an increase of our previously stated goal of 15% to 20%. So a little bump in our expected taking off the bottom of the range essentially and bumping it up a little bit on our expected EBITDA margins into 2022 of the 17% to 21% and that would be an improvement of our historical norms which hover in the 17% to 18%. So we hope to be able to at least maintain historical, but hopefully have some upside to that in this new range of 17% to 21% EBITDA margins into 2022. Remember these are goals, so there's short of guidance meaning the models are all influx and we might have targets out there, want people to understand we're working to be a growth oriented company, improve our profitability profile and establish what looks to be now a slightly higher EBITDA margins as well. So we'll state those as goals not guidance for 2022, but we thought we would give some context as we look forward. It's not only the contributions of our long-standing product portfolio that give us confidence, but it's the market's enthusiastic response to our newer solutions that it give us the confidence to put forward those kind of objectives and goals for 2022 and the market embrace our resuscitation solution from the American Red Cross and many of our other exciting innovative products that are contributing to our growth with their unique outcomes driven approach, so I want to talk a bit about one of those, talk pretty extensively and we'll more about the American Red Cross resuscitation suite, but today I want to spend a minute on Jane. So Jane is one of these new products, first of its kind in the market. Jane is an AI-driven clinical development solution that uses natural language processing powered by IBM Watson and that's a mouthful, but basically it is a cutting solution to helping assess the competency profile of staff and give them individualized intelligent plan of how to improve not only their knowledge of their work, but their critical thinking ability. So Jane is this truly is our kind of breakthrough expert system, it's kind of like a digital coach, particularly focused on our nursing population and Jane has been recognized industrywide with six prestigious awards from Brandon Hall in the last year and a unique approach through its newly awarded patent. So we couldn’t be more excited about the position of our Jane application set and so a bit of business progress as well. In 2021 we first began offering Jane at scale, our goal was to average one sale of Jane per week and as reported last quarter, we did achieve that throughout 2020. So I believe it's about 52 sales of Jane that were in the books last year, but this year we continue this good momentum in the second quarter for example have 23 new sales of more than one a week during the second quarter alone. So it's good to see that new product gaining some traction in the market. And as customer utilization grows and Jane's capabilities to expand, we report updating you on how Jane is changing the industry. It's a really exciting product and it's more than just a singular product. It's kind of a framework that we can attach more and more capabilities to it so work were excited about Jane. An important part of our strategic and patent focus now and in the last several years has involved these key transitions. We've articulated these three transitions. We use the word transition kind of in a way to infer risk that we were transitioning our business to achieve higher margins and we articulated a story of three transitions over the last three years and each of them had some I guess I'll characterize as major business risk and the great thing about today is I believe we crossed an inflection point where the major business risks what kind of point the substantial [ph] rest of the threat to our business is gone and we're really in the state now, we're trying to assess what's the opportunity behind these transitions. In other words, I think we're through some of the questions for example when we launched the Red Cross Resuscitation Suite program, would it be acceptable? We're beyond the acceptance now. We're in all 50 states hundreds and hundreds of contracts, system adoption and so it is beyond the ex-essential pair of launching new product and it fails in the market. Now the question is how good can it be and it's a better place to be right now. In addition the product adoption of VerityStream. So we built the new platform, the VerityStream platform called CredentialStream Application Set and we launched it. We were excited about it, but you never know how that's going to go and now again with over 400 contracts on VerityStream, the new CredentialStream platform, I think the acceptance of the market or the market adoption and acceptance of as a cutting edge platform we're kind of beyond questioning that. Now it's just a matter of how much market share can we get and our teams are really excited that they seem to be winning really well in the market with the new CredentialStream SaaS-based application. And then finally this third transition, I am trying to retire the word transitioning and just give you operational updates from here forward, but the third transition was about the HealthStream platform and while it's still an im-mature platform it is starting to be the interconnection tissue between all of our application sets and we've proven that some of the core functionality of the platform works for example the Red Cross Resuscitation Suite program takes advantage of the pass architecture to use the identity management and log infrastructure in the past architecture. So we know it works and we're excited to past this point of talking about the transitional risk and just start to provide more normalized operational updates on these three business initiatives now that I'll call them. So a little more detail on each of those but I've covered some already, but on the Red Cross Resuscitation Suite we thought we would share a few milestones on it. As I mentioned we're in all 50 states now. So again product adoption not a question anymore and in fact we've masked well over 0.5 million subscriptions at this point for the new product which is really quite staggering that we've been able to move that much market share to the American Red Cross Resuscitation Suite program really in a very short time since its launch in February of '19. So we continue to be excited about the product and in fact as we think about it, what's really great too is that the portfolio around resuscitation has also expanded and so in February of 2020, we now sell additional product called the Stable program and it's a leading neonatal education program around stabilizing neonates and resuscitation as a component of it and this highly expected program is now available online exclusively through HealthStream and we had strong sales in the second quarter adding to our thousands of subscriptions for the Stable program and again, this is in the portfolio of resuscitation. So not only have we found success with the American Red Cross Resuscitation Suite program, but the complimentary products that can be built around, surround and supportive of that program are beginning to gain traction in the market and so organizations like Akron Children's hospital or Spirits Healthcare [ph] and Ascension Health are adopting the stable program, which is really fantastic to see. So I'm pleased to see diversification of that portfolio area of our company as well as success as the core product, which again American Red Cross. So I've talked a bit already about the operational update on VerityStream, but I thought a little more color would be useful. During the second quarter of 2021 in fact, 42 new customer accounts contracted for the VerityStream application suite, which is called Credential Stream and that brings our cumulative total to well over 400 accounts. These accounts represent a mix of new customers and existing customers who are choosing to migrate from our legacy credentialing and privileging platforms for the new VerityStream application suite. And so some of these customers that we contract in the second quarter are name brands that people may represent a high quality health systems like Sentara Health, Shan [ph] Healthcare at the University of Florida and even Mercy Health System has selected Credential Stream application set. And importantly just it's good to know that all of our new customers, including the ones I just mentioned are coming on to the enterprise solution, the Credential Stream enterprise solution. So it's our top solution and the one that we built as a result of studying and building from the acquisitions we've made over the last say eight years. So we're excited to be gaining traction with that application set. And then finally the Health Stream platform is getting exciting. Now we think of it as connective tissue, almost like an operating system that can help us improve data mobility between applications that HealthStream offers, help us improve portability of data about the people in our ecosystem and so it is exciting to see that we added 180,000 net new Health Stream subscriptions by embedding some access to those technologies into the contracts that we're signing -- the new contractor we're signing. So that brings our cumulative total to 4.52 million subscriptions through the Health Stream technologies capabilities and solutions, which we're really, really excited about. At this time, I'd like to turn it over to Scotty Roberts for more detailed look at our financials and then we'll swing back around at the end and talk about the investments we want to make and some of the strategy and philosophy around our relatively new, we call it the third leg of our stool, but our relatively new scheduling capacity management business. So Scottie I'll turn it over to you.

Okay. Thanks Bobby and good morning, everyone. I'd like to begin my discussion with the highlight of the quarter, which is our achievement of a new record adjusted EBITDA of $14.5 million, which is after setting the previous record at $13.6 million during the first quarter. Having set back to back records of adjusted EBITDA, or raising the full year guidance to now range between $48 million and $50 million, which is up from the previous range of $40 million to $44 million. Before I go over that data guidance in more detail though, let me first speak to the results for the quarter. Revenues were $64.8 million, which is up 7% over last year and included balanced growth within both segments. Revenues for 2021 were impacted by $1.2 million reduction associated with deferred revenue write-downs, which is primarily from acquisitions that we completed during the fourth quarter of last year. Operating income was $3.4 million were down 20%, net income was $2.4 million or down 29% and EPS was $0.08 per diluted share down from $0.11 per deleted share in the prior year. While these GAAP based financial measures experienced declines, our non-GAAP performance measure adjusted EBITDA improved a $14.5 million, which was up 20%. Both of our business segments are contributing to the revenue growth over the prior year. Workforce Solutions revenues were $52.2 million and were up 6.7% and revenues from Provider Solutions were $12.7 million and were up 8.5%. We overcame a nearly $10 million headwind from the Legacy Resuscitation business during the quarter and delivered year-over-year growth of 7%. Revenues from recent acquisitions and organic growth from both segments contributed to this year-over-year improvement. Workforce revenues included $1 million of Legacy Resuscitation in the quarter and also benefited from some non-recurring software license and professional services from our scheduling and capacity management products. When you exclude revenues from the Legacy Resuscitation business, our consolidated revenues grew by 28%, which was comprised of 13% organic and 15% from acquisitions. Our gross margin was 65%, which is consistent with our objective to be in the mid 60% range for the year. As our revenue mix has shifted away from the legacy resuscitation products, revenues from higher margin products are backfilling the top line and providing improved economics. We're on track to maintain gross margins in the mid 60% range for this year and expect to continue doing so for next year. Operating expenses excluding cost of revenues were up 16% or $5.4 million. This increase reflects investments in our core business and incremental expenses associated with businesses that we acquired over the past year, including the costs for integration and transition services, which are expected to conclude by year end. Additionally, we began classifying software expenses related to our production environments under cost of revenues while they had historically been classified as a G&A expense. Our EBITDA margins improved as well coming in at 22.4% compared to 20% last year. Now switching to the balance sheet and cash flows. Our cash flows from operations improved to $24.3 million this year, compared to $13.5 million last year. DSO for the quarter also improved to 43 days compared to 47 days last year. Our free cash flows year-to-date were$11.6 million compared to $4.6 million last year and we ended the quarter with cash and investment balances of $55.1 million, which was down slightly for the quarter while working capital improved by over $6 million. Capital expenditures incurred, which includes capitalized software development were $6.9 million for the quarter and were $11.2 million year-to-date. Now, let's go over updated financial expectations for 2021. We are increasing our revenue ranges and now forecast consolidated revenues to range between $253 million and $257 million with workforce revenues forecasted to range between $203.5 million and $206.5 million and provider revenues forecasted to range between $49.5 million and $50.5 million. We also raised our adjusted EBITDA range to be between $48 million and $50 million. We continue to anticipate that capital expenditures will range between $25 million and $27 million. As we think about expectations for the second half of the year, we anticipate continued year-over-year revenue growth from both segments. As you'll see in our revenue guidance, we expect some levelling to occur in the second half of the year, mainly because the first half of the year included some non-recurring revenues that we did not expect to occur at the same levels. Specifically, this includes the $2.8 million of legacy resuscitation revenues and about $2 million of non-recurring software license sales and professional services projects delivered in the first half of the year from our scheduling and capacity management solutions, which we forecasted to be down in the second half of the year. Looking at adjusted EBITDA, we had a record first half of 2021, which was partially due to some of the non-recurring revenue items I just mentioned. And because we were delayed in making some meaningful investments in sales, marketing and product development that we had anticipated doing earlier in the year and this includes investments in the scheduling and capacity management businesses we recently acquired. One of the reasons for the delayed expenses is that we experienced a higher employee vacancy rate than expected, which created some short-term savings relative to our plan. We've been successful bringing on new employees, but the net additions to staffing that we factored into our previous guidance had not materialized according to our expectation. Our second half outlook assumes that these investments begin to ramp up which will result in lower EBITDA relative to the first half of the year. We also expect certain expenses that were halted by COVID will also come back into our run rate such as employee travel and trade shows. For context, our travel and trade show expenses before COVID were approximately $6 million per year. Finally, our forecast does not include the impact of any potential acquisitions that we may complete during the remainder of 2021. Now I'll wrap up with a few other updates. First our forecast, we're seeing continued improvement in sales and renewals which we've begun to see in our bookings over the past two quarters. Our new sales bookings are up compared to the same quarter last year, which was at the height of COVID-19 and renewals are also performing better than last year, both of which are helping us achieve growth in a year with the now $38 million revenue decline from the legacy resuscitation business. While there continue to be signs of improving conditions, there remains a degree of uncertainty as we still see some delayed purchasing decisions especially for products that are discretionary in our workforce segment. On the other hand, demand for credentialing products has been growing and Provider Solution segment had another strong sales quarter. Again while we're seeing modest improvements, we realize the conditions could change due to COVID. And finally like many companies, we've been operating for the past six quarters without significant business travel and our employees have been working remotely. We are eager to reopen our offices in Tennessee, Colorado and California later this quarter and our employees -- and for employees to have opportunity to see their colleagues in person again. Because our remote working arrangement has been a success, we will be adopting a hybrid work policy going forward meaning employees will be able to work from home or the office and with our larger, virtual workforce we've evaluated our office space needs and determined that we will not be renewing several of our office leases when they expire over the next 12 months. In fact we took this approach with two leases last year and two others already this year. While reducing our office space needs will create expense savings, we do expect having more employees moving away from a city that contains an office will necessitate more travel than these employees had in the past. We will continue to monitor our office space need to make adjustments that we deem appropriate. Thank you and that concludes my comments for today. Bobby, I'll turn it back over to you.

Thanks Scotty. What I'd like to do is talk a little bit about our plan investments and kind of flossing approach to building the scheduling and capacity management business, which is right now the result of three recent acquisitions and so a little lesson from history, if we look back and think about what we've been able to do creating the VerityStream application suite through four acquisitions over eight years and if you think back six years ago, we took these for VerityStream, we took these four standalone companies, we combined them into a new business group. We essentially created a new platform of fifth application sets to migrate those customers to and it's a multiyear journey and it's a story of time and investment that's required to take these wholly separate assets and involve them something that is market-leading and more than the sum of their parts. And so we have a very successful playbook for doing that and if you look at the five-year trajectory of VerityStream and we're really excited to see it emerging out of that kind of storming and forming phase and into a market-leading phase and of course we hope to repeat that with our capacity management and scheduling business. We've recently acquired three businesses really during the pandemic, three of them just I'd say 12 months and we've appointed a leadership team. They've begun identifying where they want to invest. So we didn’t acquire to cut, we acquired to innovate and invest and so we're fortunate to have a team at VerityStream that has created a playbook a detailed playbook on how to make this work and we think we can do it now with our scheduling capacity management business more quickly. But it is important to remind everybody that over the journey, it required increasing investments in people. So again we acquire and create synergies are just the opposite. We acquired and invested in some cases doubling the tech teams and doubling the sales teams and then many years later, which is this last say 18 months, 12 months, we've got to see real traction on what we built in the VerityStream business, the credentials How does he real traction on what we built in the Verity hStreambusiness, the credential stream application. And my goal is to repeat that playbook, almost play by play study, the timelines, try to do it faster. We've learned a lot of lessons and take these three businesses that we've acquired, which are nurse grid, shift wizard and, and sauce, and turn them into a market-leading scheduling capacity management solution and to do that will require investment. So that's why you see in Scotty's guidance kind of reserving the right to increase head count invest in sales and product development heavily in the, in this area of scheduling capacity management. And hopefully sometime sooner than three to five years we'll begin to see market leading innovations emerge in that area and market leading products emerge in that. And in fact, we have strategies is already in place to achieve some early technical integration between the acquisitions that will give them each competitive advantage. But that's why it's important to really study the second half of the year, because while the three transitions are turning into just operational updates and more normalized business risk we're, we're kind of now entering the investment phase in this creation of this new business focus areas, scheduling capacity management. So we're trying to reserve the right to increase our investments in, in those people and products to, to repeat the playbook of Verity hStream. So I couldn't be more excited about where we're positioned and we expect to provide operational updates on the business from here forward. Talk a lot less about transitions and, and transitional risks and, and give you updates on our progress that nurse grid shift was ran sauces. They become kind of a unified product suite and we introduced market leading innovations in that area as well. So wrap up, I'd like to welcome our employees to our new hybrid workplace. We're kind of transitioning from this nomenclature of offices, I think over 11 or 12 leases that are now being reduced down to about four. And we're kind of requiring our offices to be become resource centers that are employees from all over the world can visit and leverage this kind of work anywhere approach helpful with the intense belief and the power of collaboration and human interaction. So we expect to have all employees travel more to gather, celebrate plans, strategic planning in some of these resource centers, but we planned out fewer leases and more kind of resource centers and a much more mobile kind of work anywhere approach to Health Stream. We've been so successful throughout the pandemic of operating. In fact, none of our offices have been officially open for over 14 months or maybe 16 months now. And I feel like our teams haven't missed a beat and I know they're exhausted and working hard. And hopefully we come up with new policies to reflect the flexibility that they desire, but also generate the market leading solutions that we desire as an organization to deliver. So I want to thank our employees for navigating these challenges and pushing us forward to the last 16 months and their commitment to improving the quality of healthcare by developing the people that deliver care continues to be demonstrated consistently. And the challenge of pandemic seemed to have brought out the best in everyone. It helps train. And so I'm excited to be the reporter on their progress and accomplishments, patents, and awards, new work styles, and new customers they're bringing in. It's all very exciting to, to recognize and be the person who can report on the progress of our now nearly 1100 person team. Thank you. I'd like to turn it over for questions at this time.

Thank you, sir. The question-and-answer session will begin at this time.[Operator Instructions]. Your first question comes from the line of Richard Close with Canaccord Genuity.

Yeah. Thanks for the time and taking the question. Congratulations on the results. Just curious on the hiring, investing in hiring and you guys discussing turnover as well little bit higher than we're expecting in the first half. Can you talk a little bit about the hiring environment? Obviously specifically here in Nashville, I assume you guys are looking for technology people, it seems like a pretty competitive marketplace, a lot of tech moving into the city here, with Amazon and eventually Oracle and, and whatnot, but just curious in terms of, if that's increasing the wages that you guys would typically bring on tech people here in Nashville?

Sure, sure. Glad to comment on that. And so you're right to observe that we're subject to the same macro forces that everyone seems to be discussing. And what I think is happening and we look at our own workforces, everyone is kind of now right in their head up after 16 months of this new work style and some just want a change for the sake of change. And, and we have people saying, we love HealthStream, but we want to try something new. And, we've had a lot of people leave and come back over the last decade. So we're, we're encouraging people to find places that they really like. And so we are seeing an increased turnover rate that -- that said, we're the benefactor, because I think we have this fruitful culture that people read about and want to be a part of. And so we've been able to also win hearts and minds of lots of new employees. That's kind of the net additions haven't been as high because the turnover. And so it's just an interesting dynamic. We're getting all these new, highly energetic employees coming into the company while some of our employees are also seeking new and exciting experiences for themselves. So we have been able to net add meaning more, obviously more people coming in and going out. But it has been a little bit more tumultuous than, than in past really decades. And we think it's just a natural outcropping of, of kind of the nature of the last 16 months that people want to look at new and fresh horizons. That said, we think we have this wonderful, attractive culture that people come through now. And the cost sample we were talking about this what's really fascinating is right now, if you take the last hundred that have left in a hundred, we've added, we haven't seen a material increase in the cost of adding a hundred back, which means we're largely at market. And our job offers, we've seen a few areas of pressure. We've seen some people leave that are taking on more responsibility in new roles, and they're, they're telling us they're getting higher pay when they leave. But we've been able to fill the positions they're departing from at similar salaries. I do expect just broadly upward pressure on costs and compensation. But so far we haven't seen significant changes for any given position of someone departing when it been able to fill them in a reasonably tight window within the salary bands. In the tech work specifically you're right. Nashville is, is kind of a blooming tech hub with Oracle announcing a major campus expansion here in middle Tennessee or in Nashville specifically. And I think though the tech workforce is evolving to keep up with it, the number of people moving to Nashville because it's a great place to be is improving and so we've had lots of good applicants into our positions. Again, we need to slow down the people that are picking their head up to look into opportunity. I do expect, I guess I would call it at this point, a slight upward pressure on compensation in some roles. But large, that thing when people are leaving, they're leaving to take on increased responsibility at a new workplace and therefore making more money. Haven't seen necessarily wage inflation in specific roles that may change as we worked through the cycles of, of what's happening in the economy here locally and across the company across the country. But, but right now I guess I'd characterize it as slight increases in costs on a per position basis.

Okay. And just a couple of questions maybe for Scotty with respect to the comment on the $6 million travel and trade show expense in the pre-COVID world and you're talking about second half. Some of that's going to come back. Is there any way to ballpark that? I mean, are you going to be at half of that $6 million or?

Also just, I don't know about the trade shows yet, but we were talking about trap and we've budgeted essentially a very incremental return. So for example, I think we have about 250,000 in the third quarter and about $0.50 million in the fourth quarter. So you can see there kind of a growing run rate, we could be way off, we could convene all of our employees in November and then that could cost more. But -- but you see going from kind of nearly zero and zero or the first half, I think it was sub a hundred thousand, the whole first half and travel alone returning to now kind of our targeted budget would be around [indiscernible] 250 in the third quarter, 500 in the fourth quarter. So, again those are kind of budget placeholders and we don't know exactly what the new normal is. And eventually I expect travel budget to exceed where they were because the new mobile workforce, we may require employees to commute in, to one of these resource center slash headquarters to have strategic planning retreats and that could be more costly. And --and, but hopefully the offsetting a reduced rent we'll, we'll help pay for that. So that's what we mean by kind of scaling it up in the second half. And -- and again, those are just kind of placeholder numbers, but we wanted to give you, I wanted to give you a sense for where we're headed or what we're thinking. And --and of course, we'll, we'll tell you if we end up spending more or less than that, but-- but that's kind of where our heads are right now.

Okay. That's helpful. And then Scotty, I think mentioned some sort of shift in expenses up into cost of services. If, if you guys could just go over that again. And was that something that happened in the second quarter? I'm just trying to understand why the gross margin was a little bit higher, 66ish. If I'm not mistaken in the first quarter and then take down to the 65, obviously 65 is-- is great and all that, but was it that shift in expenses that, you know, was the primary contributor to that?

I'll, let you know now that on the head, Richard, that -- that's kind of exactly what happened. There's a kind of allocation of expenses from G&A to cost of revenues.

And what specifically was that?

[Indiscernible]

Software. Okay.

Software, isn't it? I think we kind of covered it as production environment related, not for licenses.

Okay. That's helpful. That's helpful. Thank you. I'll jump back in the queue.

Your next question comes from Ryan Daniels with William Blair.

Yeah. Good morning. This is Jared Haase on for Ryan. Thanks for taking my questions. I'm just wondering to stick with this theme of headwinds on the hiring and retaining front. And I imagine specifically that that's a similar theme within your client base in terms of hospitals having kind of the same issue around attracting or retaining talent as well. So just curious if there've been any changes from HealthStreams perspective, either you know, thinking from a product development side or maybe on the marketing side with how you message your value proposition to hospitals that, you know, trying to help them deal with, you know, hiring issues or maybe provider burnout, some of those themes?

Yeah, I think it's a great point. I mean, we are positioned as being supportive of developing and retaining and the, the workforce. And so we, we believe and try to demonstrate that our products and services result in higher engagement employees and that we also believe fundamentally that offering health systems that offer their employees kind of career development and new skills and capabilities and assessment tools will be favored employers. So some of them are seeing that light and beginning to invest in and invest back in their employees through their develop continued development. We also see opportunities maybe around things that are focused on the psychological wellbeing and have some products in that category that are kind of newly offered related to, to helping employers. The hospitals and health systems and home health and a continuum of care providers that we have in our customer base build their relationship with their employees through their continued development. And so we, we do use that as a form of positioning and we believe that our products have those impacts.

Got it. Yeah, that makes sense. And, and I think I just want to another quick follow-up in Scotty, I think you mentioned in your prepared remarks you know, kind of calling out an improvement both in, in bookings, as well as renewals. I'm curious, would you kind of characterize that as sort of market-based girl sort of along that theme of hospitals looking for solutions like this or do you feel like that's more indicative of maybe some competitive takeaways or you know, maybe some big, you know, a more competitive solution on the marketplace, just given all the investments that you've made over the past couple of years?

I think it's probably all the above. I mean, it's you know, I think we did experience some growth over last year, but last year you got to keep in mind was, was in the beginning of COVID the second quarter of last year. So the comparisons are, are difficult to interpret because of that, you know, COVID factor. But we had some nice wins in the quarterly announced that, you know, in our press release a nice American red cross win with prime healthcare. So I think we're still seeing some, some good wins across the board, but, you know, things, we were looking at comparisons or still kind of getting back into the pre COVID levels of sales production.

Okay. Thanks. That makes sense. I'll hop back in the queue.

Your next question comes from the line of Matt Hewitt with Craig-Hallum Capital.

Good morning and congratulations on the quarter a few different topics. I got a couple of questions on first up regarding the guidance that the revenue guidance for the year, I'm looking at the first half of the year, your guidance, essentially at the high end implies that it's basically flat second half versus first half, so not seeing a lot of lift. Is that a function of where we're at with the pandemic and the Delta variant and everything that's going on and maybe hospitals not being able to hire at the pace? But as we look at next year, I would assume that hospitals are going to need to start hiring again, and then hopefully are able to find the employees so that in its self should drive some incremental growth. Is that a fair way to think about it?

No matter I would probably say, you know, one of the factors that's going to result in some of the levelling is just those declines that we discussed. There's the legacy resuscitation. That was $2.8 million. We know pretty confidently. That's not going to be anywhere near that. It's going to be almost zero in the second half of the year. And then we also have some, non-recurring what we call one-time revenues from the scheduling and capacity management business that we just don't have enough history of kind of projecting some of those one-time software sales, which are almost immediate revenue recognition as they're delivered to the customer. So that's some of the, kind of the, the change in some of our second half outlook. I think, you know, some of the factors that you mentioned more broadly speaking about customer, you know, turnover and some other challenges I don't know if that's factored into kind of the way we're projecting our sales production necessarily, but it could be something that either could be a detriment or a benefit to us, depending on which direction and challenges they face.

Okay. Fair enough. And then Jane, it sounds like you had a really good quarter with the number of new additions. I'm just curious if you could update us on the pipeline there. Obviously that's been years in development and seeing that starting to ramp as is pretty exciting. So any update on there on Jane that is?

I don't know if you'd want to take that question?

Matt. I don't know if Bobby is on, but I think, just --just the, kind of the story there as we continue to see, you know about one sale a week that has been our objective you know, deal sizes vary, you know, we had a nice win and Q1 wouldn't say that we had a repeat of that in Q2, but we continued to gain traction. We'd like to see more adoption and penetration of it, but it's one of those products that I would put in that discretionary bucket. And so I mentioned that know, we still see delayed purchasing decisions from customers, kind of in that type of category. It's not mandatory, it's not required. And so we still see some hesitancy in some of the buying decisions there, and I put that product in that category, but even with that, as a challenge, we're still able to accomplish our objective of one sale a week.

Okay. That's great and then one last one for me, as you were talking about some of the incremental expenses coming back at you, you talked about the travel given the new workforce environment. But I'm curious as you start to think about conferences historically HealthStream has held a pretty big user event there in Nashville, maybe not so much this year, maybe it will, but more likely in fiscal '22, if we get some somewhat back to normal, would, would you expect that in what quarter would that would that fall in? And I only asked because it is typically a larger expense that kind of stands out?

Thank you, Bobby and tackle. Somehow I got booted out, but that conference, we actually stopped having pre pre-pandemic and went to smaller, more regionalized conferences or meetings of different scale. And so and spread them out more over the year and across our different business lines and business solution groups. So we, we have, we abandoned that singular large conference model, even pre pandemic, and don't currently have any plans to return to it. And it built into our marketing budgets. I guess I'd call smaller regional conferences and, and, and what we call a user group meetings. So we kind of strategically shifted several years ago and don't plan to return to the single large conference model. Regard to other costs I wanted to kind of update my thinking on the cost of turnover and new positions, because I don't want to understate it. I characterize it as slight increases in pay. I guess I'd changed that to moderate and want to think about it in certain roles different forms of compensation than, than we've had. So for example, in our sales organizations we're finding that other people are paying higher basis. We don't think that they're going to make more money because we have strong commission plans, but we have had the purchase in sales reporting higher base salaries than we pay at HealthStream. Again our sales teams typically delivered great sales results and their total compensation based on variables, on commissions has always been really strong. So we actually doubt they will make more money going to new roles but have heard reports of that. And then I'd just say, I'd upgrade from slight to moderate increased pressure on hiring everywhere else on cost and it is true that we did discuss this over the last 100 hires. We have largely been able to fill most of those roles within a similar band of costs as we had previously had in staff and so that statement remains true, but I would upgrade my pressure on pay to go from slight to moderate and I would say that in some areas we're experiencing maybe a changing nature of compensation may be less variable comp and more base where the market is headed in sales structure. So we'll see how that plays out and we always think again our team they have been well rewarded in total compensation based on those strong commission earnings, but we'll see where the market takes us on that. So hope that helps this contextualize the questions around labor and labor force because I don’t want to understate it. There's a lot more turmoil in the market with people just generally getting up and looking for new experiences. We think HealthStream is going to be a net benefit factor, benefit from those trends but still it's hard to ignore the amount of people they are looking for kind of new trajectory in life.

Your next question comes from the line of Steve Pointer with Cantor Fitzgerald.

Hi. Good morning, just a housekeeping question, you talked about $2 million of one-time software license that was in the first half correct? Can you give us what the impact was in the quarter?

Steve, the $2 million reference is combination of software licenses and some larger professional services projects that had milestones completed in the first half. Looking at the split between Q1 and Q2, it's pretty evenly split to almost a million in each quarter.

[Operator instructions] Your next question comes from the line of Vince Colicchio with Barrington Research.

Yeah Bobby are you seeing any signs or pockets of the caution on spending due to the new variant or is it too early to see that?

It's too early we've heard reports of course of the spikes and we heard that they're getting busier. What I would say is the larger health systems and hospital systems, universities, they've learnt to operate in the crisis mode and have learned to resource better and so it's not like the first few ways where all surgeries were shut down. So while there is disruption with a surge or a spike I don't think it's the same as was round one and two when there were surges that through people out of operating mode and shutting down elective surgery. So while we have plainly see some deferred purchasing, a little less focus on elective things, products from vendors. I'd just say in general, people are trying to define the new norm or the new norm includes handling surges in patient cases related to COVID. That doesn't mean there won't be pockets of the country that are overwhelmed by it. I do think that will happen. Some are not as prepared as others to handle it and so we will see some that will have to shift their full attention, but broadly I'd say particularly the bigger health system, the university health systems are much more prepared to handle spikes in COVID cases.

And a couple of questions on Jane. You had said I think that Jane is largely used for nursing. Is it solely used for nursing, that's one clarification and then where does some of the other opportunity you talked about with Jane?

Well, I think you just hit it. It is largely focused on nursing skilled, nursing careers, different departments of nursing help them transition from one department to another. There are other assessments and tools built into Jane, but expanding and to cover other types of positions I'll say home health aides would be kind of expansion opportunity. But in addition expanding to handle more of the other functionality that could be important versus reminding them of their schedule to do so many things we can do with Jane and the technology we've built around it as a kind of an open platform, open framework that we can extend that adding new types of assessments in new categories for new types of employees would be more of immediate ideas for expanding Jane capability. It is largely and most appropriate for nursing workforce, which has represented about 40% plus of the subscriptions in our HealthStream network.

Okay. That's my last question. Nice quarter.

Thank you.

There are no further questions at this time. I'd now like to turn the conference back to management.

Thank you. Look forward to reporting these operational updates in the near future and thanks to our employees for delivering a great first half result.

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