HealthStream, Inc. (HSTM) Q3 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to HealthStream's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you, and good morning. Thank you for joining us today to discuss our third 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 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 could involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC including Forms 10-K, 10-Q and our earnings release. Additionally, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. The 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 start, at this time, I'll turn the call over to Bobby Frist.

Thank you, Molly. Good morning, everyone, and welcome to our third quarter 2021 earnings call. I think context is important as we start the earnings call, so I'm going to give a brief update on our perspective on coronavirus. The coronavirus pandemic in the United States appears for the moment to be in retreat, and particularly in the markets where we practice and in the business where we operate. Since the start of September, daily cases have dropped by one-third and daily hospitalizations have fallen by more than one-fourth. And according to the CDC, approximately 58% of eligible adults in the U.S. have been fully vaccinated. As of October 22, as that number - as of October 22, as that number rises, we are hopeful that progress towards beating this pandemic will continue. I shared some of those statistics to just think through the impact on businesses. And a meaningful part of the context is the long and medium and short run impact of COVID on our business behaviors and therefore, how we plan on our expenses and allocate our sales organization. So I want to speak to that for a bit. The long-run impact of COVID on all businesses is still being determined, but we can already see some of the permanent changes that are taking effect inside of our company. Like many companies, for example, we have adopted a hybrid workplace approach officially. And this is from a company that was really an in-person company for most of our existence. And now we have a full-on hybrid workplace approach. In fact, all of our offices and resource centers remain closed at this time, but we expect to open them by year-end. Offices will function as resource centers to employees, which is a little different than big of them as a place to work. And in those resource centers, we'll hold strategic planning meetings, events and other special meetings, recognitions for employees, the things that help define the culture that are important. And we'll ask employees to travel for those events. So it would be a little different than in the past where work from an office will be elective, but travel for events might be required to be part of developing our culture as a company. We have learned new ways of selling that incorporate virtual technology to a greater extent, and our customers have embraced this approach as well. So while travel for our sales teams will pick up from the near 0 levels over the last 16 months, I wouldn't anticipate that they would occur at the pre-pandemic level. I believe our travel expenses pre-pandemic were nearly $5 million a year, and I just don't see them getting back to that level. However, as we noted, the impact of COVID on our work style, we may see travel expenses go up for business related to, what I'll call, culture building and goal setting and performance management meetings by teams and team leaders and managers across HealthStream. And so it's an interesting dynamic where maybe sales business travel may go down, but because we're a fully remote workforce, we might have some mandatory meetings that are cultural development-oriented, bringing on new employees, gathering employees to celebrate accomplishments. So travel expenses may go up in those more elective categories historically. So to be an interesting dynamic to figure out how that all plays out and to what level each returns based on the new work styles. And so another impact that we're all assessing now across each company is the, I guess, what's been dubbed the great resignation. I think COVID has made many people, including health streamers, reevaluate their personal and work life. And for a variety of reasons, most of which are indirectly attributed to the events of the last 18 months or COVID, companies are seeing turnover at record levels. And these are companies of all types, other CEOs I speak whether experiencing very similar turnover issues. And so HealthStream is no exception to that. But what's interesting is that as people look up heads up from other industries, they find HealthStream an enticing place to work. And so we've experienced record levels of hiring in the last 12 months, but also very high levels of turnover. And the net impact of that is a nearly only slightly positive headcount increase across our organization. And I think earlier in the year, we had anticipated being able to have the net increase, that of turnover to be much higher, maybe as much as 100 more employees than we've been able to achieve through our hiring in the first three quarters. And so that's resulted in lower expenses than maybe we had hoped to have. In other words, lower investment levels in people. We have had net hiring positives, but they're almost marginal compared to our expectations as we entered the year. And that is a direct impact of I guess, what I'll call the great resignation along with others that have written about it. And so again, it's a really strange dynamic where we've never had more people interested in working at HealthStream because they're reevaluating their work life from other places. And we've got these highly energetic new employees coming into HealthStream to ready to start a new career. But also some of our employees are evaluating their work life at HealthStream and they're changing locations. What's really exciting to me is I've seen several of them already on the way back to HealthStream after six months away. And so the great designation is something we all have to work out. And the result has been higher turnover and lower expenses than we had originally planned. And so a little better financial performance attributable not necessarily to good things, but to things like turnover and also some maybe longer-run challenges that are created by not having the staffing levels that we had expected to have. And we kept every quarter trying to increase the hiring rates and again, incredibly successful at hiring, but now what we need to see is the turnover rate slow down. And I'm hopeful that in the next quarter or two, this will settle out a little bit, and we'll continue to get hiring head back in the right direction on hiring. So I want to talk about those short, medium and long-term impacts on [indiscernible] they create quite a challenge for forecasting, even though they're - because the nature of work has changed, the nature of travel will change, the nature of where people want to work and how they want to work is changing. And I think HealthStream will be in the long run, a net benefactor of all these changes, the virtualization of the workforce. We've been highly successful at running our operations and building our business. But like all when major challenges occur like this pandemic, it creates different gaps in how you're operating in your learning curve and can result in operational challenges over time. So we're working through all those at the present time. So I'd like to spend a few minutes talking about financial performance and turn it over to Scotty and maybe some context for our financial performance. And first, I'll hit just a few of the highlights. Since I'd ad lib so much and little off scripts, and I'm back on. Top line revenues increased by 5%, an increase in adjusted EBITDA and 15% over the first 9 months of last year. So revenues 5%, adjusted EBITDA up 15% over the first 9 months of last year. So again, solid financial performance again in the third quarter. For the third quarter, revenues were $64.1 million, which is 5% of the same period last year. This quarterly increase reflects a substantial growth that was necessary to offset and rise above the previously announced anticipated headwind of the $9.2 million decline in the quarter in legacy resuscitation revenues. And so Again, we've talked about this for almost three years or more, the decline of a partnership and this legacy resuscitation revenues. So in the quarter, a negative $9.2 million. That's one of the last quarters of material impact for these declines, but we were able to overcome that and deliver 5% growth from a mixture of organic and inorganic work of the last year. So fantastic to deliver growth in the face of such headwinds. Based on these results, we've updated our financial guidance for the full year. We now expect revenue for the full year 2021 to be in the range of $255.5 million to $257.5 million. So we kind of lower - we've increased the bottom of the range. We have a little more confidence in the range and the higher end of the range. I believe one of the most remarkable things about this guidance is that we are projecting revenue growth despite an anticipated full year impact of $38.4 million in revenue decline from the legacy resuscitation products. So we began the year knowing they would have a $38.4 million hole to fill, and I'm really proud of our teams, the types of growth we delivered on lots of exciting new products, acquired products as well has been really fantastic. So again, I'm excited about that result. We also had a negative impact of $4 million of acquisition-related deferred revenue write-down. So we overcame that as well. And I guess that revenue will - the way deferred revenue write-downs while happen, that will come back in over the course of the next 12 months into our revenues. So that's a good thing to help put a little growth into the future. Additionally, we now expect EBITDA for the full year 2021 to be in the range of $51 million to $53 million. That's up from our last expectation of $48 million to $50 million that was announced last quarter. Now some of that continued outperformance is based on our inability to hire. Again, we do have a net positive hiring. So we are net growing our headcount, just not at the levels we had expected. So I'll just kind of comment again that there's kind of this lag effect of COVID as we work through the great resignation. And again, I want to emphasize really a record-setting levels of hiring new excited employees in the HealthStream and the outcome is a net positive headcount, so we're not declining by any means. But we're also not adding as many as we had hoped. So some of that outperformance is attributable to that change in net hiring. There's new factors that have helped contribute to the increase in adjusted EBITDA, and I'll comment on those. For example, year-to-date revenues benefited from legacy resuscitation and perpetual software sales, which we expect to be less impactful during the fourth quarter. So there's a little bit of leftover legacy revenue that was maybe more than expected and a little bit of perpetual software sales from some of the acquired products that we're trying to move to SaaS and subscription selling, hopefully, soon in the next year. And so some of that will be not repeating in the fourth quarter. Additionally, the macro workforce trends, which I've covered in great detail made it difficult to increase headcount as quickly as we planned. And so we now anticipate that in spite of three quarters of trying, we're going to just say we expect that trend to continue through the end of the year. So we probably won't be able to make up all the hiring we plan throughout the year in the remaining quarter. And our new guidance reflects that assumption. So we'll continue - the headcount increase we projected, as I just mentioned, to be essentially flat or slightly up for the fourth quarter. So only a slight labor increase cost during the fourth quarter, and our new guidance reflects all of these things I've talked about. Now I want to shift gears and talk a little bit about what we've talked about in the last three years. We talked about these key transitions. And the transitions were all defined in an effort to create a higher growth and higher margin profile company that will be more profitable for shareholders. And the great news is, this is, I believe, the last call, which I'm going to talk about in detail the transitions. And the reason for that is that I feel that over the course of this year, we have really worked through the transitions and the word transition implies some kind of maybe exceptional operational risk or business risk. And I feel we're through the exceptional period of risk on these transitions. In other words, each of the three transitions we've talked about has hit a milestone in my mind, where I'm comfortable saying there are business risks associated with the growth of these new product lines and undertakings by the company, these transitions, but they're no longer existential risk, major risk to the company in the way that they might have been, say, 18 months ago when there were so many unknowns about these. So let's look at each of those real quick and put them to bed. So we don't have to talk about them anymore. And after Scotty presents the financials, I'm going to spend a little time talking about the new go-forward paradigm of talking about the company instead of this older paradigm of explaining these three transitions. So let's look at them one at a time. The first, of course, was kind of proving the market acceptance of the new resuscitation suite program with the American Red Cross. And the second was the establishment of a new functional area with the VerityStream SaaS-based application. As you remember, we had acquired several companies over the last several years, and we had launched a new set of applications for credentialing privileging enrollment. And there's a lot of questions we launched new products about the market acceptance. And I'm here to declare that the market has accepted the new VerityStream SaaS-based application we call Prudential Stream. And so - and the third is the technical viability of our new platform architecture known as hStream. So here we go, let's put all three of them to bed. The market acceptance of a new innovative resuscitation solution has been established as evidenced by our sales of American Red Cross suite to customers in each of the 50 states of the United States of America. So the program is established, the credential is accepted. The sales team are closing new business every week. And any of this concept that maybe in the market wouldn't accept the second solution and is gone now. We've moved material market share in the American Red Cross, and we'll continue to sell that product in the coming years and months under a long-term partnership with American Red Cross, and we'll continue to innovate. But it's no longer a question - the same - the question we had two years ago was, will anybody buy it? Will anybody accept a credential, a professional credential from the American Red Cross. And I guess I'm here to say today that's not only been accepted has been embraced and the cutting-edge organizations are moving to this newer, more adaptable technology that we've introduced with the American Red Cross, and it continues to win new business in the market. So I'm going to put that transitional risk to bed. The risk now is just how much can we sell? And then can we continue on a great trajectory with this partner. And I think the answer to both of those is I'm excited that this is going to be a great product into the future. The second, the product adoption of a market-leading SaaS-based credentialing pillaging enrollment application. And I think now with nearly 440 customers under contract and many of them are implemented and live. And many of them are referenceable accounts. I think we've established that this newer platform we built, which was the best of breed from our four acquisitions is both accepted as customers migrate to it from the legacy platforms and as new customers selected in open RFP bids and competitive bids where I think we've built now the application set of choice in the industry as it relates to credentialing, privileging and enrollment. So again, the risk was we acquired four companies, we built a new product and tried to move customers to and it didn't succeed. I'm here to say that that level of risk is behind us. Of course, there's a normal market risk to competition and can we continue with this leadership position. But with 440 contracts, customers migrating and most importantly, the new RFPs being issued, we think we're going to land a disproportionate share. If an organization of scale is bidding out a privileging enrollment and credentialing services we think our new credential stream platform is going to win the day. The third is the technical viability. We've been talking for quite some time now and hired a new CTO four years ago to lead the charge on building a new technical infrastructure that will make all of our applications more interrelatable, make data more portable across our application offerings and allow us to do really wonderful new service and application development as the platform gets established. And so I'm here today to declare that the platform is real, it's operational, we're releasing new functionality at the platform level, and that platform level capability is being extended into our application sets at an increasing rate. And so I think the concept of - well, you've been building in R&D, this underlying platform, will it be viable. I guess I'm here to say today that it is a viable platform, and there's always more to build. There's a giant, a great vision in front of us of what we want to do with it. But I believe we're well along our way to having both a new platform underneath HealthStream that unifies many of our capabilities and gives customers more reasons to acquire our applications. And unifies us as a single platform company with multiple applications linking to it and also makes our architecture more extensible to third parties. And so I'm here to declare and I'll tell more detail about it. With the platform is real, we won't be talking about it as a transitional risk, we are selling in licenses. When someone acquires an application from HealthStream. We're embedding a license to the platform. And again, I'll talk more about what's exciting about that in a few minutes. So this concludes a nearly 3-year journey of talking about the three transitional business risks. We can now start to talk about our new applications, the new markets we want to proceed with and a new paradigm for talking about our company, which I'll cover after I turn it over to Scotty Roberts for a detailed look at the numbers. Scott?

Yes. Thanks, Bobby. I'm happy to report that we had another solid quarter of financial performance, and we're firmly on pace to achieve record annual revenues and adjusted EBITDA for the year, both while overcoming a $38 million revenue headwind as we entered into the year. On a year-to-date basis, we've been able to grow revenues by 5% and grow adjusted EBITDA by 15%. For the third quarter, revenues were $64.1 million, which is up 5% over last year and includes an $800,000 reduction associated with deferred revenue write-downs. Operating income was $1.8 million or down 43%, net income was $1.5 million, also down 43%, and EPS was $0.05 per diluted share, down from $0.08 per diluted share in the prior year. Adjusted EBITDA improved to $12.5 million, which is up 11.5%. Workforce Solutions revenues were $51.2 million and were up 4% and revenues from Provider Solutions were $12.9 million and were up 10.7%. On a consolidated basis, we grew revenues by 5%, while overcoming a $9.2 million decline from the legacy resuscitation business. Revenues from recent acquisitions and growth in our core business more than offset this decline. When you exclude revenues from the legacy resuscitation business, consolidated revenues grew by approximately 24%, which was comprised of 10.5% organic and 13.7% from acquisitions. Our gross margin performed as we expected, coming in at just under 65% for the quarter. And our operating expenses, excluding cost of revenues, were up 15% or $5.3 million over last year. And about two-thirds of this increase relates to the operating expenses from acquisitions that we completed primarily in the fourth quarter of last year. Our G&A expense during the quarter also includes a charge of about $350,000 related to closing several leased satellite offices that will expire next year. Our adjusted EBITDA was $12.5 million, which is an increase of 11.5% over last year. And EBITDA margin was 19.5% compared to 18.4% last year. Our cash flows from operations improved to $36.4 million this year compared to $30.8 million last year. DSO also improved to 40 days compared to 43 days last year, and free cash flows were $17.3 million versus $16.7 million last year. Our cash and investment balances increased by $5.4 million in the quarter and were $60.6 million at quarter end. Capital expenditures incurred were $5.6 million for the quarter and are up to $16.8 million year-to-date. After another strong quarter of financial performance, we have updated our financial guidance ranges as follows: We expect consolidated revenues to range between 255.5 and $257.5 million, with workforce revenues forecasted to range between 205 and $206.5 million and provider revenues forecasted to range between 50.5 and $51 million. Adjusted EBITDA is now expected to range between 51 and $53 million, and we expect capital expenditures to range between 25 and $26 million. Our financial results continued to benefit from lower expenses than our previous guidance had anticipated. As was the case in the first half of the year, employee turnover remained higher than our normal experience, which we believe is consistent with employment trends facing most companies across the country. Although turnover has been higher than anticipated, we've been able to successfully fill open positions, the total head count has remained relatively flat over the course of the year, which has led to lower staffing levels and personnel costs than we had planned. Sales performance was also steady during the quarter, and we started to experience some challenges related to both the resurgence of COVID and the impact of employee turnover that I just mentioned. Consistent with past experiences, the ongoing impact of COVID on our customers continues to cause some delays and uncertainty in their purchasing decisions with us, though it's not across the board. We have experienced longer sales cycles and delayed decisions from customers with high COVID patient admissions. We're also monitoring several other challenges our customers may be facing such as vaccine mandates, nursing shortages and overall staff turnover, which could impact their operations and their financial condition. And as for the impact of employee turnover on our sales production, losing quota-carrying reps midyear and onboarding new hires presents challenges to achieving our goals for the year. Although as we enter our busiest sales quarter, our teams are focused on finishing the year strong. That concludes my comments for this morning. Thank you for your time. I look forward to providing updates on our full year 2021 results and guidance for 2022 on our next call. Bobby, I'll turn it back over to you.

Thank you, Scotty. It's kind of an exciting pivot point for me now. Talked so long about transitions to all of you that have followed along our store, including our key analysts. And now we want to kind of begin the orientation process to the future and how we're going to talk about the business as we go forward. And so let's get oriented a little bit. The first is, over time, over a long period of time, we have talked a lot about a learning platform and the credentialing platform. And I think inside our company and now to the outside world, we're going to communicate differently. We're going to correctly identify all of those as software applications or application suites. And there's only going to be one platform at HealthStream, it's hStream. And so on a go-forward basis, let's think of HealthStream the company as a one platform company, hStream is the platform, and we have developed multiple sets of applications that run, and ultimately overtime will increasingly connect to and leverage the single platform. And so you'll see us correct ourselves off over the next year or two as we change from calling it the learning platform to the learning application set or the learning application suite or the learning application and the credentialing platform will become the credentialing application suite or the credentialing application and the scheduling applications. So there will be a shift, but it's important because it indicates the intent of why we're building hStream to underlie, interconnect and interrelate all of the application sets that we offer. And so we've really made enough progress now to make that decoration and begin to change our own internal language at HealthStream and therefore, the way we talk about it with you. So we'll have three primary application suites. They are learning and development. So we have a whole suite of applications to help manage learning and development processes at health care organizations. The second is credentialing and privileging. And again, it's a suite of products and a growing suite of products that includes products like credentialing, privileging and enrollment, but it will be known as credentialing and privileging application suite and then scheduling and capacity management. Some of our newly acquired companies, - We've talked a lot about the scheduling application area, and so the third year will be scheduling capacity management. So in review, learning and development, credentialing and privileging and scheduling and capacity management are the three different at one point, call them legs of the stool, but now I'll call them application suites. And the reason we call them applications because increasingly, we expect them to connect to each other through the platform and connect to the platform and leverage platform level services that were built into the new core hStream platform. So we're excited to kind of make that transitional - begin that transitional journey now in this important dialogue. Also, many years ago, as you remember, we dropped a metric that we had where we measured the subscribers and subscriptions to the then learning platform because we had new sets of applications that we're growing. And we've begun reporting the number of subscriptions sold to hStream. And it's my expectation in the coming year or two that every application will sell with a license or a membership to the platform. And we've begun that journey by bundling every sale of the learning architecture, the learning application with an hStream license. And we've begun that journey by selling every new credential stream sale within a subscription or a license to the stream for VerityStream platform. And so it's very exciting that those two applications, we feel are interconnected enough or reliant upon or providing value from the platform level that we can add and sell those subscriptions. So we have been reporting subscriptions at stream. And we added 402,000 team subscriptions in the third quarter, bringing our total to 4.92 million subscriptions. This represents an increase of 29% over the same period last year, and the growth in subscription is encouraging. But I want to talk a little bit about the growing power of the hStream platform itself, like what is it going to enable us to do. And so I thought I'd walk you through an example and so you can understand how it's evolving and what we hope to do with it. Remember, each of our applications already works well on its own. It's an independent application. But with hStream, our applications are beginning to work even more powerfully together. One critical reason for this is our new identity management service, we call the hStream ID. Again, it's part of the hStream platform is the hStream ID. Increasingly, the HStream ID allows data about an individual to be used across our various applications instead of remaining stuck inside of a single application. This new level of mobility and identity management adds value to the application and also adds value to the data itself. If you think about all the time expense our customers go through maintaining license data on their employees, for example, you can start to appreciate the value of the hStream ID, thanks to the hStream platform, licensed data on an employee can now enter through the HLC, the learning application, be validated by a VerityStream application and trigger our MyTeam application to inform managers when their employees license is about to expire. So what you see here is by linking the identity of people in the various parts of our ecosystem on the different applications. We can provide a service, for example, of validating a license that only existed in one set of applications to where the data is maintained and stored in another application. So the example I just gave, that portability creates kind of an interchangeable service of validating licenses. - using some of the features and functions of VerityStream and some of the distribution and access to the resultant data in the learning center application. So in this example of the learning department, the compliance department and the HR department, all benefit from the Stream ID's ability to move an individual's license data across applications and enhance the quality and value of the data throughout the journey. In the coming year, we look forward to providing you additional updates about the growing power of hStream as our definitive platform. So now I'd like to provide some business updates regarding the three application suites. Let's start with learning and development. Our most well-established application suite. And it's our oldest but also, in many ways, some of our precious things are coming out of learning and development, like the Jane platform. In fact, the company's origins trace back to improving learning and development through technology, which is what these applications focus on today. The past two years have been characterized by a great deal of innovation across this area, including the release of our patented AI-driven clinical competency application known as Jane, the establishment of a new industry standard and resuscitation certification with the American Red cost resuscitation suite and the combination of our KnowledgeQ and Safety Q solutions to form what we believe is the most dynamic governance risk and compliance solution in the market today. So we're really excited about the continued evolution of the core applications and products of the learning and development area of our business. And it's exciting to enter the next year with innovations either in the market or entering the market as we speak. The Red Cross innovations are fantastic. We created special technologies to empower the red cost program like our interval technology. which allows organizations unprecedented level of flexibility in deploying the red cost resuscitation application and programming set. We've built platforms or applications like Jane that bring in the dimension of AI into the decision-making and critical review of critical thinking ability of nurses. And we've updated what was once our core business in regulatory compliance to the new standard of micro learning and assessments and benchmarking services that can't exist anywhere else by definition because we have the largest network over 2 million subscriptions to our legacy and now our newly refined compliance products and mandatory training products. So really excited to have such a complete solution set that we think can have an impact across the governance risk and compliance areas of health care organizations across the country. I'd like to focus on two of our resuscitation offerings maybe a little more detail about two of the products that are in this learning and development category, the American Red Cross Resuscitation Suite, we already mentioned that we've sold to health care facilities of all types and all sizes from across the continuum of care in all 50 states. Some of the industry's largest acute care health care systems and organizations have made wholesale switches to the American Red Cross Resuscitation Suite. And we think it's because of the combination of the technologies HealthStream has built to enable flexibility in the program and the incredible investment and high clinical quality of the program itself built and credentialed by the American Red Cross. So it's a combination of our platform and our applications with their content and certification that's resulted in this industry-changing program. In fact, since - as of September 30, we've over 340,000 certifications have been delivered through the platform. Remember, we just began selling this 24 months ago, and it took time to implement and switch customers over. But now the rate of completions of this Red Cross program is really quite staggering, and we've just passed the 340,000 certifications delivered. And again, with the rate of consumption is just fantastic. So that's going to continue to climb very, very rapidly. And what's fascinating to is that the solution required that we deploy over 7,000 new high-tech Internet connected manikins by a company called Innosonian, the Brayden Pro manikins. And what's great about those mains is that they're modern, they provide visual feedback to the user, they're Internet connected and they use the hStream ID. So we mentioned earlier about the power of the hStream ID. So the data collected through those applications and those manikins that there's kind of skills reporting data on the employees goes into the hStream cloud services and becomes mobile and portable in that way. And so anytime someone anywhere in the world logs into the app that connects to that Braden Pro manikin by Innosonian, they're logging in with the hStream ID, which creates this record - this portable record on the individual. So we're really excited about both the new technology like Innosonian Brayden Pro manikins, which there are now 7,000 deployed across the globe and how they utilize the hStream platform to give them a new power and flexibility. So I just - I believe it's just remarkable that an option that didn't exist two years ago has gained such widespread adoption. It's a testament to the strength of our sales organization, the innovations of the Red Cross and the innovations of our technical teams to build this market-leading product from a technical standpoint, it's just outstanding. In fact, our scores, 4 out of 5 stars from our own customers on the implementation process through the change management process to this new application. So we're focused on the operations, the quality of the transition, and our customers are giving us out of 4.8 out of 5 stars during the third quarter on the quality of those transition services. So a great job by our teams that are focused on that solution. Let's shift gears and give an up straight update on the credentialing and privileging. Three years ago, we announced the launch of VerityStream. And at the time, it was our new SaaS-based application for managing the full spectrum of credentialing, privileging and enrollment needs in health care organizations. During the third quarter of 2021, 47 customer accounts contracted for credential stream, the new platform, Forty Seven. I believe in the second quarter, it was around 42% and in the first quarter, around 45%, maybe 46. So really, the adoption rate is quite staggering of the new credential stream platform. We're really excited about its progress. Now implementation cycles in this product, it's more complex than, say, some of our other application sets, so it takes longer to get to revenue. And there's a bit of a, what I'll call an air gap or a bubble from the selling that was imposed by COVID to the implementing. And so we'll see a little bit more growth coming out of all those sales in the second half of next year and a little bit of what I'll call these air gap bubbles where we made a lot of sales and then there's a delay in implementing. And the implementation cycle is already fairly long on that product, say, up to 12 months. And so we're going to see some of the impacts of COVID in the growth rates in the next few quarters, but the sales have gone unabated, which is fantastic. But it's going to take us a little longer to get to the revenue. So I would expect to see some of the growth from all those sales just really start showing up. And again, it's - we did a nice growth rate in the third quarter on VerityStream. And - but I think what we'll see is even a better growth rate in the second half of next year. So that's really exciting. And I want to give you the context for how and why the 47 new - we call them new logos, new customer accounts contracted for that credential stream application in just 90 days. So it's really fantastic the sales rate that's happening there and the new wins. So some of the wins include well-known organizations like Hackensack Meridian Health, Mainline Health, MedStar Health System up in Washington, D.C., Cooper University Health care. There are just a few of the exciting organizations that are realizing that we have a best-in-class solution for credentialing, privileging and enrollment. Now - This third application set that we want to talk about is scheduling. And just as we acquired four stand-alone companies and credential and privileging and we built a new solution, we plan to use that playbook and do it again in scheduling. And so our acquired organization, NurseGrid in the last 9 months, ShiftWizard and ANSOS, all happened in the last, say, 12 or so months. We're assembling that into a leadership team with a vision to build a market-leading scheduling system. And we believe we have some innovations in store for the industry that will help make that vision become reality. And we're early in the journey to building this part of the business out, this application suite. We're early in the journey. So we don't want to get ahead of ourselves. We've got a lot of R&D to do - But we're getting a clear road map, and I want to share some of that with you. The transition and integration of the businesses themselves, the operations at HealthStream is nearing completion. So the transition services agreements from the parent companies we acquired them from are winding down, which means we've shifted all their line to our own servers, our own capacity. So the basic business integrations are done, and the organization itself is beginning to grow and assemble a leadership team and growth leadership team. So a lot of progress on the business front. On the software front, we've now internally published our kind of our vision and road map and our tenants for success where we're going to begin building and testing the hypothesis that we thought were strategic advantages in the first place. And it's great because we have over 380 customers to work with. So through the acquired companies, we inherited about 380 customers, along with some new ones we won this year. And we plan to show those 380 customers under contract, a lot of innovation in the coming 12 months, where we'll be doing exciting things like connecting some of the best-in-class capabilities of the NurseGrid, mobile experience into the customers of the ANSOS and ShiftWizard platform. So I can't wait to show more about that, but we're making great progress. We've been working on those integrations for a while. And I think the first wave of innovation out of our scheduling and capacity management business will come as we announce the connectivity of the NurseGrid applications at both ANSOS and ShiftWizard in the coming months. Now what's really exciting about that is the nature of those products is a little different. The NurseGrid application is actually a B2C app available in the Apple App Store. And we thought that it's just kind of a growing community of nurses that love this app, which blends their social, personal life schedule with their work schedule. And we just thought there was something special about how that was happening. And in fact, we've seen NurseGrid community continue to grow since we acquired it. And now we're up to nearly 350,000 monthly active users. That's up 90,000 active users or 35% since our acquisition in March 2020. So that application has continued to grow in its adoption. And remember, that's elective adoption. That's a nurse going into the Apple App Store, downloading tab and using it on at least a monthly basis, 350,000 MAUs, monthly active users. 46% of those nurses log in every day. That's up 40% from the time of acquisition, which means they use NurseGrid often and consider to be a valuable resource for managing their personal and professional schedule. NurseGrid continues to be the #1 rated app for nurses in the Apple App Store. That's a 4.9 star rating with 70,000 reviews. That's up 40,000 reviews from the time of acquisition. And so this growing network of nurses that blends their social and personal calendar with their work calendar, we think it is something special. And we think that network - that growing network now of 350,000 monthly active users, as it's linked into the business applications that manage scheduling from the business side is going to be a powerful competitive advantage. In fact, we have a vision for how it can enhance the functionality that we'll be sharing in the coming months as we release that functionality. So during the third quarter, so some final updates here, some events that are happening across the company, then we'll wrap it up for questions because I know I've gone long, but this is an important transition cost, so I want to spend some time on it. But there are two kind of events that we want to talk about that our employees can hear and customers can celebrate. During the third quarter, we hosted our second annual Nurse Well-being Week. This amazing a virtual event that's held September 27 through October 1, and it's a week of engaging activities on the topic of nurse well-being. It's kind of our service back to industry to recognize all that our nurses across the country have been through. And over 6,500 nurses registered for the nurse well-being week activities that were focused on practical advice from peers and experts on enhancing well-being speakers and activities in sessions. So it's part of giving back at HealthStream, very successful and focused on the well-being of nurses, just a way to engage our future customers and current customers and the nurses that are serving our country so well through this effort, we call Nurse Well-being Week. Thank you to the teams that ran it. VerityStream customers also participate - will be participating in a virtual two-day Users Group conference called Thrive21. The event will be on November 2 and November 3 include keynote presentations and full track sessions for each VerityStream application, including, of course, credential stream that we've been talking about. So this is an exciting conference that where we often release data from our proprietary market research about the credentialing industry overall and the trends in it. And so Thrive21 right around the corner, November 2 and 3, for the customers of VerityStream and HealthStream's VerityStream. And finally, we couldn't miss the opportunity to shout out National Customer Service Week. We have over 100 employees in HealthStream focused on customer service of our over 160 or so employees. And those customers - those employees differentiate our company every day, by the way, they manage our customer relations. And I'm really proud of how they handle them and our customers love the service they get from HealthStream. We'll continue to improve our service continuously and innovate how we service the customers. But on National Customer Service Week, the first full week of October gives me a chance to say thank you to the nearly 100 employees that are customer-facing that really try to do everything they can to get rapid response done and high marks for quality, both of which they're achieving on a daily basis. So thank you to our customer service personnel, cross-sell stream. They serve as the face the HealthStream and we're grateful for the work that they do to build customer relations. I don't think you can sell another application to a customer unless they're satisfied with the service they get. And I think our teams are best in class and best in the country and taking care of people quickly. and give them the answers they need. At this time, I'd like to turn it over to the analysts for questions.

[Operator Instructions] And our first question will come from the line of Ryan Daniels from William Blair. You may begin.

This is Jack Senft on for Ryan Daniels. First off, congrats on the quarter and thank you for taking my question. I guess maybe if you can provide just a broader update on the health of your client base. I guess we've seen some early data points from publicly traded hospitals that suggest ED volumes are coming back. And I know in your prepared remarks, you did touch on the pandemic and seeing it subside a bit and possibly translating into potential ED volume return. So just kind of curious if that's something you're seeing broadly and any other color you can share amongst the client base.

Sure. In certain areas of our client base, so it's kind of a regional impact. And I'd say their operations through the different ways of COVID have been interrupted, which kind of put - I've now referred to as air gap. So if you sold the system and you wanted to begin implementation in certain part of the company - country, they may have delayed implementation for 30, 60 days, they work through capacity issues and staffing issues and then they get it back on but it kind of put all these whole air bubbles into our business with them. That said, they keep resurging. In other words, they learned to manage the new norm fairly quickly. I see that they're more adaptable in how they've managed say this the Delta variant surge, more responsive. The good news is there are more treatments out. So I think they - exactly as I talked to that run the big health systems have a little more confidence in their ability to handle the pandemic. And maybe as you hear now the dialogue is moving towards an endemic situation for the pandemic. And that's my observation is that particularly in the bigger systems, too, they're learning to operate in a mode that will be successful. Now they do face unprecedented and I hear this over and over challenges with their workforce. We talked about the great resignation impact on HealthStream. And - but in hospitals and nursing, it's incredible. The mobility of nurses, they're reevaluating their lives. They've been through a lot of hard work there, both resigning and changing careers. And the executives I talk to talk about the need to prime ways to retain, develop. We even see some large health systems acquiring nursing schools because they know they have to get into really talent development and retention and growth. I think that does bode well for our positioning in the future. But needless to say that the current challenge is tremendous. It has both financial implications. If you're a smaller organization, how do you retain and pay competitively. And if you're a large one, how do you reduce your reliance on contingency labor pools, which are just too expensive. So I think overtime, in the 3-year window, resulted more health systems being more involved in the development of their own workforces more than they have had in the past is a positive, but in the short run, cost pressures and turnover issues on quality are all going to be real. So generally, I see recovery and with a few remaining pockets that are still dealing with issues I talked about.

Perfect. And just kind of a quick follow-up, and I know you just talked about a little bit of the burnout and staffing issues and stuff. But if you could touch on a little bit how HealthStream is kind of helping the providers deal with these issues. And if you can provide any additional labor on - or additional color on the labor market pressures, that would be really appreciated.

Sure. Well, I think the trend I just noted was it's kind of a belief that maybe a current reality. But I do see - and I've seen some of the market-leading large organizations began to address the issue of their workforce by doing things like I mentioned, like buying a nursing school. To me, that's a symbol of the willingness of the market leaders to invest in the future of their workforce. And of course, that bodes well for us because we're all about retaining, developing credentialing and support that workforce to be more successful in their role. And so I would just say that they'll need to awake into the need to the extent that they haven't already to net invest in their workforce. And it doesn't mean just education. It means all things related to the benefits, flexibility for those costs, but also in the outright training and development of their skills and development of their career path. Career paths for nurses have been fairly flat overtime. You kind of become a nurse and your nurse your whole life. It's unlike business where you become maybe a Director, Senior Director or AVP, a VP. I think the organization is going to need to find new ways of recognizing skill, promotion and differentiating quality and good decision-making by their staff. And then, that resulting in better pay models and paying the talented people more. So all of that bodes well for HealthStream as we help distinguish the high-quality nurses that are able to think on their feet and get better patient outcomes. We're able to identify gaps with our Jane technology and their skills and their thinking processes and then remediate them with intelligent AI-driven recommendations. So I think we're well positioned for the future as organizations wake up and need to invest in their workforce. And the shortages are acute. We've seen a boom in the travel nurse industry because the inability to retain and attract will keep full staff. So the staff bed counts have gone down and only the largest organizations are able to kind of keep everything running the way they want to. So there's a lot of staffing issues that they have to work through. And mainly, they're going to see price inflation for their staff in the coming year if they don't find ways to develop their own staff and retain them.

Our next question will come from the line of Matt Hewitt from Craig-Hallum. You may begin.

Good morning, and thank you for the broad-based update this morning. My first question relates to your employees, some of the challenges that you've been finding, but now that you've moved to more of a hybrid model or in many cases, maybe even just a fully remote with occasional travel to meet up as a team, is that allowing you to recruit nationally? And if so, what types of barriers or challenges does that present?

Well, there's just so many things - It was a culture where we got together a lot, of course, worked out of offers almost - we are a majority focused in the office, and we spent a lot of money and time through our teams to celebrate successes, recognize peers, onboard new employees in a face-to-face setting. And of course, the last 16 or more months that we haven't done that. And so what we're kind of declaring while we've closed leases, we've gone from like 11 leases, we'll be down to like three or four years soon. We're doubling down on the big resource centers in San Diego, Boulder and Nashville and which are well positioned across the country to convene employees. But the cost of convening, let's say, each division gets their division together for a three-day retreat now annually. So we didn't do that before. But we want everybody to come in and centered around one of our resource centers have a three-day retreat where they had recognized new employees, give awards to those that hit milestones. So onboarding new employees, do a day of strategic planning and the cost for that will be higher. Like it's like a national sales meeting several times a year for each division as we think differently about convening. But I think it's essential investments like that to maintain our culture, and our culture is what's attracted the talent to our company. So we have experienced higher turnover of departures. I just think that people have been somewhere for four or five years or more, they put their head up and thought maybe they wanted a life change and they look out they try to see if they can find greener grass. Even if you're part of a great company, I think there are variables that are beyond just - even if you love your colleagues and peers and we hear that a lot and someone says, "Well, I just want to go try something different." And I love HealthStream, love the colleagues - The great news there is I've seen a couple come back already, and they kind of went astray, in my view, and they've decided to come back. So I think the turnover will settle out. I think we'll be positioned to be in a better vision than other companies as it does. And as I mentioned in the call earlier, we continue to hire an incredible rate. So as people are leaving, we have excited people who wanted to join our vision because they want to - they think health care is a great place to service humanity and kind of live out a personal life mission along with a work-life mission. And so we've attracted great new talent. But the net effect of all that has been a fairly flat headcount. And one of the reasons for our financial outperformance is because of that, we had expected to add a net of over 100 employees throughout the course of the year. We've been unable to do that. We've kind of hired 1.5, lost one. And so I hope that the turnover reduces so that the new hires take hold, and we can get our staffing levels up a little higher. But I think we've determined this point three quarters in that we're not going to catch up in our numbers this year. We'll just maybe look to slow down the turnover rates as we enter next year and continue the hiring and have some people start to return to HealthStream, which I do fully expect and get out of the loop of the great resignation.

Understood. Thank you for the color. May be on other - one additional question here. And I'm not trying to nitpick. Obviously, it was overall a very good quarter. Workforce Solutions was down sequentially. Was there anything that hit in Q2 that was maybe more onetime in nature that we didn't see recur here in Q3? Or what kind of drove that albeit very small, but just normally used to seeing sequentially up - used to seeing sequentially up for workforce.

I'll comment on that for you. So I think in the - maybe the last call, I alluded to a couple of onetime items that were benefiting our revenues in the first half of the year. And so we saw less of that benefit in the third quarter. I think each quarter, we saw a little bit of that occur, but just less of an impact in Q3 than we had in Q1 and Q2. And mainly, that's the legacy resuscitation that continues to dwindle down. And then the second one is just some onetime software or perpetual license sales benefited from some of those in Q1, but less of that in Q3. So those are primarily the two driving forces behind the sequential decline that you saw.

Our next question will come from the line of Richard Close from Canaccord. You may begin.

Scotty, can you go over the acquired and organic percentages again? And just a clarity that was total revenue that you gave it for?

Yes, Richard, I think I spoke about consolidated revenue growth once you back out the impact of the legacy resuscitation assets. Let me get to the number real quick, and I'll repeat it for you. I think it was, what, 10.5% on workforce - I'm sorry, 10.5% total. That was organic and then I think 13.7% from acquisitions. So roughly 24% thereabouts in total.

Okay. And then schedule wins all in workforce, right, correct? Is that

Yes, that's where it is.

Okay. Great. Thanks for the clarification there. So with Bobby, maybe with respect to turnover, could you give sort of maybe characteristics of the individuals that are leaving in terms of is it any one department like sales, product development, whatnot? And then like the experience level, are these like long tenured health streamers or have they been there a short period of time? Anything along those lines?

Sure. I would say in our group of what, I guess, I would call our AVPs, VPs and senior VPs so the top 50 employees is extremely low, like I think the one that I can identify just indicated the desire to come back to the company. So that's the good news there on the leadership front. Now maybe leaders take longer to reevaluate opportunities and decide to lease. So I don't want to say that, that's a done deal that we've kept all of our leaders. But that is the fact currently right now in the leadership group, it's very, very low. And as I mentioned, the one that I can think of that left is indicating a dialogue to come back already. So which is fascinating. And then - but stands that, so that's 50 of 1,060 employees. The other 1,000 employees, I would say it's just - it's across the board. - its turnover in the new employees that came in for a few months and want to try something different. I don't know that this may be a more mobile, younger workforce. It's some of the veterans. It's in all departments. You'll see it like if one person gets recruited away to work somewhere in a department, then maybe they - that recruiter and that team comes back in and we have a few more from that department. And sometimes it's resulted from a pay raise or a rumor that's going to be a better, more flexible job. So I think it's just kind of broad-based and it's a result of people reevaluating their work life and trying - deciding to try something new. And I can't identify any single area, but I would say it's kind of equally high in all areas from sales to operations and across all experience levels. So it will introduce a challenge, right, when you have that much change at all those levels of experience. Now what is resulting in though is a lot of internal promotions, which is exciting. So people are willing to stay with us are assuming new roles, like if there are five project managers and one of them leave and there might be a new team lead out of the four that remain and then we backfill and hire new project leads. A tremendous amount of promotion coming out of our service groups as we promote someone who's been three to five years in our customer service areas and the operations support. So there's upward mobility that's resulting in new employees coming in, but there's also that outflow, and it's balanced, Richard. I'd have to say it's hitting every operations function of the business and kind of in little weights, like a couple of salespeople lead and a couple of operations people leave. And so it's just balanced.

And if I could just slip one another housekeeping just for clarification. The 47 customers on credentialing, are those totally new credentialing customers? Or does that also include the conversion of the legacy.

It's both. And I think the ratio is about half-and-half. And so it's those that are upgrading to and those that are brand new to. And I may get correct on that, I'm going to watch my text from some of my officers, who may have sent. But hopefully, you still listen, although this call is long. I think it's split across the 2/3 of 47. They're new to the credential stream platform, but some are migrating. And I may get correct on that in the next few seconds, but if not, we'll stay with that.

Our next question will come from the line of Vincent Colicchio from Barrington Research. You may begin.

Yes, Bobby, a follow-up on the last question. Is the transition to the VerityStream from existing clients. Is that - that make you meet your expectations in the quarter?

Hang on, I'm texting an officer to get a better answer. So yes, they exceed expectations. I think a couple of things we've learned is that as long as the customers stay on the older platforms until they're ready to migrate, there's not a huge, huge cost benefit for the migration. So we're really happy if they stay happy and they migrate when they're ready to. So, there's no forced conversions here. These are elective when they see enough features to move. And so what I would say is we're seeing a material number of them decide that there's enough reason to move - to move, and I'm excited about that. And then, of course, the new accounts that we're winning are fantastic because they are in RFPs, and we're competing and we're winning a disproportionate share of the open bid - And so we're really excited to see that trend. And so both of those trends are encouraging. We're not forcing transitions, but we're getting them, and we're winning in the open market.

And on the labor side, does the company continue to see moderate wage inflation...

Well, so far, it has not been tremendous wage inflation. In other words, we've been able to promote internally to fill a position loss so someone may get a raise because they moved from a team participant to a team lead, if a team leader leads the company. But overall, we've been able to reasonably fill the open positions at the similar salary bands previously, which is ironic - at some point, we're going to see wage inflation because people are leaving or leaving to get a promotion or market themselves into maybe a better, higher paying more job of more responsibility. And if we bring them back, they'll come back and be more expensive. But right now, on the whole, I'd say we're filling at only slight increases in the total net cost.

Okay. That's it from me. Thanks.

And I think that's because of our approach to promoting from within. So as a manager leaves, we often are able to pick someone to promote into the manager position and backfill the lesser experience position with a new person. And so I think that upward mobility has helped us a lot in kind of maintaining our cost structure. What it means you have to do a lot more hiring at the entry level, and you have to rely on the entry level. And one thing that might be happening a bit is as we drain the entry-level pool, in other words, if you've been in customer service for two years and you're eligible for a motion to the manager, and we've passed all those people get harder to fill the experience level at the same cost. Does that make sense? And so our first our first wave, we've been able to maintain flat costs, but I do expect things to maybe start to creep up on us in the next year. And then a quick update on the question that Richard Close asked. 47, 31 of them were new customers and 16 were migrations. So 2/3 of the 47 were new - brand-new accounts to HealthStream on the Credentials platform, and 16 of them were migrations

Now I'll turn it over to Robert Frist for any closing remarks since we don't have any more questions in the queue.

Well, I imagine we scared off the questions by going for an hour. I appreciate anybody that's stuck it out this long. Hopefully, the detail was informative. We look forward to putting the transition behind us and speaking to the three application sets and the single platform company we're becoming, and the past architecture we're deploying couldn't be more excited, and thank you all for participating. Look forward to the next earnings call.

This will conclude today's conference call. You may now disconnect. Have a good day.