Good morning, and welcome to HealthStream's Third Quarter 2024 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [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 quarter 2024 results. Also on the conference call is Robert A. Frist Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President of Finance and Accounting. I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K, 10-Q and our earnings release. Additionally, we may reference measures such as, adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call. So at this time, I'll turn the call over to CEO, Bobby Frist.

Thank you, Mollie. Good morning, everyone, and welcome to our third quarter 2024 earnings call. We have a lot to cover today, and I'll just jump right in. We'll start with some basic financials. I'm pleased to report that in the third quarter, our financial performance showed year-over-year increases in each of the major categories we highlight in our earnings release. We delivered record quarterly revenues of $73.1 million and record quarterly adjusted EBITDA of $17.7 million. Moreover, we are seeing strong sales pipelines on CredentialStream and in credentialing, ShiftWizard in scheduling and on our new reporting and analytics and API-related products that bolster our market-leading HealthStream learning center. And so in that third one there, I'll talk a little bit about an exciting product rollout that's happening right now. We are also gaining traction in new markets, including the nursing school market, which is -- we talk about these 2 communities that we're operating now that are growing. One is for students and one is for nurses. And we'll talk a little bit about both of those here in a few minutes. So in addition to the three core applications, we're operating and growing two growing communities, one for students and one for nurses. We'll talk about those a bit later. I'm excited about our ongoing progress towards the key development milestones in our hStream platforms, this underlying technology that's simply put quite a bit of time and capital into is starting to manifest, which ensures interoperability between and among our 3 primary application suites. And now our 2 communities and -- one of the 2 communities actually a thriving social network. So we'll talk about that as well. As we kick off the call, I do want to go kind of back to the basics and summarize the…

All right. Thanks, Bobby, and good morning, everybody. So let's begin with the financial highlights for the third quarter. And then after that, I'll go over the updated financial expectations as we head into the final quarter of the year. Unless otherwise noted, the comparisons will be against the same period of last year. Revenues for the quarter were $73.1 million, and they were up 3.9%. Operating income was $6.5 million, which was up 33.6%. Net income was $5.7 million, and it was up 48%. Our earnings per share was $0.19 per share, which is up from $0.13 per share and adjusted EBITDA was $17.7 million, and it was up 9%. Revenues increased by $2.8 million or 3.9%, coming in at $73.1 million compared to $70.3 million in last year's third quarter. Revenues from our subscription products accounted for 96% of total revenues and were $69.9 million, increasing by $2.5 million or 3.6% and professional services revenues were $3.2 million, an increase by $0.3 million or 10.8%. Subscription revenue growth was led by a variety of our innovative solutions such as CredentialStream with 34% growth, ShiftWizard with 17% growth, our stable solution with 38% growth and the DEA make course a new solution that we launched in Q4 of last year. Growth in these products, among others, helped overcome some declines of our legacy products, such as the ANSOS product suite, Echo and MSOW, which are often on-premises as opposed to SaaS solutions. Taken together, the products I just mentioned, along with quality manager, resulted in third quarter revenue declines of approximately $2 million compared to the prior year third quarter. Finally, revenues from professional services included approximately $0.4 million from a onetime payment associated with the customer acquisition. Our remaining performance obligations were $549 million as of the end…

Thank you, Scotty. I'm going to dive into a few more areas and turn it over to questions. I want to remind start by reminding everyone that our hStream technology platform is the center of our Platform as a Service strategy. Increasingly our own application suites are being powered at the platform level by hStream and third parties are beginning to use our platform and its growing set of APIs to build or enhance their own solutions. Each of our subscription-based core applications in learning, credentialing and scheduling is provided to customers via the hStream platform. Additionally, an hStream membership package that comes in the form of a subscription and is tailored to each of the 3 core application suites is concurrently purchased with the respective products, and we talked about it earlier, we call each of these packages, for example, hStream for learning, hStream for credentialing and hStream for scheduling. Each of these subscription products provide customers access to the hStream platform and it's a defined access, which APIs they get, for example, and exclusive applications, services, content and other benefits that comes with that value package. And I think each quarter, we're just getting a little better at putting value into those value bundles. Last quarter, we shared the news that our credentialing business is expanding to address the health plan market. I'm proud to share that our growing momentum and positive market receptivity in that area. First, we officially announced our solution, network by HealthStream, at the NAMSS conference in late September. Our news plus our marketing efforts at NAMSS helped us quickly generate a pipeline of opportunities at more than 3 dozen organizations. We expect that several of the opportunities will convert into sales over the next few months. Secondly, we formally partnered with the Verisys…

[Operator Instructions] And our first question is going to come from the line of Matt Hewitt with Craig-Hallum.

Maybe first up on the top line with revenue growth particularly, your 3-year kind of objectives that you've rolled out previously, you've talked about getting to 7% to 10% growth with the new accelerators on the pricing side, that's going to add a little bit of a goose to the top line. But what else could you do or what else do you see that could drive a little bit faster growth on the revenue side?

Yes. Let me break down those objectives first and then comment on each of them. So the first was in that 3-year objective when we disclosed that as an objective in, I think, November '22 at an Investor Day. And by the way, we're going to try to target another Investor Day early next year. Probably in late January, early February. But we'll work on that announcement later. But in that meeting in November '22, we did announce growth targeting 7% to 10%. But here is the breakdown. It was 5% to 7% organic. And it looks like this year, we're going to come in around 4%. So we're right within striking business is at the bottom of that range. And of course, we'd love to be at the top of the range. But if you think of the organic growth profile we've been able to deliver, it looks like we'll wrap up this year around 4%, factoring in our new guidance we just issued. And so we're right within striking business that goal. We haven't quite hit it. We've hit it a couple of times in a few quarters since that announcement, but blended, again, this year, we're looking at right about 4%. And you can hear all the excitement about the new products. So the answer is how can we do better is continue gaining traction with all these new products. And some of these are brand-new products like Insights plus application that we just talked about, generating new revenue. And so it's exciting all those are like, well, why isn't the growth rate higher? And the answer is, when you look inside a lot of the ways we've built our market share is through acquisitions, and sometimes we inherit legacy application suites. And we've addressed some of…

That's super helpful. And then maybe shifting gears here a little bit. The macro environment, the customer spending environment was pretty challenging last year. I think you noted it on several calls, it sounds like that's starting to show signs of improvement. Is that, in fact, what's happening? Are you seeing some improvement on the customer spending side? And is it your expectations that, that will continue, maybe even accelerate as we get into '25.

Well, we did open this call by talking about our pipelines, and we feel good about our pipelines in credentialing and scheduling and with the new products and learning as well. So we feel good about the plan. Now they need to materialize and to close deals both in Q4, we have really good expectations in Q1 and Q2. But the pipelines are strong. So the way, again, to work on this growth rate is to focus on retention and these legacy applications and being more successful in what I'll call retention and migration strategies. And we'll turn our attention to that next year and see if we can do better in those areas. But yes, I mean, we opened the call by talking about our confidence in the pipeline. I don't know if those are pipelines. They're not closed deals. So -- but they look good. We measure pipeline as a multiple of your objectives. And typically, what you want to hear from a measured pipeline is 2x and 3x and 4x coverage of the quotas you're setting essentially. And in those pipelines in both cases, we see 3x coverage, which is kind of -- for those who are in sales, know that's a kind of a healthy sign of the opportunity. Again, they do need to matriculate and turn into actual contracts, but it feels good on the pipeline side.

[Operator Instructions] And our next question is going to come from the line of Stephanie Davis with Barclays.

First one I have, you've been really bullish and expansion in the health plan channel. And I believe you mentioned in the prepared remarks. So I was wondering, just given some of the NCO earnings that we've been seeing lately if there could be maybe a step back in spend as they kind of focus more internally.

Yes. I'm not Stephanie, quite as close to that. We have teams focused on that, and they're really excited about our positioning in that market. And I think from a cost standpoint, you did hear about some of the things like the interoperability between our CredentialStream application when we use on the hospital side and then used on the payer side of the insurer side. And I think those will provide efficiencies. And so we think we're competitively positioned to gain share and maybe be the more efficient provider in those areas. So even if they have some kind of pressure on them, my goal has always been take regulatory training. It's a mandate and regulatory training, be the lowest cost, highest quality provider in the industry, and then you'll be selected even in a down market. And so maybe there's a little of that. But again, I'm less remitted to the overall pressures on that space. It's a new one for us. We have a team of people that are very familiar with that, and they're excited about their pipeline. So I can't really characterize it. I can just say that I think the pipelines look good in that vertical for us. And we think we have some synergies to offer them. We've mentioned the wallet today as well that will provide them more efficient technologies than the current strategy they use.

Helpful color. Another one on the sales channel. You're just -- you're rolling out a ton of new products recently. We've got another one announced earlier in the call. How are you thinking about kind of having a cohesive messaging to your clients as you have so many new products that you're coming out with. And how does that kind of play into the sunsetting too, of some of these -- maybe the data sunsetting of keeping some of these legacy platforms on board?

Right. Stephanie, it's a great point. We’re trying to create some cohesive understanding of the hStream platform and its capabilities first. So I'd say the first half of next year before we do any kind of global repositioning of our capabilities, we're kind of repositioning at the product level now to show the enhanced capabilities. And you're right about the new products. So we have been working for many years, and it's fun to be able to announce something like we've been working on Insights Plus for, I'd say, about 18 months with I don't know, 15 or more developers at least. And the watches start to roll out and be in customers' hands in the last 3 weeks is super exciting and both in that, as you pointed out, we're essentially able to retire our old reporting engine, some of which were sold and some of which were included in our base subscriptions. But watching those get -- be sunset and replace the new one that generates higher NOV, which is new order value or contract value is exciting. And we do have another announcement. I'll just kind of tease this now by -- hopefully, by year-end, we'll be announcing yet another new product. And to your point, the platform strategy enables more rapid development of products and generally a lower internal cost because you're using platform level services to build and piece together new capabilities that then turn into products. And so I kind of -- obviously I'm excited that we're at that area where we're going to be able to more rapidly introduce more capabilities to our customers. And then as far as positioning and selling, I think, in the second half of next year, we have the opportunity to really present maybe what we'd call a suite of suites. We'll go a little -- we'll slow off this a little bit. But as you can really show the strategic and tactical and operational benefits of the application suites that truly work together, then you can begin to position a little bit more like the big guys position, more like an EHR and ERP, like where you kind of have a suite of suites that works together. And a lot of times, CEO's of health systems pick their ERP based on the breadth of their offerings and how they work together. They don't always deliver on that interoperability promise. So we're being a little careful and as we see these new capabilities manifest before we market them -- overly market them. But I'd say, certainly by the second half of next year, we'll be attempting the position and more robustly to our -- to the C-suites of our customers, our capability sets go beyond the areas they are originally intended to serve, just learning serving HR and the Chief Medical Officer buying credentialing I think in each area, I think we have the opportunity to demonstrate more capabilities in the second half of next year.

[Operator Instructions] Our next question comes from the line of Jared Haase with William Blair.

Maybe I'll ask one on the new reporting tool sets for the learning application suite. Nice to hear about the positive rollout there. I was just hoping to hear a little bit more about any incremental functionality that's now available with this sort of next-gen version of the reporting tool. I think you referred to the legacy tech stack as kind of Asian architecture. And then just to clarify, is this something you'll push out as contracts come up for renewal over the next couple of years? Or can you actually go to clients a bit more proactively? Just -- it sounds like it's a pretty meaningful upgrade. So kind of wondering what the cadence of that looks like.

Yes, great. I'm glad to comment on as much of that as I can. Of course, there are teams that are really detailed here. But I will say this, the -- we're excited for many reasons. One, the architecture of this new reporting capability for learning will be the same architecture we're used to enhancing reporting data analytics for all of our products across the company. Again, when you talk about a platform strategy you expect leverage. And so this is the first rollout of new enterprise class reporting capabilities, analytics capabilities, benchmarking capabilities. And you're also right to know that it's built on a much more modern, faster, scalable technologies, and we mentioned Snowflake, for example, the performance benchmarks are multiples better than our older engines. And so secondly, on the economics, if you take -- look at its impact on learning, I'd say not to oversimplify, but the older methods were slow getting people their data harder to extract, less configurable, less able to integrate multiple data sources, essentially the old data warehousing technologies were just clunkier. And now we can pull data in from other applications into reporting capabilities. So the flexibility is just much, much greater as we release the basic insights that comes with the HLC replaces the old kind of reporting capabilities. And then Insights Plus provides a new level of analytics, helping measure learning effectiveness, for example, and there's minimal benchmarking service now, but that will come soon. And so yes, there's an upgrade economic pathway as well. So not only is it faster, better, smarter, more flexible and based on newer tech stack. And I think our customers -- one of the biggest things you do in learning is you pull data and you make sure you're compliant and you make sure you're on track and how you're comparing to others in the industry. How are you benchmarking your scores? What does your workforce now what's the competency profile. So that use of data is critical. And it's so great to be able to replace a 15-year-old architecture with a modern one in the last 30 days start to really deploy it into our top accounts and get great feedback. So -- and again, we did mention it has incremental new order value incremental contract by. So when you buy the Insights Plus, it's a buy-up and results in incremental revenue growth for us. So for all those reasons, we're excited. And don't forget, you can expect announcements over the next 3 quarters on new reporting capabilities for other products built on the same new technical architecture. So watch for that as well by the middle of next year, we expect to really lever these capabilities across our whole ecosystem, which, again, is reflective of the platform strategy. Thanks for the question.

Great. That's great to hear. And then maybe as a follow-up, I'll switch gears a little bit just on capital allocation and specifically the M&A environment, thinking about the common or the expectation that we could see that start to pick up over the next 12 months or so. I'm curious what's driving that inflection in your view? I guess, is that just stability in the macro environment or something else that's maybe catalyzing some of those incremental opportunities here? And then is there anything you would share in terms of areas of the solution set today that you think would make sense to bolster through M&A versus organic investment.

Yes. Great question, lots to that question. I do think the macro conditions are improving for strategic buyers like us, meaning a little bit of a price recalibration for targets that maybe it's got a little frothy. That said, there's -- anywhere there's a really hot, really great company. There's also a lot of active bidding now. There's a lot of private equity money on the side that -- but I would say just overall, the macro conditions for us, the way I do them through our lens, are, we think, improving. And so we're working hard to try to make that a reality. And to finish the discussion earlier when we talked about the 7% to 10% growth, I broke it down into 2 pieces. I failed to talk about the second piece. So the first piece was 5% to 7% organic, which we're going to deliver for this year. It looks like the other was 1% to 3% inorganic. But remember, that was spread over multiple years. And so while we've been very quiet on the M&A front for, I'd say, 24 months now, somewhat intentionally but also somewhat attributable to macro conditions. We've teed up some deals, decide they weren't the right fit. We've decided to focus on the core 3 apps and the platform technology for 24 months. But now we're getting to where we feel we can fold things in. And I think the first thing you'll see for us and hopefully in the next 2 quarters are small immaterial tuck-ins, but they support existing lines of business. Yes, like categorically will be launched. I think over the next couple of quarters, you'll see things that you will understand to fully be supportive of the businesses that we're currently in. So learning, credentialing and scheduling…

Our next question is going to come from the line of Richard Close with Canaccord Genuity.

Congratulations on this success. Bobby, I think it's been 2 quarters in a row now. You've given some examples of pretty significant growth in a customer on renewal. But you were -- I mean, I guess, last quarter, sort of warning us, not warning, but saying, "Hey, that's not necessarily completely normal in all cases. But if you're getting the escalators and now you have these new products, do you think that these larger renewals or expansions are going to become more prevalent?

Well, of course, it's our focus, and we have 60 account managers that look at blending new products into every renewal. So we're getting a little better, I'd say, showing -- showcasing more products at renewal, and they're getting more logical because they feel like more extensions when they're interoperable or there's a case to be made for interoperability in the near future. And so I hope. I mean, if you look at our sales organization, let's say, it's a 200-plus people. It's roughly 130 or so of quota-carrying specialists, meaning they represent specific products and 60 or so are account managers that work on what you just talked about, creating a better blend and they really watch the renewals and focus on the ARR, the account management group focus on the annual recurring revenue and account. And usually, if an account has 10 products, they drop to and add 3 or 4, you're trying to drive the ARR up. And so they're looking at changing the blend and mix of products in the accounts. And hopefully, they continue to get better and better at that. The cases I gave today, which show growth were critical because they feature the adoption of the platform technology, the APIs and the other pull-through products. So for that reason, we're excited. But you're right. We needed to be more typical than atypical and we do have 60 people focused on making that happen.

Okay. That's helpful. And then, Scotty, maybe just a little bit more on the consumption contract or customer that led to the lowering of the revenue. Was there anything specific that the levels did it accelerate as you expected for the second half [indiscernible]?

Yes. I mean I think that's kind of what I explained on the call was that they did pick up in the third quarter versus the second quarter, but just don't see the pathway to get to the, I guess, recoupment of the deficit that we saw in the second quarter. So they didn't like over consume in a manner that we felt like it was going to push through to get to the deficit that we saw. So we are kind of forecasting that to be a little bit off again.

Okay. And then just really quick. On the product declines, when does that sort of move to the rearview mirror, is that just like as things come up for renewal? How should -- is there any time line we can sort of set in terms of that?

Not yet, Richard, but I'll work on that. Here's what I would say. Right now, we've very carefully kind of classified our many lines of revenue by whether they're growth products, new products. We call them legacy products, which means they're supported and encouraged and maintain. Like if you look at even ANSOS right now, we call a legacy product, but it's not a sunset product yet. And so we're not in the active phase of saying, look, we're actively sunsetting. We're changing the support models. We're not there yet. And so I think next year, we'll get a little closer to the life cycles and trajectories of some of these core legacy products, which if you think about how we built credentialing, we bought a company called Morrisey, a company called HealthLine and they still have a lot of legacy customers, and they're profitable customers. They're also the highest risk customers because our competitors try to convert them just like we do to newer software. And so if you think of Morrisey and HealthLine and ANSOS three examples of legacy, what we need to do in the coming year is figure out when legacy becomes sunsetting and none of those are sunsetting right now. We're still supporting them. Again, they contribute to our EBITDA and our overall cash flows but they're definitely not growing. They're either shrinking by converting up to the, say, in this case, CredentialStream or ShiftWizard or we're losing them to the market as there are also targets for our competitors. But we're supporting them. We're having our quarterly updates to them. We're having webinars those customers. We're trying to maintain them because they are profit contributors to our business. And so right now, I would say in these 3 major ones, we just talked about Morrisey, HealthLine and ANSOS, we classify them as legacy customers, and we service them really well or we try to improve our service to them. We do a little less frequent patching and updates, but we still maintain and make current their basic infrastructure and holding them for the day when they'll be ready or we'll be ready to ask them to make a firm migration. And so that's kind of where we are. I'd say next year, we'll get more clarity on quantifying those and kind of having a path for them. Once they're officially declared to be sunsetting products, then that would still probably be a multiyear journey where people have choices on migration strategies and things like that. So I think it's going to take us some time to work through it. But I think we're getting better at stabilizing them in the last few quarters instead of losing them to the market. But again, it is the single biggest challenge we face in our total growth profile is attrition in those legacy customers.

Our next question comes from the line of Constantine Davides with Citizens JMP Securities.

Bobby, just a couple of platform questions. First, I think it's been a couple of quarters since you've given this, I'm just wondering how many users have claimed hStream idea at this point. And then Second, I guess, more of a bigger picture question. Just when you're on the other side of this platform initiative, do you see it helping more in terms of accelerating the top line growth files of the business, growth files of the business? Or is the impact more going to be just in terms of the margin profile of HealthStream?

Well, we wouldn't have undertaken this nearly 4-year journey. And actually, in many way, it goes back before that, where we started changing our strategies around data accumulation, things like that. So we wouldn't have undertaken this but we didn't think it provides a growth trajectory to the company, both hopefully, operating leverage, shorter time to develop new products and better cross-selling and products. And so I think we hope at the end of this rainbow is not just better core technologies, but a better growth rate as well. So I just want to make sure we don't just talk about it as a tech stack. It's a tech stack that we think drives growth and allows us to think about growing in new and exciting ways. Somewhat related to that, the -- when we integrate a partner, like I mentioned we made a minority investment, and I'm going to go ahead and tell more about it because I misspoke, I just got texted to correct it. And so we put a $0.25 million in. So again, very small investment into a small fintech start-up called [Plenary], and now so I'm announcing that. And it will be using our platform technologies to integrate their services, which we think their services will bring value to the 600,000 nurses in our NurseGrid network. And sometime before year-end, we'll announce the integration of their capabilities in the nurse grid and generate new financial opportunities for the company. Leveraging our platform strategies, our platform technologies to achieve that rapidly. So checkout [Plenary], it's a fintech that provides money-saving strategies to nurses that we think will be beloved as much as nurse grid for helping nurses save money when they're eliminating student debt and paying off loans. And so when you think of an ecosystem…

And just the first part of the question on the -- how many users have claimed their IDs at this point?

We haven't released claimed ID numbers. Maybe that's something we could consider for our investor conference, which, again, we'll target that late January, early February before our next year report probably. But certainly, early next year, we'll try to get an Investor Day. That would be a good topic to talk about. Because as you know, it's a complicated topic. There's a number of IDs issued and then there's those that are claimed, and then there's those that have what we call multiple keys on that key chain. So having a unique ID is one thing, but having a unique ID for each of our 27 different applications is another thing. And so as a whole, we call keys on key chains initiative, maybe that's something we can address in our Investor Day.

Great. And then one last one for me on scheduling. Are we at the point where sequentially the growth and ShiftWizard is starting to eclipse the attrition of the legacy product?

Maybe another -- so in our Investor Day, that would be another great opportunity to look at these crossover opportunities when you look at -- because the same question maybe exists when you look at CredentialStream against the acquired companies, Morrisey and HealthLine, which again have installed customer bases. It might be a good discussion to take a few of these cases and talk about that crosswalk. I mean we're excited to be able to show net growth of 4% even during the crosswalk. But obviously, we've had more of a drag on overall growth from these legacy applications than we wanted. But nevertheless, feel that we'll have good plans in place and do our best to manage through those migrations over the coming years. I feel a bit like a politician answering that because we haven't published the crosswalks yet and the plans. And as I said even earlier, they're more classified as legacy customers. There are no active rollout of sunsetting plans. And so -- but that's something we'll tackle in the coming years.

And our next question is going to come from the line of Vincent Colicchio with Barrington Research.

Most of my questions have been answered. Just curious, could you update us on ShiftWizard as far as how far along it is in terms of being where you want it to be for the large organization market?

Yes. I did just get an update on that the other day and in our recent Board meeting, actually yesterday. And here's what I would say about that. I think by the end of Q2 next year, will be better than feature parity. And that's at all levels of scalability, reporting and data because we just mentioned, for example, we launched Insights Plus for Learning, we'll turn our attention to data management on credentialing as well, so -- and on scheduling. And so I think what I would say is Q2 of next year, we should have the kind of feature parity and beyond. We think we'll actually be better than the legacy application set. So I think -- and also, we're already at the place where the ShiftWizard revenue run rate is higher than the ANSOS revenue run rate, I believe that's an accurate statement. So we've begun the crossover and the feature period that we think is necessary to improve our retention rates, I would say, Q2 of next year.

Thank you. And I would like to hand the conference back over to Robert Frist, CEO, for any further or closing remarks.

Well, thank you. I think we've covered everything I want to cover today. So we look forward to reporting our next quarterly earnings call, our year-end results, which will be later -- early next year, I think the end of February. So it's going to be a while since we talked to you guys, that's what we'll probably work to insert an Investor Day, and they're somewhere between, and we'll focus on wrapping up the year strong. So thank you, everyone, for participating in our earnings call, and we look forward to continued dialogue with investors in the coming days. Thanks. Bye.

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