HealthStream, Inc. (NASDAQ:HSTM) Q4 2023 Earnings Call Transcript
HealthStream, Inc. (NASDAQ:HSTM) Q4 2023 Earnings Call Transcript February 20, 2024
HealthStream, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to HealthStream's Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, I would like to inform you that this conference call is being recorded and all participants are a listen-only mode. [Operator Instructions] I will now turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.
Mollie Condra: Thank you. Good morning and thank you for joining us today to discuss our fourth quarter and full year 2023 results. Also in the conference call with me today is Robert 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 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. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call. So with that start, I'll now turn the call over to CEO, Bobby Frist.
Robert Frist : Good morning, everyone. I'm having a few connection issues. There might be a glitch here and there will push through it though and do the best we can. For the earnings call, I'm really excited about how we finished the full year 2023. There are lots of exciting things to cover, and we'll do that in great detail in the next 30 minutes. We delivered record top-line revenue of $279.1 million and record adjusted EBITDA of $61.3 million. In our guidance for 2024, we expect to surpass both of those high watermarks as we further expand our ecosystem with exciting new products, new sales channels and new target markets. The significant development in our market expansion [Technical Difficulty] directly to individual end users, like physicians, nurses, nursing students.
Our extreme focus allows us to approach individuals [Technical Difficulty]. Our online platform website is better for handling purposes. The most popular purchase due to the DNA mandate opioid with over 2,700 orders placed in. We also amplified our ability to reach and to sell individual nurses through NurseGrid Learn, which is linked via our popular NurseGrid app. As a reminder, NurseGrid is the number one most popular app for nurses based on ratings and downloads in the Apple Store, with approximately 1 and 6 nurses in the U.S. regularly using it. During the third and fourth quarters in 2023 over 1,800 orders were placed by nurses. Some of the top products sold [inaudible]. Yes, I'm having some connection issues I'm getting feedback from.
So again, we'll push through the best we can. I'm excited about our early success in selling direct to healthcare professionals with our new e-commerce enabled hStream platform. I believe that the ability to participate in our ecosystem throughout one's healthcare journey includes new opportunities for caregivers to advance both their skills [indiscernible] and their quick follow-up reminder about our business and who we are for the benefit of anyone who is new to HealthStream. First and foremost, HealthStream is a health care technology company dedicated to developing, credentialing and scheduling healthcare workforce through SaaS based solutions, each of which are becoming more valuable because of the interoperability they're achieving through our hStream technology platform.
Historically, we sell our solutions on a subscription basis under contracts that average 3 to 5 years in length, which is very predictable. In fact, 96% of our revenues are subscription based. As I just mentioned, we have also started to open our sales channels directly to healthcare professionals and nursing students across the continuum of healthcare training. We are profitable, have no interest bearing debt and a strong cash balance of $71.1 million. We are solely focused on healthcare and more specifically, the healthcare workforce. The 12.3 million healthcare professionals and nursing students in the United States comprise the total addressable market for our SaaS. I'm going to need to [indiscernible] it looks like we're having bigger connection issues than I thought.
So I apologize for that. I'm going to have to go find another dial in. Give me just a second. Hey, Mollie. I'm going to ask if you can hear me that you pick up since the script is written. If you could pick up in the paragraph or maybe even since you know where I dropped?
Mollie Condra : Yes.
Robert Frist: Go ahead and so I can get back in. Go ahead and start from the top.
Mollie Condra: Sure. So I'll start where Bobby left off, if I understood that correctly. So in the fourth quarter, revenues from our scheduling application ShiftWizard grew 31% over the prior year quarter as customers continue to report high customer satisfaction. Since purchasing ShiftWizard in October 2020, we have selected it as our primary scheduling application and significantly expanded its ability to perform at enterprise scale. And it's only going to become more powerful, more differentiated in the market in the coming year. In the fourth quarter, we welcome many new customers for ShiftWizard, including Norman Regional Hospital, Freeman Health Systems, and Phelps Health. Revenues from credentialing privileging enrollment application, credential stream grew 52% in the fourth quarter versus the same period last year.
In the fourth quarter, we contracted 37 new customers for our credential stream solutions. These new credential stream customers included many highly respected healthcare organizations like Intermountain Healthcare, Lyra Health and Dayton Children's Hospital. So there's still a great deal to talk about. But right now, I'm going to turn it over to CFO, Scotty Roberts for a more detailed look at our financial performance and expectations.
Scotty Roberts: I'm going to start my portion of the call today with a recap of our financial results for the fourth quarter and then I'll go over our financial outlook for 2024. Unless otherwise noted, the comparisons will be against the same period of last year. We continue to deliver solid results as we closed out the fourth quarter of 2023. Revenues were $70.6 million, up 3%. Operating income was $4.3 million, up 38%. Net income was $4.6 million, up 87%. Earnings per share were $0.15 per share, up from $0.08 per share. And finally, adjusted EBITDA was $16 million and was up 17%. Our revenues increased by $2.1 million or 3% coming in at $70.6 million, compared to $68.5 million in last year's fourth quarter. Our revenue mix continued to tilt in the direction of subscriptions versus professional services.
In fact, revenues from subscription products accounted for 96% of total revenues and were $67.9 million increasing by 4% in the quarter. Professional service revenues declined by $0.5 million or 17%, which had a negative impact on our growth rate of approximately 80 basis points. So now let me provide some more color about the revenue results. As Bobby and Mollie mentioned earlier, we saw a good mix of growth contributors throughout our portfolio, but I want to call out and quantify a couple areas that kept our growth rate for the quarter lower than it would have otherwise been and lower than we expect to see it in 2024. The first area that I'll highlight is associated with our ANSOS scheduling products. The suite of products was down $0.5 million or 13% in the quarter.
Our focus continues to be on stabilizing existing ANSOS customers and migrating them to ShiftWizard, our SaaS scheduling application, which grew its revenue by 31% in the quarter. Future declines associated with the remaining $14 million of ANSOS related revenue are contemplated in our 2024 guidance. The second area that I want to mention is our quality manager solution, which accounted for approximately $5.5 million of subscription revenue for the full year of 2023, and it was down $0.4 million or about 23% in the quarter. We acquired this product in 2019 and unlike most of our products it's sold to the skilled nursing facility market. And while most areas of healthcare have rebounded since COVID, skilled nursing facilities, in particular, have continued to experience financial pressures.
ANSOS, quality manager and professional services declines offset some of the exciting growth that we experienced in products like CredentialStream and ShiftWizard. Now, our remaining performance obligations were $541 million as of the end of the year, compared to $517 million the year before, and we expect approximately 42% of the revenue backlog to be converted in 2024. Our gross margin was 66% compared to 65.7% last year, and this was in the range that we expected. Moving on to operating expenses. The reorganization of the business as a single operating segment at the beginning of the year led to efficiencies and cost synergies in our operations that are reflected in our financial results for the quarter. We were able to maintain our operating expenses, excluding cost of revenues to a modest increase of $0.4 million or 1%.
And most of this year-over-year increase was from depreciation and amortization, which was up 10% and product development was up 1%. Our G&A and sales and marketing expenses were down 6% and 1%, respectively. Adjusted EBITDA was $16 million which was up 17% and adjusted EBITDA margin improved to 22.6% compared to 19.9% last year. Now, let's go over the balance sheet metrics. We ended the quarter with cash and investment balances of $71.1 million, compared to $71.8 million last quarter. During the quarter, we deployed $6.6 million for capital expenditures, $8.8 million to shareholders through our dividend program and we repurchased $6.8 million of our common stock under the share repurchase program announced in September. For receivables management, our day sales outstanding were 42 days for both the fourth quarter of this year and last year, while we've had a relatively steady performance with receivables.
During the past year, our bad debt charges increased by approximately $600,000, which about $350,000 occurred in the fourth quarter. Our total bad debt charges for the full year approximated $1 million or about 0.37% of revenue. Now switching over to cash flows. For the full year, our cash flows from operations improved by $12.8 million or 25% coming in at $64 million, and free cash flows improved to a record high of $36 million, compared to $26.1 million last year, an increase of 38%. We have a strong balance sheet with over $71 million of cash, no debt and improving free cash flows, with available capital to deploy, we apply disciplined approach to our capital allocation strategy, which includes M&A, dividends and share repurchases. While we did not complete any acquisitions during 2023, we maintain an active M&A program to evaluate potential transactions that are --that fit our investment criteria.
In addition, deploying capital through cash dividends and share repurchases are ways for us to improve shareholder value. In February of 2023, our Board of Directors adopted a dividend policy, which we returned $3.1 million of cash back to share shareholders last year. Yesterday, our Board of Directors declared a quarterly cash dividend to be paid in March, increasing the payout by 12% over the previous quarterly dividend. As for our share repurchase program, during the quarter, we made $6.8 million of share repurchases and we have $1.1 million remaining under the program. Our current share repurchase program will expire on the earlier of March 31, 2024, or when the maximum dollar amount under the program has been expended. In the fourth quarter, hStream subscriptions increased by 85,000 over the previous quarter to a total of approximately 5.8 million.
Now as we turn our attention to metrics that are more relatable to revenue growth and our medium-term financial objectives, we are planning to retire the hStream subscriptions metric with this report. We believe that hStream subscriptions have served as a good indicator of our ability to deploy our platform at scale. We are now turning our attention to the future financial performance that scale can drive. As we've said before, hStream subscriptions are not intended to be used to calculate revenue per subscription or revenue per subscriber. A key reason for that is because not all products that result in revenue gains or losses require hStream subscriptions and subscriptions do not necessarily correlate on a one to one basis with subscribers.
We continue to believe that medium-term financial objectives that we introduced at our September of 2022 investor meeting are key performance indicators for our business. So, let's refresh on our medium-term objectives, metrics which support them and our performance against those metrics in 2023. Our revenue growth objective is to be in the 7% to 10% range with 5% to 7% coming from organic growth and 2% to 3% from inorganic. For 2023, we achieved revenue growth of 5%. Our gross margin objective is 65% to 68% and we achieved 66%. And our adjusted EBITDA margin objective is 21% to 24% and we achieved 22%. We're excited to now give our financial guidance for 2024, which we expect to deliver on each of the three medium-term objectives I just described.
We expect consolidated revenues to range between $292 million and $296 million. We expect adjusted EBITDA to range between $64.5 million and $67.5 million and capital expenditures are expected to range between $28 million and $30 million. This guidance does not include assumptions for any acquisitions that we may complete during the year. Our revenue guidance range implies a growth rate between 4.6% and 6.1%, and we expect steady performance across the year. Our ability to upsell and cross-sell solutions to existing accounts, improve our net revenue retention and acquire new customers, including targeting the nursing school market and increasing sales through our commerce channels, are elements that we believe will help us achieve these revenue targets.
We expect gross margin to be around 66% for the year and subscription revenue mix from solutions that we own versus partner solutions, which we pay royalties and investments in our platform and infrastructure, such as cloud hosting and software will be the primary influences on gross margin. As for staffing, we have just under 1,100 employees and approximately 50 open positions as of the beginning of the year. So labor costs are expected to increase steadily across the year. We expect both product development and sales and marketing to increase in the 4% to 6% range. We have plans to increase our marketing efforts this year, including our trade show presence and engagement directly to students and professionals. We expect that our G&A costs will increase 1% to 2%.
And finally, we estimate the effective tax rate will be in the low to mid-20% range. That concludes my comments for this quarter's call. Thanks for your time this morning, and I'll now turn the call hopefully back over to Bobby for some additional updates.
Robert Frist: Thanks Scott. What I'm going to do is repeat my opening section because we need a good record of it, and then I'll pick up with the third section, my final section. If I break out again, I'll ask Scotty to do the same. Just go back to the top of the script and get my first section in the record and finish with the third section of our presentation. Good morning. Thank you, Mollie for the handoff earlier. Welcome to our fourth quarter and full year 2023 earnings call. I'm excited about how we finished the full year 2023. We delivered record top-line revenue of $279.1 million and record adjusted EBITDA of $61.3 million. In our guidance for 2024, as Scotty just mentioned, we expect to surpass both of those high watermarks, as we further expand our ecosystem with exciting new products, new sales channels and new target markets.
A significant development in our market expansion strategy in 2023, so our additional focus on selling directly to individual end users like physicians, nurses and nursing students. Our hStream platform now allows us to approach individuals with the learning most applicable to them. I'm going to check real quick and see how that came through. Scotty or Mollie?
Scotty Roberts : You're coming in just fine, Bobby.
Robert Frist: Around midyear, we began selling primarily to physicians on our newly released CME courses site powered by the hStream platform. On that site, we've seen a surge in site visits and purchases with the most popular purchase being the new DEA mandated opioid course with over 2,700 orders placed in the fourth quarter alone. During the last two quarters in 2023, we also amplified our ability to reach and to sell to individual nurses through NurseGrid Learn, which is linked via our popular NurseGrid app. As a reminder, NurseGrid is the number one most popular app for nurses based on ratings and downloads in the Apple Store, with approximately 1 in 6 nurses in the U.S. regularly using it. During the third and fourth quarters of 2023, empowered by our new hStream commerce capabilities, over 1,800 orders were placed by nurses.
Some of the top products sold directly to nurses via NurseGrid Learn include our stable program, our regulatory courses we call SafetyQ and ComplyQ and CE Unlimited. I'm excited about our early success in selling direct to healthcare professionals with our new e-commerce enabled hStream platform, I believe that the ability to participate in our ecosystem throughout one's healthcare journey, including as a student, which is a new target for us, when they're an employee at a healthcare facility or as an individual finding us between jobs even now with this new commerce capability. We kind of create a continuous revenue opportunity out of the millions of subscribers in our network. And I think this gives them opportunity to continuously develop them and engage with our ecosystem throughout their career.
Before we go further, I wanted to provide a high level reminder about our core business and especially for the benefit of those who may be new to HealthStream. First and foremost, HealthStream is a healthcare technology company dedicated to developing, credentialing and scheduling the healthcare workforce through SaaS-based solutions, each of which are becoming more valuable as they become increasingly interoperable through our new hStream platform technologies. Historically, we sell our solutions on a subscription basis under contract that average 3 to 5 years in length, which makes our revenues recurring and predictable. In fact, as of today, 96% of our revenues are subscription based. As I just mentioned, we have also started to open our sales channels directly to healthcare professionals and nursing students across to continue with health care training.
We are profitable, we have no interest bearing debt and a strong cash balance of $71.1 million. We are solely focused on healthcare and more specifically the healthcare workforce. The 12.3 million healthcare professionals, which now include about 1 million nursing students, in the United States comprise the total addressable market for our SaaS solutions. In the fourth quarter, revenues from our scheduling application ShiftWizard grew 31% over the prior year quarter as customers continue to report high customer satisfaction. Since purchasing ShiftWizard in October of 2020, we selected it as our primary scheduling application and significantly expanded its ability to perform at enterprise scale and is only going to become more powerful and differentiated in the market in the coming year.
In the fourth quarter, we welcomed many new customers for ShiftWizard, including Norman Region Hospital, Freeman Health System and Phelps Health. Revenues from our credentialing, privileging and enrollment application CredentialStream grew 52% in the fourth quarter versus the same period last year. In the fourth quarter, we contracted 37 new customers for our CredentialStream solutions. These new CredentialStream customers included many highly-respected health organizations like Intermountain Healthcare, Lyra Health and Dayton Children's Hospital. There's still a great deal to talk about. And since Scotty's covered his second, I'm going to jump right down to my concluding remarks. Now during investor call in October, I mentioned that we grow our business by expanding market share and increasing wallet share.
In the first half of the call, I talked about expanding our markets by selling directly to an audience or physicians, nurses and nursing students. Now I want to provide a good example of how we expanded wallet share through better retention strategy, expansion and cross selling at a key customer account during the fourth quarter. One of our valued customers on the West Coast chose to expand their Learning Center and hStream subscriptions from 6,200 users to about 8,000 users. They also renewed their purchases of several content offerings like their HealthEquity and Belonging education for their staff, the checklist software tool they use for different compliance efforts and competency validation, their SafetyQ and ComplyQ, again regulatory training content and even EBSCO's clinical skills program and dynamic health.
Not only did this customer commit to a long-term five year renewal on those products, they decided to further leverage the power of the hStream marketplace by adding our CE Unlimited product with the Jane AI technology. I just love that this customer continues to trust HealthStream for the kind of the more complete education training of its workforce. You heard that some of this was in compliance, some in clinical skills, some in soft skills and business skills. It's exciting to see the breadth that they use us for that area. But in Q4, the customer actually also purchased ShiftWizard, our scheduling application. This is the first time they've entered that part of our ecosystem using our ShiftWizard application. I'm encouraged by the cross selling that occurred when the ShiftWizard purchased, because it represents our focus on that cross selling effort in all of our accounts, but in particular, this one is exciting.
In this example by noting that the recurring revenue from this customer grew by 55%, through that renewal process to about $216,000 in the quarter. So it's a pretty good sized account and it grew by 55% when it renewed and it added not just more learning products, but also the cross sell or the up sell, the purchase of the scheduling applications. And we're really excited because now we're beginning to demonstrate how those applications, now although limited and powered by new hStream technology, some limited capabilities of how our different systems can work together. I do want to talk just for a minute about our evolving AI strategy. Going forward, we expect AI to impact how we develop products, the capabilities of our products and even kind of some of the models for our products like the learning model, gets adjusted with the application of AI technology.
We are really excited that we're making incredible progress with our Jane AI product and we really are putting our energy in AI around the Jane platform, which is used to develop and identify competency gaps for nurses. It's a really great place to apply AI technology because we have proprietary taxonomies that can be used in navigating a custom pathway for someone. We can use the natural language processing to interpret their written feedback when they take our Jane competency testing. And so this product is really exciting. Over the last 24 months, we've received numerous awards since its introduction. And in the fourth quarter, it was recognized for 3 more prestigious national awards, bringing the total number of awards for Jane to 11. And so, I'm definitely excited about this award winning product and its recognition for pioneering new methods of learning and application of AI to the learning journey.
And what I'm most excited about though is that in the next quarter or so, we're bringing a new version of Jane to market that's specifically tailored for nursing students. And if you remember, last quarter we announced that we were going to target the nursing school market and the nursing students in that market. And I think the new version of Jane that we're preparing to that market is going to be particularly impactful for those students early in their career. And so, we're really excited about our emphasis on the use of AI in the learning journey, in particular the award winning Jane product and the new modifications of that product make it appropriate for both professional staff in hospitals and nursing students in nursing schools. In closing, I do want to highlight that our Board recently approved or just yesterday an increase in the cash dividend to be paid out to shareholders.
They approved the dividend payment of $0.028 per share, which is about a 12% increase over the previous quarter's dividend of $0.025. The upcoming dividend is payable on March 22 to holders of record on March 11. And so if you're not in stock, you can still come in and earn that dividend and go on this journey with us. We continue to be confident in our ability to accomplish our innovative organic and our inorganic growth strategy. As we mentioned, we have about $71.1 million of cash, while also returning cash to shareholders as part of our objective. So, we're excited about the dividend program. If you're interested in a profitable, highly recurring revenue, SaaS PaaS Healthcare Technology Company that for 2024 expect to deliver steady growth and is determined to share some of its gains directly to shareholders in the form of a dividend, one that we just increased, maybe HealthStream as a company and stock for you.
And so that's my marketing pitch. I've always got to do a little bit of selling. Look, we're on the journey together, and I've been building this company for a long time and I've never been more excited about the prospects for the company, as our technologies evolve and incorporate the latest like the evolving AI landscape. And our teams are amazing. We have 1,100 employees that are building incredible products and taking them to market with great passion. So we're really excited as we launch into this New Year. I'll turn it over to the operator for Q&A. I hope that that came through. If it didn't, we'll probably have to schedule another day like an investor day or something to make sure we get all this great information on the transcript. I'll turn it over to the operator for questions.
Operator: [Operator Instructions] Our first question comes from Matt Hewitt with Craig-Hallum.
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