Robert Frist - Chairman and Chief Executive Officer Scotty Roberts - Senior Vice President and Chief Financial Officer Mollie Condra - Vice President of Investor Relations and Communications.

Good morning! And welcome to HealthStream’s First Quarter 2021 Earnings Conference Call. At this time I would like to inform you that this conference is being recoded and that all participants are in a listen only mode. At the request of the company, we will open the conference up for question and answers after the personation.

I would 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 first 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 risk and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements.

Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K, 10-Q and our earnings release. Additionally, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure.

A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call. So with that start, at this time I'll turn the call over to Bobby Frist..

Thank you, Mollie. Good morning and welcome to our first quarter 2021 earnings conference call. There is so much news to cover this morning, I can't wait to get started. But I think context is very important and so personal contextualize.

The nation continues to move through the pandemic and there are reasons for cautious optimism, especially here in the U.S. given that over half of the adults has now had at least one vaccine dose and a third are fully vaccinated.

As we celebrate this remarkable progress, there are plenty of challenges still remaining regarding the pandemic that affects us as individuals and of course our company as well.

For example, figuring out our new work-from-home models and our approach to operating as a business and making them more, whatever the new norm is, the new permanent new norm is going to be, we are working on that diligently now.

So, what I can tell you is absolutely certainty is that HealthStream’s mission, that's focused on the people of healthcare and improving the quality of healthcare by helping develop, retain, engage and credential those that are in healthcare remains constant. And as you listen to our call today, I hope you recognize our commitment to that mission.

How we are striving to achieve it, and you're going to how we are executing on it through some of our exciting new products, many of which have been in development for years and are emerging in the market place as we speak. So I'm going to give a little more detail today, about some of these exciting new products or progress with them.

So to start out though, I do want to start on our financial guidance, which we updated after a strong first quarter of necessity.

The quarter included a record high adjusted EBITDA that's in our company's history and record quarterly sales for Verity hStream, which is as you know have been working diligently on Verity hStream for several years through a combination of core acquisitions to build a new application set and credentialing and privileging, and we're seeing it emerge now delivering record quarterly sales and I can't wait to share more details on that.

And there are also two multi-million dollar contracts for our emerging products. These are products that we are excited about and now we're glad to see the market get excited about them as well.

And so with all of that context, we expect revenue for the full year 2021 to be in the range of $245 million to $255 million and adjusted EBITDA to be in the range of $40 million to $44 million. So I’m excited to provide that updated guidance to all of our financial community and current investors.

As I stated in our call in February, I believe one of the most remarkable things about this guidance is that we are projecting potential revenue growth despite a $38.4 million revenue decline in legacy resuscitation products from 2020 to 2021, and the $4 million to $4.3 million negative impact of acquisition related deferred revenue write-downs.

So despite these headwinds, our first quarter performance gives us confidence in our improved financial expectations for 2021, where we believe we have a good shot at showing top line revenue growth on a year-over-year basis.

So I think that's a great accomplishment by our team to figure out the balance of both organic growth as we’ll talk about and inorganic growth, to deliver what looks like the potential amount to actually deliver growth in the year with such material financial headwinds from a declining product set.

I just want to take a moment to reiterate some of the directional information I provided in our last call on what we could expect beyond the current year, which is a little bit longer view than we normally provide. It’s building on our anticipated results for 2021. In 2022 we expect to deliver organic, high, single digit revenue growth rates.

And second, we've been focused on our gross margin profile. We're expecting a gross margin profile of 65%, approximately 65% in that time frame as well.

And third, a return to adjusted EBITDA margins of 15% to 20% and we saw some depression in those margins as we saw the product changes and the investment change we would make in the last few years, but we see a return to those margins for adjusted EBITDA in 2021.

So it's not only the continued success for our long standing product portfolios, but also the market's enthusiastic response to our innovative new solutions that contributes to our confidence in the company's future growth, and I'm going to highlight a couple of those now.

One of those new innovative products that we call Jane, is the first of its kind in the market, to the best of our knowledge. Jane is AI driven. It has components of really exciting technology, but it’s not the technology that’s exciting at it, but what it does for clinicians.

It’s one of the first intelligent competency development systems in the market. It's got components like Natural Language Processing by IBM Watson and so the state of the art technology is changing the way nurses assess and develop and maintain their clinical competencies. Let me explain how it works just a little bit.

We, through two acquisitions, through our M&A program, we acquired testing services and data sets that some of which had 30 years of history on how to evaluate the comp – clinical competence of nurses specifically.

And over the years we painstakingly converted that data into dynamic algorithms that involve components of AI capable of having real-time conversations with nurses.

Next, we developed high quality videos and simulations that present clinical events that nurses respond to in real time by telling Jane what they believe is happening and what should be done for the patient. This produces an assessment that identifies the nurses’ strengths and areas for improvement. But we didn't stop there.

In order to make Jane a true virtual coach, like a mentor to nurses, we took our proprietary taxonomy engine, and connected it from the assessments that I talked about are included in Jane, to a library of 1800 content titles.

This allows Jane to provide a personalized learning plan to each nurse by identifying particular areas of need and then recommending actual education and training to address their unique individual needs. So, you can probably tell we're excited about Jane and I'm excited about it, because it has been, well over five years in development.

And we started selling it you know 18 months ago and we're not the only ones excited about Jane. Jane just recently won six of the industry's most prestigious awards, including two first place awards from the Brandon Hall group.

One was a gold medal for best advance in AI and machine learning, and another was a gold medal for best advance in emerging learning technology. So we're excited that others are seeing what we see in our new Jane capabilities.

These awards recognize that Jane has moved assessments from the pen and paper world and put through online test to an immersive multimedia journey that is specifically tailored to each nurse. We are also pleased that Jane was awarded a patent to further recognize it's one of a kind technology and approach.

Awards aside, we think the greatest accolade Jane can deliver is adoption by our customers, right, because we think it can have an impact on eventually the skills and capabilities and competencies of their staff. In 2020 when we first began offering Jane at scale, our goal was to sell Jane to one account per week every week of the year.

We actually accomplished that goal and on a similar pace so far in 2021. As I mentioned earlier, we had a leading health system to make a multi-million enterprise wide purchase of Jane, kind of the first of its type, and kind of its scale in this first quarter of 2021.

As customer utilization grows and Jane’s capabilities expand, we look forward to updating you on how Jane is helping healthcare providers improve the quality of care that patients receive, and I think it's one of the most exciting developments we had in the industry in a long time and it's not an overnight thing.

It's taken many years to build, tune and refine and test and have customers evaluate the Jane Technologies. So, you know our focus remains on innovation and that’s little hard to see given all the transitions we've been talking about in the last several years.

But we think these innovations can deliver improved outcomes and higher skilled workers in healthcare. So, I do want to talk a bit about the transition though. An important part of our focus has involved several key transitions, we discussed on really for over two years.

I believe we crossed an inflection point, where the major business risk associated with the transitions are like market acceptance, so these are the major – will the market except what we build, will we get any adoption of the technology, will the technology be viable.

There is always questions like that, have you've been building technology for a long time and then it's my sense that many of those kind of major business risks, I call them existential risks are behind us and we're kind of doing operational risk phase on these three transitions.

And so it’s a different kind of risk and we are two years in to this, little more than two years into the three year transitions and I guess I'm kind of declaring the existential risks of these major transitions behind us, and we have normal market competitive risks and the normal dynamics, but the technology we're building are viable now and they are starting to make a difference.

So for example, the Red Cross Resuscitation Suite program comprised of BLS, ALS and PALS competency developmentcurriculum. We launched in January of 2019. It brings an updated, highly adaptive competency base development solution to healthcare professionals.

It offers certification to healthcare professionals, successfully demonstrating proficiency of lifesaving, resuscitation knowledge and skills.

So it’s a really well defined product and I think you know when we first went on the journey in early ‘19 we were uncertain of its adoption, but just by way of an update the program has been adopted across all 50 states and since its launch we’ve amassed over 289 new contracts signed by customers, which includes healthcare facilities of all types and sizes from across the continuum of care.

It includes some of the industry’s largest acute care health systems like HCA, Committee Health Systems, Quorum and Trinity, along with many of the most award winning, thought leading, acute care organizations like Cedars-Sinai and Kettering Health Network.

And in the non-acute space as well we have really great wins and customer benefits going to say Fresenius Medical Care, one of the largest renal care providers in the U.S. and the LHC Group, a leading home healthcare service provider operating in 35 states.

So all of them have seen the innovation of the Red Cross Resuscitation Suite, particularly how it’s executed through the HealthStream network, the HealthStream platform, bringing this really exceptional converge to this relatively new product.

But like I said, with 289 new contracts and some of those representing hundreds and hundreds if not more locations and facilities and thousands or over 0.5 million workers now moved through the program or engaged in the program, we are through that the concept of – look, will it be accepted as a viable solution in the market? I mean now we face normal execution against our competition.

How much market share can we gain? How will it continue its growth trajectory? So, it's helpful to think through a bit of history. It took us 12 years to build our highest level of adjusted EBITDA contribution from our legacy resuscitation offering. So 12 years of selling and marketing the legacy products.

We expect to eclipse that level of adjusted EBITDA contributions from sales of our Red Cross Suite in just 3.5 years. So by the middle of 2022 is our current forecast where we will eclipse what was the highest level of adjusted EBITDA from the prior legacy platform.

So we do have some time to go in front of us, but we're on an incredible trajectory with the Red Cross Resuscitation Suite. And speaking resuscitation offering, it’s important to understand too that we're building a more comprehensive portfolio simulation offering and resuscitation offering.

And so in February of 2020 we announced the addition of the S.T.A.B.L.E. program. That’s a leading neonatal education solution. It’s highly respected and it’s now available online exclusively through HealthStream. And we saw strong sales in the first quarter and it was adding to our thousands of subscriptions for the S.T.A.B.L.E. program.

It’s just a really well known program, nationally and in some cases internationally and we’ve helped develop and take it online, an online format from a classroom format and its being well received in the market.

So our portfolio is no longer dependent on a single application point in our Simulation Suite and our Resuscitation Training Offerings, it's being broadened.

So we are committed to the continued diversification of that product portfolio and have exciting new advances coming in areas like, it will be specific dimensions to resuscitation and specific care settings.

The second transition that we talked about is Verity hStream and we’ve created through four acquisitions and been working diligently for four years to build a kind of a common vision, a common team to focus on credentialing and privileging enrolment needs in healthcare.

And during the first quarter of 2021, 45 customer accounts contracted for the Verity hStream Application Suite and we call that the CredentialStream Suite.

Bringing our cumulative total to approximately 390 customers on the new CredentialStream Suite, and this included one new customer to sign a multi-year, multi million contract with Verity hStream’s next generation SaaS application, and it represents the single largest sale in Verity hStream history.

And so we're really excited that this product, this transition if you will through, from four acquisitions to one common approach and one SaaS Application Suite called CredentialStream, you know 390 accounts now contracted for that new platform, we think we're beyond just proving its technical liability and so the existential risk of the four acquisitions bringing them the one company we think is behind us.

Now we are in the normal business risks of how much market share can we gain against the competition and how well can we position the product for future growth and how compatible it will be and I think we are well positioned on all those fronts with Verity hStream and the CredentialStream platform.

And it’s measured by the kind of customer you see coming on to the platform.

In the first quarter you know Providence Health System and Mount Sinai Health System and Atlantic Health System and Seattle Children's Hospital, all these new customers, including the distinguished ones I just mentioned, came on to the new enterprise CredentialStream platform through contract and we're in the midst of working through implementation strategies for all of them.

So we are excited to be gaining adoption of the best-in-class solution, that’s our belief and with best-in-class customers. It’s really kind of an exciting part of this transitional journey.

And again there is always challenges in front of us, learning the new selling model that are more virtual and getting through all these implementation backlogs from new signed customers to get to revenue recognition. There is plenty to do, to continue to execute in this area and there's plenty of business risk.

But I do think that at this point, you know 27 months into this migration, we've at least proven the viability and the acceptability, the market acceptance of the CredentialStream platform built by the Verity hStream team, they’ve done a fantastic job.

And further here to talk about is the upgrade, kind of our move to a past strategy through the hStream platform, and we do have a lot of work left here.

Not all of our application sets, particularly on new acquisitions in the fourth quarter and the first quarter are wired to or even benefiting from this new pass architecture we’ve been building for over 3.5 years.

But increasingly we are connecting them to the pass architecture and that's allowing us to develop things more rapidly, it's allowing us to interconnect applications that connect down to the hStream platform.

It’s allowing us to put value added services in the new platform that can manifest back out in the application sets, like the learning and development set, credentialing and privileging set and the scheduling and capacity management set of applications.

So we're finding ways to just pass application infrastructure we are building to connect to and power up into each of those applications sets. So, just a quick update on that. In the first quarter we added approximately 21,000 net new hStream subscriptions, bringing our cumulative total to about $4.34 million subscriptions.

Those are subscriptions not subscribers. It’s important to note that if you’re using an application that connects to hStream, you are going to get a subscription to hStream and that could be tailored a little bit based on the application your licensing from us, the features of hStream you're getting and the benefits from that subscription.

And so it is possible for an individual to have multiple subscriptions to the hStream platform by buying multiple applications that connects to the hStream platform or drive benefit from it, say economically, like maybe a discount.

So hStream brings value to customers and partners alike and it's important to know that since inception for example, the American Red Cross Suite has been powered by the hStream pass architecture.

Our updates with regard to these business transitions began in the start of 2019, that’s 27 months ago from really about now, and we continue to work on each of these transitions. But as I’ve said, we’re moved to – call it an operational execution phase.

So we are going to talk a lot less about transition and transitional risk on a go forward basis and talk a little bit more about what things are exciting, that are emerging like Jane and other new products that are coming in the market as we speak. At this time I think it’s important to take a look at the finances.

The one thing we want everyone here and our analysts to hear, we had a really good first quarter.

Obviously we are excited about it, but there are reasons for it to be conservative as we go forward, including increased need for investment, some one-time expenses that were not in Q1, that as we return to normal operations like putting pay raises back in place for employees will have increased expenses.

So we still need to even though we had a strong first quarter, be cautious about how we model the future, because we're still investment phase. With that I’ll turn it over to Scotty Roberts. .

Good morning everyone. I want to start with a summary of our results for the quarter. Our revenues were $63.5 million, which is up 3% over last year and included modest growth within both reporting segments.

Revenues for 2021 were impacted by $1.6 million revenue reduction associated with deferred revenue write-downs, which were primarily related to acquisition that we completed during the fourth quarter of last year. Operating income was $3.3 million or down 54%.

Net income was $2.3 million or down 68%, and EPS was $0.07 per diluted share down from $0.22 per diluted share in the prior year. Operating income, net income and EPS were all down, in part because last year's first quarter included a $3.4 million non-cash reduction to cost of revenues.

While these GAAP based financial measures experienced declines, our non-GAAP performance measure, adjusted EBITDA improved to $13.6 million or up 14%, which is a record quarterly half for the company. Both business segments achieved revenue growth over the prior year.

Workforce Solutions revenues were $51.3 million and were up 3% and revenues from provider solutions were $12.2 million and were up 4%. As we previously discussed in the past several years, we no longer sell legacy resuscitation products and revenues from these products have been declining over the past two years as subscriptions expired.

We indicated that revenues would cease at the end of 2020, which essentially occurred as expected. However, with our partner’s support, we extended utilization of these products for a small group of customers, which resulted in a $1.8 million of revenues on legacy products during the first quarter.

Similarly, we expect legacy product revenues in the second quarter of approximately $700,000, then to be de minimis for the remainder of the year.

Revenues from the legacy products were $11.2 million last year, and despite a year-over-year decline of over $9 million and more than offset the decline in revenues through contributions from recent acquisitions, coupled with growth in other solutions from both segments.

Excluding revenues from the legacy resuscitation business, consolidated revenues grew by 22% which was comprised of 8% organic growth and 14% from acquisitions. Our gross margin was 66.5% compared to 66.9% last year. Gross margins last year were also positively impacted by the one-time $3.4 million non-cash reduction to cost of revenues.

If you exclude the impact of this favorable adjustment, gross margins would have been 61.3% last year. This margin improvement is in-line with our goal to achieve a gross margin in the mid 60% range for 2021. Operating expenses excluding cost to revenues were up 15% or $5 million.

This increase reflects both investments in our core business, as well as incremental expenses associated with acquired businesses, including integration and transition services costs. Operating expenses from the acquired companies makes up the majority of the $5 million year-over-year increase.

Offsetting these cost increases though were lower expenses such as commissions associated with the decline in legacy resuscitation revenues, reduced travel as a result of COVID-19, and we had a non-recurring, non-cash expense reduction based on changes to our paid time off policy.

The combination of these factors led to our operating income declining by $3.9 million or 54% to $3.3 million, while adjusted EBITDA improved by $1.7 million or 14% to $13.6 million. Our cash flows from operations improved to $19.1 million this year compared to $6.1 million last year, which mainly resulted from higher collections.

Our DSO was 52 days compared to 44 days last year and this increase was primarily impacted by the additional receivables from acquisitions that we completed at the end of last year. Free cash flows were $11.9 million compared to $1 million last year and we ended the quarter with cash and investment balances of $56 million.

Coming off the closing of three acquisitions in the fourth quarter of last year, we completed one more during the first quarter, which is included in our workforce segment. We paid $2 million in cash to fund this acquisition. We also increased our position in an existing minority investment by $1 million during the quarter.

Our capital expenditures incurred, which includes Capitalized Software Development of $4.3 million. Now let's review our financial expectations for 2021, which we've updated after our strong first quarter performance.

As a reminder though, COVID-19’s continued impact on our operating results and financial condition could influence our actual performance compared to our guidance assumptions.

We are raising our revenue ranges and now forecast that consolidated revenues will range between $245 million and $255 million with workforce revenues forecasted to range between $197 million and $205 million and Providers revenues forecasted to range between $48 million and $50 million.

Also following the first quarter's performance, we're also raising our EBITDA forecast to now range between $40 million and $44 million, which equates to a 17% EBITDA margin at the mid-point of our guidance ranges.

We anticipate the capital expenditures which includes both capitalized software development and content to range between $25 million and $27 million. For purposes of modeling the full year and better understanding our guidance, we want to highlight some key variances between the first quarter's results and the rest of the year.

In short, we believe it would be a mistake to annualize the first quarter performance when trying to extrapolate cumulative performance for the year. This is true for the following reasons.

Our first quarter revenue performance benefited from a couple of factors that will not recur at the same level, including the $1.8 million in legacy resuscitation revenues that I've described earlier, which we expect to be only about $700,000 in the second quarter.

And we also had some non-recurring professional services and one-time software license revenues from our scheduling and capacity management solutions during the quarter. Also our adjusted EBITDA guidance reflects the increased investments in sales, marketing and product development, which will accelerate across the remainder of the year.

These investments will be more weighted towards the new companies that we've recently acquired. In addition to making these new investments, our forecast also assumes that business travel gradually resumes and it also includes annual compensation increases which were frozen last year and those will take effect beginning in Q2.

We also anticipate that costs associated with acquisitions integrations will continue over the next three quarters at levels higher than the first quarter. We may expect those to decline when these integrations are completed.

And finally, our forecast does not include the impact of any other potential acquisitions that we may complete in the remainder of 2021. It will only take a moment to provide a few comments about the COVID-19 impact on our business.

While our forecast assumed a gradual improvement in sales and renewals, the pandemic may continue to negatively impact our customers, which may continue to cause uncertainty in their purchasing decisions for our products.

Since the onset of the pandemic, our business operations shifted to remote selling and remote implementation and over the past year we've conducted very little travel to our clients. Our customers have generally limited or prohibited vendors to their facilities during the pandemic.

Our sales and operations teams have adapted well to accomplishing their work virtually and we're pleased with their ability to maintain sales pipelines, bring new business and implement our solutions, all without traveling.

While we have adapted to this new operating environment, we continue to experience some continued uncertainty in our customers purchasing decisions. With a diverse product portfolio, bookings of certain products have performed better than others at times, and overall our bookings for the first quarter outpaced the same period last year.

Product categories or regained momentum include the multi-year multi-million dollar contract for our Jane solutions and our credentialing and privileging solutions achieved record sales results this quarter.

Our offices remain closed and all employees continue to work remotely, but we are optimistic that we can reopen later this year and provide the opportunity for our employees to connect and collaborate in person again. We're also continuing to monitor our liquidity, including weekly cash flows, customer payment patterns and bankruptcy notices.

We've been fortunate not to experience any significant bad debts and our customer payment patterns have been more stable over the past few months. Although if economic conditions worsen and our customers financial condition deteriorates, it could negatively impact our future cash flows.

We ended the quarter with approximately $56 million in cash and investments, no debt and full availability under our $65 million line of credit facility. Our share repurchase program expired last month and we remain open to establishing a new program in the future depending on market conditions and other needs for capital allocation.

We also continue to evaluate potential M&A opportunities. We believe our multi-year objective to grow revenues, improve and maintain gross margins and deliver incremental EBITDA are in the long term best interest of shareholders in the company. Thank you. That concludes my comments for this morning. Bobby, back over to you. .

Thank you, Scotty. Speaking of working-from-home, I was in my office. In my office there is a fireplace and on top of the fireplace I had song birds, so I guess I was competing with the song bird to share the news and I've moved the location so hopefully you can hear me better.

And it’s kind of – so finally just to that, so it’s all the new working conditions. As Scotty mentioned, our President and COO is working on our return to office strategies now for our 1,000 employees and we're excited to get back together again and work together again here in the not too distant future.

So a few more things to cover as we wrap up and before we go to Q&A. Our last earnings call we introduced this metaphor of a three legged stool to describe the totality of our business.

The three legged stool is standing on the foundation of our pass hStream architecture, so I thought I’d just refresh you on that analog and then we'll probably drop the three legged stool analog, but know that we have these three focus areas for our business.

And so you know with each of our solution group areas representing a leg of the stool, lets kind of review what they are.

The first learning and development solutions, you know a longstanding core of our business is learning and development and obviously we’ve expanded and have next generation technologies about the Jane platform, working alongside of the [inaudible] some of the most adopted learning platform in healthcare.

Then there is our credentialing and privileging solutions. Of course, that's the Variety hStream organization. 250 employees’ strong and gaining momentum with setting new records in the quarter.

Credentialing and privileging is an area we think that we have a good market positioning and are beginning to show what we built to the world and be will received. And in the new area that we’re assembling through acquisitions in the fourth quarter and the first quarter and earlier last year is our scheduling capacity management solutions.

That's kind of in the storming phase now. We’re assembling the management team, figuring out the best of each of the platforms.

We bought some really exciting platforms like the nurse grid platform or application set, the ANSOS application set and the ShiftWizard applications set, all of which were recognized for different capabilities and it's our – I think our unique skill of picking the best of all of those and the people and assembling a strategy that can lever each of the best of those teams that we've assembled and applications.

So we'll be excited to speak to you more about scheduling the capacity management advances in the coming years. It won't be without its challenges. Anytime you hear, you know three companies, three cultures and three application sets, there's always going to be hurdles.

But I feel like we've learned a lot from how we assembled in credentialing and privileging and trying to you know use that playbook to do an even better job of scheduling capacity management.

Each of these solution groups is leveraged to connect to the pass technology, the platform hStream, and again while the wiring isn’t all there yet and the hStream platform is maturing, increasingly I'm optimistic that the platform is viable and its ability to create say interoperability between the application sets is real.

Everything from identity management, the hStream identity management system, to the data mobility across application sets are things that – and for the API libraries were building there will include and improve the rapid development of new applications and services.

Like our taxonomy service took us three years to build, the medical librarians, but the taxonomy service is a core service of the hStream platform and because you know how our ecosystems are built, but taxonomy is kind of the connected web, it relates topics and content and application table and data sets to each other, and allows you to use them and manifest them in new ways and new products.

So we're really excited about all that's happening with the hStream platform.

The tech team is leading out and Jeff Cunningham our CTO had been leading the continued evolution of the platform and I'm just excited to see some of the capabilities emerging now as we connect that platform to new advances in our learning technologies like Jane and the American Red Cross Resuscitation Suite.

So I think you know our customers are increasingly able to make sure that the right people are at the right place and the right time, and providing patient care in the right way with constantly developing systems and screenings for sanctions screening and verifying credentials to make sure it’s the right people, the right place, right time to get the right care provided.

This is something that increasingly we see HealthStreams toolsets playing an important role in.

When we talk about whether if it's important to think about the people in HealthStream and the challenging conditions of the pandemic and it's fun to celebrate when they achieve something unique, and we continue to look at the data out of our comparable survey where we had over 11,000 comments from our nearly 800 employees at the time.

They were all put on public display on Comparably.com. Comparably continues to parse that data from our employees and tell us where we perform well. So we just received news from them that in April, HealthStream received an award from Comparably for the Best Operations Team.

So all the people that self-identified as operations people of HealthStream, when compared to other companies that identified – where employees identified as operations personnel rated our environment as positive and one which they are proud of to operate in.

So congratulations to the Best Operations Team as determined by Comparably.com at HealthStream. Again, its fun to continue to learn from the feedback of our employees with 11,000 publicly made comments.

We essentially conducted our employer reviews in front of the world and we learned a lot about our employees here and we’re using that data to make our company better.

As we wrap up, I just want to remind everybody that on Thursday, May 20 at 02:00 PM Central, we will have our virtual annual shareholder meeting, again virtual as last year, and that should make it easier to participate for those using our shareholders and look forward to giving you that report here on May 20 at 02:00 PM Central.

With that, I’d like to turn it over to questions, for the operator to take questions..

Thank you. [Operator Instructions] And our first question comes from Ryan Daniels from William Blair. Your line is now open..

Joe [inaudible] in for Ryan. Thanks for taking the questions and congrats on a solid quarter. I wanted to ask two questions related to the demand environment generally. So the first, you're looking at the Verity hStream product line.

I know Bobby you talked about having record quarterly sales there and as well as the single largest sale in the history of that product line, so nice to see some of its success.

You know I’m just curious if you could talk a little bit further on what's driving that success in the marketplace? If there's any specific tailwind or competitive advantages to call out there?.

Yeah, I can comment a bit on that. I think we acquired four companies that are all in this space. We carefully sorted through the vast capabilities of those companies.

For example, some had the best privileging libraries, which are kind of a data asset, some had the best work flows and when we built the CredentialStream platform, we not only incorporated the best of those into that platform. We also created a more comprehensive view of all the services and related functions around the core credentialing process.

And so it's my belief that our application suite in credentialing and privileging enrollment is just simply more complete in its thoughtfulness and approach, to not just the credentialing process, but the related processes like the physician onboarding process, there are elements of that where credentialing plays a role.

The privileging process which affects the time to practice, you know from the time we hire a physician to the time they can actually practice medicine on your behalf and the organization. So the vision that the team put together and as they built the new CredentialStream platform, I think is simply more robust than the competition.

So what we're beginning to see is an improving win rate in the head-to-head competitions, because of the completeness of the vision of VerityStream team and the execution of the platform. That said, you know there is definitely a delight here through the middle of last year where you know organizations have stopped shopping.

If they had something that was okay or functioned, they weren't really in a position to evaluate other vendors or switch platforms, even if it's a better platform. We're beginning to see a little bit more heads up from our customers and they see the benefits for a more comprehensive platform.

So I'd say they are looking more and they are considering at a higher rate replacing legacy platforms that we think we believe are less effective, even sometimes in the case of our own legacy platforms that they acquire from us, they are more interested in upgrading to the newer ones.

And so now there are still going to be implementation lags, just because the nature of where everybody is operational is kind of emerging from the pandemic, at least in the U.S. and there are definitely hot spots as you know in our country, where there again the health system, they're experiencing you know operations being overwhelmed again.

But on the whole just a general improved buying environment and I do think we have one of the more complete application suites in the area for VerityStream, now known as CredentialStream Applications Center. .

Got it. Yeah, that's super helpful. And then, yeah I wanted to circle back on some of the comments you made around… [Cross Talk].

One other thing I’d like to add, because I want people to hear it, is that we're also beginning to see this first small benefit of its connectivity to the hStream ecosystem.

So for example, the ability now – if a customer is on the Red Cross Resuscitation Suite, they use our learning platform and the VerityStream customer of the CredentialStream application set.

If those three conditions exists, the data flows seamlessly from the consumption of the red cross program as an earned credential in the learning platform to manifest automatically in the Credential platform.

And that may sound simple, but really it's the integration of those three applications that creates a seamless workflow, reduces the burden of gathering information of that credential in the credentialing process and so at the first sign of light of the power interconnectivity between application sets when connected through hStream engineering, which we talk about you know, so it’s a concrete benefit of hStream.

That's one small example and it's a unique ven diagram. Like you have to be on our learning platform or Red Cross program with our CredentialStream platform. But when those three conditions exist, you definitely have an easier workflow, automated data communication and less manual intervention to credential, that’s part of the physician’s record.

So I want to give that example, because I think there’ll be dozens more over time and we're just getting the first signs of power of the HealthStream eco system..

Yeah, yeah, thanks for that. I think that all makes sense. And just to follow-up that I wanted to add, wanted to circle back to some of the comments you made on the Jane product and you know the connection is kind of one of the first AI driven in the workforce competency management products in the marketplace.

I guess how you would characterize sort of the demand from a health systems, for our workforce management solutions within the context of their broader AI priorities. I think we often hear about things like your large chatbots for patient engagement or other sort of AI solutions related more to sort of the operations of patient and things like that.

So just curious how you would characterize your workforce development or competency management tools within sort of the broader budget or context for your AI priorities?.

It's a great question. I think you know just in general and this is a disappointment for us for our long legacy, but you know the value of high quality education and training is often hard to quantify, even though we all strive. We kind of intuitively know that the more confident the team is, the better the health outcome is.

But proving it is difficult and so often times education and training is lower in the budget priorities.

I think that's sad, because I think patient outcomes can be most greatly effective if they increased their willingness to invest in those areas, instead of just new equipment and technologies and you know the incremental gains of a new MRI machine are good, but they may not be nearly as much as the focused competency development on our clinical staff.

That said, you asked me where it ranks? I’d say it’s lower in the priority poll. When things get tight, education tend to be cut. Investment and competency is most appreciated by the highest of quality organization. So the leading organizations investing in Jane right now are the ones that I think I've used to enlighten customers.

They are the ones that see the link between competency and clinical outcomes and unfortunately some of that, they are a little bit more than intuitive.

But Jane definitely makes it easier to see that link, because it more accurately quantifies, not just knowledge deficits, but competency, kind of decision making deficits and that's where the errors occur, is when clinicians make a poor decision and it's hard to judge, because you know it takes an expert to judge someone's quality of decision making and now that expert capability is built into Jane.

And so I would say its early adopters. A higher price point than products we usually sell, so the adoption facility heard me say one per week.

You know that's great, it got the two contracts last year, but against the thousands of organizations I think need it, it's very low and a part of that's because of the higher price point; part of that's because of the lower priority as you asked me to prioritize, and part of that is because it's going to take time for people to get the link between investment and competency development.

That is now like test phasing, but actual competency development and quality outcomes. And so you know that's the journey we're on and we serve a higher purpose.

The education training of the healthcare workforce is sometimes not as valued as it should be, but I think the allied organization, particularly the ones that just bought at the system level are beginning to see the potential impact on clinical outcomes by making real dollar investments and to staff and clinical competency development.

That's my hope, that's our ambition. We believe in it and we need to rest of the world to see it. I think some of these thought leading organizations that are buying Jane now will begin to have competitive advantage, and by that I mean better patient outcomes. .

Okay, great. Yeah, thanks for that. .

Sadly it is a lowest priority though and so you know when the tough things get tough, education training and competency development, all in the week organizations gets pushed to the bottom along with things like marketing you know and that's always been a frustrating part.

Wherever your educated on the planet, it’s hard to quantify and know the value invested in quality competency as well. .

Thank you. And our next question comes from Matthew Hewitt from Craig-Hallum Capital Group. Your line is now open. .

Hi, good morning and congratulations on a great quarter. I guess this might be a good follow-up to that question. When you think back to Q2 and Q3 last year, you had hospitals that were dealing with the pandemic, that were shifting employees from one – you know from – maybe from elective surgeries to emergency care.

You’ve had some employees that were even laid off. As we’re kind of getting through that now with the vaccinations and with some pockets of pandemic easing, how are hospitals shifting their priorities and how does that play into your products quite frankly? I mean where are you seeing them prioritize Verity hStream or some of the other solution.

Is that – are you seeing that in your discussions with them and how does that play out over the remainder of the year. .

Well, I think – you know if you think about the last decade, there's been a big move towards the EHRs and huge growth for them, and a lot of those transitions have been down. They are still working in front of them there.

The digitization of the patient record, the mobility of data, a lot of that made a lot of progress, and the patients we know it's very – it’s still kind of an immature feeling, but a lot of progress has been made there.

I think there's a continued move towards focus on quality outcomes, and the organizations that are bigger and stronger that can afford to invest and achieve in quality outcomes, I think are beginning to prioritize the tool sets that can get them there.

And there there's just, some – all of our – another good thing about how some of them are positioned is that, you know we help provide against the regulatory requirements, the highly regulated environment.

For example, the credentialing and privileging process is not just important to ensure quality workers, quality physicians and nurses are in the staff, but it's important to keep those that aren't quality out of practicing medicine and so there is kind of gatekeeper functions on quality that are provided by the Credentialing services that are important and they need to be accurate, and the tools need to be good and so you know new products like our Workforce Validate product which looks and checks for sanctions against workers to warrant to help the organizations when there's a sanctioned employee trying to enter the workforce.

I think it will be increasingly important and maybe that's a sad comment on things, but it is. And then I do think things like Jane are well positioned to kind of be the next generation approach to learning.

Like I think the idea of an individualized learning plan is far more exciting than assignment driven regulatory compliance training, which is at our core, and both have to coexist. And one is more developmental and one is more regulatory in nature, but both have to be done well to achieve quality outcomes.

And so I think Jane gives us a new dimension beyond just compliance training, which is required, and frankly viewed as more commoditized. Like how do you do that the least expensive way and we're kind of a low cost, high quality provider in regulatory training.

But with Jane we are now, we’re kind of also the higher cost, higher quality, educational development platform and so I’m pretty excited about our positioning.

But as was noted, the uptake while exciting at one contract a week, we think could go a lot faster, and we are looking for the right combination of price point and value add in Jain to make it go faster.

So I don't know, I think areas of credentialing and privileging learning and development, and managing schedules in time effectively are all things that are going to go up on the radar a little bit higher and some of the things that have consumed us wholly like COVID or EHR transitions of the last decade are going to recede a little bit in background.

So on balance, I think there will be a little more visibility to certain types of applications sets that we provide. That said, there is a long runway in front of us and lots to do to convince people that they need to invest in quality, the way we want to see them invest in quality..

Understood, thank you. And then maybe a little bit more mundane question, but as far as implementations are concerned, you spoke a little bit about the lag. Where do those sit today, maybe where were they pre-pandemic and where do you see that kind of shaking out as we exit say this year, as we get into fiscal ‘22. Thank you. .

Yeah, there is definitely a period of I guess February to June of last year where really no one was even taking phone calls, much less implementing new systems. And so now everybody's putting things on the schedule, thinking about when to get them done.

They're a little less urgent, everybody had to build, all the vendors had to build new deployment models because you can't, you don't go on site as much to do deployments if at all.

And so there's a kind of a natural lag from both the transitioning models and implementation, and the slow recovery back to what the new normal is in operations for our customers. And so those two things together are creating a little bit of a lag in time to revenue issue.

That said, I feel like everything is getting on the schedules now, and different products have different horizons for implementing.

Like that multi-million dollar, multi-year contracts for credentialing, it will take you know two years to implement fully and get to full revenue or maybe more, because you're talking about taking dozens, in this case more than 50 or 60 locations and upgrading legacy installed system and SaaS systems and unifying the process.

They also use it to improve the process or credentialing and privileging at the same time, so it implies operational changes. For example, we asked them to standardize on certain practices when they adopt our platform and use our taxonomies and our libraries and data to classify thing. And so it’s a big change management journey.

But to your point and question I think people are putting them on the schedule and getting on with the changes they need to make the organizations better now, and that feels better to me. .

Understood. Thank you. .

And thank you. And our next question comes from Richard Close from Canaccord Genuity. Your line is now open. .

Great. Thank you. Congratulations on a solid start to 2021. Scotty, I was wondering just on a housekeeping.

Can you go over the organic and acquired growth again? I didn't catch those, didn't write fast enough, but if you can go over those again and then are all the acquisitions in the Workforce area just as reminder there?.

Sure Richard. I think we characterized it as organic growth excluding the legacy resuscitation business, organic growing 8% and acquisitions contributing about 14%. So it’s a combination of both of those. It yielded about 22% growth rate once you factor out the legacy business from the prior year and current year.

And then, the acquisitions that we’ve completed, we've done five since the beginning of 2020, and they're all included in the Workforce business unit. .

Okay, great. And then with respect to the – I guess the third leg of the stool so to speak, can you – Bobby, can you just go over this scheduling area? How you are thinking about that, you know that’s where the acquisitions have been.

And just trying to get a feel of you know do you expect a similar sort of path that you had on the credentialing side in terms of time frame on the integration of those products and then just, how do you look at that?.

Richard, I think it will be a bit of a journey. The good news is, the team from the VerityStream put together over a 30 page document that tells about all that they learned, about everything from how quick to work on the branding issues, to how to select a core architecture and rebuild the platforms and how to combine the feature sets.

Like it’s a really great document or road map for how to do what they've done at VerityStream. Look at the market conditions and build right out there. So we're going to repeat the playbook.

We acquired, as you know NurseGrid early last year and by the way that app has continued to grow its organic user base even with minimal investments and so it still continues to be the most popular adopted nurse app that nurses use to help manage their professional life and schedule. So we are really excited NurseGrid.

We acquired ShiftWizard and ANSOS assets. ShiftWizard separately and ANSOS assets from Change Healthcare and they each have capabilities that the market appreciates. It’s like the ANSOS is more enterprise capable than any of the others.

With ShiftWizard it’s got market leading workflows, award winning recognition for the innovation in their application set, but it has some scale issue, and so like any set of acquisitions we’re you know 100 days in andfinding all the things we have to work on to make it better.

I got a great leader over that and Scott McQuay, a 20 year veteran in healthcare technology and we've got a great road map that Michael Sousa and his team VerityStream have created for Scott, and yes we plan to repeat it again.

Hopefully instead of four years of assembling all those companies, we can do it in three year or less and announce our new product strategy and vision and one that levers the best of each of NurseGrid, ANSOS and ShiftWizard, along with efforts to create smooth branding approach and catch the eye and ear and wallet of the competitive landscape.

So it is a repeat playbook. You know we gained some market share, we gained some unique assets like NurseGrid. We gained the people that know a lot about and have a long history of understanding time management and scheduling for nurses in our company, over 120 employees in the business unit, the business area.

It is embedded within workforce, it’s a little harder to see, but we are thinking of it as a business leader and Scott McQuay and our trajectory and a roadmap to get there. So it will be a bit of a repeat. I hope to get to it a little faster and have a fewer bumps than we had.

Maybe it was VerityStream, but as you can see VerityStream I think is coming out the back end of that and I can't wait to report both the syncing and credentialing, I mean in scheduling and what we call capacity management. .

And is there any you know thoughts on the margin?.

Our lot of our investments, yes the margin profile should be similar, the 60%, 65% range. Actually it's a little higher than that right now. I think it's around 64% of that business. So it is a good SaaS or application set with decent software margins and so we're excited about that.

There is some content dimensions to what we're building in the engagements parts of those platform and promotional efforts say around a NurseGrid that maybe lowered the gross margin a bit, but generally consistent with our goals as a unit, as an operating area and then definitely an area of investment.

So for example the sales team right now across all those sets is about 10 strong. We plan to take it to 22 by the middle of the year. So just in the next three months we plan to double the sales organization on scheduling capacity management. .

Great! Thank you. .

Thank you. [Operator Instructions] and our next question comes from Vince Colicchio from Barrington Research. Your line is now open. .

Yes Bobby, your just answered part of my question, but I’m curious if you can give us more color on what investments you will be making this year. .

Yeah, a lot of investments, you know things like Jane you have to continue to invest or find those technologies and add value to that product. The VerityStream team has an incredible R&D team and they continue to evolve their application set.

So in technology the visions is always grander than the ability to execute it, and you're always chasing that, and trying to decide how much money to put into R&D and talk development. But clearly, the newest area of investment will consume a material part of our growing investment rates.

It will be shaping the leadership team and the technologies and roadmap for scheduling and capacity management. So I just gave you one concrete example. We plan to take the sales team from say 10 to with new leadership to your added leadership from 10 to over 20, I think 22 in the next three months.

And similarly the tech teams there, like in that area we’ll take the best of the technology people from those three acquisitions.

We've got a new leader over that tech group, who is kind of a CTO of the Scheduling Capacity Management business and they'll be hiring and adding to the team members there, because they have to build a unified technology road map. So you'll see R&D increase in the scheduling application sets.

And of the necessity too, some of those applications needed to be updated and modernized and what you also see is work on the interconnectivity say for between NurseGrid and ANSOS, and between NurseGrid and ShiftWizard.

In addition to all that we’ll be working on the branding and positioning of those products sets to create more clarity on the role of each of these technologies and that will cost money. And it isn’t all of that, don't forget. You know we didn't do rises last year. We limited the executive bonus program.

We reduced travel and all of that in the second half of this year, which was in the second half last year is coming back. And so that’s why we need to be careful as we look at Q1, the sales and marketing ramp, the tech investments are beginning in new areas of our business in Q2. .

And Scotty one for you, how much was the non-recurring Professional Services and software license revenue in Q1?.

We didn’t quantify Vance, but it’s mainly from the ANSOS organization that we acquired in Q4 and its less than a million. .

Okay. Thanks for answering my questions. Nice quarter guys. .

Thank you. .

And thank you. And I'm showing no further questions. I would now like to turn the call back over to Robert Frist for closing remarks. .

Thank you to all the analysts who are following us. We appreciate you telling our story and we want you to be careful as you model out.

We tried to explain the second half of this year, including increased investments, and we do have a really strong first quarter, but we want to be careful to look at the new guidance ranges and make your models fits within those guys range, because we making them as thoughtful as we can, as accurate as we can and we don't want you to over model or annualize Q1, because we have more investments coming out of the business in Q2, Q3, Q4.

That said, we promise we are excited to raise guidance and report the continued research on the company. To our shareholders we look forward to hearing from you in our shareholder meeting and to our employees, I just want to say thank you for your continued feedback.

We listened and we do it in a public forum, and we try to make our company better and stronger and more fun place to work.

And now what I can say is many of you've been working for years on these products like Jane, and it's fun to see them and Workforce, Validate and others and now these new acquisitions and new employees and I want to encourage you that you're making a difference and say thank you to all of our over 1,000 employees now at HealthStream. Thank you all.

Look forward to seeing you all on the next quarterly earnings and before that at the Annual Shareholder Meeting. Thank you.

Bye-bye!.

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