HealthStream Inc

NASDAQ:HSTM

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, and welcome to the HealthStream's Second Quarter 2023 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded, 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 presentation.

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, and good morning. Thank you for joining us today to discuss our second quarter 2023 results. [Technical Difficulty]

So with that start, I'll now turn the call over to CEO, Bobby Frist.

[Bobby Frist, Chief Executive Officer]

Thank you, Mollie. Good morning, everyone, and welcome to our second quarter 2023 earnings call.

Mollie, you were breaking up just a little bit, so I think I heard the hand off correctly, and maybe someone will text me if I'm also breaking up.

But look, some quarters you move the company forward more than others, and this was one of those solid prints, as they say, or a good quarter. We're pleased to report our results to you now this morning. In the second quarter, in fact, we achieved record revenue and record adjusted EBITDA. So, I'd like to start by highlighting those strong financial metrics.

Top-line revenue reached $69.2 million in the quarter, which was up 5% over the same period of 2022. We also delivered solid profitability with $15.3 million of adjusted EBITDA, which was up 17% over the same period of 2022. In just a minute, I'll describe some of the key customer wins in each of our learning, credentialing and scheduling application suites that help drive these results.

All right. I need one second because I see lots of text flying in. I got to make sure I'm not breaking up. Okay. It says I sound clear. I'm going to come back here. Perfect.

So, before we dive into some business updates, let's take a moment to refresh everyone about our business overall, which is also helpful to anyone who's 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, we believe, because of the interoperability they are achieving through our hStream technology platform.

We sell our solutions on a subscription basis under contracts, which average three to five years in length. That means our revenues are recurring and predictable. We are profitable, and we have little to no debt. We are solely focused on healthcare and, more specifically, the healthcare workforce. We define our addressable market as the 11.2 million healthcare professionals working in the United States in healthcare organizations. In the second quarter, HealthStream subscriptions also achieved a new high watermark of 5.6 million subscriptions, adding approximately 68,000 subscriptions.

Even in the face of macroeconomic concerns and inflation and recession, we are confident that HealthStream will continue to provide results in line with our guidance range, which we just reiterated in our earnings release. So, overall, a fine print and good results. So, I'm proud of the team and what we're able to achieve.

Now, I want to highlight each of our three primary application suites of learning, credentialing and scheduling, and of course, we call them application suites because they're more than just a singular module, like a learning model. It includes a breadth of services and capabilities in each area, a complete suite of capabilities: learning, credentialing and scheduling. So, let's highlight some of the wins and maybe some indicators of how we're achieving the results we achieved in the quarter.

So, as a reminder, our flagship application in the learning area is the HealthStream Learning Center, which is a learning management system. For credentialing, the flagship application is Credential Stream, which onboards credentials, privileges and enrolls physicians. And for scheduling, it is ShiftWizard, which is a software application that helps schedule empower and engage the healthcare staff. We believe that each of our SaaS solutions is best-in-class, and the wins I'm about to describe kind of reinforce that belief.

The HealthStream Learning Center is the most utilized learning management system in healthcare and continues to add new customers. In the second quarter, for example, a Midwestern health system with approximately 2,000 employees chose our HealthStream Learning Center over six LMSs, one of which was a major ERP vendor. The customer clearly recognized the value of our integrated ecosystem. The only prior purchase from HealthStream was a small revenue cycle library.

With the addition of the HealthStream Learning Center, they also added SafetyQ, one of our compliance products, several clinical content libraries, the Red Cross Resuscitation Suite and our Checklist application. This customer win, which included multiple competitive takeouts, illustrates the value that health organizations place on integration solutions suite that only HealthStream is bringing to market currently.

With this win, revenues at this customer grew from $8 per person per year to $80 per person per employee immediately, a 10x increase. So, of course, this is the kind of story we'd like to see more of, but increasingly, we're getting better at positioning our solutions together. In this case, a suite of products and services related to employee development, and winning a contract kind of altogether. And in case, as I mentioned, our partnerships of our ecosystem displaced many competitors in that takeout.

Our credentialing solutions also enjoyed a successful quarter, both in terms of competitive takeouts and conversions from our legacy solutions to CredentialStream. In the second quarter, we contracted 38 new customers for CredentialStream, representing approximately 50,000 new subscriptions collectively. These new customers included many highly respected health organizations like Rush Health, the University of California Davis Health System and Augusta Health. Additionally, and this is fun, HealthStream's CredentialStream application was rated as the number one credentialing software in the prestigious G2 online site. So, overall, a strong quarter for our credentialing suite.

In the second quarter, revenues from ShiftWizard grew 19% over the prior-year quarter as customers continue to report high customer satisfaction. Among our many new customers was the Children's Hospital of Wisconsin, other customers like the University of Florida Health System transitioned from our ANSOS product to ShiftWizard. As we continue to increase investment in ShiftWizard, it is only going to become more powerful and more differentiated in the marketplace.

As the power of a hStream-driven interoperability continues to emerge, we believe that each of our three discrete application suites will come together to form an enterprise suite of workforce solutions that represent a value proposition that is unique in the market today; we believe difficult to replicate, takes a long time to build, and we're finally seeing some of the initial benefits of these integration opportunities. In the second half, after we hear from Scotty Roberts, I'm going to highlight some of the advances as it relates to our platform technology and how it's empowering some of these opportunities.

I'll turn it over to Scotty Roberts to take a look at the numbers and circle back and talk about some of our platform advances. Scotty?

[Scott Roberts, Chief Financial Officer]

All right. Thanks, Bobby, and good morning.

Let's begin with the financial highlights for the second quarter. And unless otherwise noted, the comparisons will be against the same period of last year.

We delivered another solid quarter of financial results with many of our key financial metrics improving over the prior year, which resulted in new records for revenue and adjusted EBITDA, as Bobby mentioned. Our results were as follows: Revenues were $69.2 million, up 5%; operating income was $4 million, up 36%; net income was $4.1 million, up 34%; EPS was $0.13 per share, which was up 30%; and finally, adjusted EBITDA was $15.3 million and was up 17%.

Our revenues for the second quarter were a record high of $69.2 million and were up $3.6 million or 5% compared to last year's second quarter. Organic revenue growth was 4% and the two acquisitions that we completed last year, CloudCME and eeds, contributed to the remainder of the growth. Revenues from subscription products accounted for 96% of total revenues and our subscription revenue came in at $66.5 million or an increase of 6%, while revenues from professional services were $2.7 million, and they declined by 15%.

Gross margin was 65.9% compared to 66.1% last year. Margins were somewhat impacted by increased royalties and cloud hosting costs, both primarily driven by revenue growth and changes in revenue mix.

Operating expenses, excluding cost of revenues, were up $1.2 million or 3% over last year's second quarter, of which approximately half of the increase came from the two acquisitions that we completed last year. Sales, marketing and product development expenses all experienced year-over-year increases, while G&A expenses declined compared to last year.

Sales and marketing expenses increased by 4%, which most of this increase was associated with higher sales commissions, which is consistent with the growth in revenues. Our product development costs also increased by 4%, which is net of labor costs that were capitalized for software development.

Capitalized labor cost increased approximately $700,000 over the prior-year quarter. And these increases reflect our continued investment towards our single platform strategy and our suite of applications and content offerings. Additionally, part of the increase includes the incremental costs associated with the two acquisitions we made last year.

G&A expense declined by 5% due to reductions in several areas, including lower bad debt charges, outside recruiting services, professional service fees and other infrastructure-related costs.

Our effective tax rate for the second quarter was approximately 8% compared to 15% last year. Positively impacting the tax rate was approximately $600,000 in deferred tax benefits, resulting from the remeasurement of our deferred tax liabilities upon the enactment of a new law in Tennessee that changed the income apportionment rules. The apportionment change is expected to reduce our future taxable income in the state as well.

Finally, our adjusted EBITDA was $15.3 million, which was up 17%, and adjusted EBITDA margin was 22.2% compared to 20% last year.

Now, let's move over to the balance sheet metrics. We ended the quarter with cash and investment balances of $56 million. During the quarter, we deployed $6.2 million for capital expenditures and returned $1.5 million to shareholders through our dividend program. DSO increased to 50 days compared to 45 days last year. And while we've had certain customers delay payments for a little longer than usual, we've generally still been successful in obtaining payments.

Year-to-date, our cash flows from operations declined by $2.5 million versus last year, coming in at $25.5 million, and free cash flows were $10.8 million compared to $15 million last year. Cash flows from operations and free cash flows were both impacted by higher income tax payments, which were $2.6 million this year compared to just $0.4 million last year. This increase was primarily due to changes in the federal tax law that requires capitalization of research and development expenditures rather than being immediately deductible. In addition, our free cash flows were impacted by higher payments for capital expenditures and an increase in DSO that I just mentioned.

As announced in February, our Board of Directors adopted a dividend policy under which we intend to pay a quarterly cash dividend on our common stock at a rate of $0.025 per share per quarter. We paid the first two quarterly cash dividends in April and June, returning $1.5 million back to shareholders. And yesterday, our Board of Directors declared a third quarter dividend and intends to declare another cash dividend in the fourth quarter.

Now, for our guidance expectations, we are reaffirming the financial expectations that we previously announced in February of 2023. To recap, we consolidated revenues to range between $277.5 million and $283 million; adjusted EBITDA is expected to range between $57.5 million and $60.5 million; and capital expenditures are expected to range between $27 million and $29 million. While our guidance includes the acquisition of eeds, which occurred late last year, it does not include assumptions for any acquisitions that we may complete during the remainder of the year.

Now let me share a few other thoughts about our expectations for the second half of the year. We anticipate quarterly revenues to grow sequentially and generally expect steady performance across most of our product offerings. Some of the products we expect to continue driving top-line growth include: Jane, our AI-enabled clinical judgment and assessment solution; CredentialStream, our market-leading credentialing, privileging and enrollment solution; ShiftWizard, our innovative SaaS-based scheduling application; and myClinicalExchange, our solution for nursing and medical student onboarding and clinical placement.

Now as for expense expectations, we anticipate certain categories to increase in the second half of the year, and one of those areas is our staffing. We currently have over 40 positions we're working to fill. Thus, we expect our labor costs will be higher than they were in the first half of the year. We also have several trade shows slated for the second half and that our marketing spend will increase about $1 million in total over the next two quarters.

And that concludes my comments for this quarter's call. Thank you for your time this morning, and I'll now turn it back over to you, Bobby.

[Bobby Frist, Chief Executive Officer]

Okay, Scotty, thanks.

Great financial results, good work by all the HealthStreamers to deliver them. I'd like to dive a little bit into the future state of the company and give some insights into the developments happening related to our hStream technology and our hStream platform and our hStream positioning in the marketplace. So let's dive in.

One encouraging development was the growing early momentum we saw in customers' use and adoptions of the APIs available in our developer portal, which we launched in the fourth quarter of 2022. The portal provides access to a modern, scalable secure architecture with a growing collection of shared services platform-level applications and APIs. In my view, the portal, when we launched it, was kind of the symbolic beginning of a journey we've been on for many years with the launch of the hStream platform technology and architecture.

For our customers, the APIs offer meaningful extensibility of our applications. We believe the extensibility increases the stickiness of our applications as customers begin to rely on functionality from our applications to power other applications that use in their organizations. At the end of the second quarter, 40 healthcare organizations, including large health system customers, a global publishing company, a market-leading EHR vendor and several health tech start-ups had chosen to open an account on the developer portal, where we collectively enabled 145 developers have access to the eight robust APIs currently available in the developer portal. Again, the portal is essentially a window into the emerging platform capabilities and gives access to these APIs to exercise and take advantage of those capabilities.

So, a couple of examples of use. For large partners and customers, we saw organizations using our user/student API to automatically register new staff directly from their HRIS system into the HealthStream Learning Center. So here we see tighter and stronger integrations between core applications like the HealthStream Learning Center and core important systems like the HRIS system at the hospitals.

One large health system that was a customer centralized their learning records from -- with HealthStream by using our learning API to bring records in directly from a video system they're using to educate their staff into the HealthStream Learning Center transcript. And so here, we have organizations using the APIs to add data that otherwise wasn't created in our learning center into the transcript -- the educational transcript. What this does? It reinforces the HealthStream Learning transcript as the single source of truth for the longitudinal history of the training and development for employees. So, as they use our APIs to connect outside systems into ours, we become more authoritatively the learning transcripts of record for the healthcare employees.

We think these are just a couple of great examples of the APIs creating interoperability that benefits our customers and adds market differentiating value to our platform and applications. I also believe in the second half, we'll start to see some commerce directly tied to these platform-level capabilities. We already see, as I mentioned, some health tech start-ups poking around on our developer portal. We think they'll integrate some of our capabilities into their applications that they take to market separately. And I would expect that some of those services will be licensable services. So, I believe in the second half of the year, we'll drive our first direct-from-platform revenue, which will be exciting. It will be very small, and so I don't want to overstate it, but it will be exciting kind of a differentiated moment for our company as the platform itself begins to show some financial opportunity.

Another benefit of an hStream subscription for a customer is the customers' ability to participate in what we call a collaborative purchase process. Through the collaborative purchasing process, facilities within our larger health system can coordinate and pool their purchasing power in order to create a greater volume discounts on HealthStream products they want and need. The collaborative purchasing process has been around for a while and it's mostly in used in some of our larger accounts.

However, in March, we launched a significantly enhanced collaborative application through the software that they use to operate the collaborative purchasing process. For the first time, participants are accessing their collaborative application using their hStream ID, which is the identity management service that exists in the hStream platform. This benefits both HealthStream and the customer since we now know who the participants are and what role they play in the purchasing process. We can better match the participants with the products that are most valuable to them. In other words, as Eddie Pearson, our former President, used to say, "We get the right solution to the right person at the right time," or something like that.

Another great feature of the collaboratives is that they use gamification to engage purchases in the process. As facilities add their purchases together, they can see the volume discount of their purchase increase -- the discount level increase and therefore, the product price they're going to pay decrease in real time. The automated platform interface enables this by connecting directly to our price book, which is held in our sales force infrastructure. So, we've kind of gamified and organized around budget cycle, the purchase process, where they can review and purchase and aggregate demand inside the health system across multiple products.

So, this is exciting technology. We expect to complete around 18 purchasing collaboratives this year, the last 10 of which will run on the new application, which is a significantly enhanced kind of software architecture that empowers this purchasing process. In March, in fact, the first collab that they utilized the collaborative application took place. And on a dollar basis, this top 10 customer purchased 42% more in this collaborative on the new application suite than did in the prior year. In addition, we gathered a lot of information about who is reviewing what products, who is buying what products. And so, we had direct insight into the kind of the organizational purchase process and product review process that we've never had before.

So, really excited about this hStream collaborative capability. It's a benefit of being on the hStream platform. So, when your license with HealthStream includes a subscription to hStream, which increasingly our products include a subscription to hStream, it includes the right to participate in collaborative purchasing. And then, you get, of course, access to the collaborative software, which is the applications that I just mentioned.

So, we're excited about this. We hope to expand this program beyond 18 core accounts. We have, in fact, added a few this year. And we've moved some executive talent to lead this initiative and expect to sign more and more accounts up to use this budget-aligned technology-enabled purchasing process, which we're really excited about it.

So, I think that's a prime example of the network effect in action. We're able to bundle products, incentivize purchasing, do it automatically using software, it's a win, win, win for everybody. For the partners that are featured in the collaborative, they got more orders. And for the customer, they were able to see their discount as they place more orders grow -- their discount grow or their discount be greater as their order size increase. And of course, for HealthStream, we got to present the collective of our -- of many of our products and services, which is part of our power is the completeness, in this case, of our learning offering. So win, win, win. It's kind of a rare situation in business, but in this case, I believe that's what it does. It makes our ecosystem stronger from all directions.

So, those are my updates on our developer portal. We'll have more in the next quarter. I'm excited about how that's evolving. Not only does the power of the platform power up our own applications, as we talked about in the past, our new license verification service, for example, being incorporated into each application suite, it also enables capabilities like the collaborative purchasing process that I just mentioned. And of course, we'll be excited as small startups and large ERP vendors begin to tap into our platform directly to add capabilities to their application suites. And we hope that someday that will drive economic benefit as well as interoperability.

Great. A few more updates as we wrap up, and then you're going to have to stay around for the exciting conclusion of this, which is I have to read that opening disclosure statement again, because it's a little bit [indiscernible]. And so you can stay for me to read through that as well.

So, a couple of other updates. On June 5, HealthStream announced the addition of Dr. Alex Jahangir to our Board of Directors. Dr. Jahangir is a nationally recognized physician executive with extensive experience, leading academic medical centers, specifically at Vanderbilt. He also is an investor owner and founder of a biotechnology company, and he was the Head of our Metropolitan Public Health Department during COVID-19 pandemic and was featured nationally for our city's response to that. So, we're really pleased to add Dr. Jahangir to our Board of Directors. He is currently the Vice President for Business Development, Vice Chair of Orthopedic Surgery and Director of Orthopedic Trauma at Vanderbilt University Medical Center as well as the Executive Director of the Vanderbilt Trauma, Burn and Emergency Surgery Patient Care Center. We're pleased to have someone of Dr. Jahangir's caliber and national visibility on our Board of Directors, who will also serve on our Nominating Governance Committee. We enthusiastically welcome Alex to our Board of Directors.

As we reach the close of the portion here, I want to remind you about our new dividend policy. We just made the second payment under this policy about a month ago. And just yesterday, our Board approved what will be the third installment of quarterly payments under the plan, which will be paid on September 29. We are pleased that our strong balance sheet and our strong operational performance puts us in a position to return value directly to shareholders to the company's first quarterly cash dividend program. Over the course of the year, we expect a new dividend policy to return approximately $3 million to our shareholders. Halfway through the year, we are on track to meet that goal.

So, if you are interested in a highly recurring revenue, profitable, SaaS, PaaS healthcare technology company that for 2023, we expect to deliver steady growth as determined to share some of its profits and its gains directly to shareholders in the form of dividend, may be HealthStream is the stock for you.

I want to remind you of one other exciting event happening here in Nashville, Tennessee, where we're headquartered, on September 18 through 22, the city will be hosting what we're calling the Nashville Healthcare Sessions, which we believe will be one of the most dynamic healthcare conference weeks of the year. And the reason I say weeks is because over a dozen organizations are coordinating their healthcare conferences during the National Healthcare Sessions Week and Board members of the Nashville Healthcare Council will be actively helping each of these organizations launch their healthcare conference.

So, if you come to our city, you can participate in over a dozen different healthcare conferences during national sessions. They'll be open for participants to register across these conferences. Again, we're calling the week the National Healthcare Sessions Week, and we're going to kick off that event with a -- I'll be interviewing Sam Hazen, the CEO of HCA, and we look forward to that opportunity to present Nashville's healthcare community to the world. You should all come and listen in and see where healthcare is headed by hearing from the leaders of the healthcare industry here in Middle Tennessee. Hope you're going to join us for that.

And now, before I turn it over to the operator, I'm going to flip back and I'm going to read the opening statements.

I would like to remind you that this conference call may contain forward-looking statements regarding future events, which I certainly did, and 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 -- and we may refer to it in this call.

I'll now turn the call over to the operator for Q&A.

[Operator]

Thank you. [Operator Instructions] And the first question that we have today is coming from Matt Hewitt of Craig-Hallum. Your line is open.

[Matt Hewitt, Craig-Hallum]

I don't know if -- who she called?

[Bobby Frist, Chief Executive Officer]

We can hear you, Matt. You're on.

[Matt Hewitt, Craig-Hallum]

Okay. Great. Yes, she cut out there. Thank you. All right. Well, first off, I'm wondering if you could give us an update on the customer landscape. Obviously, a year ago, the great resignation, you had a lot of people coming going from your customers. I'm just curious where that sits today. And one of the things, I guess, that's ancillary to that, but the wage growth that hospitals are seeing may be part of that helping to attract and retain talent. But how does that impact your selling model?

[Bobby Frist, Chief Executive Officer]

Well, certainly, healthcare still experiencing turnover, a lot of job shifting. And so, I don't think -- some of the challenges for labor persist. I think some of the larger health systems have gotten a better handle on how to manage, and they've started to respond by the kind of -- essentially the travel industry by raising benefits. And I think in some ways, there's a little fatigue in the travel industry, nurses are getting a little tired. I'm sure they made more money, but hopping around place to place. There might be a little more appeal specifically the nurses to find a home and a team they can be on. And I think that favors positively hospitals. So not only reacting with improved benefits and they realize they have to recruit more and pay more attention to the needs of their staff, I do think they're doing a better job recruiting and retaining talent a little bit. Costs are definitely higher. That affects their budgets, and I think they're beginning to adapt to the realities of higher wages overall and realizing that if they don't offer higher wages, they're going to pay even more for the temporary staff that comes in to fix them. So I think it's kind of a little bit of an enlightened employer.

I do think that, that positions us well for some of our solutions. Our clinical pathways programs can be used to cross-train nurses to get them ready from one department to another. I think that our onboarding solutions are timely, like in our credentialing suite. We think our credentialing suite is essential in reducing the time to making doctors from the new hire to when they're productive. We think that we're the best in the market at shortening that cycle of the steps necessary to get them ready to see patients and essentially bill for services. So, the credential privilege and enroll process through our integrated suite is definitely a winner in the onboarding of new docs. I think overall, they're going to be gaining efficiencies and seeking efficiencies in how they operate over time.

So, now the environment is still a tough selling environment. Our margins have always been historically thin at the large organizations that we sell to. So while they're more enlightened about the need to invest in more core solutions, they're still tight. It's still -- it's not an easy market. It's a lower-margin, high-volume market. And we have to respect that. I think the way we respect that is that we try to have best solutions, for example, for a lot of mandatory requirements. We help them meet those requirements at the lowest price possible. And so I think if you have to comply with certain federal laws, the objective is to have full compliance and exceed compliance, but do it efficiently. And I think a lot of our solutions like SafetyQ and ComplyQ, as a product category, for example, help them get out of the business of meeting the regulations on their own, offload that to us at an efficient low price, and it's good for our business and good for them. They can focus on the patient, and we'll focus on lowering their compliance costs, but helping them achieve perfect compliance.

So that's a little bit about the environment and the shifts and the attitudes in the workforce. I hope I got it some part of your question.

[Matt Hewitt, Craig-Hallum]

You did. Thank you very much. And then shifting gears a little bit. Obviously, congratulations on the big win with the Midwest health system. I'm curious, it sounds like there was numerous competitive displacements there. How much of that was a function of them looking to have the "one throat to choke" versus you coming in having the best solutions for all of those and basically simplifying their internal processes?

[Bobby Frist, Chief Executive Officer]

Well, look, it's a little bit of both, because there is a good amount of, say, brand loyalty. For example, if you picked a clinical education partner, maybe that's because you experienced their content when you're in nursing school. And so now you want to use their brand. So to shift someone to say our partner in the ecosystem from maybe an established part of they've used in the past, is -- can be some work, even if the products are equal or better or lower cost. So I think it really was, in this case, the aggregate value, which gave more value and more categories than many existing vendors and resulting almost a package replacement, which obviously, I'd love to see more of that.

When you look at our investor deck from last year, we gave examples of several accounts that had built from $8 to $80 or $8 to $100 per person per year over a decade. And so what was fun about this one I talked about today was it happened over the course of the sale process over 60 days, essentially, I would say, four competitive products were displaced in addition to putting our LMS infrastructure in. They like the concept of kind of in this case, around their developmental efforts for employees having one throat to choke, as you said, I think, or one place to go. So, we did create consolidation of their purchasing model.

In addition, we believe that in most categories, our product offerings from our partnerships like the American Red Cross, in this case, was one of the switches they made, is superior to the market alternatives, which ironically are also available in our marketplace. So here, though, they chose what we believe is a lower cost, more efficient model for resuscitation training, for example. So -- and that was just one of three or four displacements. So I think our sales teams are getting a little better at presenting the packages and showing the power of this, what we call, our HealthStream ecology.

[Matt Hewitt, Craig-Hallum]

That's great. Maybe one last one, then I'll hop back in the queue. But regarding Jane, obviously, there's a lot of excitement, a lot of talk about AI in the press, media and elsewhere right now, and you've got a platform that has been in the market for a while. I'm just curious, are you seeing increased interest in adoption of Jane? Or any update there would be appreciated. Thank you.

[Bobby Frist, Chief Executive Officer]

Well, Jane is still early stages and it has components of AI and machine learning, and we're enhancing it. It's beginning to make a real difference in the organization that adopted. It is kind of a premium product. And so it's a little bit more costly. It's a little bit foreign from, say, the minimal required education programming. This is a real investment in your workforce to invest in Jane.

However, when you do, you get insights into your workforce that you would never have otherwise. We believe it's one of the very best, essentially expert systems that allows an organization to differentiate the clinical thinking and the clinical reasoning and the clinical actions of their staff. And what that means is we believe these Jane scores that are beginning to be delivered really can be used to differentiate competence and quality, not just knowledge. A lot of products in the market, it can tell you who tests well and who knows the most, who can explain something really well, scientifically, but almost none of them get it what Jane does, which is, how well do they act? If an expert were in the room, the expert would do A, B, C. When your nurse is in the room, does that nurse do A, B and C or something different? And that's what Jane is really good at teasing out. So, we're excited about it. Again, it's a premium product.

Now the other power of where we're going is that we're getting better at organizing what we call our curated our core data sets. And I think -- and so while we're new to AI, and we're making progress with Jane and for the early adopters, they're seeing a real difference as an instrument to develop and differentiate their SaaS skills conferencing capabilities, long run, I think our ability to execute on this AI mantra is -- will be derived from the strength of the data that we're ingesting into our network. I think we're getting more and more insights into the workforce, more and more data about the workforce, longitudinal history, 10 years of educational programming. And so, I think we're getting better at collecting information about their skills, competencies, credentials.

So, I think the future is bright for us as we look and examine and have pilots more and more on how to leverage AI into the HealthStream framework. And Jane is certainly our first foray. And right now, our strongest. And as Scotty Roberts pointed out, it is growing nicely and has many implications for healthcare as it really differentiates competence of the staff and not just knowledge of the staff. So, we're really excited about the future of AI, our growing data sets and Jane specifically.

[Matt Hewitt, Craig-Hallum]

That's really interesting. Thank you for that detail, and congratulations on the strong quarter.

[Bobby Frist, Chief Executive Officer]

Thank you.

[Operator]

Thank you for your question. One moment while we prepare for the next question. And our next question will be coming from Richard Close of Canaccord. Your line is open.

[Richard Close, Canaccord]

Yes, thanks. Congratulations. Can you hear me, okay?

[Bobby Frist, Chief Executive Officer]

We got it, Richard.

[Richard Close, Canaccord]

Great. So, Bobby, just on the collaborative that you were talking about, you mentioned one client purchased 42% more. I'm just curious if you can put that into perspective. Are you saying that client's total revenue to HealthStream will be up 42% year-over-year? Or is that something different? I just...

[Bobby Frist, Chief Executive Officer]

Yes, that would be different.

[Richard Close, Canaccord]

...don't want to misunderstand what you're saying.

[Bobby Frist, Chief Executive Officer]

Sure. Yes, I should have and we'll provide more information. So that customer is a large enterprise customer for us. They buy many things that are not in the collaborative. For example, their base contract for technologies like the HealthStream Learning Center is not in the collaborative. They didn't extend it or anything in that purchase process.

So, what it was, was a bundle of educational products that they didn't want to necessarily purchase centrally, they wanted to understand across, say, there are dozens of hospitals, what the demand was for, say, I'd say 15 or 20 products. And so we were able to feature 15 or 20 products, some of which are only relevant for, say, a small department in each hospital, some of which are relevant for the whole organization.

But essentially, what it allowed them to do was add on 10 or 15 products into the collaborative allow all of their dozens of hospital leaders and heads of departments to review them in 30 days and place orders then aggregate the orders into kind of a single order. They could see the demand for that product and then purchase. So over a 90-day window, they reviewed 15 products and purchased many of them. And the purchases on those products were up 42% over the prior year.

It does not imply that the revenue from that account will go up 42%. It implies that for that set of products, the order value, which -- again, those are -- sometimes they're multiyear commitments. So they wouldn't even be 40% growth on those 15 products in the year. It would be -- let's say, they extended 10 products, added five new products for three years, then that 40% order value would be spread over three years.

So I hope that gives some clarity. But nonetheless, it's very exciting because both they purchased products they've never purchased before and they extended products, and they bought more of existing products across that library of offering, and they did it in a focused 90-day way and is kind of a gamified process and orders were up 42% in total dollar value.

[Richard Close, Canaccord]

Okay, that's helpful. And then maybe on the commerce side of hStream, obviously, exciting from that perspective that you expect something possibly in the second half of this year, albeit likely small. As you think about that going forward, though, over the course of several years, how do you think that the commerce side of hStream has the potential to impact margins? And maybe that's for Scotty, but I'm just curious on margin impact. And then if there is license fees associated with that in terms of -- is the revenue -- should we think of that revenue as one-time revenue or recurring in nature?

[Bobby Frist, Chief Executive Officer]

Let me give an example of how it could come recurring, and we don't really know yet. So the first thing is it's a future state, but let me talk it through a little bit. So, we have talked about one of our platform services that I do think itself can generate revenue. It's our license verification service. And so, in the platform, as we've mentioned, we built a capability, allows an organization to verify that a license is current, and it's driven by API, so it's easy to incorporate.

So, let's say, for example, you're a small startup company and you store nurses' licenses in your application that you sell or that the market uses, and you want a way to know whether the license of that nurse is current. Our future state would be you don't have to be a customer of the HealthStream Learning Center to benefit from that service. You don't have to buy our CredentialStream. You could just directly pay us to check our connected hStream platform, which is connected, in this case, to over 2,000 end points to check the license, and you can pay us a small fee to paying our service and get back a flag that would say, current or expired license.

And so, the idea here would be that maybe in the future, 500 different start-up companies that store licenses for nurses want to add a verification capability to their application, and they might license that service directly. So it's my hope that several of the capabilities of our platform end up becoming a revenue-generating services in the future.

I do want to reemphasize as a future state, but as I noted in our developer portal, which is the window into those services, we've already got a couple of start-ups that have registered their developers to look in there and see how it may be applicable to what they're doing. In addition, as I mentioned, we had a large ERP vendor, one of the largest in the world, having some of their developers in there. They may be one of our what is currently viewed as a competitor would go in there and license the license service and use it to validate licenses in their HRIS system or the ERP system as such.

So again, this is a future state, but -- and currently, that license service is plugged into our own learning center. Soon, we'll be checking licenses before we schedule in our own credentialing -- in our own scheduling system. And so, we're using these functions in our own applications to enhance them, but the point is they may become licensable obvious themselves. And so right now, we don't want to get too excited about it because it's undefined. But we're beginning to see the early signs that people might have an interest in that, or organizations might and that they could generate revenue.

So we'll leave it at that for now. And then the next few quarters, I hope to be able to give examples of where that's maybe either actually starting to occur or be incorporated into the value prop of other people's platforms. That's what we mean by a platform. The platform powers our own applications. The platform differentiates our own applications, and the platform may power other people's applications.

[Richard Close, Canaccord]

Okay, that's helpful. And then just maybe going back to Matt's question, the new win on the learning system, obviously, positive. But you talked about six firms that you beat out, including an ERP vendor. Last quarter, I think you mentioned two lost accounts. And I'm just curious, any updates and perspectives on the competitive environment in learning? Has there been any meaningful changes?

[Bobby Frist, Chief Executive Officer]

No, I don't think so. I think all the major players have a learning architecture. There's a lot of question over how appropriate that architecture is for the learning environment and the mandatory training environment in hospitals. For example, there's a lot of initiative around self-directed learning. And -- I think self-directed learning is wonderful. However, I think targeted learning through Jane that helps you pick a career path and maybe develop skills in other area that's more directly needed. So, if you want to move from the OB to ER department, maybe Jane is going to be better than a generic learning platform where you kind of purchase a content library from a third party. Jane is much more intelligent about identifying what you might need. So, I think -- and then the completeness of our ecosystem.

So, sometimes an ERP LMS, which is, I think, not as powerful as ours, or specific to the needs of healthcare, at all levels, including, for example, when the joint commission walks in, our LMS prints out a report that we know meets the needs of that joint commission audit. And so, as opposed to -- but sometimes, if you're the CEO or the CFO and you're just trying to aggregate vendors and you may just take the -- what I would consider, a less capable LMS from an ERP vendor, that does happen. So, we lose that occasionally.

That said, I think generally, when you hear like the story we just told, the power of the collective offerings of the best content brands in the industry, the capabilities like differentiating true competency as HealthStream as a partner favors our learning architecture, our learning systems, our learning products like Jane over generic learning architectures from competing LMSs.

That said, there's dozens and dozens of competitors, some even have bigger budgets and, in some ways, may be more features. Now the question is, are those features relevant to our customers. The fact that, that does international currency exchange may not be -- or a currency conversion in a LMS may not be something relevant to U.S. hospital systems.

So, I think our features are focused on the known needs of our customers, and we feel competitive, and because of those reasons. And this was an example where the aggregate value of our partnerships, our capabilities that resulted in kind of a wholesale switch to HealthStream.

[Richard Close, Canaccord]

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

[Operator]

Thank you for your question. One moment while we prepare for the next question. And our next question will be coming from Vincent Colicchio of Barrington. Your line is open.

[Vincent Colicchio, Barrington]

Yes, Bobby, gross margins were down year-over-year in the first half. I'm curious, what should the second half look like in terms of year-over-year comparisons?

[Bobby Frist, Chief Executive Officer]

I'll let Scotty take that one, and then I'll chime back in if needed.

[Scott Roberts, Chief Financial Officer]

Sure. Hey, Vince, how you're doing?

[Vincent Colicchio, Barrington]

Good.

[Scott Roberts, Chief Financial Officer]

I think margins, we're still aiming for that mid-60%, 65%, 66% range, we kind of teeter a few basis points quarter-to-quarter. As I mentioned on the call, a couple of factors that influence margins continue to be revenue mix changes, the royalties, obviously, and then cloud hosting costs as we continue to expand our CredentialStream application, for example, grow that revenue stream -- some of the costs start to filter through.

And then just revenue mix also, we didn't mention it on the call, but we've mentioned it on prior calls, reductions in revenue from our legacy applications, one being the scheduling application called ANSOS, still see some a little bit of attrition there that's pulling down revenue and obviously influencing margins a little bit. And some of that is obviously shifting over to the ShiftWizard solution that we also spoke about, but also there's just pure attrition going on too.

But I think net-net, I think we're still aiming for that 65% to 66% range.

[Vincent Colicchio, Barrington]

And a follow-up on that. On the ANSOS, is the attrition stabilizing? What's the trend there? And do you expect it to get better going forward?

[Bobby Frist, Chief Executive Officer]

I think as we described in the last call, it's a challenging situation. I think we're converting them as best we can. We announced one today, the conversion from an ANSOS customer to ShiftWizard. We're developing the capability of ShiftWizard to meet the full needs of the large enterprises, but we have more development to do. And so, it's kind of a known quantity that we acquired a company that was a legacy platform and that we would experience some attrition. I think we continue to experience that. That said, I think we're getting better as a company at trying to move those accounts into our own application called ShiftWizard, and retain them as customers.

So, I expect the attrition to continue and be a drag. That's why we're hitting this 4.5%, 5% growth rate. I think without that, we would be delivering better growth rates. As you heard in the call today, ShiftWizard grew 17% over the prior year same quarter. So, the promise is in the future of these new SaaS applications. And I think that in general, we kind of entered the market with ANSOS with a known risk and we're experiencing that risk, but it's a known and quantifiable drag on growth that we're just going to manage through as we build out the ShiftWizard application.

[Vincent Colicchio, Barrington]

And one follow-up on Jane. Are you seeing -- what does the competitive landscape look like there? Are you seeing similar products or no, as of yet?

[Bobby Frist, Chief Executive Officer]

Well, state the question again. So, yes, I think I shared my excitement for Jane, but what was the question?

[Vincent Colicchio, Barrington]

Are you seeing a competitive product emerge? What does the landscape look like?

[Bobby Frist, Chief Executive Officer]

I have not. So I may be missing something. I'm sure there's startup somewhere that's building something. But we believe, Jane, because of the data sets it's based on that were unique in the industry when we acquired, the company that had built a 20-year history of assessing competence in this way, gave us the infrastructure we needed to build a true expert system using that data to train it. I just think at the time, that was a unique asset in the market, and we think we've turned into a unique asset in HealthStream. So, it is a premium product. So I think rate of adoption could go up. If price was a little lower, we're going to be working with that and thinking about it. But right now, we want to just keep tuning the product to get it where we want it because we think it's a differentiated product.

[Vincent Colicchio, Barrington]

Nice quarter. Thank you.

[Bobby Frist, Chief Executive Officer]

Thank you.

[Operator]

Thank you for your question. One moment while we prepare for the next question. And our next question will be coming from Ryan Daniels of William Blair. Your line is open.

[Jack Melick, William Blair]

Hey, hi. Good morning. This is Jack Melick on for Ryan. So, I guess a little bit more into the weeds here. Deferred revenue was flat year-over-year and looked to be down more sequentially this quarter than compared to the prior-year period, which would indicate a negative billings growth, if my math is right. Now I get there are plenty of nuances that impact your reliability of billings as a forward indicator. But do you mind walking us through the details that might impact deferred revs and other related metrics? And how that would or would not triangulate to visibility over the next few quarters? Thank you.

[Scott Roberts, Chief Financial Officer]

Hey, Jack, interesting question. I'll try to give you a few thoughts. I probably can't explain it the way you're asking. But I would say that billings for us tend to fluctuate and -- both in timing and the nature of billings. And so, we have kind of a good variety of options for our customers to help kind of smooth the payments to us. And so, annual billings is very prominent for us. Those tend to happen at least for us, seasonality-wise in the first quarter. And we also have a good mix of monthly billings, quarterly billings and some semi-annual.

So how they influence deferred revenue at any given point in time tends to also fluctuate. And so, if you look back at Q1, that's where we typically see the increase, but just year-over-year, contracts -- renew contracts, new contracts come in, billing terms often change as well. And so, we've started to see more of a trend towards quarterly billing, which generally would have flushed through the balance sheet most likely by the end of a reporting period versus annual billings, which tend to sit on the balance sheet a little bit longer.

[Jack Melick, William Blair]

Okay. Great. I appreciate the detail there. And I guess switching gears a little bit. Looking at professional services, I get that it's a smart chunk of the business, but I can't help but notice that its growth has been lagging overall subscription revenue and actually negative over the last few quarters. My assumption here would be that these two would sort of increase in lockstep, but that doesn't seem to be the case. Is there a reason that the direction of this relationship isn't more clear? And I guess, more broadly speaking, is there anything you believe is worth highlighting as it relates to this segment of professional services and its longer-term outlook? Thank you.

[Bobby Frist, Chief Executive Officer]

Yes. Great question. It is intentionally being dropped. I am a believer that we should minimize implementation fees and pro services and build a subscription business. And so, in some cases, we even intentionally decided to reduce or lower, or the fees associated with the initial implementation cycles, try to get to implemented software as fast as possible and move on to subscription recognition. So, I love the fact that I believe Scotty, our number is about 95% of our revenues are subscription, therefore predictable. This 5%, if I could find a way to eliminate it, I probably would. If I could slightly increase our subscription price and eliminate implementation fees, I would do it.

So, we've got a conscious effort to -- on the biggest of biggest implementations, there's just a lot of people involved, and so you do need to charge something. But in general, we're really trying to get it to where these services can be turned on and configured remotely without travel and on site. And so, our -- my vision is that the pro services would be intentionally diminished. And we'll probably get to a point like here where it's so small and not growing that it's not a material part of our financials.

But we have -- we do not have an ambition to grow pro services. In fact, it's just the opposite. I'm trying to reduce the time, the implementation, make it simpler, get applications online by self-configuration that don't require implementation services and get to the paying monthly subscriber. That's what we want. And so, I would say it actually is a positive kind of hidden. I know it's down year-over-year, but in my mind, that's a positive thing, it means that more -- higher percentage of our revenues are subscription based.

I don't know if Scotty wants to add anything to that, but...

[Scott Roberts, Chief Financial Officer]

Yes, Bobby, I think your explanation is exactly right. It's more of an intentional shift towards product mix and how we deliver the services.

[Bobby Frist, Chief Executive Officer]

And like I said, I think it's Jack we're talking to, there are some so large scale that you just -- if you put 10 people on something for four months, you need to charge something for it. But my goal is we could find a way to implement them in two months and have it self-configured, we would do that, and there would be no pro services fees. So, just directionally, you asked the question, is it a business we're trying to grow? And the answer is no.

[Jack Melick, William Blair]

Yes, make sense. Really appreciate the insight there.

[Operator]

Thank you. And one moment. We have a follow-up question. And that follow-up question will be coming from Richard Close of Canaccord. Your line is open.

[Richard Close, Canaccord]

Yes, I'll keep it quick and save my other follow-ups for later. But Bobby, just a clarification on ShiftWizard. You just mentioned 17% growth. For some reason, I thought you said 19% in the prepared remarks.

[Bobby Frist, Chief Executive Officer]

Scotty, can you clarify? I may have misspoke, let's check.

[Scott Roberts, Chief Financial Officer]

Yes, I think it was 19%.

[Bobby Frist, Chief Executive Officer]

19%? Okay. Good. Well, that's better than 17%, but they're both solid numbers. And yes, thanks for asking, Richard. So, I guess it turns out as it's 19% year-over-year.

[Richard Close, Canaccord]

Okay. Great. I'll follow-up with you my other questions. Thanks.

[Bobby Frist, Chief Executive Officer]

Okay. Great. Just one kind of closing comment related to the whole ShiftWizard, ANSOS, it's definitely one of the more challenging parts of our business. We've talked about it. We've formed it quickly over 24 months with three acquisitions. Some of the acquisitions had a legacy component. We knew what we're getting into kind of hot water. But -- that acquisition gave us a roadmap and some paying customers.

And what we have done, which is relatively new, is that the team and the leader that helped us really get CredentialStream into the market-leading position as evidenced by our G2, our recent recognition as the leading credentialing system in the industry, the team and specifically the person, Michael Sousa, that helped us get there, is now in-charge of building the ShiftWizard application suite, the whole scheduling area. And so, we're installing those best practices and lessons learned. I think in the year prior, I said we had gotten the playbook from Michael Sousa and delivered it to other executives to try to deliver on it. But now we actually have the executive that made it happen -- making it happen in scheduling as well.

So, we're excited about that and expect to see some gains from that experience being applied to this challenging set of -- this opportunity set is what, I guess, I would say. And hopefully, the early returns will start coming in later in the year on the leadership team we put in there.

[Operator]

There are no questions in the queue. So, this concludes the Q&A session. I would like to turn the call back over to Bobby First for closing remarks. Please go ahead.

[Bobby Frist, Chief Executive Officer]

Thank you all for listening in. We're looking forward to the next quarter. Don't forget to come to Nashville for the Nashville Healthcare Sessions. You'll see HealthStream participating as well. An opportunity to say hi to all the people that are changing healthcare for the better. Thank you to all HealthStreamers who made it happen, and we look forward to the next earnings call where we'll update you guys on the hStream platform, the portal technologies and our customer -- hopefully, what will be a strong -- another strong quarter of customer wins and great stories. We'll talk to you guys soon. Thanks.

[Operator]

This concludes today's conference call. Thank you all for participating, and enjoy the rest of your day. You may now all disconnect.