HealthStream Inc (HSTM) 2022 Q3 法說會逐字稿

Good morning, and welcome to HealthStream's Third Quarter 2022 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 would now like to turn the conference over to Mollie Condra, Vice President of Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you. Good morning, and thank you for joining us today to discuss our third quarter 2022 results. Also in the conference call with me today is Robert A. Frist, Jr., CEO and Chairman of HealthStream; and Scotty Roberts, CFO and Senior Vice President of Finance and Accounting.

I would also like to remind you that this conference call may contain forward-looking statements regarding future events and the future performance of HealthStream that could involve risks and uncertainties that could cause the actual results to differ materially from those projected in the forward-looking statements. Information concerning these risks and other factors that could cause the results to differ materially from those forward-looking statements are contained in the company's filings with the SEC, including Forms 10-K, 10-Q and our earnings release.

Additionally, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HealthStream is included in the earnings release that we issued yesterday and may refer to in this call.

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

Good morning, everyone. Thank you, Mollie. Looking forward to our third quarter 2022 earnings call, and we'll start with reviewing some of the highlights. Each of the financial metrics highlighted in our earnings release showed growth in the third quarter. We delivered record top line revenue in the third quarter of $67.3 million, which is up 5% compared to Q3 of last year.

And based on our guidance, we expect revenue next quarter to increase by 6% when compared to Q4 of last year. So it's fun to be back on offense and have higher growth rates here in the second half than in the first half. .

Operating income was $2.4 million, which is up 33%, and adjusted EBITDA was $12.7 million, up 2%, all compared to the same period last year. Net income was $3.7 million, which is up 144% from $1.5 million. And EPS was $0.12 compared to $0.05 both compared to the same period last year and both due in part to the successful sale of a company in which we held a minority equity interest.

Concurrent with our financial progress, HealthStream's ecosystem continues to expand. hStream subscriptions are now at 5.35 million, which represents an additional 50,000 subscriptions since last quarter. The support we're providing to health care organizations is driven by our vision to improve the quality of health care by developing the people that deliver care.

With that in mind, I want to take a moment to ground everyone in the core dimensions of our business. First and foremost, HealthStream is a health care technology company dedicated to developing, credentialing and scheduling the health care workforce through SaaS-based software solutions. We sell these solutions on a subscription basis under contracts, which average 3 to 5 years in length. That means our revenues are recurring and fairly predictable. We are profitable, and we have little to no debt.

We are also fortunate to be solely focused on one of the more recession-resistant markets around, health care, which is comprised of about 10.9 million workers, the way we define our audience. Those health care professionals are the end users of our SaaS applications and software solutions.

We are led by a seasoned team of executives who have a proven track record of generating strong earnings and cash flows through both organic and inorganic means. We have developed internally innovative patented solutions such as Jane, and we have created new application suites such as CredentialStream through acquiring and integrating other companies.

At our Investor Day program held last month, we reminded everyone that HealthStream's emerging platform, hStream, is central to many of the most exciting developments in the company today. For example, hStream's identity management capabilities will enable interoperability that gives us leverage between various proprietary and third-party applications. Our platform strategy will enable us to build increasingly powerful ecosystem, which we believe will create new business opportunities and also new ways for health care professionals to participate in our ecosystem.

Given these developments and our confidence in their ongoing evolution, we announced medium-term financial objectives during our Investor Day, and I want to reiterate those objectives today. First, from a revenue standpoint, we are targeting to grow 7% to 10% on average per year over the next 3 years, which will be a mix of organic and inorganic growth.

Second, we are working to deliver gross margins of 65% to 68% over the same time period. Third, we aspire to deliver a higher EBITDA margin of 21% to 24% over that period. Remember, these are not guidance, they're objectives that inform our strategic planning process. Unlike guidance, for example, these objectives include inorganic growth, which is less predictable, obviously, than our subscription organic growth. Later in the call, we'll talk about our 3 application suites that focus on learning, credentialing and scheduling.

But for now, I'd like to turn it over to Scotty Roberts for a deeper dive into the financial results.

All right. Thank you, Bobby, and good morning. Let's start with the financial highlights for the quarter. And unless otherwise noted, comparisons are against the same period of last year.

Revenues were $67.3 million and were up 5%. Operating income was $2.4 million, up 33%. Net income was $3.7 million, up 144%. Earnings per share was $0.12 per share, which was up 140%. And finally, adjusted EBITDA was $12.7 million and was up 2%.

Workforce Solutions revenues came in at $54.1 million and were up 6%, and revenues from Provider Solutions came in at $13.2 million and were up 2%. The third quarter's consolidated revenue growth rate of 5% was in line with our expectations and was an improvement over the 2% growth rate during the first half of the year. This is indicative of a steady progression of both new sales, particularly since the height of the pandemic and getting past the legacy resuscitation runoffs and some other comps that were pulling down the growth rate earlier in the year.

And through the first 9 months, we've experienced an improvement in bookings compared to last year, which is also contributing to our revenue growth in the second half of the year. Our forecast for the fourth quarter anticipates consolidated revenue growth will be approximately 6%, as Bobby mentioned earlier.

Gross margin was 65.3% compared to 64.8% last year. Mid-60% margins are already in line with the medium-term objectives Bobby also mentioned earlier. Revenues from partner products in which we pay royalties increased during the quarter, resulting in a slight decline in gross margins compared to the first half of the year.

Operating expenses, excluding cost of revenues, were up 5% or $1.8 million over last year's third quarter. The increase in expense was primarily within the sales, marketing and product development categories. Sales and marketing increased by 11% due to a combination of increased staffing levels, higher sales commissions and travel. Our business travel expenses have been steadily increasing and were over $400,000 this quarter compared to about $100,000 in the third quarter of last year as customer-related site business increased along with the return of many industry trade shows and events. And we expect travel will remain at the current rate through the end of the year.

The investments that we've made in sales and marketing are leading to positive results. As bookings are up year-over-year, sales pipelines are increasing, and our closure rates are improving compared to the past couple of years. Our product development expenses also increased by 11%, which is net of labor costs that were capitalized for software development. And capitalized labor costs increased about $1 million over the prior year quarter.

General and administrative expenses declined by 9%, and there were 2 primary drivers behind this reduction. First, HealthStream adopted a hybrid workplace policy last year, and it's been going well for our employees and for the company. We reduced our office space footprint over the past couple of years and some satellite office leases came up for renewal, and we decided not to renew them. That reduction in office leases resulted in expense savings of over $550,000 in the third quarter and is expected to result in about $1.1 million in savings for the full year.

We will continue to evaluate our office space needs in light of our new model and have recently decided to market approximately 1/3 of the space in our Nashville headquarters for sublease. Additionally, impacting G&A, we do not have about $150,000 of transition service costs from the acquisition that we had in the third quarter of last year. And during the third quarter, a minority investment that we've held for over 7 years was sold and resulted in the recognition of a $2.7 million pretax gain, which increased net income by $2.1 million and increased earnings per share by $0.07. The proceeds that we received were approximately $3.5 million.

Adjusted EBITDA was $12.7 million and was up 2% over last year's third quarter. And for clarification, the gain from the sale of the minority interest I just mentioned is excluded from our calculation of adjusted EBITDA.

Now switching to the balance sheet metrics. We ended the quarter with cash and investment balances of $51.8 million, which is up by $12.6 million since last quarter. During the quarter, we deployed $6 million of cash for capital expenditures, and we did not have any share repurchases this quarter.

DSO was 38 days compared to 40 days last year. On a year-to-date basis, cash flows from operations were $43.1 million compared to $36.4 million last year. And free cash flows were $24.1 million compared to $17.3 million last year.

And for our share repurchase program, as I said, we had no repurchases this quarter, and we have approximately $1.9 million remaining under the plan, which expires in March of 2023, unless earlier terminated by the company.

Now let me provide a review of our guidance expectations as we close out the year. With 1 quarter remaining, we are updating our guidance ranges as follows: we expect consolidated revenues to range between $265.5 million and $267.5 million; adjusted EBITDA is expected to range between $52 million and $53.5 million; and capital expenditures are expected to range between $25.5 million and $26.5 million.

For the fourth quarter, we expect revenues to grow approximately 6% over the same period last year. We also expect adjusted EBITDA to improve over the fourth quarter of last year. We're pleased that our revenue growth is expected to accelerate from 2.1% in the first half of 2022 to 5.5% in the second half.

Despite this positive direction, the primary reason that we've lowered our revenue guidance range for the year is due to underperformance from scheduling. During the second half of the year, we decided to curtail our sales of legacy installed software in favor of subscription-based SaaS solutions. We also adopted a conversion strategy, intended to transition customers away from installed scheduling software and on to SaaS-based scheduling solutions. We believe these decisions will benefit customers, the company and shareholders over the long term.

That's all I have for today. Thank you for your time. And Bobby, I'll turn it back over to you.

Thank you, Scotty. Let's turn to a brief overview of each of our 3 application suites, those are learning, credentialing and scheduling, and I'll hit some highlights from each. Remember, each of these application suites are made up of a subscription-based SaaS applications that are specifically designed for the health care workforce, and each of them is increasingly powered by and connected to and informed by our hStream technology platform and our hStream platform strategies that I discussed earlier.

First, let's look at learning, which is well established and encompasses a broad range of solutions. Our flagship product in this set of solutions is the HealthStream Learning Center, which is the most adopted and utilized learning management system in health care. The health care learning center -- HealthStream Learning Center continues to be the market leader in the acute care space and has a growing presence in the continuing marketplace, including in ambulatory surgery centers and skilled nursing facilities.

Learning also includes our proprietary market-leading safety and compliance solution known as SafetyQ. With SafetyQ, our customers can positively impact our GRC programs by utilizing the interactive learning content and proprietary national benchmarks only available through our platform. SafetyQ added 31,000 subscriptions in the third quarter.

Contributing to the diversity of our ecosystem, over 75 marketplace partners utilized our learning channel to enhance and deliver their products. Examples include American Red Cross, EBSCO and ARN and many others. In the past year, we've added approximately 35 new products from our marketplace partnerships.

Let's turn our attention towards credentialing, which is the product of acquisitions that occurred from 2012 to 2019. We took the absolute best features of each companies' products that we acquired, and we combine them to form the new software SaaS application suite we call CredentialStream. We believe CredentialStream is the best credentialing solution on the market for assessing, enrolling, onboarding, credentialing and privileging positions. It allows our customers to positively impact their revenue cycle by minimizing the time between hiring a physician and getting reimbursed for that physician's work.

Our customers appreciate the return on investment that CredentialStream provides. Sales of CredentialStream remained very strong. In fact, they remain so strong that the backlog for implementing new sales remains substantial. And as you know, we do not recognize revenue until the solution is fully implemented. Generally, we are both selling and implementing 3 customers per week. We're working on automating even more of this fairly complex implementation process, which will benefit customers and our company.

I mean, obviously, if we could tilt that ratio a little bit and win 3 deals that we can implement 4, we could work our way into the backlog instead of both just kind of growing together. So we're working on that.

Finally, let's talk a little bit about scheduling, which is formed through 3 acquisitions, all of which were completed in 2020. And as we described this journey, it will be a journey like in credentialing. But we have a clear vision, we have a solid set of hypothesis to test in which we can deliver value and why we believe we can deliver some of the best scheduling systems on the market. But it's going to take us time to develop those things and get them into the marketplace.

So we're running the same playbook in scheduling that we successfully ran in credentialing. Fortunately, with scheduling, we already have a promising SaaS solution in ShiftWizard, which is outperforming our sales expectations. We plan to continue enhancing ShiftWizard with the best elements from our other scheduling assets.

I'll end our discussion of scheduling by highlighting the continued viral growth of our NurseGrid application. For the first -- from the time we acquired it in early 2020 to now, NurseGrid continues to be the #1 application for nurses in the Apple's App Store. Perhaps more impressive is that the monthly active users for NurseGrid has more than doubled since we acquired it. Over 425,000 nurses log into NurseGrid every month to manage their calendars, swap shifts with their colleagues and generally plan the professional and social agenda with their peers.

We do not believe that this level of engagement and satisfaction exists in any other nurse-centric application on the market today, and we look forward to evolving our uses of it and the opportunity provided by it over time. Stay tuned for more on the future of that product.

I want to close today by pointing out the consistent and steady growth of our ecosystem. In the third quarter alone, 55,000 new subscriptions to our Learning Center application were contracted. 87,700 American Red Cross certifications were issued. 30,000 more nurses became monthly active users on NurseGrid, and approximately 3 new contracts per week were signed for CredentialStream.

We're just -- these are just a few of the metrics that show our dynamic growth of our solutions throughout the company. I believe our platform strategy supports continued growth and innovation, and I look forward to reporting on those in the coming months.

Now I'll turn it back over to the operator, so we can head into quality -- to our Q&A sessions.

(Operator Instructions) Our first question will come from Richard Close of Canaccord Genuity.

I just want to clarify on the workforce implied or the change in guidance there, so that's solely related to not selling the license software, the old products, and it's just on the scheduling side?

It is coming from the scheduling side and the biggest characterization or one of the elements would be that there was also, as we mentioned in the prior quarter, a little bit of churn in the legacy software business, which we're trying to convert to the SaaS business. So I'd say it's just, in general, a few variables in our projections for the scheduling business.

Okay. And then on the Provider Solutions or the credentialing product, I guess, we should call it. With respect to the growth that's at like 2% to 3%. I think if you look at the third quarter, the implied guidance is down 1% year-over-year to up 3%. And I know you hit on this with the implementations. But what do you think the long-term growth rate is in the credentialing business?

Well, we've tried to provide these objectives to try to get at that answer kind of universally across our application sets, the puts and calls, as you will. And we provided the objectives which should inform our planning process and, therefore, kind of each of these application suites is what our goals are. It would be to grow 5% to 7% organically, and that's all the ins and outs. So for each of the businesses, some at different maturities that have a little more churn, some are high growth but have implementation backlogs. So in each -- and then in the scheduling business, we're very new to that whole process of both retaining the legacy customers and introducing the SaaS subscription model and migrating customers.

So for different reasons, they all have different -- slightly different puts and calls, but we do project growth from all of them. And collectively, we are communicating that our objective for growth is 5% to 7% organic over the next 3-year period. And then in addition, for the first time, we've committed to this concept, although our history would indicate with over 18 acquisitions that we'll also have an inorganic component, that should push again, our objective, not our guidance, but our objective and the way we plan, over time, the inorganic growth should contribute another 2% to 3%.

So we've guided to 7% to 10%. We have provided our objectives of 7% to 10%. And there's some variables in there like acquisitions that are less predictable, as I mentioned. But instead of addressing in each application suite because, as we've talked, they're at different stages and for different reasons, we'll just say collectively, we believe we'll be targeting that 5% to 7% organic growth.

Okay. And staying on credentialing, Bobby, you talked about the ROI that you're delivering for customers. There was an article, I think, last week that I stumbled across that by class, I talked about the different vendors in the credentialing area and maybe called into some questions in terms of the maybe value proposition of VerityStream. So do you have any comments related to that?

Well, I think they've got more research to do. We really are convinced that we're both gaining market share by displacing competitors because our solution is better. And we probably have some more work to do to describe the value proposition and -- but we're confident in all the components of our software being best of breed, especially when put together as a continuum of products that does shorten time to revenue for physicians.

We believe we have the most comprehensive suite that handles from the onboarding process, all the way to the privileging process, so enrolling and insurance, doing the privileging and credentialing process, we think we're just -- we think we're the best at it. So at an enterprise level, we are very confident of our value proposition. And I imagine that over time, those class rankings will work themselves out because that's the feedback we also get from our customers.

Yes. And you're signing 3 per week?

Yes, that's 3 what we call new logos a week, and those are coming from somewhere. So we feel really good. Now in our market, we're focused on the acute care market, and some of the other credentialing vendors focus on, say, the insurance market where they're credentialing in the position for insurance purposes. That's not our strength. Our focus, as you know, for all of our application suites, is on the workforce where they're employed, which in many cases, especially in credentialing, is in the acute care market. (inaudible) on who they're calling and how they're getting the data, I don't know. Class is an important function, but our customers are speaking with their choices each week.

Yes, that was fair. I just wanted to hear your thoughts on that. So I appreciate that. Congratulations.

(Operator Instructions) Our next question will come from the line of Ryan Daniels of William Blair & Company.

This is Jack filling in for Ryan. Looking at your targeted growth objectives over the next few years, can you speak to your thoughts around the underlying assumptions or growth levers across each of the 3 core product offerings? And with that, how are you thinking about the composition of that organic growth between new logos and same client expansion?

Yes. It's a little bit difficult because there are so many solution sets, but we've broken down to these 3 categories. And as we talked, the each at slightly different maturity stages, but emerging as market leaders in the first 2 and a great vision and direction for the third here, which is the scheduling area. So -- and we have incredible assets in that area.

So first of all, characterizing it, it's largely in organic, it's an organic growth strategy at that base level of our targeted objectives. We grow by adding subscribers, cross-selling and upselling. So we have a really good account management model that shows customers the other applications we have once they get into the ecosystem with one and the other.

Increasingly, one of the levers we're hopeful for and expecting of is that cross-selling will occur more frequently as the applications become more integrated as they lever the core integrated technology of the hStream platform. And so we think there'll be a growing value proposition to each suite as they become more interconnected through the hStream technologies.

And again, we're fairly early in that journey, but a lot of exciting milestones along the way. For example, at Investor Day, we announced our developer portal, which is really a symbolic shift to becoming a pass architecture. It means that we're beginning to make the functions of our ecosystem available on an API basis, which ensures greater interoperability between and among our applications and also the ERP and larger systems of our customers.

So the launch of our developer portal, we think, is a great kind of symbolic moment of the shift to become as offering a platform as a service capabilities, which means we're going to be more integrated, more leverageable and should ultimately facilitate better cross-selling and more reasons.

If you have, for example, our learning system, there should be competitive advantages to also buying our credentialing system. So we're kind of evolving an hypothesis instead of just being kind of best of breed in 3 areas, that each of those areas can lever the other 2 as they develop and mature using the hStream technology. So we're really excited about that.

We've been adding to the sales team. So whenever we come up with our targets, we try to figure out, we've got to backfill some sales team through the pandemic. We had more turnover in many areas of the company, including sales. So we think we're getting back up to par on our sales team, which again has resulted in stronger sales pipelines. Our marketing programs are getting better at finding opportunities, both in our existing ecosystem and new customer acquisition outside the ecosystem for any given product.

So cross-selling, better account management, organic growth, leverage between applications that show more kind of benefit to customers are all examples of why those -- we have those objectives, which would show higher growth rates than, say, we've been able to deliver through parts of the pandemic. and in the first half of this last year. So for all those reasons, we're excited that those are our objectives.

Again, we can't say they're our guidance. We'll do guidance every February. -- and it may be a little above or below those ranges on a given year, but over the 3-year period, that's the expected profile of our company. And kind of inherent in that is, as you can see, a boost in our gross margin profile again. And so we also believe that our product mix and the new types of products we're building have an inherently higher gross margin, say, our long history of, say, partnered products. And so the product mix should continue to favor higher-margin organic products over the next 3 years. And so we're excited about that as a force for earnings as well.

Great. Could you talk a little bit about the level of visibility looking out into 2023 at this point in the year, given any headwinds that might still persist in the health system end market?

Yes. Scotty, if you could refresh yourself from our investor deck, what we said our percent subscription revenues were. I know it was really high, and I think I know the number, I just want to fight it from the deck.

And while he's making sure we have that number, I'd say, just in general, of course, we're SaaS-based. We target 3- to 5-year contracts for the majority of our products, and it gives us a lot of visibility. Now the fourth quarter is an important selling season. But the good news is we feel really on track with solid pipelines through the end of the third quarter.

And so a lot of the revenue setup for, say, the second half of next year is determined by the sales cycles of the fourth quarter because some of those products get implemented, and implementation starts revenue rec. And so we need to have a strong fourth quarter to feel really good about the second half of next year. That said, the first 9 months of the year feel on track, and a huge percentage of our base revenues are already under 3- to 5-year contracts. So we have a very high visibility into next year.

So Scotty, any additional comment?

Yes, I think, Bobby, you're trying to highlight what kind of the mix of our revenues are roughly 95% subscription based is I think what you're asking. Visibility, say, generally speaking, we have a fairly predictable revenue stream because it's mostly subscription-based. But one chart I would probably point you to in the Investor Day slide deck, where you get a sense of what our remaining performance obligations are, you can see kind of how that's behaved over the past 4 to 5 years and get a sense of how much revenue if you're looking for visibility on kind of what's currently under contract that might give you another indicator.

Thank you, Scotty.

Our next question will come from Vincent Colicchio of Barrington.

Bobby, the backlog in credential stream, you said it's been growing nicely. Is there any churn from that backlog? Were clients being frustrated with the pace of implementations?

That's really funny that I was literally just texting that question to the GM that runs that area, the President. And my answer is, and I'm waiting for his text reply, but I don't think there's very much churn or loss at all even in the legacy platforms there. Largely, we've kept that customer base intact, both the acquired customer base, and we're getting them really excited about the new product that they can migrate to. So we're not only winning new logos. A meaningful number of those wins are transitions, probably half are transitions and half are brand-new logos. But the 3 week is, I think, the new logo numbers.

So I hope that provides clarity. But no, we're not seeing churn in the base business of any material measure in credentialing.

And the automation potential, any sense on the time line there? Have you identified sort of what you can do and map out how long it will take?

Yes, the team has a road map. They've been working on it. And by the way, just the sales rate has gone up and the implementation rate has gone up. So we have gotten better even in the last year at implementing. So it's just interesting as we're getting better at implementing, we're getting -- we're selling more, which I'll take that problem.

That said, they've also had well thought out and well-executed road map for improving the implementation cycle. For example, we've begun to seed the market with certain functions prepurchase that really those seated functions are only valuable in the context of a fully implemented system. And so the customers are beginning to both experiment with the new platform, but also do some of the pre-implementation work before they even buy the software, which is really amazing.

And so we see really a smart approach to trying to figure out how to take what is a really complex migration. So if you think about these credentialing systems are integrated with as many as 60 upstream and downstream applications. And so when we go in and win, sometimes we're replacing as many as 4 vendors with our suites, and those vendors are fairly integrated, but they're not integrated as well as we are with each other or as flexible and powerful as we are.

So you got to remember, this is a complex process. It also requires the customers to adopt some of our framework, which will have tremendous long-term benefit. For example, the customers adopt our privileging libraries, which is a form of proprietary data we provided to them. Instead of each hospital system having a proprietary privileging library to grant privileges against, they -- when they move to CredentialStream, they adopt our privileging model and our privileging databases and our privileges as written.

And so we're getting -- we'll have the ability kind of unique in the industry to provide insights into the credentialing profile of customers through the use of common data sets, which we have created and own. So I'm really excited about the overall model. And you have to remember, this is a big enterprise and important system. It's enterprise critical. It has to be done with great precision. And we're doing that, and we're doing an increased rate and we're coming up with clever ways to get customers to try and implement and work through some of the change management issues before they even buy the software.

So a cycle that maybe used to take a year, we're finding ways to shorten it down to 9 months and 6 months, and I think we can do even better in the next year. So yes, there's a road map. The process is improving, but it is a complicated process that requires change management on behalf of customers. And we're getting better at coaching them through that process.

Will you continue to hire? I know you said your sales force has come a long way, salespeople in Q4. And overall, has there been any change in the labor market in terms of availability and inflationary pressures?

Well, inflationary pressures are there. We're really working hard on our retention and development strategies. We think we have an incredible culture and lots of reasons for people to want to be a part of this exciting journey at HealthStream. So we're -- overall, I feel we're managing through all of those variables fairly well, actually, I'd say really well.

Last quarter, we increased our net headcount by 5 people. So we're kind of stabilizing right now the size of our workforce with new hires offsetting attrition just by a little bit. So kind of a net growth in employees, but it's much lower. And I'd say we've largely filled a lot of the seats in sales that we need. And so we don't have big holes in the sales organization like maybe a year ago or even 6 or 7 months ago. So now we've got to ramp up be make them all more effective as they learn the HealthStream way and HealthStream products.

But I think largely, I feel fairly -- I feel well staffed at this point and managing expenses, as you can tell pretty well. Now we have some trade-offs occurring. For example, we're reducing our office footprint while increasing, say, some areas in compensation and other areas of inflationary growth. So as a result of that, too, just as a sidebar, we've engaged in a study of our pricing models to see where we can work in, say, automated pricing escalators into our contracts.

So we have a lot of work to do in a lot of areas to handle the inflation and workforce issues, but I feel our teams are taking the right steps to deal with both.

(Operator Instructions) And we have a follow-up from Mr. Richard Close of Canaccord Genuity.

I was curious on the decision with respect to the legacy scheduling. Was that just made during the third quarter? I know you had maybe some softness in churn in legacy in the first half of the year, but just the decision not to offer those going forward?

Yes, that did occur early in the third quarter after kind of we had talked about in the second quarter call that we had some softness in selling. I think we just decided, look, let's just stop and let's also focus on migration strategy. So we're also creating programs to incentivize the migration towards the SaaS application. So both -- we made the active decision early in the third quarter to stop selling the license software. It wasn't selling very well anyway, as you know, which is not our model, the old installed software model, so that was okay.

But instead of counting on some of that in our budget, we just said, look, let's just stop selling it. And meanwhile, we launched and are in the process of creating benefits to migrating, and we're focusing our sales organizations and our account management teams on both showing those benefits and providing the right incentives to get people to consider migration.

So of course, we're maintaining and supporting all the legacy platforms to keep the customers engaged while also connecting them to new benefits and also now giving them formal reasons to want to migrate. So I'd say, yes, in the third quarter, both of those are active changes of the active migration program and the decision to stop trying to sell the installed software.

Okay. That's helpful. And then with respect to the credentialing, is there any metrics you could provide or just maybe commentary with respect to -- like when someone signs a new credential deal, what's the time line to go live? Is there an average that you can talk about?

I'll tell you what I'm confident that our -- the teams that run those areas have really good both probably white papers and ROI analysis. And what we're trying to do is find a way to post those on our website. So you can see kind of the -- what we would call kind of the time to revenue profile or at least the implementation cycle. We'll find a way to put some of that out for you guys because there's things that we use in the sales process, frankly, when we explain the implementation cycles and the time to revenue.

So there's kind of 2 things going on there. And I'm confident we have white papers and research on -- or at least sales and marketing materials on both of them. We'll try to point you to them as they're generally publicly available.

Yes, that would be great. And final question maybe for Scotty. Obviously, very solid free cash flow generation through the first 9 months. Is there some sort of target we should be thinking about, Scotty, in terms of free cash flow as a percentage of adjusted EBITDA or anything that you sort of target there?

Probably nothing I want to provide guidance for. But I think, obviously, we're trying to do our best to keep moving that metric up as quickly as possible. And I think for the past 2 years, it was fairly flat, around $17 million to $18 million. So it's good to see that this year, we're seeing some benefits come through and improving that metric. But obviously, our goal is to continue to improve and generate as much free cash flow as possible. And so -- and we think about the metrics to provide that as we go into next year.

In addition, Richard, I'd say right now, we have a very active program and kind of a leadership-based initiative to really make sure that our capitalized software development and our capital allocation strategies are going into our growth areas of our business. So for example, we're making sure that our product management teams and our company has created a classification system where we know our legacy products and our growth products, and we can carefully calibrate how much capital and our approach to maintaining the older software versus developing the new software.

So I mean, you would expect us to have those programs; we do. I'd say we're getting more focused on it and more experienced in managing software development pipelines and making sure our capital allocation, which turns into capitalized software costs, we can really get good leverage out of them in the future and making sure we're putting money into the right products at the right ratio.

So in addition to the kind of what Scotty mentioned, I think managing our capital allocation process, we're getting better and better at it.

And I'm seeing no further questions in the queue. I would now like to turn the conference back to Robert A. Frist Jr., for closing remarks.

Thank you, everyone, for participation, questions from analysts and those that follow our story to see our exciting developments. I look forward to reporting the next quarter, everyone. Thank you to our employees for delivering these really outstanding results that are driving us back on offense, as I say, and not on defense anymore. So let's keep up the great work, and I look forward to reporting the year-end results, I think, some time in February. We'll see you guys then. .

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.