HealthStream Inc (HSTM) 2022 Q4 法說會逐字稿

Good morning, and welcome to HealthStream's Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded 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.

Thank you, and good morning. Thank you for joining us today to discuss HealthStream's Fourth Quarter and Full Year 2022 Results. Also on 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 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 over to CEO, Bobby Frist.

Thank you, Mollie. Good morning, and welcome to our Fourth Quarter and Full Year 2022 Earnings Call. We do have a lot of developments to cover in the morning. So we'll -- let's first look at a quick view of financial performance. We move into in-depth discussion of operational enhancements we've made to begin 2023.

I'll turn it over to Scotty Roberts for a more detailed look at financials. And I do want to kind of reiterate the fundamentals of who we are and where we're going. So let's start with that. And then exciting news around starting a cash dividend policy to share as well.

So first, the financials. Each of the financial metrics highlighted in our earnings release, we did show growth in both the fourth quarter and the year when compared against the same period last year. For the full year of 2022, we delivered a record high amount of top line revenue of $266.8 million, a record adjusted EBITDA of $53.4 million.

In 2023, we expect to eclipse both of these high watermarks due in part to our streamlining of the company around our single platform strategy, where we use -- we used to be organized around 2 business segments: Workforce Solutions and Provider Solutions, we are now organized and managed as one operating company, unifying our work to enhance and leverage our hStream technology platform. We call this our one HealthStream approach or initiative, and we're going to talk a little bit more about that in the rest of the script here. Before we go further, I want to cap 2022 and start 223 by grounding everyone in 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, each of which are becoming more valuable because of the interoperability they are achieving through our hStream technology platform.

We sell our solutions on a subscription basis under contracts, which average 3 to 5 years in length. That means our revenues are recurring and predictable. We are profitable, and we have will to no debt. We are solely focused on health care and more specifically, the health care workforce.

The 10.9 million health care professionals work in the United States are the end users of our SaaS solutions and the target for our core applications. 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, and I'm pleased that our executive leadership continues to evolve along with our business.

Today, we're announcing new executive positions, but the individuals filling those positions are familiar to you all and have shown themselves capable of driving growth through innovation. For example, as part of our One Houston approach, we are consolidating our credentialing and scheduling solution groups into one group that will be internally known as enterprise application solutions.

Michael Sousa is being promoted to Executive Vice President of Enterprise Applications to lead this new group. It's kind of like a new grouping of product family based on the similarities of the product lines. Having joined HealthStream in 2004, Michael has already distinguished himself as the executive leader of our enterprise sales department and more recently, as the President of VerityStream.

As many of you know, VerityStream is the brand we have used to refer to our credentialing business up to this point. Now we will drop the VerityStream brand in favor of operating as one HealthStream. We believe the consolidation of credentialing and scheduling to enterprise applications will benefit customers as they receive a more integrated set of workflow solutions, and we are pleased to have one of the top SaaS solution executives in health care leading this new group.

We have also formed a new group called Digital Network Development to focus on business to professional solutions. This group is innovative and new and exciting in their direction as being led by established health executive, Scott McQuigg. We have a deep history of serving institutional customers through our B2B business model, but the growth of NurseGrid and the footprint of my clinical exchange, both acquired businesses through our M&A program, have shown us that we have a lot to offer the individuals who would like to become our customers as well.

With that opportunity in front of us, Scott and this new group take on the opportunity to turn subscriptions into subscribers when we expand our business to professional offerings. Considering Scott's many accomplishments at HealthStream and his prior entrepreneurial successes, he is uniquely qualified to grow professional audiences, user engagement and modernization strategies in this newly defined solution group. Scott will serve as Senior Vice President over our new Digital and Network Solutions Group.

Our alignment around One HealthStream means organizing our company to achieve future growth and investing in areas where we see potential for growth and see key growth drivers. Our philosophy has always been to invest in the innovation necessary to deliver technology solutions that help improve the quality of health care.

Streamlining around One HealthStream is the next step in that journey. We believe the realignment announced today positions us to deliver strong financial growth and market-leading innovations going forward. This can be seen in the 2023 financial outlook described in our earnings release and the longer-term financial goals discussed during our September 2022 Investor Day presentation.

As the macroeconomic forces of inflation and recession add challenges and uncertainty on the global scale, we are confident that HealthStream will continue to deliver strong and growing profits.

There's still a great deal to talk about. But first, let's look at a detailed look at the financials, and I'll call on Scotty Roberts to do that, our CFO.

All right. Thank you, Bobby, and good morning. I'll start with the financial highlights for the fourth quarter and then speak to our financial outlook for 2023 and share how the operational changes we've made will impact our financial reporting beginning in the first quarter of 2023.

Unless otherwise noted, comparisons are going to be against the same period of last year. Our revenues were $68.5 million and were up 7%. Operating income was $3.1 million, up from an operating loss of $0.5 million. Net income was $2.5 million, up from a net loss of $0.4 million. EPS was $0.08 per share, up from a loss per share of $0.01 and adjusted EBITDA was $13.6 million and was up 13%.

As a quick reminder, last year's fourth quarter included $2.4 million of stock compensation expense associated with a stock grant to over 1,000 employees that was facilitated through a contribution of personally owned shares from our CEO. And despite being fully funded personally by our CEO, GAAP requires this transaction to be accounted for as a compensation expense of the company. And this resulted in lower operating income and net income in last year's fourth quarter compared to this year.

So now let's go back to our financial results. Our Workforce Solutions revenues were $55 million and were up 8% and revenues from Provider Solutions were $13.5 million and were up less than 1%. Revenues from Provider Solutions were impacted by lower professional service revenues compared to last year, while subscription revenue increased by 5%.

After delivering a consolidated growth rate of 2% in the first half of the year, we finished with an overall growth rate of 6% in the second half. A steady progression of revenue from new sales, particularly from our learning and development solutions along with a midyear acquisition contributed to this year-over-year improvement.

Gross margin was 65.7% compared to 64.3% last year. After adjusting for the impact of the CEO stock grant accounting treatment, gross margin for last year would have also been 65.7%.

Operating expenses, excluding cost of revenues, were flat, although last year's fourth quarter included a portion of the $2.4 million of stock compensation expense from the CEO of Stock grants employees, which I mentioned earlier.

Aside from the reduction in stock compensation expense, we experienced year-over-year increases in sales, marketing and product development expenses, which were mostly offset by reductions in G&A. Sales and marketing expenses increased by 7% due to a combination of growth in staffing levels, higher sales commissions related to a higher level of sales bookings and increased travel versus the height of the pandemic.

Our business travel expenses have been steadily increasing over the past several quarters, and they approximated $300,000 this quarter compared to just under $100,000 in the fourth quarter of last year.

And for the full year, travel was up approximately $1 million, and we expect travel will continue to trend upwards in 2023. The investments that we've made in sales and marketing resulted in an improvement in our sales bookings during the fourth quarter compared to the first 3 quarters of the year, and they were notably higher than last year's fourth quarter. We had several key wins, including some large multiyear contracts across our portfolio of applications.

Some of the larger deals, specifically for the credentialing and scheduling enterprise applications typically have a longer cycle time to revenue generation than our learning applications. So we expect these subscriptions will begin to materialize in the revenues later in 2023.

Product development increased by 3%, which is net of the labor costs that are capitalized for software development. And capitalized labor costs increased approximately $1.2 million over the prior year quarter, resulting from investment towards our single platform strategy and suite of applications. General and administrative expenses declined by 12%, which came from several areas, including lower bad debt charges, reductions in outside recruiting services, reductions in our leased office facilities and other infrastructure-related costs.

In last quarter, I mentioned that we decided to market about 1/3 of the space in our Nashville headquarters for sublease, and this process is still underway. Our adjusted EBITDA came in at $13.6 million and was up 13% over last year's fourth quarter and the adjusted EBITDA margin was 19.9% compared to 18.7% last year.

Let's move over to the balance sheet metrics. We ended the quarter with cash and investment balances of $53.9 million. And during the fourth quarter, we deployed $6.1 million of cash for capital expenditures, and we did not have any share repurchases this quarter.

DSO was 42 days compared to 41 days last year. And for the full year, cash flows from operations were $51.2 million were up 21% compared to $42.4 million last year, and free cash flows were $26.1 million compared to $17 million last year and were up 53%.

On December 31, 2022, we acquired substantially all of the assets at Eeds, a North Carolina-based health care technology company, offering a SaaS-based continuing education management system for health care organizations.

The consideration we paid for Eats consisted of approximately $7 million in cash and was subject to customary purchase price adjustments and the transfer of consideration occurred in January.

In our history, our capital allocation approach has included a combination of investing internally, acquiring complementary businesses that fit our model and returning value to shareholders through share repurchases. And as announced yesterday, we introduced another means of returning value to our shareholders.

Our Board of Directors adopted the dividend policy under which we intend to pay a quarterly cash dividend on our common stock. We believe our history of steady and consistent profitable growth, along with positive cash flows, provides us the opportunity to return value to shareholders via cash dividends while continuing to invest in both organic and inorganic growth initiatives.

The Board declared a quarterly dividend of $0.025 per share, which will be payable on April 28, 2023, to shareholders of record as of April 17, 2023. As I already mentioned, we did not have any share repurchases this quarter, and there's approximately $1.9 million remaining under our current plan, which expires next month, unless earlier terminated by the company. And since 2020, we have deployed over $48 million towards share repurchases at an average price of $21.75 per share.

Now let's move over to our guidance expectations for 2023. We expect 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.

Our guidance does not include assumptions for any acquisitions that we may complete during the year, but does reflect the recently completed acquisition of Eeds, which is expected to contribute between $1.6 million to $1.8 million of revenue during the year.

Our objectives for growth include generating cross-sell and upsell opportunities across our customer base, increasing the revenue per subscriber and growing the number of subscriptions to our hStream platform.

We believe our workforce-centric ecosystem of solutions positions us well for continued expansion and growth. With the most adopted learning application in the health care industry, combined with a wide array of cost-effective content offerings that address our customers' needs for training, continuing education and compliance. We anticipate another solid year of performance.

In addition, migrating customers from legacy products to our SaaS solutions, specifically within our credentialing and scheduling application suites is a top priority and will be another driver for growth.

We expect to maintain our gross margin in the mid-60% range for the year, which is consistent with our medium-term objective of 65% to 68%. Now looking at our expense assumptions. Over the past several years, we've made investments to scale our product development, sales and marketing teams, and we expect modest incremental investments in these areas for 2023.

We plan to increase the relative level of investment towards our single platform strategy, our scheduling application suite and by expanding our business to professional footprint while somewhat stabilizing our investments in our learning and credentialing application suites.

A meaningful portion of our capital expenditures over the years has been associated with capitalized software development. We expect the allocation this year will be similar. As I mentioned earlier, travel costs in 2022 were up and are expected to gradually increase on a year-over-year basis to approximately $2 million for the full year.

In addition, we anticipate certain costs will be impacted by the inflationary conditions that continue to persist. And as it relates to the organizational changes we announced yesterday, we expect to record severance charges in the first quarter of approximately $800,000, which has been taken into account what the guidance being provided.

We anticipate that our forecasted adjusted EBITDA margin will increase to the 21% range, which is also consistent with our medium-term objective of 21% to 24%. We expect our effective tax rate to be between 25% and 26%.

And I would also like to note that given some recent changes in how research and development expenditures are treated for income tax purposes, I expect that our cash tax payments will also increase during 2023. And we have a long history of leveraging our M&A program to drive growth and expand our product portfolio.

And during 2022, we acquired 2 more companies, cloud CME and Eeds to round out a set of solutions that are unique to health care CME administration.

As we highlighted during our Investor Day presentation last year, one of our growth strategies is to pursue opportunities through M&A. And we'll remain disciplined in order to find the right strategic fit at an appropriate valuation that we believe will create return. With a healthy cash position, no debt, access to a $65 million revolving credit facility and our free cash flows, we are well positioned to support our capital allocation strategy for the year.

Now before turning it back over to Bobby, I want to read something to you that we began including in the management discussion and analysis portion of our periodic reports this time last year. Its first appeared in our 2021 annual report on Form 10-K, and we have repeated it in our quarterly filings since, and it reads. We are in the process of we're completely unifying the company under a single platform strategy that will serve as the foundation for the entire enterprise. By enabling our applications through a common technology platform known as a hStream, we believe that stand-alone applications, which already provide a powerful value proposition, we'll begin to leverage each other to more efficiently and effectively empower our customers to manage their businesses and improve their outcomes.

And I want to highlight this part, in particular, as we continue to achieve this goal of orienting multiple applications in relation to a single technology platform, distinctions between our current reporting segments of Workforce Solutions and provider solutions may become less applicable or even obsolete in terms of how we operate and report on the company's business.

Now I read you that exert from our filings because we've reached an inflection point and are now operating as a single platform company, whereas one HealthStream, as you heard Bobby say earlier. This is reflected in the way we run our business across the board, including in terms of technology, operations, accounting, our organizational structure, compensation, performance assessment and resource allocation.

This something you've heard us talk about since we began reporting the subscription count for a hStream in February of 2019 and more recently on our Investor Day call in September of last year. And today, our operations are aligned with our vision, and we celebrate that fact.

To reflect the way we now operate and organize ourselves as a single platform company, it's necessary to begin reporting accordingly. From 2023 forward, our financial outlook and results will be provided on a one-segment basis. The results from prior periods will be provided on a 2 segment basis, given that we operated 2 segments: Workforce Solutions and Provider Solutions during the period, those results were generated.

As our single-platform approach advances, we look forward to determining new metrics that we may report in order to give you insight into our business and into growth. And with that, I will wrap up, and I want to say thanks for your time this morning, and I'll turn it back over to Bobby.

Thank you, Scott, for that detail. We got lots to pick up on operationally, so let's get started. My comments at the start of the call were about positive aspects associated with streamlining our business according to our one hell stream approach.

I also want to pause and acknowledge the most challenging part of our realigning our business, and that is the elimination of 33 positions from our base of over 1,100 employees. With consolidation comes the need to eliminate overlapping roles and that is driving the efficiency measures we announced to our employees yesterday afternoon.

We did not take this decision lightly, and we wish all of our health streamers past and present all the best moving forward. As I mentioned previously, we will continue to invest in our business and employee base and continue to channel those investments where we believe they will be most likely to help recognize our vision of improving the quality of health care by developing the people who deliver care.

With that, I want to quickly mention some of the successes we achieved to end 2022. For each of our learning, scheduling, credentialing and now our platform solutions -- we will -- I will highlight a win that I think characterizes where our business is heading.

First, for the HealthStream Learning Center. It is the most utilized learning management system in health care and continues to add new customers. And the last month of the year, Ardent Health Services purchased our HealthStream Learning Center to support their workforce enterprise-wide. We recently issued a press release about our partnership with Ardent Health, which I encourage you all to read if you haven't already.

Second, we believe that our SaaS scheduling solution known as ShiftWizard, is the best-in-class solution of its kind and it will only become more valuable to customers as it begins to integrate with other applications through our hStream technology platform. In December, Prime Healthcare, another enterprise-wide customer of our HealthStream Learning Center also became an enterprise-wide customer of ShiftWizard, our SaaS scheduling solution.

One reason this is noteworthy is because half of Prime's facilities converted from our legacy installed scheduling products while the other half purchased scheduling solutions from us for the first time. As a result, we welcome Prime Healthcare as an enterprise-wide customer of both the HealthStream Learning Center and now ShiftWizard. Our credentialing solutions also enjoyed the successful end of the year, both in terms of competitor takeouts and conversions from our legacy solutions to credential stream, which is the best-in-class solution for enrolling, credentialing and privileging physicians.

In March of 2022, Spectrum Health signed an enterprise contract for credential stream. Then in the fourth quarter of 2022, after merging with Beaumont Health and forming Corewell Health, they decided to extend the credential stream contract to all of Beaumont Health, replacing one of our top competitors in the process.

This extension more than doubled the value of the original enterprise contract -- as a forward-thinking health system, they are motivated to use conventional streams powerful technology to drive process and privileged standardization enterprise-wide, while also accelerating optimal efficiency and effectiveness as a foundation for the newly combined entity, Corewell Health.

In terms of platform solutions, the hStream platform, the transaction that I would like to highlight is a new type of sale for us. Less than 3 months after releasing our developer portal, we were able to provide Kaiser Permanente in Rosen California region and an API-only deal that allows them to monitor and validate their entire workforce. Being able to sell APIs as a product is representative of our platform strategy, becoming a very tangible reality, and we look forward to more of these sales in the future.

We believe these wins illustrate the value our customers see from our ability to provide enterprise-wide solutions. And we believe that those solutions will become more valuable as the hStream technology platform enables interoperability across multiple applications.

We continue to innovate across the company, which is helping us to create market-leading products. At the end of the fourth quarter, our innovation was recognized at 5 prestigious brand and haul product awards. They include awards for our Safety Q compliance program, our quality management tool called Abacus, our HealthStream Customer Community and 2 of our American Red Cross Resuscitation Suite, which included an award for Best Advance in education delivered through technology.

Thank you to our employees that have worked to make these HealthStream products stand out above the rest and to earn these national recognitions and awards.

On January 3, 2023, we also announced the acquisition of Eeds. With this acquisition, we expanded our ecosystem with an innovative SaaS-based continuing education management system for health organizations. Eeds represents the third acquisition in the specialty area that we completed within a 13-month period, making us a market leader in this niche area of health care technology.

Importantly, we believe that the acquisition of Risen technology, cloud CME and Eeds, which are all CME application management businesses showcases how our platform is well positioned to empower new solutions that add to our growing ecosystem and marketplace.

We plan to begin utilizing our well-established M&A program to enhance our ecosystem by bringing new and expanded offerings to our customers. Apart from the operational updates related to our One House turn approach, we also announced in our earnings release that Eddie Pearson, HealthStream's President and COO, will be retiring from his current role at the end of the second quarter of this year.

At that time, he plans to continue serving the company in a multiyear part-time leadership position that we are going to call executive and residents. Eddie has played a significant role in transforming the company during his 16-year tenure. When he joined the company in 2006, there were 200 employees and $27 million in revenue, contracting that to today's employee count of 1,100 individuals and annual revenues of $267 million helped provide context for the magnitude of growth Eddie has helped the company achieve.

The good news is that Eddie will still be at HealthStream in an important role where employees can learn from him and benefit from his years of experience and wisdom as we draw closer to the date of this transition to his next role at HealthStream, there'll be much more said regarding Eddy's numerous contributions and legacy as President and COO.

Before we move to questions, I want to discuss one more piece of exciting news, our new dividend policy, -- we are pleased that our strong balance sheet, including our reliable free cash flows puts us in a position to return value directly to shareholders through the company's first ever quarterly cash dividend.

Over the course of the year, we expect our new dividend policy to return approximately $3 million to shareholders. Importantly, we believe that our new dividend program highlights the fact that HealthStream is a profitable technology company that has both the discipline and the resources to return cash to our shareholders while also pursuing our organic and inorganic growth strategies.

So if you are interested in a profitable, highly recurring revenue, SaaS pass health care technology company that for 2023, expect to deliver steady growth and is determined to share some of its gains directly with shareholders in the form of a dividend, maybe HealthStream is the stock and the company for you.

I'd like to turn it back over to the Operator for -- to begin our Q&A.

The question-and-answer session will begin at this time. (Operator Instructions) Please stand by for your first question -- our first question comes from the line of Matt Hewitt with Craig-Hallum.

Thank you for all the details and the update. Maybe first up, Bobby, could you describe what the sales environment is like? Obviously, the last couple of years has been pretty challenging. Hospitals reluctant to maybe bring in new software, given some of the challenges they were facing with COVID, it seems that that's freeing up. Now you've got some issues on the hiring and retention side at hospitals, but maybe just a little bit of color on what you're seeing from the customer side.

Yes. I think probably the simplest way to say is that our products are well aligned with business needs, but the larger customer base is under a lot of financial duress. I think 2022 is probably one of the most difficult financial times for -- take acute care hospitals in a long time.

A result of the shift in how they operated, the running out of COVID support funds I think just in general, there are several exceptions of strong operators that are generating solid growth in profits. But I'd say on the whole, the target customer base is under -- still under stress, financial stress. And particularly in the second half of 2022, I kind of saw that.

The good news is that I still think our solutions are both aligned with the areas they need to invest in and/or are required to invest in sake safety training. In many cases, we also are the low-cost provider of that high-quality service. So we should be the selected vendor in those -- when they make those choices.

And I feel that our products are now getting in a position where their capabilities are market-leading or and very innovative. So I feel well positioned, but I don't want to underemphasize that the typical hospital still under a lot of pressure when investing and deploying capital cash or operating cash flow into really anything.

So we are a bit cautious on our overall growth for the year. Some of it related to long implementation cycles and some of it related to the sales cycle still. I would see -- I see a much higher -- I like our pipeline. They feel strong. We just have to see how well the deals close. And so we kind of -- we've got this essentially 4% to 6% top line growth range on us for the year as we see how this all plays out.

But it's an interesting dynamic because we're well aligned, but our customer base is under kind of stress. And -- but I think we have good price points that to entice them and a great sales team, and we've got a strong pipeline. We just have to see how well we can convert it.

And then, of course, implementations for scheduling major enterprise adoption scheduling and credentialing are rather long implementation cycle. So the time to revenue is a bit delayed. So I talked a little bit about second half being a growth period.

That's really helpful. And maybe a follow-up. Getting a little more specific with the Ardent win, obviously, congratulations there. Maybe if you could provide a little bit of detail on how long was that deal in the pipeline. Who are they -- what were they using prior to converting over to hStream and the learning center? And how long was that deal in the pipeline? How long did it take to get to close that one given some of the challenges that the customers are facing?

Well, sure. Will that one moved along fairly well over the course of the year from initiation of discussion was that they were going to look to the market to see what was available. They are on a competing application suite. And so it was a change for them to move to us.

Unfortunately, we had previously a year prior, convinced them to move on to the Red Cross application suite and connect to that program to the hStream platform. So they already had hStream licenses in place for a lot of their employee base. And it kind of shows how the model works. Like we connected to them -- their existing learning architectures through the hStream platform. We were able to sell the Red Cross program. They like the program. It was approved effective and it also saved them money over their prior programs.

And then we introduced the learning system as a better way to manage the administration of the Red Cross program. And over the course of the year, we won them over. And with them already having licenses to the hStream core technology that made it more economical to just add on the learning center application. So it is a bit of a process, but it's also essentially an upsell because they had already adopted parts of our technologies, including the hStream platform itself.

Our next question comes from the line of Richard Close with Canaccord Genuity.

Congratulations and thanks for the question. Bobby, maybe just to build on some of the comments you just made to Matt's question. With respect to revenue growth in the first half, should that be somewhat flattish and then seeing the growth -- most of the growth in the second half of the year? Just curious...

Fair question. I don't think it's going to -- we do think more -- in some areas, the business will matriculate in the second half. But that said, like the learning platform is going live at Arden, and we'll get to those revenues sooner, for example. So I think the year will show growth. I haven't looked at its quarterization in the last 24 hours, I can't quite remember the ups and downs on it.

Scott may comment a little bit on it. But the overall growth, we have at 4% to 6% and probably a little bit more weighted to the back half based on our current dialogue. But it doesn't mean no growth in the first couple of quarters, I don't think. Maybe Scott, you could comment and clarify the quarterization a little bit better.

Yes. I think, Richard, it will -- won't be quite as dramatic as last year where we had a 2% first half and a 6% second half kind of growth rate, I think it will be a little bit more balanced than that, but I would expect, just given some of the way revenue strength flows in over time, that the second half will be a little more pronounced than the first half, but probably not as big as a gap as we saw last year.

Okay. And then considering you guys just posted 6.5% growth, I guess, in the fourth quarter. So you would gauge that for the year, the 4% to 6% is baking in some conservatism just basically because the current environment is uncertain.

Well, there's definitely a little of that, but I don't know if I'd call it conservative. It is our best estimate based on all the variables. It really is. I don't think we're trying to be overly conservative or overly aggressive. It's just kind of when we look at our pipelines, how they're converting. We looked at our fourth quarter sales, obviously very important to have some nice big wins there to know how they'll roll in.

I think in the sense that the macro conditions are still tough, it's hard for us to get beyond that range right now as what I'm thinking. So I don't characterize as a concern. I think it -- it really is what we think is our accurate view of how things will play out this year, of course. And without trying to overengineer it to be conservative or aggressive.

I think I think it's a careful study. The good news is we waited to get the year-end sales numbers in. And as you know, a lot of our growth for this year is based on how the contract flows were over the last 2 quarters of last year. So the growth numbers are largely a projection of how the sales of the fourth quarter and third quarter of last year will matriculate into this year.

Okay. That's helpful. And then when I think about something like the cloud CME acquisition earlier or midyear, I guess, and then the Eeds here recently, not huge from a revenue contribution, but how easy or hard is the process in terms of plugging that into the those offerings into the platform -- and then just like cross-selling that into your significant base. Is that something where the sales process is relatively easy? Just any thoughts on that front?

Yes. It's a great opportunity to kind of talk about the platform a little bit more and create more clarity on it and how to best think about it for the next, say, 12 months. And so the first thing to remember the actual platform itself, the technology of the platform is growing and maturing as reflected in the actual release of our developer portal on our first set of publicly available licensable APIs and the Kaiser deal we just announced. So we're really excited about that. And each time we add to that platform, the actual technology capability of the platform things will get faster, easier and better.

That said, on a maturity curve, I would say that the platform technology is fairly, fairly new and immature, meaning there's like so much in front of us that's opportunity to create leverage. So a more constructive way to think about hStream, I think, for the next 12 months is maybe the way you would think of, say, an Amazon Prime, it's a license that includes access to some technologies, but also a lot of other benefits. For example, the way Prime bundles in your free audio and video, the hStream license bundles in 300 free industry sponsored courses with our learning system.

And so we are selling lots of licenses to hStream when it's bundled with learning, for example. But because of the maturity level of the platform, not all of our applications are technologically leveraging the platform. And we're still in the early stages of rolling out some of the core functions of the platform like the common ID.

And so even of our own application suites, not many of them leverage the hStream ID infrastructure, which is the common infrastructure that we're now aggressively deploying. And the good news is that particular part of the technology, the hStream ID is mature and ready to go. And now it's just a matter of this year of incorporating it into each product like cloud CME and Ryzen and NurseGrid and ShiftWizard, -- we need to get all of those actually utilizing the hStream ID.

And this year should be a year of great progress in deploying that common identifier across all of our application suites because again, the tools are built, and now we're in the kind of almost our own internal implementation cycle. So I don't want to over underrepresent my excitement for the platform is very high, it's well positioned to include a value a bundle of services in the license, which includes things like 3 Courseware, a discount program. And also, as in the case of Kaiser, some direct access to APIs and functionality that they can pay for.

And so I don't want to underestimate it or overestimate it. This year, we'll be mostly about connecting our own platforms to our own applications. And then the next year, that will allow us to report more metrics about revenue per subscriber per application that are connected to that application. So another way to think of it is we've sold a lot of subscriptions to hStream, and now we're going to convert them into subscribers. And subscribers are those that you directly benefit from the platform.

I hope that kind of discussion just helps frame it up. The portal is real. The APIs are growing. I expect new APIs to be delivered to the portal every quarter. Increasingly, internally, our applications are being hardwired to the platform. And each time we hardwire something to the platform. It improves interoperability and functionality.

We're in the process of example, right now of wiring the licensed API service into each. So for example, won't it be great when you schedule a nurse and ShiftWizard and it checks their license validity in the background through the API. That's the service we would expect in the second half of the year.

So those are just examples to clarify where we are in this platform journey, but we are clearly at an inflection point where the platform is manifesting in our business, both directly as an example, of the Kaiser license, -- and another large customers is using the APIs to power one of their own internal mobile applications, for example. So we're beyond the R&D stage, but we're not to the fully deployed stage.

And Richard, to your point, cross-selling, interoperability like our sales team, I hope every quarter can demonstrate some new functionality like, oh, the licenses are in the learning system appear in the credentialing system. And therefore, there is more benefit to owning both of those from us directly instead of thinking them as separate SaaS applications. So I know you kind of prompted a question around interoperability and cross-selling, but I wanted to -- there's a great opportunity to adlib a little bit and update everyone on the hStream platform technology, the hStream licenses that we're bundling when we sell applications. The good news is we can sell a license to the hStream platform because it includes a mixture of services and benefit programs and technology.

And then a pretty detailed update on the progress for the technology itself. I hope that helped. And if I didn't get to your question exactly, just fired at me again.

No, that's fine. I actually got to a couple of questions I had in my back pocket here. My final question, if I can ask another one, is on the digital network development business. So just if maybe you could describe that a little bit better exactly what that is and how we should think about understanding the financial opportunity longer term there?

Scott, do you want to take that for a second?

Sure. Richard, so this new solution group be led by Scott McQuigg, as Bobby mentioned on the call. This is a kind of forming a solution group around the individuals versus the businesses that we've traditionally done work with over the years. And so trying to target that audience more discretely and specifically. And so an example of applications that already have as assets or NurseGrid and My Clinical Exchange, both from prior acquisitions. So continuing to invest in those technologies to get more of the footprint directly with the individuals at our end users in health care. So that will play out over time. Obviously, just kind of putting more attention to it as we head into 2023.

But as time progresses, I think we'll see some more opportunities arise out of that. And I think just trying to, like I said, get more footprint in that area as our objective for this year.

Richard, just building on that. I love -- we kind of coined this internal phrase turning subscriptions into subscribers. If you think of the $5.4-plus million subscription licenses that we sold to hStream, Scott McQuigg new job is to try to find those individuals as individual consumers over time. So for example, we have lots of -- through a few visionary statements out there that, again, haven't occurred, but they're in front of us under Scott McQuigg leadership.

So for example, when a doctor is going through the credentialing process and they need some CME to finish their credential report to show that they've gotten all the CME required for their license maintenance. They may be short a class -- and in the new model, we would present them with opportunity to enter their credit card and purchase that class that they're short because we know what it was and we'd be able to recommend it out of our massive library. And that would result in a direct transaction in that case with the physician that was originated because they're in the credentialing process at a health system.

So this monetization of the individuals is an opportunity. I'd say it's a long run opportunity, but we're beginning to put a little bit of emphasis on it because it allows us to look internally at all the channels and figure out where we might be able to catch an individual as a customer as well.

So we have 2 applications in my clinical exchange that are already onboarding professionals as individuals and getting them in hStream ID as an individual. And the other thing this simply as an example, is more of a lifetime journey for people when they become in HealthStream's ecosystem our goal is that when they're not employed, I say you're between employment, you work somewhere on the HealthStream morning center, you leave for your work somewhere else in the HealthStream Learning Center.

First thing is to make that transcript portable that will happen in this technology. But the second thing is between employment maybe that doctor and (inaudible) wants to check their record, and they're not a customer through the business use of our software as an individual, they want to log in with their HID. So the long-run vision here is to keep all those individuals themselves as interacting with our ecosystem and find if there's a financial opportunity there.

And I would just say we're very, very early to that. I don't expect financial impact, certainly not in the first half of this year. But it's a long run, important part of our vision that the platform enables us to think of those individuals as lifetime consumers at HealthStream.

And so we've taken a senior executive early and put him in charge of thinking of that journey of those individuals. And so we've moved some of our applications that we call direct-to-professional applications, which CME, which the NurseGrid is, for example, NurseGrid is growing thousands of nurses a week organically. It's doubled its traffic. Monthly active user number is double when we bought it. And all of those nurses are electively individual consumers or the HealthStream ecosystem. They're downloading the app of their own choosing, and they're using it as a social networking and scheduling management app as individuals.

And now we'll think like maybe that's a channel for those individuals to begin their journey at HealthStream, whether or not they're in a health system that uses one of our core applications like our -- so it's going to be a long journey. I don't expect financial impact in the short run, but we wanted to go ahead and break it out because it's a unique set of business opportunities and challenges and put it under the leadership of Scott McQuigg, who has a history of building businesses of that nature.

Our next question comes from the line of Jared Haase with William Blair & Company.

I guess you talked a lot about some of the sort of product experience synergies from having the interoperability across the single platform. In the release, you also mentioned sort of branding and contracting being consolidated as part of the single platform strategy as well.

So maybe just a clarification. Is that something you think can actually benefit the top line growth profile over time, just in terms of maybe speeding up sort of time to revenue or having a more cohesive message to the market? Or do you think of it is more just kind of beneficial to the bottom line in terms of sort of those operational efficiencies?

Oh, gosh. I hope it's both. We're early to making these changes, obviously, and some of them were position changes. But I do think I mean, obviously, for a while of necessity, we operate a separate wholly owned company, and it had its own infrastructure and its own thought and it had to be built out and become market-leading, the VerityStream company led by Michael Sousa.

In a way, it was kind of hedged to all the other things that are going on in the company to separate that out and let it be focused on and get it to where it is. But as of really yesterday, we're folding those teams in. We're delayering the brand. So the VerityStream brand will go away. And so customers -- a lot of customers are verities 600 new customers of VerityStream that bought the VerityStream product called CredentialStream may or may not have paid attention to that it was a HealthStream product. And so now it will become crystal clear, right? It will be part of HealthStream.

All those customers will have a better appreciation as part of the HealthStream vision, part of the HealthStream company. And so I think that it should benefit both from the operational side and some day from the customer retention, recognition and hopefully, cross-selling as well. So it's a little early to tell, but I would expect that operating off of a single master services contract, for example, we'll make it easier to buy when everything has a very similar structure legally.

And so we're making that move to eliminate separate MSAs. The VerityStream organization had its own master contract. It will result in streamline operations. For example, Tier 1 customer support for a lot of the company will be centralized now instead of having separate Tier 1 data centers or support centers for scheduling and credentialing.

So I think we'll get operational synergies. And in the long run, let's say, 24 months, we should see it helped in the cross-selling and the brand recognition for HealthStream and the brand appreciation. And most importantly, as the applications become more interoperable, which is we're kind of at the dawn of that period, we want them to know like there's a reason to buy Allstream learning and health stream credential because of how they work together. And again, we're not quite there yet. I try to describe the maturity of where we are on that journey earlier. But we're getting closer, and it's time to declare it now. So we're going to clean up branding and contracting initially.

Make sense. And then I think maybe just a related follow-up, but specific to the guidance. So looking at the 100 basis points of EBITDA margin expansion that's embedded in the 23 outlook, I'm curious how much of that is -- would you say is directly related to some of the operational efficiencies that you announced in tandem with this inflection point of the single platform?

And then how much of that sort of margin expansion is reflective of the natural embedded earnings growth coming from the top line organic growth profile. So I guess in other words, trying to sort of gauge how much to read into the 100 basis points of margin expansion as kind of normalized margin opportunity relative to maybe 2024 and beyond if we think about the longer-term model?

I'll let Scott address that. I mean there's obviously a little bit of both contributing. And clearly, when you delayer parts of your business where you have duplication of leadership, it creates some -- a more immediate financial leverage, so it certainly is important to the impact.

But I also think, just structurally, it represents the long-term vision to continue to move that gross margin and EBITDA margin up and that's reflective of a lot of our new products just generally have a higher gross margin profile than in our past. And so I think the answer is going to be the combination of both, but I'll let Scotty maybe chime that a little bit.

Yes, Jared, I think without trying to get into specifics of quantifying it, I think that we do expect some of those synergies to flow through to improve EBITDA. But we're also planning to look for increasing investment in some areas where we need to, like in the hStream platform and I think I mentioned our scheduling application and then this new area that we just mentioned on digital and network development.

So we see some costs coming out of the equation, but we're planning to reintroduce some new positions in the year as well to kind of offset some of that savings, but there will be some savings that flow through. I did mention that in the first quarter, we expect to have a severance charge related to the employee departures, and that's about $800,000.

So there's going to be a little bit give and take throughout the course of the year. But again, we do expect some margin improvement just through the organic growth of the company as well.

Back in the queue and congrats on all the updates.

(Operator Instructions). Our next question comes from Vincent Colicchio with Barrington Research.

Yes, Bobby, I'm curious, will there be any meaningful changes in how the sales force is organized and operates?

Not now and nothing is immediately planned. We've kind of built out the sales force the way we like it last year, and it's broken between account management strategies. I do think the -- well, as I said that I'm thinking through, I think that as a result of merging in VerityStream, things like the account management teams will take on slightly new probably account assignments. We'll think of them again as one set of customers, set of 2 set of customers.

So I think there'll be a little of that. But structurally, we have a certain number of account managers. We have -- we have a certain number of specialists. And those components and structures remain the same. We also have what we call BDRs that generate the leads and process incoming leads off of marketing and the way our mechanism work between marketing and sales is similar.

I do think obviously, for example, the VerityStream sales team was in the market with a VerityStream brand, like we're very stream. We have the credential stream product. And as you guys know, as part of our Provider Solutions segment. So you think about all of that, like Provider Solutions is VerityStream, there's credential stream.

And now they'll be entering the market as one HealthStream sales force. And so the VerityStream teams will carry on a HealthStream business card instead of a VerityStream business card, again, providing more leverage to the brand and visibility to the company.

So in that way, there'll be some changes around Symantecs and positioning. But structurally, BDRs for business development, processing market leads, account management infrastructure is similar to the same, maybe some reassignments and the specialized sales teams that go into target buyers like the Chief Medical Officer for credentialing or the Chief Nursing Officer for a lot of our learning products like the Red Cross Resuscitation program. All that remains very similar, but the branding and positioning will, I think, further the HealthStream position in the market.

And how did cross-selling how did it perform in the quarter versus your expectation?

Well, I mean I gave those 4 examples to show, I think, how we're emerging. You saw prime health care go from being just a learning customer to being a learning and now an enterprise scheduling customer. And so I think it would be our plan to continue that journey to show that in these 3 application areas, we are the best of breed and to show they're increasingly interoperable and increasingly leverageable. They improve efficiencies when you have more than one of our applications.

And so I hope and expect that it will cross some become more a part of the story. If you look at our past, we're more with individual SaaS applications and sometimes sold under different brands even. And now in the present and the future, it's entering the C-suite as HealthStream and showing about how these things can work together.

And again, we're early, just the quarter end, as shown "how they work together. And not all of our applications are connected technologically to hStream. But this is the year for that. Our leadership team has been reorganized around that with the addition of Kevin O'Hara, Senior Vice President to lead in the platform as a product. We have a really great release schedule of new capabilities of the platform really every quarter from here forward.

So I expect cross-selling should pick up, Vince.

Thank you. I'm currently showing no further questions at this time. I'd like to hand the call back over to Robert Frist for closing remarks.

Well, I was so glad to get to the part where I can kind of add live and answer your questions because there was so much change in the quarter from the dividend, Eddie Pearson's I guess, I'll call it semi-retirement to the structural changes, and the branding changes, that I was told to say on scripts. So you've probably got a little sense that I was reading, reading, reading and so I kind of was it was fun to get to your questions and answer them.

We're obviously excited about the future and trying to get to that as soon as we can. And -- but our expectations are a steady shift with returning some to shareholders, and we appreciate all of you guys following our story and publishing on it.

Thanks, and we look forward to reporting our next quarter earnings. And thanks all of our employees making all these great things happen. Congratulations on the branded Hall awards. We'll see you guys next quarter.

Thanks, everybody.

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