HealthStream, Inc. (HSTM) Earnings Call Transcript & Summary

Good morning, and welcome to the HealthStream Fourth Quarter and Full Year 2024 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 answer after the presentation. I will now turn the conference over to Mollie Condra, Head of Investor Relations and Communications. Please go ahead, Ms. Condra.

Thank you. Good morning, and thank you for joining us today to discuss our Fourth Quarter and Full Year 2024 results. Also in the conference call with me 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 the call over to CEO, Bobby Frist.

Thank you, Mollie. Good morning, everyone, and welcome to our Fourth Quarter and Full Year 2024 Earnings Call. We definitely have lots to cover and look forward to getting to your questions at the end. I'll just start out with some financial overview. I'm pleased to report that we finished the full year 2024 with strong year-over-year increases across all of our key financial metrics. Full year revenues were up 4.5%, net income was up 31.5%, operating income was up 32.9% and adjusted EBITDA was up 9%. Looking forward to 2025, as we think forward, we expect HealthStream to continue to deliver growth in each of the areas where we provide financial guidance as we anticipate organic revenue between $302 million and $307 million, net income between $19.2 million and $21.4 million and adjusted EBITDA between $70 million and $74 million. These forward looks do not include any acquisitions that we may complete during the year, though our strong cash balance is $97.2 million and our untapped line of credit and no long-term debt position us to take advantage of M&A opportunities as they arise. And I would say that as we think about 2025, we're going to focus on rekindling our M&A. We've been a little bit quiet on that front. And I do feel that both the pipeline of opportunities and those that are good fits for our business, there seems to be more available to look at and review, so I look forward to 2025 being a rekindling of our M&A program. Since our last conference call, I'm pleased to report that our hStream platform has made some excellent progress, as indicated in some of our recent press releases. Internally, we've declared 2025 as the year of the platform. And I know we've talked about the platform for a while now, but we're really starting to see it manifest in both our strategies, communications and to customer benefit. And we're going to continue to advance our Platform-as-a-Service capabilities to create interoperability among our primary applications, the ones that the health care workforce constantly uses. In fact, another way to think about the platform, too, we've seen a material increase in our customers accessing the features and functions of the platform directly through the developer portal. For example, in the developer portal, we've seen over 400 developers from across 184 customer accounts accessing the platform APIs to date. And that's really -- a really nice sign that the platform is beginning to mature into a useful tool set for our customers, direct access to features and functions of the platform from over 400 developers and 184 customer accounts. I look forward to that someday being all customer accounts and we're seeing this nice expansion of utilization of these platform-level APIs. Importantly, the interoperability we're enabling starts with our own application suites of learning, credentialing and scheduling, all of which are being powered at some level from the platform at the hStream platform level. From there, the hStream platform is designed to extend interoperability well beyond HealthStream's own proprietary applications as it begins to power third-party applications as well. So when we talk about the year of the platform, we're referring to the year when the platform interoperability increases meaningfully among our own applications and also begins to manifest in third-party applications. We believe that creating this type of network effects will help improve the quality of health care which is one of our fundamental purposes and to drive our business results over the next several years. While interoperability is a key feature, it's not the only benefit we're recognizing from moving to a single platform or the hStream platform strategy. Due to its API-first design HealthStream platform, we call hStream is allowing us to develop new applications and functionality faster and more efficiently than ever before. Last quarter, we announced the release of the HealthStream Learning Experience which is the first application to be built on top of the hStream platform itself. We're excited about the HealthStream Learning Experience, which we call the HLX for a lot of reasons. Not only is our first application built on top of the hStream platform, is the only application of its kind designed specifically for health care. Using AI native design, the HLX offers the health care workforce personalized, self-directed, intelligent learning and development pathways and incorporate a wide range of learning modalities from journals to VR simulations. It's modern design and interface are built to provide the health care workforce with the unique learning they need in the way they want it, in the way they want to experience their learning journey. Because it is built on top of the hStream platform, the HLX is interoperable with the HealthStream Learning Center, our Learning Management System. Three large health care organizations that are longtime users of HealthStream Learning Center are launch partners and entering a pilot phase for the HLX, we're super excited about the HLX, it represents kind of a major refresh of our learning technologies and learner capabilities. Speaking of HealthStream Learning Center, it kind of stole the spotlight last week as G2 named it the #1 software in all of health care across all types of software applications and products. G2 is the most trusted and largest review site around and the rankings are based on verified customer reviews, which makes the honor all the more special to us. I have to admit it was fun to see the HLC recognized on the NASDAQ electronic board in Times Square as the top software application in health care. That just not a category killer in learning, that's across all software applications in health care rated by G2. I want that to sink in for a minute for our teams, too. They've done an amazing job building, maintaining and growing the HealthStream Learning Center and now with the HLX kind of exciting new frontiers and learning for HealthStream. It's also great to see that in that same list, CredentialStream top the charts ranking #5 overall. And again, that's not just in credentialing software, that's 5 overall in health care application software which makes it the highest ranking credentialing application in health care. We think a key reason for our learning and credentialing applications to rank as the best is because the innovation there beginning to enjoy from the hStream platform. We look forward to adding to that platform value throughout 2025, the year of the platform. Before we go further on our call and to briefly summarize our business for the benefit of anyone who is new to the HealthStream story. First and foremost, HealthStream is a health care technology company dedicated to developing, credentialing and scheduling the health care workforce through SaaS-based solutions, each of which are becoming more valuable because of the interoperability they're achieving through our hStream technology platform. The company holds 20 patents for its innovative products, which have been awarded over 40 Brandon Hall Awards. Historically, we sell our solution on a subscription basis under contracts that average 3 to 5 years in length which makes our revenues recurring and predictable. In fact, 96% of our revenues are subscription based. As I mentioned, we have also started to open our sales channels directly to health care professionals and nursing students across the continuum of health care training. We are profitable, have no interest-bearing debt and a strong cash balance of $97.2 million. We are solely focused on health care and more specifically the health care workforce and those preparing to enter it. The 12.6 million health care professionals and nursing students in the United States comprised the core total addressable market for our SaaS solutions. Look, there's still a lot to talk about, and I look forward to the second -- my second section. But before I do that, I want to turn it over to Scotty Roberts, our Chief Financial Officer, for some more detailed look at our financial performance for the quarter and the year.

All right. Thanks, Bobby, and good morning. I look forward to discussing the financial results we achieved in 2024 and our outlook for 2025 with you today. Unless otherwise noted, the comparisons would be against the same period of last year. I'd like to start off by congratulating our teams on another successful year. The drive and dedication to building great products for our customers is paying off as evidenced by the accomplishments that Bobby just mentioned. Now let's get into the financial discussion. Revenues were $74.2 million, up 5.2%. Operating income was $4.7 million, up 10.2%. Net income was $4.9 million, up 6.5%. Earnings per share was $0.16 per share, up from $0.15 per share. And adjusted EBITDA was $16.2 million and was up 1.3%. Our revenues increased by $3.7 million or 5.2%, coming in at $74.2 million compared to $70.6 million in last year's fourth quarter. Revenues from our subscription products accounted for 96% of total revenues and were $71.2 million, increasing by $3.2 million or 4.8% and professional services revenues were $3.1 million, increasing by $0.4 million or 15.7%. Subscription revenue growth contributors included CredentialStream with 28% growth, ShiftWizard with 17% growth and the Competency suite with 8% growth. Partially offsetting this growth were declines of legacy products, including the ANSOS product suite, Echo and MSOW which are often on-premise as opposed to SaaS solutions. Taken together, the legacy products I just mentioned resulted in fourth quarter revenue declines of approximately $1 million compared to the fourth quarter of last year. Our remaining performance obligations were $621 million as of the end of the quarter compared to $541 million for the same period of last year. This improvement is due to the strong fourth quarter performance we had. We expect approximately 40% of the revenue backlog to be converted over the next 12 months. Gross margin came in at 66.2% compared to 66% in the prior year quarter. Cloud hosting, software and labor costs contributed most of the increase in cost of revenues over the prior year quarter. Operating expenses, excluding cost of revenues increased by 5%, product development was up 6.3% and sales and marketing was up 9.3%. These increases primarily resulted from higher labor costs associated with additions to staffing levels in our product development area over the prior year, higher sales commissions associated with the growth in revenues and increased investments in marketing initiatives, including the development of our e-commerce channels. G&A costs were up 4.3% primarily resulting from increased stock-based compensation and higher bad debt charges, which were primarily associated with customer bankruptcies. Depreciation and amortization declined by 0.6%, and adjusted EBITDA came in at $16.2 million, which was up 1.3%, and adjusted EBITDA margin was 21.8% compared to 22.6% last year. Now let's move on and go over the balance sheet metrics. We ended the quarter with cash and investment balances of $97.2 million, up from $94.9 million last quarter. During the quarter, we deployed $6.8 million for capital expenditures, completed 2 acquisitions, which were TCPS and The Clinical Hub for a combined outlay of $1.3 million and paid $0.9 million to shareholders through our dividend program. We also made $1.6 million in income tax payments during the quarter. Our days sales outstanding improved to a record low of 35 days compared to 42 days last year. As I mentioned just a moment ago, bad debt charges were up in the fourth quarter and they totaled $2.6 million for the full year, which was up from $1 million in the prior year. Approximately $1.8 million of the bad debt charges that we incurred during 2024 resulted from 3 highly publicized customer bankruptcies. While these bankruptcies are unfortunate, we don't think this represents a broad trend across the industry. Year-to-date, our cash flows from operations were down 9.9% or $6.3 million from the prior year. They came in at $57.7 million compared to $64 million last year. Free cash flows were down $6.5 million or 17.9% and were $29.5 million compared to $36 million last year. I want to provide some more context about our cash flows and why there was a decline this year. For many years, we've utilized net operating losses and other deductions to help offset our cash tax liabilities. In 2024, the tax benefits from the NOLs were less impactful and our cash tax liabilities were greater than they were in the past several years. In fact, we had approximately $6.1 million more of income tax payments in 2024 compared to 2023. In addition, just general timing of disbursements at the end of the year also played into the year-over-year decline in free cash flow. Our balance sheet remains strong with $97.2 million of cash and no debt providing us with several options to strategically deploy available capital to improve shareholder value. We maintain a disciplined approach to capital allocation and how we prioritize our use of capital. Our utmost priority is making organic investments back into the business, which is evident by our annual capital expenditure and R&D plans. The second is pursuing acquisition opportunities, which we have a long track record of executing, including 2 small tuck-ins during the fourth quarter. The third is returning a portion of profits back to shareholders in the form of cash dividends. And the fourth priority is that our Board may authorize share repurchase programs, which we also have a successful track record of executing. From an M&A perspective, we maintain an active pipeline and continue to evaluate opportunities that fit our criteria, which include industry, product and financial, among others. While the M&A markets in health care technology have been slower than usual over the past 18 to 24 months, we expect to see them to begin to pick back up over the next 12 months. Now let's transition over to the financial guidance for 2025, which we announced yesterday in our earnings release. We expect consolidated revenues to range between $302 million and $307 million, we expect net income to range between $19.2 million and $21.4 million, adjusted EBITDA to range between $70 million and $74 million, and capital expenditures are expected to range between $31 million and $34 million. This guidance does not include assumptions for any acquisitions that we may complete during the year. Our revenue guidance range implies a growth rate between 3.6% and 5.3%, and we expect more of the growth will be concentrated in the second half of the year versus the first half. There's a couple of factors that we expect will impact comparisons in the first half of the year, which include reduced revenues from the customer bankruptcies and reduced revenues from perpetual license sales of legacy products. We expect gross margins to come in around 66% for the year. For expenses, we plan to ramp up hiring rates, so our labor costs are expected to increase steadily across the year. We expect product development expense to increase in the 2% to 3% range, sales and marketing expense to increase in the 4% to 6% range. G&A costs are expected to be flat to down 1%, and depreciation and amortization is expected to increase between 7% and 9%. We expect the effective tax rate will be in the 20% to 22% range. Our capital expenditure forecast anticipates between $27 million and $29 million of capitalized software investments across the hStream platform and our 3 application suites to further differentiate and enhance our product offerings. It also includes approximately $4 million to $5 million for technology upgrades within our data centers, which is where we host the majority of our learning application solutions. This includes firewalls, storage networks and servers, which typically have a 4- to 6-year life span. So every few years, we have to upgrade and replace these assets. In closing, I want to share the news that our Board approved an increase in the cash dividend to be paid out to shareholders. They approved a dividend payment of $0.031 per share which is an increase of 10.7% over the previous quarter's dividend of $0.028 per share. This is the second increase we've announced in our dividend since we began the program 2 years ago. The upcoming dividend is payable on March 21, 2025, to holders of record on March 10, 2025. We continue to be confident in our ability to accomplish our innovative organic growth strategies while also returning cash to our investors in the form of a dividend. That wraps up my comments for this quarter's call. Thanks for your time this morning, and I'll now turn it to Bobby for some additional updates.

Thank you, Scotty. And this back third here, I look forward to updating some highlights related to our core applications. I thought it would be good to take a little time to focus on scheduling, credentialing and learning application suites and some of their accomplishments during the fourth quarter. First off, we'll start with scheduling, ShiftWizard, which is our core product in scheduling. I think you all know, we're working really hard to make ShiftWizard have what we call feature parity with our legacy ANSOS products, and we expect that here in the middle of the year. So we're excited about that advance. ShiftWizard, the core product in scheduling earned best-in-class award for software and services. And for those of you keeping score at home, that means that each of our core applications in scheduling, credentialing and learning just notch major awards victories. And all those awards are based on customer feedback. Congratulations to our teams on earning these recognitions. Importantly, ShiftWizard continued to deliver strong revenue growth as well. Revenues grew 17% over the fourth quarter of last year and 25.1% over the full year 2023. In the fourth quarter, sales were both from transitions from our legacy ANSOS applications like Guthrie Clinic and St. Francis Health System and from competitive takeouts like Stormont Vail Health Care and John Muir Health, among others. Let's move to credentialing here for a minute. We're really excited, again, we put a lot of time, almost 18 months of really hard effort into earning the HITRUST r2 Certification for our credentialing application suite. This is a gold standard of information security and compliance assurance and we're happy to deliver that peace of mind to our CredentialStream customers. CredentialStream also had a productive fourth quarter and full year in terms of growth. Revenues grew 28% over the fourth quarter last year and 35% over the full year 2023. These results included sales from both new customers and customers who chose to migrate from our legacy credentialing applications, like Kettering Health and Geisinger Medical Center, were among enterprise CredentialStream deals that we closed in the fourth quarter. This brings us to our learning application suite, and I started to talk on that application suite. Again, it's gratifying to have HealthStream earnings are named as G2's Best Software Application in health care. And that's happening while we're in the midst of a major enhancement cycle that spans the entire learning application suite. Significant enhancements include innovations in our insights reporting, which is the core reporting and data architecture and the introduction of the groundbreaking HealthStream Learning Experience. We launched Insights Plus in the first quarter, our new reporting analytics capability of 2024, and it already has over 5,600 users across 252 organizations. We launched the HealthStream Learning Experience in January of this year, so just a few weeks ago, we've already implemented an AI-powered search feature in the HLX. And as I mentioned, 3 exciting major early adopters are in the pilot phase with HealthStream Learning Experience. With the advances being achieved in our emerging hStream platform, we've realigned our operations to better support growth. And so I want to turn a little attention to our internal structure and some updates to our leadership. First, as we move to single HealthStream -- single platform strategy, we call it the One HealthStream initiative inside of our company. And we approached the year of the platform, which is this key year of integrating the 3 applications with each other through the platform and connecting those applications to the social networks we're building through the platform. And so in an effort to better organize around those key initiatives and make this view of the platform, Senior Vice President, Kevin O'Hara has been promoted to Executive Vice President, Enterprise Workforce platform. Through this promotion, we've integrated the management of the hStream platform and our 3 core applications suites learning, credentialing and scheduling to be under Kevin's leadership as our suite of suites. And so we've now moved these 3 primary applications, learning, credentialing and scheduling to one leader and promoted him, Kevin O'Hara. And his job this year is to make it the year of the platform, to make those applications further connect to each other and to the platform. So congratulations to Kevin O'Hara, and we look forward to his leadership on this important initiative. Executive Vice President, Michael Collier has been promoted adding additional responsibilities to the current Executive Vice President role. Essentially, we're going to pull a lot of operations off of our product leaders like Kevin and Trisha Coady will talk about in a minute and centralize them to Michael Collier. So Michael Collier is assuming in addition to his corporate strategy development, a large part of the HealthStream's operations. So responsibilities in his new role will cover a broader scope of HealthStream's enterprise operations, which will now also include Customer Success Management, implementations and onboarding for all the company's products and services. So instead of having separate onboarding and implementation groups in separate -- under separate leaders, for [pooling], onboarding, success management, implementations under one leader, Michael Collier. Senior Vice President, Trisha Coady, based on her incredible performance across our Workforce Development solution sets. In the last year, delivering a lot of our growth and managing over half of our revenue for the company has been promoted to Executive Vice President of Workforce Development Solutions. She will continue to provide executive leadership over our Workforce Development suite of solutions which includes our products in competency development like Jane and our Competency Suite and Resuscitation and Quality and Safety and revenue cycle. So she has a very broad suite of tools that are very relevant to the clinical workflows, clinical development of the clinical workforce. Michael Sousa, who has served as Executive Vice President of Enterprise Applications will be leaving the company at the end of March. And this is after a long 20-year tenure with HealthStream where he's helped deliver amazing results for those 20 years. In fact, looking back on it when he joined, the company was around 140 employees and $20 million in revenue. And as he leaves, he can be proud that he's helped build the company with over 1,000 employees and nearly $300 million in revenue. Great appreciation of Michael Sousa as he enters the next step in his exciting career. And what's really, really exciting is that both parties are intending to find a way to work together in the future, and so we'll have more announcements on that in the future. But we hope and expect that his future endeavors will lead to partnership with HealthStream and our partnership with our ecosystem. We'll see if we can pull it off, but it will be really exciting. Again, congratulations to Michael Sousa. Thank you for his 20 years of service helping build the company and I look forward to seeing how Trisha Coady, Michael Collier and Kevin O'Hara can continue to deliver the excellent results in their new roles as we lead the company forward. About 2 weeks from now, HealthStream will be holding its Annual Credentialing User Group Conference at our corporate office in Nashville, Tennessee. This event is called Thrive25, and we expect about 350 of our CredentialStream customers to attend network and participate in roundtable discussions. They'll attend training sessions and learn more from one another in those 2 days, March 11th and 12th. We look forward to welcoming customers to Nashville and to HealthStream here in the coming weeks. Now my pitch to all of you as shareholders, I'd like to think through this way. If you're interested in a small but growing, profitable company with highly recurring revenue, focus on the future of the SaaS and PaaS, Platform-as-a-Service powered company. We expect to deliver steady growth and we're determined to share some of our gains with shareholders in the form of a dividend, maybe HealthStream is the right stock for you. And so I can't stop myself from asking for the sale. We'd love to see you all listening on this call to become shareholders of HealthStream and go on the journey with us. We work hard every day to deliver shareholder value. I'm just so excited about how our products are beginning to deliver in the marketplace. At this time, I'd like to turn it over to the operator to begin Q&A.

[Operator Instructions]. Our first question comes from Matt Hewitt at Craig-Hallum.

Maybe the first question is last year, you set out some kind of some midterm targets for revenue growth, gross margins and EBITDA margins. You've now hit 2 of those, and hopefully, that continues. The third one is the revenue growth. You've kind of pointed to a 7% to 10% top line growth. What's it going to take to achieve that type of a growth profile? It seems like the last couple of years, you've kind of been in that the mid-single digits. What's going to be the lever to kind of accelerate that growth rate?

Yes. Fair enough. I think -- well, first of all, I just want to break down that number set. The 7% to 10% was composed of 5% to 7% of organic and 1% to 3% of inorganic. And as I did mention, we do hope to see, and we think we're good at executing M&A and we have the resource to do it. So as far as that part, the 1% to 3% inorganic, I feel like over time, we'll be able to deliver that part of the growth profile. So that leads to 5% to 7%. We did give that guidance, I think, at the end of '22, as -- wasn't guidance, it was really a set of what we call medium-term objectives, and they were -- our aspiration was to get organic growth in 5% to 7% range within the 3-year time. I will note that the fourth quarter was the first quarter we kind of pushed in, we did the 5.2%. But as we looked at the forward year, we still see that we have this offsetting declines to this rapidly growing SaaS applications that we mentioned in some of our legacy businesses. And so we did predict and look at another year where we have to handle that trade-off between migrating customers and some lost customers against the more rapidly growing SaaS applications. Eventually, of course, we'll work through that problem and then hope to return to more natural growth rates of the newer products overall. In addition, in the meantime, we're working on improving our margin profiles. I think the shift to the platform technology enables us to be more efficient in the way we deliver the revenues. And so we do look forward to staying in the range and pushing to the top of those ranges from our medium-term objectives from a measures of cash flow and particularly EBITDA, which is a measured target that we focus on. And so I think it's a little more of continued the same progress. I think if we deliver award-winning products, we factor out our legacy applications over time. We need to do a little better job of converting customers instead of losing some to the market, and we're going to focus on that this year. A little better conversion rate would also boost the growth rate. So there are several priorities for our team to focus on to try to bump us back up into that 5% to 7% organic growth range. And we'll just keep working on them. Click of the wheel, click of the wheel. We'll keep advancing the business until we figure it out. And it is exciting to have great new products to take to market and see if we can outperform in those to get us into those growth ranges. That's all I know to say is that we'll keep iterating until we get it right and get it better.

That's incredibly helpful. And maybe just one point. The headwinds that you've been facing as you've been shifting customers from perpetual to SaaS. Is there any way to quantify what that headwind is? I think last year, if I'm not mistaken, it was like 1% to 2% which in the end would have ultimately put you in that -- the lower end of that 7% to 10%. But as we look at '25, is it a similar magnitude, another 1% to 2% headwind this year?

I think those are the kind of details, especially when we talk about medium-term objectives, I want to leave those for a potential Investor Day. We haven't committed to the date just yet, but we're trying to get one in the first half of the year. And I think it's appropriate to separate annual guidance and our annual forward look from our medium-term objectives, which are just that, the objectives that we drive toward. And so I think I'd leave those kind of questions and specifically that one for an Investor Day. And it's our commitment to try to get one scheduled before the first half of this year.

Got it. And then maybe one final question. I think last quarter, you had kind of noted that your pipelines were incredibly strong. And in fact, I think you even noted 3x coverage. I'm just curious your success rate in closing those? What are you hearing from customers? Was there any hesitancy at the end of the year to maybe hold off until January? Just any color along the pipeline closure rate would be helpful.

Yes. Actually, I think you could see that a little bit, and we mentioned the contract backlog, it really did move up a good bit. We had some really good sales performance in the fourth quarter, multiyear contracts, of course. But the remaining performance obligations had a really nice jump. It doesn't always correlate to -- directly to revenue growth because length of term of contract matters and all that. But it was nice to see some of that pipeline come rushing in. In particular, December was strong and even amazingly, a meaningful percentage of our overall annual sales occurred in the last 5 days. So it was an exciting to watch that pipeline. I think we still have a strong pipeline as we ended the year, and so we're optimistic. January was a tiny bit slow because we did so well in December, but I've already seen February starts turning around, and we're expecting great things for this year and still maintain one of the strongest pipelines I've seen in our history. So we're excited and expect the sales team to deliver great results this year as well.

Our next question comes from John Pinney at Canaccord Genuity.

John Pinney on for Richard Close. So just to start with AI, you're using it in HLX. So I'm just curious, are you seeing any like efficiencies to drive like efficiencies and product development or anything like that using AI internally?

It's really fascinating. We have bifurcated the problem even at the Board level and the opportunity of AI from both its internal application, how it changes, how we build and perform our work, everything from experiencing with AI to help us in our sales process. We have several pilots going to use AI to help us program and develop. And so yes, there are a lot of internal initiatives to try to learn to make us more efficient, make our workforce more efficient, that we're undertaking now. But I'll say we're new to it, as it is most everyone and we're learning as fast as we can. I do expect productivity gains but probably not in the short run. In fact, probably a little bit more added expense as you pay for the tools of AI before you get the maximum benefit from them is the way I would think about it for the next, say, 6 to 9 months. But we have lots of exciting [talk] internally. In our product design development, we've had -- we've used some AI for many years in our Jane products to help assess clinical reasoning ability. We use things like Natural Language Processing with IBM Watson in the last several years. And now we're further advancing our products with the large language model search capabilities in our new HLX, so we're seeing implementations now of AI in our products as well. So we're very excited about the potential for AI to change both how we work and how we build products. I would say probably, and this is probably true of most organizations, they'll probably see a bit of an increase in expenses before they see a bit of a decrease in expenses. Paying for all these tools and learning to use them will have a bit of a curve. But I'm optimistic for a long run impacts to make us much more efficient. There are certain roles I think can almost be automated. We're seeing that. We have a pilot going on. Our researching software in this area in the paralegal space would help design contract templates and we think it's going to be incredibly effective at helping us in our contracting process. So I hope that answered your questions. Lots of initiatives, probably a little bit of increase in expense in this year. And then I'm expecting great things in the years to come, though, from efficiencies, benefit, product launches and customer benefit.

Great. And then one follow-up. So I guess with these new deals that you closed in fourth quarter, I guess like an update on these pricing escalators, are you successful in getting pricing escalators in these new contracts? Are you seeing like these new products, making it easier to negotiate price escalators into the contracts? Or any commentary you can provide there would be great.

One of the things we're finding is that in a strange way, the customers appreciate the escalators because if you enter a 3- or 4-year contract with a flat price, and then when you come up for renewal, there's a big jump and your budget isn't ready for it to reflect the changes in market. And so in a strange way, and being a laggard and implementing escalators, but now fully deployed, meaning that every time we sell our new software, for example, as a learning customer comes with renewal, we've been very successful, I would say, a 95% plus hit rate of incorporating escalators into every renewal. And so I think it will be a multiyear process over, say, 36 months if you think of an average contract length of 3 years. We'll be able to incorporate escalators into every base contracts, we're just not getting any pushback yet and we've rolled out the program now in our other 2 primary application areas. Now once you implement an escalator, it doesn't start until the next year, and so kind of if you think of a 3-year average contract, a 3.5-year average contract at HealthStream as they come up for renewal, we renew them, we may insert the escalators and then their impact begins the next year, the first year of escalation in the new contract. And so it will be a multiyear impact. But I would say that we're in the process of fully deploying, meaning I expect as every contract renews we have a very high success rate of incorporating base escalators in the contracts, which is very exciting and should provide within 36 months, a new base level of growth for the company which maybe is a bit of an answer to a prior analyst question about another positive element to getting us in the midterm objective growth range we articulated earlier, 5% to 7%.

Our next question comes from Ryan Daniels at William Blair.

Bobby, I was hoping you could go into a little more detail on HLX and when that might go to full launch? I think you said you're in 3 pilots now. So I'm curious when that might be a meaningful contributor?

Sure. We've begun a product demonstration. The sales team was trained at this year's sales meeting just a few weeks ago. And so we have pricing, and it's available now. So we're beginning the sales process now. Of course, there's nothing like successful customers to point to when you're working on the sale. But we found several things. One, after watching this space for years, meaning the HLX the learning experience space. We finally launched our solution, we've seen it that it will have a material positive impact being health care focused. We think that the criticality of having well-defined development pathways for people with this mixed media approach and self user-guided learning is going to be very powerful for workforce development needs in health care, both helping with the themes of organization providing a better tool set other than kind of top-down administrative of learning. Now you can put people on exploratory career journeys, and so some of our early pops, I look forward to talking more about, but we have a governmental entity that's looking to develop new categories of health care workers up in New York that is piloting and they're really excited about it because if they have a deficit of a certain type of worker they think that the HLX will help them guide people to those career paths, which is similar to what we think employers might do. So to summarize, the product is live. It's available for sale. The sales force is trained on it, and we're beginning to go to market. And also as an add-on or extension to the HealthStream Learning Center, we think it provides tremendous additional value at a relatively small incremental cost, especially compared to competitors. So again, efficiently built on the HealthStream hStream platform, allowed for rapid development cycles, health care tailored with some AI features that make it more health care specific and then focus on the career development opportunities for health care workers, we think, fits a broader need in the market. So I think we'll start to see some sales of that in the first half of this year. And then once the pilot is successful with the larger organizations, I expect sales to pick up in the second half.

Okay. Perfect. And then as a follow-up, I'm curious as you go to market with more interoperability between your 3 core application suites. Are you starting to see more cross-sell and upsell opportunity emerge upon renewal? And is it driving up user satisfaction as well as they can tie things like credentialing and learning pathways together to really advance their workflows?

Well, I'd still say this is a year that, that manifests more. And so what I would say is that the Senior Executive team is working to find our first, I guess, I'd call them our Enterprise Workforce Platform, our Enterprise Workforce Suite, the suite of suites. We're kind of working with trying to find a couple of key customers that will go on that journey with us. So I'd say it's not broadly manifesting yet in cross-selling, but I think we're well positioned to see some of that also in the second half of the year. Of course, we already have amazing cross-selling going on, anyway even as independent applications because our nearly 60 people on account management are always working to cross introduce the product. So a big part of our long history is effective cross-selling and growing the value per person per year at our accounts, and we're very good at it. I think when it becomes more technology-enabled and they see the benefits, as you pointed out, we think there are concrete benefits to health systems and, say, onboarding physicians when our learning and credentialing systems work together. And I think, again, by the middle of this year, we'll have more tangible benefits to show our customers about how that's progressing.

Okay. Perfect. Congrats on all the recent awards and all the product enhancements.

Thank you. Well, we want you to see where some of our CapEx was going because we put a reasonable amount into product development in the form of direct software investments and capitalized software investments. And it's good when those come out with winning products at the backside.

I'm showing no further questions at this time. I would now like to turn it back to Bobby for closing remarks.

Thank you to everyone following us, especially for our employees. Congratulations to our 3 promoted senior executives. And also, we wish the best with Michael Sousa. I look forward to our next meeting as we talk about the future together with Michael. All employees should take great pride in accomplishing our G2 rating #1 and getting our systems through the security protocols to make us HITRUST certified, amazing set of accomplishments. Thank you to all of nearly 1,100 HealthStream employees for delivering a great year and look forward to 2025. And look forward to all of you on our next earnings call. Thank you much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.