Third Quarter 2026 Earnings Conference Call - HEALTHSTREAM INC

Explicit Guidance:

• Full-Year 2026 Revenue: Updated range of $331 million to $333 million, representing an improvement over prior guidance.
• Full-Year 2026 Net Income: Range of $21.8 million to $22.4 million.
• Full-Year 2026 Adjusted EBITDA: Range of $77 million to $78 million.
• Full-Year 2026 Capital Expenditures: Projected range of $31 million to $34 million.
• Q4 2026 Revenue Growth: Implied growth rate of 4% to 6% year-over-year.
• Q4 2026 Adjusted EBITDA Margin: Expected to approximate 21%.
• Q4 2026 Expense Drivers: Guidance assumes higher operating expenses due to increased labor costs, a significantly higher volume of trade shows, and professional services for cloud hosting consolidation.
• Guidance Exclusions: Ranges exclude impact of future acquisitions/dispositions, fair value changes in non-marketable equity, contingent consideration adjustments, or long-lived asset impairments.
• Capital Allocation: Quarterly cash dividend of 3.5 cents per share declared; no new share repurchase authorization announced for the coming period (repurchased ~$9.3M YTD).

Business-Segment Outlook:

• Product Suites Strategy: Shifting sales organization to lead with enterprise-level suites (Competency, Compliance, Resuscitation) rather than point solutions; expected to drive larger contract values, longer commitments, and improved renewal rates starting 2027.
• Competency Suite: Identified as a primary growth driver; strong customer feedback and sales momentum anticipated to accelerate in the coming year.
• Compliance Suite: In market for less than one year; market adoption expected to continue growing, leveraging the "Single Verified Clinician Record."
• Market Bundles: Targeting specific care settings (Critical Access Hospitals, Skilled Nursing, Home Health, FQHCs) with curated solution mixes to enable single-point vendor consolidation.
• Legacy/Sunset Products: Legacy and sunsetting products currently represent ~10% ($8.7M) of Q3 revenue; management plans to become more aggressive in migrating customers to newer solutions and sunsetting unsupported products over the next 4–8 quarters.
• Remaining Performance Obligations (RPO): $686 million as of Q3 2026; 41% expected to convert to revenue in the next 12 months, and 68% over the next 24 months.
• Career Networks: My Clinical Exchange continues strong performance (revenue up 26.5%); user base growing with 123,000+ H-Stream IDs created by students.

Market and Competitive Outlook:

• Demand Trends: Strong customer demand for vendor consolidation; healthcare organizations increasingly prefer holistic, programmatic solutions over disparate point solutions.
• Sales Cycle Dynamics: Bundled deals may involve longer approval cycles due to committee approvals but offer compelling economic value; overall pipeline remains robust with no significant delays observed to date.
• AI Integration: Belief that healthcare employment (specifically nursing) will continue to drive software seat growth; AI viewed as a tool to free caregivers from admin tasks rather than reduce seat counts.
• Competitive Positioning: Unique data sets, ecosystem size (13.7 million professionals), and platform infrastructure create high barriers to entry; expected to gain share by displacing 1–3 competitors per suite sale.

Macro / Industry Outlook:

• Labor Market: Healthcare employment viewed as a top engine for job growth; clinical workforce expansion supports recurring revenue growth.
• Regulatory Environment: Some products are "sunsetting" due to passed regulatory deadlines (e.g., DEA mate mandates); no new specific regulatory headwinds identified.
• Cloud Hosting: Migration to AWS initiated to consolidate hosting environments; expected to take several quarters (through 2027) with potential short-term gross margin pressure, followed by long-term cost and efficiency improvements.

Strategic Initiatives:

• Sales Reorganization: Transitioning sales force to prioritize suites and bundles; new product training and kickoff scheduled for January 2027 (Sales Kickoff) and a separate HealthStream Kickoff.
• Product Rebranding: Shift Wizard $\rightarrow$ HealthStream Scheduling; CredentialStream $\rightarrow$ Healthcare Credentialing; HealthStream Learning Center $\rightarrow$ HealthStream Learning.
• M&A and Capital Deployment: Strong balance sheet ($115.2M cash, no debt) supports active M&A pipeline; focus on strategic fit and ecosystem expansion rather than strict size/valuation criteria.
• Strategic Investment: Private placement raised $40 million at $29.50/share; investor holds minority stake in Empath Vitality, creating a cross-ecosystem partnership.
• Capacity/Infrastructure: Cloud migration to AWS expected to complete over multiple quarters starting in 2027.

Risks and Headwinds to Outlook:

• Margin Compression: Short-term gross margin pressure expected due to AWS migration overlap, higher labor costs, and increased hosting expenses.
• Legacy Revenue Erosion: Ongoing decline in legacy/sunsetting product revenues (approx. 15% decline in Q3 vs. prior year) as customers migrate or products reach end-of-life.
• Acquisition Performance: Recent acquisitions (Versus 12 and Mission Care Collective) currently performing "okay" but not yet meeting initial expectations; integration and sales team expansion ongoing.
• Seasonal Expense Fluctuations: Q4 operating expenses expected to be elevated due to seasonal trade show concentrations and the January sales kickoff event.
• Guidance Caveats: Outlook does not account for potential future M&A, fair value adjustments, or asset impairments.

Management Tone on the Future:

• Confidence: High confidence in raised guidance (second consecutive raise); describes results as "solid" and "resonating" with customers.
• Strategic Shift: Expresses strong conviction in the "suite and bundle" strategy as the primary growth vector, noting it aligns with market desire for consolidation.
• AI Optimism: Reaffirmed belief that HealthStream is uniquely positioned to leverage AI due to proprietary data and ecosystem depth; sees AI as complementary to workforce growth.
• Financial Discipline: Emphasizes profitability, recurring revenue durability (96% subscription), and a "disciplined" approach to capital allocation.
• Acquisition Sentiment: Cautiously optimistic regarding recent acquisitions; willing to invest further to improve performance.

Miscellaneous:

• G2 Recognition: HealthStream products ranked in the top three in 26 of 79 G2 reports; average rating of 4.5 stars; Net Promoter Score (NPS) increased from 36 to 69.
• Investor Relations: Annual Capital Expenditure and R&D plans prioritize organic investment; free cash flow seasonality typical with Q1 and Q3 being strongest quarters.