HealthStream (HSTM) 2026 年第三季財報電話會議：營收成長 8.9% 上調財測指引

重點摘要

• HealthStream 公布 2026 年第三季營收為 8,330 萬美元，年增 8.9%。調整後 EBITDA 成長 1% 至 1,930 萬美元，而調整後 EBITDA 利潤率則從 25.0% 降至 23.2%。
• 管理層連續第二個季度調升 2026 全年財測。目前預計營收為 3.31 億美元至 3.33 億美元，淨利為 2,180 萬美元至 2,240 萬美元，調整後 EBITDA 為 7,700 萬美元至 7,800 萬美元。
• 有機營收成長率為 4.7%，主要由 myClinicalExchange、HealthStream Scheduling、HealthStream Credentialing、Resuscitation Suite 以及 Competency 產品系列所帶動。收購項目貢獻了 4.2% 的非有機成長。
• 在完成 4,000 萬美元的私募後，現金與有價證券達到 1.152 億美元。HealthStream 在本季結束時無任何負債，並擁有 5,000 萬美元的信用額度可用。
• 管理層正將銷售團隊轉向以整合套件與市場組合方案為主。公司表示，這些產品方案能帶來更高的合約價值、更長期的承諾以及更廣泛的企業採用率。
• 近期獲利能力面臨高勞力成本、雲端轉移費用以及季節性展覽支出的壓力。管理層預計第四季調整後 EBITDA 利潤率約為 21%。

核心財務業績

2026 年前九個月，營收成長 10.6% 至 2.482 億美元，調整後 EBITDA 成長 13.4% 至 6,000 萬美元。營業現金流成長 16% 至 5,800 萬美元，自由現金流則成長 40% 至 3,470 萬美元。

業務與營運表現

根據財務長提供的產品層級成長數據，訂閱產品實現了 4.7% 的有機成長。HealthStream Credentialing（前身為 CredentialStream）成長 15%；HealthStream Scheduling（前身為 ShiftWizard）成長 20%；Resuscitation Suite 成長 14%；Competency 產品系列成長 10%；myClinicalExchange 則成長 34%。

收購 Virsys12 和 MissionCare Collective 帶來了 320 萬美元的營收，產生 4.2% 的非有機成長率。管理層形容這兩項收購表現「尚可」，但低於最初預期，並表示正投入資源以改善其表現。

舊有（Legacy）與停售中（Sunsetting）產品產生約 870 萬美元營收，約占季營收的 10%，年減 150 萬美元或 15%。HealthStream 已不再向新客戶銷售舊有產品，而被正式歸類為停售中的產品則不再銷售或續約。

HealthStream 正從單一的點解決方案（Point Solutions）轉向整合套件與特定市場的組合方案。其 Competency Suite 結合了應用程式、內容與平台能力，而 Compliance Suite 則整合了安全、合規與政策管理。管理層表示，這些產品有助於客戶整合供應商，長期來看可帶來更大的合約金額與更強勁的續約表現。

該公司也正在擴展其職涯網絡。根據執行長的業務更新報告，myClinicalExchange 在本季的營收成長了 26.5%。該網絡在 2,100 多個學術機構中擁有超過 219,000 名獨立學生使用者，並已促進了超過 564,000 次臨床實習。超過 123,000 名使用者已建立 hStream ID，較上一季成長 10%。

HealthStream 表示，其營收有 96% 屬於訂閱制，合約期通常為三至五年。其開發者門戶在 441 家客戶中擁有 890 名註冊使用者，支援透過 hStream 平台的 API 進行整合。

管理層財測

更新後的營收範圍隱含第四季成長率為 4% 至 6%。管理層預期成長放緩的部分原因，在於收購的 Virsys12 和 MissionCare Collective 將開始納入有機基期進行比較。

第四季調整後 EBITDA 利潤率預計約為 21%。該預測已考量較高的人力成本、更多的展覽支出，以及與雲端託管整合相關的專業服務費用。

該財測排除潛在的收購或處分、非公開交易股權投資公允價值或或有對價的變動，以及可能的長期資產減損。

風險與觀察重點

• 毛利率因人力、軟體、授權費及託管成本增加而下滑。
• HealthStream 正將其託管基礎架構整合至 AWS。管理層預計在轉移期間將產生重疊成本並面臨輕微的利潤率壓力，此過程將持續至 2027 年，甚至可能更久。長期來看，公司預期這將帶來安全性、效率與單位成本方面的效益。
• 舊有與停售中產品的營收正在下降。客戶可能會續約、升級轉用 HealthStream 的新產品，或轉向競爭對手，這使得轉化率難以預測。
• 營業費用中包含扣除保險理賠後的 25 萬美元費用，該費用與 7 月揭露的網路安全事件後的安全強化、修復及專業服務相關。
• 管理層表示，較大的套件交易可能需要更多審批關卡，但尚未觀察到整體銷售節奏出現重大變化。

分析師問答亮點

以套件為主導的銷售策略：管理層表示，HealthStream 正調整其銷售團隊，改以套件和組合方案為主導，而非單一點解決方案。針對大型醫療系統，推廣 Competency、Resuscitation 及 Compliance 等套件方案；對較小型的醫療機構，則提供特定市場的組合方案。

資本配置與併購：公司表示其平台策略擴大了潛在收購、合作與少數股權投資的範圍。管理層仍專注於戰略契合度與投資回報標準，而非設定特定的交易規模目標。

資產負債表擴展：HealthStream 以每股 29.50 美元發行約 140 萬股，籌集了約 4,000 萬美元。管理層表示，該交易起源於與 Impact Vitality 相關的投資人，而 HealthStream 持有 Impact Vitality 的少數股權。

舊產品過渡轉型：管理層計劃採取更主動的做法，引導客戶脫離舊產品。預計在未來的法說會中，提供更多關於續約、轉移與客戶流失模式的細節。

現金流季節性：財務長表示，第一季與第三季通常是現金產生能力最強的時期，而第二季與第四季則相對較弱。

人工智慧與臨床培訓：管理層認為 AI 是減少行政工作同時提高臨床人員基礎技能評估重要性的有效途徑。公司特別強調 Jane AI 是評估臨床推理能力並找出個人能力缺口的工具。

法說會逐字稿全文

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完整財報電話會議逐字稿

管理層陳述

Operator

Good morning, and welcome to HealthStream's Third Quarter 2026 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded [Operator Instructions]

I will now turn the conference over to Mollie Condra, Head of Investor Relations and Corporate Communications. Please go ahead, Ms. Condra.

Mollie Condra

Thank you, and good morning. Thank you for joining us today to discuss our third quarter 2026 results. Also on 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 this morning 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 certain non-GAAP financial measures relating to the company's past and future expected performance on this call. The most directly comparable GAAP financial metrics and reconciliations are included in the earnings release that we issued yesterday.

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

Robert Frist

Good morning, everyone. Welcome to our third quarter 2026 earnings call. We do have a lot to cover, so let's get started with the numbers.

It was another solid quarter, which is allowing us to raise our previous guidance for the second quarter in a row. For our updated full year guidance, we now expect revenues of $331 million to $333 million, net income of $21.8 million to $22.4 million and adjusted EBITDA of $77 million to $78 million, each representing an improvement over the ranges we shared with you in August.

Revenues in the quarter -- for the third quarter were $83.3 million, up 8.9% year-over-year, and adjusted EBITDA was $19.3 million, representing a margin of 23.2% -- that means revenue came in a little above the midpoint that we were forecasting in August and EBITDA margin also outperformed the 22% we had been forecasting. For the first 9 months of the year, revenues were up 10.6% to $248.2 million and adjusted EBITDA was up 13.4% to $60 million.

Importantly, and this is kind of the color around it, we achieved these results while investing more aggressively in the future growth drivers, including our hStream platform technology, our career networks, which we talked about in the last call and also importantly, our sales organization as we get ready for our sales kickoff meeting in early January of next year. Those investments are reflected in our operating expenses this quarter, and we believe they are laying the foundation for the next chapter of HealthStream's growth.

We also took the time to strengthen our balance sheet in the quarter. In September, we received approximately $40 million in cash proceeds through a private placement of HealthStream common stock at $29.50 per share. We view this investment as a meaningful endorsement of our strategy and the long-term value of HealthStream ecosystem.

Therefore, we ended the quarter with $115.2 million in cash and marketable securities and no debt, which puts us in a strong position to continue investing in our solutions and platform, pursue acquisitions that expand our ecosystem and create lasting value for shareholders.

With an untapped line of credit, in addition to our cash, we have the flexibility to act quickly when the right M&A opportunities arise, and we do plan on having an active pipeline. We're always on the look for good opportunities, while continuing to pursue other capital deployment strategies that we believe will benefit shareholders across the board.

Advances in our hStream technology platform are allowing us to deploy more complete solutions that address the totality of the health care organization's competency, compliance and development needs. More specifically, the single verified clinician record, which is at the heart of the hStream technology platform is enabling robust programmatic solutions that replace the disparate point solutions of the past.

We call these programmatic solutions suites. And the key examples include our Competency Suite, our Compliance Suite and our Resuscitation Suite. These suites are built to drive enterprise-level outcomes. They engaged individual caregivers at a personalized level while also enabling organizations clear, actionable and efficient ways to run and improve their operations.

The sales momentum and customer feedback regarding these suites lets us know that we are on to something meaningful here. We talked a good bit about AI last time. I want to repeat some of the fundamentals of AI as it relates to our vision, philosophy and direction. It continues to be an important part of our vision. On recent calls, I've shared 4 reasons we believe HealthStream is well positioned as AI reshapes health care technology and our conviction in each of these four areas has only grown since the last call.

First, I'd point out that our user base is growing. While some industries may see AI reduce the number of software seats they need, health care employment is projected to remain one of the strongest engines of job growth and nurses specifically who make up our largest group of users are at the heart of that growth. We see AI as a tool that will free caregivers from administrative tasks so they can devote more time to their patients, which is a great thing overall for all of us that could be patients.

Second, our data sets us apart, and I think it would be extraordinarily difficult to replicate and assemble the unique data sets that we've accumulated over time. Millions of health care professionals, for example, have a unique hStream ID issued by our platform and as they operate in our platform.

Our enterprise applications serve as systems of record for our health care organizations train, credential and schedule their workforce. And this is important. Our new career networks add proprietary insight into how clinicians learn, work and build their careers.

For example, NurseGrid alone reaches roughly 1 in 5 U.S. nurses. That depth and history gives us a foundation for AI that would be very difficult for newer entrants to match. Third, hStream, our platform was built with AI as a core capability. Foundational assets like hStream ID and our growing set of APIs gives us the infrastructure to support AI-driven innovation in health care workforce technology. Our developer portal, for example, now has 890 registered users across 441 customers who are already building dozens of integrations through our APIs.

Fourth, our ecosystem ties these strengths together. Thousands of health care organizations, millions of caregivers, dozens and dozens of industry partners and more than 3 decades of health care expertise form a platform that would be very difficult to replicate. AI can't build an ecosystem like ours, but we believe it can make ours even more valuable. Taken together, these advantages are why we believe HealthStream is uniquely positioned as AI reshapes health care. And the more clinicians, data and solutions we connect to our platform, the more valuable each of those advantages becomes.

Before we go further, I want to briefly summarize HealthStream for anyone who is new to our story, and we hope there's lots of new people to our story today. HealthStream is a health care technology platform company, and we are focused exclusively on the clinical workforce. Through our hStream platform, we deliver the health care industry's largest ecosystem of clinical workforce solutions, helping organizations find, develop, credential, schedule, engage and retain their people with each solution becoming more valuable as it connects to the other solutions.

Our reach extends from nursing students preparing for their first clinical rotation to experienced clinicians and the 13.7 million health care professionals and nursing students in the United States make up the core addressable market for our solutions.

Our innovation is backed by 24 patents and more than 40 Brandon Hall awards. Our business model is built for durability. 96% of our revenues are subscription-based under contracts that typically run 3 to 5 years, which makes our revenue highly recurring and predictable. And we are profitable with no debt and a strong balance sheet, and those things give us the flexibility to invest more in our platform, pursue acquisitions and return capital to shareholders.

Later in the call, I'll share more about the momentum we're seeing with our customers and the progress we're making across our solutions and platform. But first, let's turn our attention to a more detailed look at the numbers with Scotty Roberts, our CFO, and he'll look at some financial metrics for the third quarter along with further comments about our financial outlook for 2026.

Scotty, it's yours.

Scott Roberts

Okay. Thanks, Bobby, and good morning to everyone who's joining the call with us today. During the third quarter, we delivered solid financial performance while also strengthening our balance sheet by raising $40 million in cash through the issuance of our common stock in a private placement transaction. We also extended our $50 million line of credit facility, providing additional access to capital with cash and investment balances of over $115 million, access to a $50 million credit facility, positive free cash flow and no funded debt, we are well positioned to grow the business and improve shareholder value.

Now, let's go over the financial results for the third quarter. Revenues were $83.3 million and were up 8.9%. Operating income was $6.6 million, down 13%. Net income was $5.4 million, down 11.7%, EPS was $0.18 per share, down from $0.20 per share and adjusted EBITDA was $19.3 million and was up 1%.

Our revenues increased by $6.8 million or 8.9% and were $83.3 million compared to $76.5 million in the prior year. Revenues from subscription products increased by $6.2 million or 8% and professional service revenues increased by $0.7 million or 26.2%.

Our subscription solutions continued to deliver solid growth with an organic revenue growth rate of 4.7%, which was led by products like CredentialStream growing by 15%, ShiftWizard growing by 20%, Resuscitation Suite growing by 14%, the Competency family of products growing by 10% and myClinicalExchange growing by 34%. Our inorganic revenue growth rate was 4.2%, which is comprised of $3.2 million in revenues from the Virsys12 and MissionCare Collective acquisitions that we completed in the fourth quarter of 2025.

As a reminder, our legacy products include acquired credentialing and scheduling products such as Echo credentialing and ANSOS. We do not sell legacy products to new customers, though we continue to support, maintain and renew legacy products for existing customers of those products.

However, when a product moves to the sunsetting stage, we no longer sell or renew that product and it's on a clear life cycle runout path. Examples of sunsetting products include things like our discontinued partner products, products that were driven by mandated regulatory deadline, which has passed and acquired products that we sunset in favor of newer solutions. We plan to continue actively managing legacy products, but over time, we may transition those into sunsetting products as we focus on newer solutions.

Revenues from our legacy and sunsetting products approximated $8.7 million or roughly 10% of third quarter revenues and declined by $1.5 million or 15% compared to the third quarter of last year.

Our remaining performance obligations were $686 million as of the end of the third quarter, which compares to $621 million for the same period of last year. We expect that approximately 41% of the remaining performance obligations will be converted to revenue over the next 12 months and that 68% will be converted to revenue over the next 24 months.

Gross margin was 64% compared to 65.3% in the prior year quarter. The decline in gross margin was primarily related to higher labor costs, software expenses, royalties and hosting costs. The increase in software and hosting expenses is indicative of our growing portfolio of products, increased customer utilization of our solutions and pricing. We operate multiple cloud environments and on-premise data centers. And earlier this year, we initiated an RFP process to consolidate all hosting to the cloud, selecting AWS as our partner.

We believe partnering with a global leader will provide operating efficiencies, standardization, enhanced security and improved economics over time. It's important to note that migrations of this magnitude will take several quarters. And as we get further into the migration, I'll provide additional updates on this important initiative.

Operating expenses, excluding cost of revenues, increased by $4.3 million or 10.2% with all expense categories showing year-over-year growth. Operating expense increases were influenced by higher labor costs, commissions, stock compensation, amortization and professional services, including $250,000 of expenses net of insurance recovery associated with the cyber incident that we disclosed in July, and that was generally for security enhancement, remediation and professional services. In addition, operating expenses from the Mission Care and Virsys12 acquisitions contributed to the overall expense increase.

Net income was $5.4 million and was down 11.7% compared to the prior year. Adjusted EBITDA was $19.3 million, up 1% and adjusted EBITDA margin was 23.2% compared to 25% last year.

Now let's switch over to the balance sheet and our cash flows. Our cash and investment balances were $115.2 million compared to $66.7 million last quarter. And during the third quarter, we raised $40 million of cash by issuing approximately 1.4 million shares of our common stock in a private placement transaction. We paid $7.4 million for capital expenditures, and we returned $1 million to shareholders through our dividend program. Our day sales outstanding were 35 days for the third quarter compared to 33 days in the prior year third quarter.

On a year-to-date basis, cash flows from operations were $58 million compared to $50.1 million last year, and that's up 16% Free cash flow was $34.7 million compared to $24.7 million last year, and that's up 40%. Year-to-date, capital expenditures were $23.3 million compared to $25.4 million last year.

Ending the quarter with $115.2 million of cash and investments, free cash flows and no debt, we're well positioned to deploy capital to improve shareholder value. We maintain a disciplined approach to capital allocation and how we prioritize our use of capital.

Our most 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. The third is returning a portion of profits back to shareholders in the form of cash dividends. And our fourth priority is that our Board may authorize share repurchase programs.

In line with the third capital allocation priorities that I just explained, as announced in our earnings release yesterday, our Board of Directors declared a quarterly cash dividend of $0.035 per share to be paid on November 27 to holders of record on November 16. As for our fourth capital allocation priority, I'm pleased to report that during the first 9 months of the year, we repurchased approximately $9.3 million of our common stock at an average price of $21.50 per share.

Now, let's turn our attention over to our updated financial expectations for 2026. As Bobby mentioned at the outset of the call, we expect that consolidated revenues will range between $331 million and $333 million.

Net income will range between $21.8 million and $22.4 million adjusted EBITDA to range between $77 million and $78 million and capital expenditures to range between $31 million and $34 million.

Consistent with our previous guidance earlier in the year, we expect lower revenue growth rates in the fourth quarter due in part to lower inorganic growth rates as the acquisitions that we completed in the fourth quarter of 2025 will start to have organic year-over-year comparables. Our updated revenue guidance range implies the fourth quarter revenue growth will be in the 4% to 6% range.

We expect that adjusted EBITDA margin will approximate 21% for the fourth quarter. And our fourth quarter forecast assumes that we'll have higher operating expenses, including labor costs. We'll also have significantly more trade shows in the fourth quarter compared to the previous 3 quarters and the professional services associated with the cloud hosting consolidation initiative that I described earlier.

These guidance expectations do not include the impact of any acquisitions or dispositions that we may complete during the year, gains or losses from changes in fair value of nonmarketable equity investments or contingent consideration or impairment of long-lived assets that we may complete during the year. And that wraps up my portion of the call this morning. Thanks for your time.

And Bobby, I'll now turn it back over to you.

Robert Frist

Thank you, Scotty. I'd like to begin this final section of our report, covering some business updates with a theme that I think is shaping nearly every conversation that we have with customers today.

As I mentioned in the first part of the call, health care organizations are increasingly coming to HealthStream for broad programmatic solutions, not just one-off products. Rather than buying a single product to solve one part of a larger problem, customers are asking for the broader question.

Does HealthStream have what we need to address this workforce challenge holistically across our entire organization? That's where our suites come into play. Our Competency Suite is a prime example of this approach, and the customer demand for it is growing. Developing and validating the competency of clinical staff is an ongoing requirement for health systems because the competent workforce is at the heart of driving positive clinical outcomes.

Historically, a customer might have assembled his competency program over several years, buying one tool, then adding another a year later and another after that. At the end of the day, that incremental approach left them gaps when executing their competency program. With Competency Suite, we have created a solution that combines platform, applications and content into a single suite that addresses the totality of an enterprise's competency needs. What used to be 5 or 6 separate purchasing decisions becomes one decision.

And what used to be a struggle to manage multiple products becomes a single enterprise-level solution. That simplicity benefits everyone. Customers get more complete interoperable solution at a better value than buying each component separately, and they avoid the ad hoc budgeting, approval and management burden that comes with point solutions.

For HealthStream, suites typically mean larger contract values, longer commitments and a broader adoption across the enterprise. And because customers keep the full suite rather than adjusting individual components at renewal, we believe bundles can also support stronger renewal rates over time.

The feedback from customers who have adopted Competency Suite is overwhelmingly positive, and we expect the sales momentum for this approach is gaining and to be a growth driver for us next year. Compliance Suite is also a great example of our suite strategy. Like Competency, this suite provides a solution to enterprise-level issues by allowing our customers to manage their compliance needs in a unified and effective manner.

For example, Compliance Suite combines safety and compliance with policy management to help organizations achieve compliance, safety and high reliability with less effort and less error. This is possible, thanks to the single verified clinician record that helps ensure that each individual is compliant and operating within a customer's overall compliance framework.

Again, this is not something that point solutions can offer. This is something that only a contiguous enterprise caliber Compliance Suite powered by our hStream technology platform can offer.

We have been in the market with Compliance Suite for less than a year, and already the market is beginning to embrace it. We are applying similar thinking into smaller care settings as well. We recognize the needs of critical access hospitals, skilled nursing facilities and home health require different workforce solutions than a large health system that span many states.

At HealthStream, we want to be positioned to serve all types of health care organizations, and we believe that our market bundles can help us do just that. Our market bundles create the right mix of software and content for specific care settings, such as those I just mentioned as well as the FQHC, ambulatory surgery, assisted living and behavioral health markets. Market bundles allow these care settings to make one decision for a more complete set of solutions at a better price per unit.

So whether it's a large health system standardizing on the Competency Suite or a rural hospital adopting a critical access market bundle, the message from our customers is consistent. They want a partner that can deliver complete solutions at a single price. That is exactly where we are focusing our efforts, including continued investment in our sales team to bring these suites and bundles to more customers. As part of our ongoing work to bring our solution together under the HealthStream brand, we are renaming several of our core applications.

Now listen to this closely because we think these brands have been around a while. ShiftWizard will become HealthStream Scheduling. CredentialStream will become HealthStream Credentialing. And the HealthStream Learning Center, one of our most established and long-term brands will become HealthStream Learning. I'll use these new names from here forward.

Another important area of investment is our career networks, which helps health care organizations find the most qualified clinical talent while helping health care professionals, those preparing to enter the field, develop and navigate their careers at every stage. My Clinical Exchange, one of our career networks or our career networks for students, connects nursing and allied health students with clinical rotations at the hospitals and health systems.

myClinicalExchange continued its strong performance with revenues up 26.5% in the third quarter compared to the same period last year. At the end of the quarter, myClinicalExchange had more than 219,000 unique student users across more than 2,100 academic sites and have placed more than 564,000 clinical rotations.

During the quarter, new health system customers and expansions with existing customers added commitments covering more than 46,000 additional students. Importantly, myClinicalExchange users now have created more than 123,000 hStream IDs, up 10% from last quarter, which means these future clinicians are already part of our ecosystem before they even take their first job.

Independent customer feedback continues to reinforce the value of our solutions. G2, for example, one of the largest software review marketplaces, ranks products each quarter based on verified user reviews. Across the 79 G2 reports in which our products were ranked this fall, HealthStream ranked in the top 3 in 26 of those reports, including first place in 15 of those reports, earning 30 badges along the way, including 18 leader badges. Again, remember that those are from verified customers. And so it's a growing side of growing influence, and we're really proud to see our products perform the way they are based on user -- verified user feedback from a third party.

HealthStream Scheduling, formerly known as ShiftWizard, ranked #1 overall medical staff scheduling and HealthStream Learning, formerly the HealthStream Learning Center, was the top leader on G2's grid for health care learning management systems, where 88% of reviewers said they are likely to recommend it.

Over the past year, the number of reviews of our products on G2 has more than doubled, and our average rating has risen to 4.5 stars. And importantly, for me, because we track this for all of our products, the Net Promoter Score among reviewers has climbed from 36 to 69.

As health care organizations increasingly rely on peer-reviewed and AI-powered search to evaluate software, this kind of third-party validation helps them see HealthStream as a partner they can trust with their workforce.

Before I close, I want to thank the customers who joined us here in Nashville on October 1 for our Innovation Council meeting, 65 leaders from across health care organizations and industry partners, including Chief Nursing Officers, Senior Vice Presidents and clinical education leaders from organizations such as Cleveland Clinic, Kaiser Permanente, HCA, Vanderbilt Health, Intermountain Health, Cedars-Sinai, New York and Yale New Haven Health all came together to help shape the future of health care workforce technology.

These leaders are at the forefront of solving our industry's toughest workforce challenges and many of them engaged across multiple discussion areas, giving us perspective that spans their entire organizations. Their insights directly inform what we build next and we're grateful for our partnership with them through this innovation council structure, which has just turned out to be a really great way to build products just right with our leading customers.

And now I want to close with a reminder I share with you each quarter. If you want a profitable health care technology platform company with highly recurring revenue, a strong balance sheet and guidance we've raised twice this year, then HealthStream may be the right investment for you. If you're interested in a company whose core user base, the clinical health care workforce is expanding faster than any other sector of the job market, then HealthStream may be the right investment for you.

If you value a platform that serves as a system of record for clinical workforce with data and AI capabilities that grow more valuable as more of our solutions connect to it, then HealthStream may be the right investment for you. If you believe, as we do, that health systems will increasingly choose integrated solutions over point solutions, then HealthStream may be the right investment for you. For all of these reasons, HealthStream is finished -- is positioned to finish 2026 with momentum, and we're focused on helping the nation's health systems find, develop, credential, schedule, engage and retain their clinical workforce. HealthStream may be the right investment for you.

Now, let's turn it over to the operator for Q&A to begin.

Operator

[Operator Instructions] Our first question comes from the line of Matt Hewitt from Craig-Hallum Capital Group.

分析師問答

Matthew Hewitt

Maybe first off, Bobby, you spoke a little bit about some of the success and the increased focus on the bundling strategy. I'm just curious if you could provide a little bit more color there. When you go into whether it's a hospital or a facility outside of that market, are you going in starting with the bundling pitch? Or are you going in with a suite and kind of extrapolating and kind of broadening the offering once you're inside?

Robert Frist

Yes, sure. So our long history is selling. We have a really large and fantastic sales organization that takes a lot of value propositions into the market. A lot of them historically, I guess, you could view them as point solutions. They're very beautiful products targeted to various identifiable problems. But we found that as we put them together and as they become more interoperable through our platform, which we've been talking about now for years, but we're finally seeing these things really work together. We're able to achieve a different kind of economic and sales value proposition.

And so we're -- I guess I'd say we're in the middle of shifting our sales organization to lead with the suites and bundles from the what again, I call the point solutions. We just think there's more value to them. So for example, in our Competency Suite, it's evolved over the years. It has components in it like the Jane AI. You've heard us talk about. It's incredibly powerful tool. We think it's the best in the market for assessing the clinical reasoning ability of nurses. We don't think there's anything like it.

But Jane AI was kind of a higher-priced product sold to a small subset of the audience, but it's a critical tool for your core nursing workforce to assess their clinical reasoning ability. But right alongside that is our checklist tool. And it's a wonderful tool. It can be used for many things. It's most often used to validate competencies to check people off on their competencies.

And so if you could just imagine those 2 products sold separately, you'd approach the Chief Nursing Officer, you'd show this great tool set or tool and then try to make the sale and then they go through a budget cycle and approval process. Well, now we take those 2 and about 4 other products, including a massive content library, which Jane recommends courses from the content library. So now the content library is bundled and the recommendation engines are linked and the checklist is integrated.

And so all these things, so now there's about 4 components that are put together into the Competency Suite. And we're just finding that it's much easier to talk once to the C-suite or in this case, the Chief Nursing Officer, like this is the investment you need to make to manage the competency of your thousands of nurses. And so all -- and so you don't have to meter the use of each product anymore. You don't have to worry about how they work together anymore. They work together as a suite. And we're just finding that it resonates.

And while we get a lower price per piece, we don't sell the pieces when we sell the suite. We sell the bundle or the suite as it's branded. And so we're finding that's working in the market. So we have these market bundles. So the critical access bundle is different than the Competency Suite. So in the smaller facilities, we lead with the market bundles, which are kind of assembled based on the uniqueness of that environment. With the bigger health system, we lead with the suites like the Competency Suite and the Resuscitation Suite and the ComplyALIGN Suite. And we're finding it to be a very effective message. It's a time of great desire for vendor consolidation.

And again, when we sell one of these suites, we're almost assuredly displacing 1 to 3 competitors, which is great for our customers because they get to consolidate down to fewer vendors in their IT area. And so we're finding it's not only a more comprehensive approach to selling, and it's a comprehensive approach to value creation. And from the IT standpoint, it's a vendor consolidation initiative, all of which seem to be resonating right now with our customers.

Matthew Hewitt

Thank you for the detailed response. Maybe shifting gears to the balance sheet. Obviously, incredibly strong. Lots of cash. You've got the line of credit. Does this extend or expand the opportunity set from an M&A perspective? Are you looking for potentially larger companies to acquire? Does it maybe loosen your valuation criteria? Any color you can provide there?

Robert Frist

Yes, I think a couple of things are happening there. One, of course, we're always looking for interesting things that strengthen this network effect or ecology as things become interconnected. It also -- as everyone is modernizing their technology, including our tech stack and the companies that we look at as they modernize theirs, it gets a lot easier to integrate those technologies with our expanding capabilities or our platform itself.

And in addition -- and so I think what can happen is essentially, we can launch new competitive vectors through partnerships and acquisitions faster over time. And so while not immediate, I would just say that in general, it's easier for us to integrate modern technology into our more modern technology, a; and b, it's easier to envision how new types of partners that maybe don't fit the traditional categories can lever these massive audiences we have with their product. And so the -- as you become a PaaS company, Platform-as-a-Service company, as opposed to a point solution SaaS company in which we're well into that migration now, it opens up how people can partner with you to offer their products, either through acquisition or just interconnectivity. And so we're really excited about as the platform strategy matures, our ability to open up our ecosystem, both for more acquisition categories and types or partnerships or minority investments or just outright partnerships can now connect in more efficiently.

So yes, I think the landscape expands, kind of what we think that the nature of the problems that we can help solve expands. And so I think all those things become true directionally that we can be more aggressive.

As far as issues like valuation and size, really, we look for a strategic fit and consistent with our constitutional values, which are published and make sure that we obviously use things like hurdle rates and IRR to make sure we think we're making a good investment based on projected growth. But the size of the organization has never been as big a factor. It's just fit and whether we think it expands the business model that we're building. And so we'll look at all things, big and small, if they make sense, and we feel like they provide growth, we'll take a look at them.

Operator

Our next question comes from the line of Constantine Davides from Citizens.

Constantine Davides

Just starting with gross margin. Can you talk a little bit more about expectations there and how the new hosting agreement is going to impact margins over the next few quarters? Should we expect incremental gross pressure -- gross margin pressure in the fourth quarter? And can you help us understand what margins might look like on the other side of the new hosting agreements?

Robert Frist

I'll let Scotty do that first, and then I'll add some color based on what he says.

Scott Roberts

Sure. Thanks for the question, Constantine. Yes, the new hosting relationship that I mentioned on the call with AWS will begin to take hold over the next several quarters. It will take several quarters throughout 2027, maybe slightly beyond to kind of completely migrate all of our data centers and other cloud environments. So I would expect some kind of overlapping as that process takes place.

So some margin pressure kind of is expected. I won't go into the details yet. We still need time to kind of work through the planning phases and kind of stage out when things will roll off and roll on to AWS. But it will be kind of a long process, somewhat complex, just given the size of our data center environments and hosting environments and just the number of products that will be required to move the number of customers on those products. So I would expect some minor pressure to evolve, but I think it's not something we can't manage.

Robert Frist

Yes, the longer-term benefits are really outstanding. It's obviously a volume commitment. And so we expect in the long run, it will be more secure, more efficient and lower cost per unit. And so over time, we'd expect it to give back after those -- that period of kind of where you have some duplicative costs and you have a lot of energy going into that migration. But we think on the backside, it's going to have tremendous benefits, including kind of a better cost per unit of buying capacity and all the things that we need. So in the long run, it should be an improvement. In the short run, meaning, say, 3 or 4 quarters, it might have a bit of a drag.

Constantine Davides

Great. And then the way you're discussing legacy revenue exposure, it seems like you -- and I missed this a little bit, but it seems like you're also adding in some commentary around sunsetting products. So I was just wondering if you could expand a little bit about that and just what you're expecting in terms of how that exposure might change over the next 4 to 8 quarters?

Robert Frist

That's great for you to pick up on that, Constantine. We did add to the definition of legacy products, this category of sunsetting products. Sometimes the same thing, sometimes a legacy product is set to sunset and sometimes officially, it's a sunset product.

And so we did add to our calculus in this pool that we're looking at and defined using some terminology in this call, what a sunsetting product is and what a legacy product is. So -- and what I expect is that we're probably going to get a little more aggressive in working with customers to migrate them off of legacy products. And so use strategies to encourage them to move. And eventually, like all good software companies do, just you have to sunset things and declare them like they just can't be supported technologically anymore. There's too much to do and too much risk involved, and they're too old of an architecture.

So I think we'll have -- now that it's less than 10% of total revenues fit this new definition of legacy and sunsetting products, we're going to get a little more aggressive in how we manage them over time. And so we don't know the immediate implications of that, but we've identified the bucket. In most cases, the legacy products are not being sold anymore and the sunsetting products are definitely not being sold anymore.

So they're definitely not going to be growth drivers for the company. Sometimes the product is sunset if we lose a partner in our content ecosystem and we can't sell their product anymore, it just kind of declines over time, usually because we found a replacement partner or a better product to try to sell into the market. But again, there will be some category there. Sometimes we have fixed opportunities, like a couple of years ago or 18 months ago, we talked a lot about this DEA MATE.

It was kind of a onetime opportunity because there's a federal deadline to do certain training, and it had a very -- a great effect, and we pursued the opportunity. We landed a lot of new business. But it's sunsetting because the mandate has passed and the time for that training has passed. And so that product that we built around DEA MATE, while it might have some other uses, it certainly won't have the regulatory driver for it. And so that -- those are kind of more natural sunsetting.

And then on the other side, a legacy product that we determined should be sunset can get that extra classification that we've really -- for me, sunsetting means we've communicated to the market and to the customers that there will be an end date to support for that product. And that's very different than just a legacy product, which if you keep it and renew it from time to time, we'll let you keep it until you choose to migrate or we hopefully don't, but we lose the customer.

Whereas a sunset product, we've generally sent the letter to the customer saying, look, the technology you're on and Microsoft, the big companies do this all time, is no longer supported past XYZ date. And so yes, we've added to this a group of small products that we call sunset products. It's just good portfolio management that we think is necessary. And I think we're really great at building exciting new products. We have to get a little better at sunsetting products that have past their time.

And so if you reread our script, you can see how we classified it, and you can kind of now know with us that we consider in these 2 categories to be about 10% of our overall revenues that we're essentially managing hopefully transitionally to the newer products. A lot of the legacy products, we have a goal of transitioning them to the newer product as opposed to sunset products, which are just going to kind of bleed out of revenue over time. So I hope that helps. And you can reread the script for our definitions and we give example products and also the magnitude of this category now that we call legacy and sunsetting products.

Operator

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

Richard Close

Congratulations on the results. Maybe just a follow-up to that legacy sunsetting. Maybe if you could just provide some characterization of the success rate of converting people to the go-forward products versus maybe them deciding to essentially leave or not move forward with the new products.

Robert Frist

Right, right. Well, that will be a topic over time. What we generally show is the loss in this category. For example, I think it was down $1.5 million this quarter. We haven't characterized in detail the transitions. But every quarter, there are definitely transitions to the newer products, which is a loss in the legacy category. So -- but we haven't talked about the ratios yet. I think -- that's why we introduced the sunset category.

I think as we get -- move forward with the sunsetting strategy, we'll then project because there's kind of -- in the legacy category, there's 3 outcomes. They can renew where they are, they can switch to a competitor, or they can upgrade to our newer solutions. And so it's really hard to -- since there's 3 options, it's really hard to kind of forecast around there because the legacy products, we try to renew until they get to a time where they want to change. And so there's kind of 3 outcomes there, and it's a little harder to figure out each bucket. So we just report the loss each quarter.

Sunset products since we introduced that category, I think it's more deliberate, like there's 2 outcomes there, right? You can -- well, sometimes they're going to trail off because we sunset the product. And so that's easier to give the run out on those. So I don't have numbers for you right now. We'll pick them. You know the total magnitude of the size of this category. But I mean, it is -- we often just renew them and extend them and we generate EBITDA on them, even the legacy products. So know that they're not a drain, they're just not in an optimal position of the legacy products. And so we renew a significant portion of legacy products on a go-forward basis. We lose some to the market and we transition some. And we'll pick pockets in the next earnings call, and we'll talk about those ratios.

Richard Close

Okay. Maybe a housekeeping, Scotty, I thought you said 4.2% organic growth in the third quarter. Just curious if I heard that right. It seem to hit 4.7%.

Scott Roberts

Sure, sure. It's 4.7% for organic growth and 4.2% was the inorganic growth rate.

Richard Close

Okay. Okay. Thanks for clarifying that. And then just you guys are -- with the Platform-as-a-Service, it's highly subscription-based, I guess, predictable revenue. So with the implied fourth quarter revenue range, it looks like the low end is slightly below the third quarter. So anything to be aware of with that? What goes into that low end that you're assuming?

Robert Frist

Scotty, I'll let you take that.

Scott Roberts

No, nothing in particular, Richard. I think it's just -- we kind of just put a general range on the full year, and it kind of implies the 4% to 6% in the fourth quarter. We generally kind of gravitate towards the midpoint, but we do like to put a range on it, it just gives some leeway there.

Richard Close

Okay. I just wasn't sure if any of the legacy sunsetting was a factor there that you're expecting.

Scott Roberts

Nothing more than what we're saying.

Richard Close

Okay. And then just a follow-on on Constantine's question. I appreciate the commentary on the AWS transition and maybe 3 or 4 quarters there. But you called out some other expenses, higher labor costs. Obviously, some of the investments, I assume, are hitting the income statement in terms of expenses as well. But just can you sort of comment on the other level of higher expenses and maybe what you're thinking in terms of duration of those expenses? Are they somewhat permanent in the expense structure? Or how are you thinking about that?

Scott Roberts

Yes. For Q4, in particular, I commented on 2 categories of higher costs, labor being one. Another one is more seasonal in nature, and that's trade shows. We do have a significant more -- significantly more trade shows in the fourth quarter than we experienced in the other 3 quarters of the year. So that's just kind of a seasonal expense that probably shouldn't kind of repeat at that level each quarter, but they do kind of spread out throughout the course of the year.

We do try to attend some of the same trade shows each year. It just seems to be a higher concentration of those in the fourth quarter of this year than kind of what we've seen in the past. And I think I called out kind of just the services for the migration project as well. But the labor, that's kind of an ongoing cost for us. The trade shows is just, like I said, seasonal in nature. It's hard to tell when they're going to happen each year until we sign up for the conferences that were more in Q4 than kind of the other 3 quarters.

Richard Close

And is there much -- how should we be thinking about -- I think you said there was a sales launch or something in January or at the beginning of the year? Is there a significant expense associated with that?

Scott Roberts

We have our national sales kickoff meeting each year in January. It's a pretty big event. We bring a lot of people to Nashville. So there is a cost there, but it's been in there for years. So in a way, that's seasonal. But yes, we added what we call the HealthStream Kick Off and the Sales Kick Off, SKO and HKO, and they're both in January. And it's a time to convene large groups of our employees for planning. Of course, the sales kickoff is where we do the new products and train the sales organization for the new year on the bundles, and so that's exciting. It's exciting 3 or 4 days we have in Nashville. Usually, we have over 500 or 600 people here in town. So it is an expensive week, and it is in January.

Richard Close

Okay. That's helpful. And my final question is just on the outside investment, the $40 million where you issued stock. I'm just curious, what was the genesis of that transaction? Maybe if you can provide some background, it would be helpful for us to understand.

Scott Roberts

I think we put a lot of color in the announcements at the time to describe some of it. We essentially encountered an investor in a company that we wanted to invest in called Impact Vitality. We were putting in a minority investment, and this other investor was putting in the majority investment in that. The companies have a really great strategic plan, and we're excited about the growth trajectories and the model implications for this Impact Vitality partner, which we now have a minority interest in.

Anyway, we met the investor that was the major investor in that company. And they realized that the strategic plan had our products kind of working together. And if they did well in the market, it would help HealthStream do well and vice versa. And so that investor took an interest in HealthStream directly and had a discussion they'd like to be an owner of both companies. And so at the end of the day, that's what happened, and we got a new, a big shareholder with hopefully a longer-term orientation, committed to the strategies we're evolving as our platform links to Impact Vitality and helps power their business. I guess, this investor just wanted to be on both sides of that bet. He believes in HealthStream and believes in Impact Vitality as well.

Operator

Our next question comes from the line of Ryan Daniels from William Blair.

Ryan Daniels

Bobby, maybe one for you. It sounds like the bundles are seen very attractively in the market. And I get it because you get the best content, you get better pricing, there's simplicity in contracting and fewer vendors. But also when we hear kind of larger bundles, longer contract terms, that could extend the sales pipeline and require more committee approvals, et cetera. So I'm curious if you're hearing if that's impacting the sales pipeline at all in regards to kind of closing cycles or conversion times given the new bundles?

Robert Frist

Well, it may, but also it's a really great economic value proposition for the customers. And so -- but you're right, if it's going to displace 2 or 3 vendors and the price is compelling, the value prop is compelling. So those things work against each other. One tends to lengthen the sales cycle and one tends to shorten it, like if you give real financial reasons to also make the move to the bundle.

So I don't know, I think the pipeline is building. It has a good closing cadence. I haven't noted particularly any longer sales cycles. And we're bundling up some of our core applications like learning into the bundles. And so -- and then sometimes those recede into the background using the APIs for learning integrated into the products. And so it is an interesting thing. But I don't -- so far, I'm not sensing any delay in pipeline, just the bigger pipelines that we can work against. I guess we'll report on it as next year unfolds, if it seems to be holding up deals.

Some of the larger deals, though, you're right, when you get a real enterprise going on a bundle, it's a bigger decision. And so there are more committee approvals. That may lengthen a little bit, but right now, it feels like there's just a lot of energy around these. They're economically compelling. They're consistent with the theme of vendor consolidation, and we seem to be in a good position to deliver those 2 things.

Ryan Daniels

Okay. That's very helpful color. And then maybe another...

Robert Frist

Just a more comment on some of our bigger products had long sales cycles already. And so like our CredentialStream product, they're fairly long sales and implementation cycles. So some of these bundles for the smaller institutions can go faster. like the critical access hospital bundles, those are easier to implement, easier to sell and have an economic value proposition. So again, just overall, I would say, pretty consistent cadence with our past. We kind of always had long sales cycles on the bigger products anyway.

Ryan Daniels

That makes sense. And then maybe a philosophical or bigger picture question for you, Bobby. If we think about AI coming in the health care market, I think some would argue there could be longer-term skills erosion as clinicians rely on AI more. But conversely, you could see kind of nurse practitioners and nurses maybe amping up the level of care they deliver and practicing at the top of license. So I'm curious how you and the management team think about the future and need for training the workforce kind of given AI. So not the AI risk, but maybe how AI changes your business model in the future for training opportunities.

Robert Frist

Yes, that's great to observe. I mean you see us going downstream on the channel. In other words, we're getting into the student level now. So we're trying to enroll students in the last part of their journey and smooth the clinical onboarding process. So essentially, what's been called this gap to practice between a student that was academically prepared but hadn't developed the skills and the confidence, although they're adding the sim labs now at schools, that helps.

But we're really getting good at that bridge between student and actual practice. And some larger health organizations are using us to shorten that time and onboarding to be more effective. So at the student end, we're getting better at the selection and onboarding and the skills development phase for those students.

At the other end of the market, the advanced practice nurses, we have a push into that area as well. That's newer for us, but we have dedicated leadership now on building out programmatic changes and content and product offerings for that end of the market as well. I think there, like our clinical reasoning software for Jane is really important. And I think it was already a distinguished product in helping assess clinical reasoning ability, but it's really well equipped for these more advanced nurses to help them develop their skills and not have that deterioration you're talking about and identify weaknesses and gaps on a personalized individual level.

And so I think tools like Jane become more relevant as AI sweeps in because you still want to parse out kind of what the human knows and what they're skilled at doing. And I think our Jane products are really, really, really good at that.

Operator

Our next question comes from the line of Gene Mannheimer from Freedom Holdings.

Eugene Mannheimer

Congrats on the good quarter, Bobby and team. Yes, a question on the guidance. I mean, you beat us by about $1 million on the top line. I just -- you raised your range. I'm just wondering if you want to call out any specific platform applications or bundles that maybe drove the strength in the quarter. I think competency may have been one of them or anything you want to call out there would be great. And then my follow-up would be on the free cash flow. It looked like a strong quarter. Can you talk about the seasonality of free cash flow and how that trends through the year?

Robert Frist

I'll let Scotty do the seasonality of cash flow. I think from a selling standpoint, it's a pretty balanced quarter across the small market bundles and the product suites and even individual products. So it's fairly balanced. I wouldn't highlight any one thing. We've got a couple of exciting kind of bigger deals in our pipeline for Q4. I hope some of those materialize. They center a little bit more on the competency suite. And so we'll hopefully deliver on some of that in the quarter -- fourth quarter.

But I would say, overall, through the first 3 quarters, it's been a pretty balanced portfolio of selling, and I wouldn't highlight any one over the other. We did call out some of the growth rates, though. And so we called out myClinicalExchange growing as one of our top growers. But it's also, again, categorically kind of a medium-sized product category. So but had high growth on it. So we did -- if you look at the script and since I don't have it right here, we articulated 4 or 5 different growth rates. Now those are based on multiple quarters, so not specific to the third quarter performance.

Overall, balanced selling, balanced revenue growth in lots of categories, no one standout thing. I'd say on the forward pipeline sales, I would say that the -- say, the Competency Suite is something we're very optimistic for helping lead the way into next year.

Eugene Mannheimer

Great. And then the free cash flow?

Robert Frist

Scotty?

Scott Roberts

I'll talk -- I'll speak about that one. That is a seasonal kind of trend for us. If you look at our kind of last 5 years of cash flow generation by quarter, you'd see that in Q1, generally is going to be our strongest quarter of cash flow generation and then a dip in Q2, a rebound, not quite as strong as Q1, but a rebound in Q3 has kind of been the historical trend and then it kind of bounces back down a little bit in Q4. So it is a little bit seasonal with Q1 and Q3 being the strongest quarters of cash flow generation and then Q2 and Q4 being weaker than those 2 quarters.

Operator

Our next question comes from the line of Vincent Colicchio from Barrington Research.

Vincent Colicchio

Yes, just 2. Most of my questions were asked. Just curious, Bobby, Virsys12 and MissionCare, those 2 deals, how are they performing relative to your original expectations?

Robert Frist

I'd say they're doing okay. We still have higher hopes for them. So not quite up to expectations, but okay. And we're new to those businesses. So we're learning them. We've got a great team on it, and we are investing. And so again, this whole career networks area is an area for investment. That's what MissionCare fits. And so I would say they're performing okay. We can do better, though, and we have the right teams on them. And I think they'll evolve over time because that whole area, I'd say, of career networks is just -- is evolving for us. It's the area where we started to add sales team members for the first time in Q3. And so I think we'll see it hopefully kick into higher gear next year. Again, I'll give it an okay rating, not quite to expectations, and we can do better. And in fact, we're making the investments to do better.

Vincent Colicchio

And then one follow-up. On the credentialing software side, any progress with large payers?

Robert Frist

Well, that's a little bit of the Virsys12 suite of products is targeting that. And so again, I kind of -- I guess I'll give that an okay, not an exceptional right now, but still great optimism for it and making steady progress.

Vincent Colicchio

Nice quarter.

Operator

This concludes the question-and-answer session. I would now like to turn it back to CEO, Robert Frist, for closing remarks.

Robert Frist

Thanks to all of our employees delivering these results. Thanks to investors for staying along for the ride with us. We hope if you're new to the story, you'll join us, and we'll work really hard for you guys to try to deliver the best we can as far as returns. We'll see you on the next quarter call, which I believe will be in the New Year. So enjoy the finish of the year, and we'll see you guys in the New Year. Thank you.

Operator

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