HealthStream (NASDAQ:HSTM) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
HealthStream raised full-year revenue guidance to $331-333 million, with net income between $21.8-22.4 million and adjusted EBITDA between $77-78 million, showing improved financial performance.
Q3 revenues reached $83.3 million, up 8.9% year-over-year, with adjusted EBITDA of $19.3 million, reflecting a 23.2% margin.
The company invested in growth drivers like the hStream platform and career networks, and strengthened its balance sheet with $40 million from a private placement, ending the quarter with $115.2 million in cash and no debt.
HealthStream is emphasizing sales of its programmatic solutions suites, such as Competency, Compliance, and Resuscitation, which are designed to drive enterprise-level outcomes.
The company is transitioning to AWS for cloud hosting, expecting initial margin pressure but long-term benefits in security and economics.
Legacy and sunsetting products now account for 10% of revenues, and the company plans to transition customers to newer solutions.
My Clinical Exchange showed strong performance with a 34% revenue increase, and overall customer feedback remains positive, as evidenced by high rankings in G2 reports.
HealthStream aims to expand its ecosystem through acquisitions and partnerships, supported by a strong cash position and no debt.
Full Transcript
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 and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation. I will now turn the conference over to Molly Kondra, Head of Investor Relations and Corporate Communications. Please go ahead, Ms. Kondra.
Molly Kondra (Head of Investor Relations and Corporate Communications)
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 A. Frist Jr. (Chief Executive Officer)
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 updated full year guidance we now expect revenues of $331 million to $333 million, net income of 21.8 to $22.4 million and adjusted EBITDA of 77 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 nine 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 by 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 the 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.
An untapped line of credit. In addition to our cash, we have the flexibility to act quickly when the right M&A opportunities arrive and we do plan on having an active pipeline or 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 a healthcare 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 engage 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 onto 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 four reasons we believe HealthStream is well positioned as AI reshapes healthcare technology, and our conviction in each of these four areas has only grown since the last call. First, I point out that our user base is growing.
While some industries may see AI reduce the number of software seats they need, healthcare 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 healthcare 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 how healthcare 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, Nurse Grid 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 the healthcare 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 healthcare organizations, millions of caregivers, dozens and dozens of industry partners, and more than three decades of healthcare 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 healthcare, 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 healthcare technology platform company and we are focused exclusively on the clinical workforce. Through our HStream platform, we deliver the healthcare 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 healthcare 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 three to five 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.
Scotty Roberts (Chief Financial Officer)
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 flows, 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 Versys 12 and Mission Care 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 Antolis. 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 a 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 and standardization, enhanced security, and improved economics over time. It’s important to note that migrations of this magnitude will take several quarters. 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 Versys 12 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. 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 days sales outstanding were 35 days for the third quarter, compared to 33 days in the prior year.
On a year-to-date basis, cash flows from operations were 58 million compared to 50.1 million last year, up 16%. Free cash flow was 34.7 million compared to 24.7 million last year, 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, 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 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. 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 priority that I just explained.
As announced in our earnings release yesterday, our board of directors declared a quarterly cash dividend of 3.5 cents per share to be paid on November 27th to holders of record on November 16th. As for our fourth capital allocation priority, I’m pleased to report that during the first nine 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 and 22.4 million, adjusted EBITDA to range between 77 and 78 million, and capital expenditures to range between 31 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 that 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 three 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 non-marketable 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 A. Frist Jr. (Chief Executive Officer)
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, healthcare 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 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 a competent workforce is at the heart of driving positive clinical outcomes. Historically, a customer might have assembled its 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 five or six 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 a 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 to 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 spans many states. At HealthStream, we want to be positioned to serve all types of healthcare organizations, and we believe that our market bundles can help us do just that. Our market bundles curate 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 more complete, selective 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 solutions together under the HealthStream brand, we are renaming several of our core applications. Listen to this closely because 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 help healthcare organizations find the most qualified clinical talent while helping healthcare professionals, and those preparing to enter the field, develop and navigate their careers at every stage. My Clinical Exchange, one of our career networks for students, connects nursing and allied health students with clinical rotations at hospitals and health systems. My Clinical Exchange 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, My Clinical Exchange had more than 219,000 unique student users across more than 2,100 academic sites and had 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, My Clinical Exchange users now have created more than 123,000 HSTM 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 three 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 site of growing influence, and we’re really proud to see our products perform the way they are based on verified user feedback from a third party. HealthStream Scheduling, formerly known as ShiftWizard, ranked number one overall in medical staff scheduling, and HealthStream Learning, formerly the HealthStream Learning Center, was the top Leader on G2’s Grid for healthcare 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 organizations increasingly rely on peer reviews 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 1st for our Innovation Council meeting. Sixty-five leaders from across healthcare 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, and Yale New Haven Health all came together to help shape the future of healthcare 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 healthcare 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 healthcare 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 the 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 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
Thank you. At this time, we will conduct the question-and-answer session. To ask a question, you will need to press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt Hewitt from Craig-Hallum Capital Group. Matt, your line is now open.
Matt Hewitt (Analyst)
Good morning, and thanks for taking the questions. Maybe first up, Bobby, you spoke a little bit about some of the success and the increased focus 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 suite and kind of extrapolating and kind of broadening the offering once you’re inside?
Robert A. Frist Jr. (Chief Executive Officer)
Yeah, 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 very 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 I’d say we’re in the middle of shifting our sales organization to lead with the suites and bundles from what, again, I call the point solutions. We just think there’s more value in 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 an incredibly powerful tool, we think 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 is 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 can just imagine those two products sold separately, you’d approach the chief nursing officer, you’d show this great tool and then try to make the sale, and then it would go through a budget cycle and approval process. Well, now we take those two and about four other products, including a massive content library, which Jane recommends courses from the content library. So now the content library is bundled and the recommendations are linked, and the checklist is integrated and so all these things. So now there’s about four 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 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. 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 Resuscitation Suite and the Compliance 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 one to three 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.
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’s 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 of our platform itself. 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 as you become a PaaS company, platform as a service company, as opposed to a point solutions SaaS company, 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; more partnerships, or minority investments, or just outright partnerships can now connect in more efficiently. So, yeah, 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 strategic fit and consistent with our constitutional values, which are published, and make sure that we, you know, 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, you know, big and small. If they make sense and we feel like they provide growth, we’ll take a look at them.
OPERATOR
Thank you. Our next question comes from the line of Constantine Davidez from Citizens. Your line is now open.
Constantine Davidez (Analyst at Citizens)
Thanks. Just starting with gross margin, can you talk a little bit more about expectations there and how the new hosting agreements can impact margins over the next few quarters? Should we expect incremental 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 A. Frist Jr. (Chief Executive Officer)
I’ll let Scotty do that first and then I’ll add some color based on what he says.
Scotty Roberts (Chief Financial Officer)
Sure. Thanks for the question, Constantine. Yeah, the new hosting relationship that I mentioned on the call with AWS will begin to take hold over the next several quarters, and it’ll 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 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. But I would expect some minor pressure to evolve, but I think it’s not something we can’t manage.
Robert A. Frist Jr. (Chief Executive Officer)
And then I want to speak to the longer-term benefits. Yeah, the longer-term benefits are really outstanding. You know, it’s obviously a volume commitment. And so we expect in the long run it’ll be more secure, more efficient, and lower cost per unit. And so over time, we’d expect it to give back, you know, after 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 three or four quarters, it might have a bit of a drag.
Constantine Davidez (Analyst at Citizens)
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 four to eight quarters.
Robert A. Frist Jr. (Chief Executive Officer)
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 a 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’ll be some category there. Sometimes we have fixed opportunities. Like a couple years ago or 18 months ago we talked a lot about this DEA mate. It was kind of a one time opportunity because there’s a federal deadline to do certain training and it had a very 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 DA Mate, while it might have some other uses, it certainly won’t have the regulatory driver for it.
And so those are kind of more natural sunsetting. And then on the other side, a legacy product that we determine should be sunset can get that extra classification that, you know, we’ve really, for me, sunsetting means we’ve communicated to the market and to the customers that there’ll be an end date to support for that product. That’s very different than just a legacy product which, you know, if you keep it and renew it from time to time, we’ll let you keep it until you choose to migrate or we, you know, 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 the 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 are past their time.
And so if you reread our script, you can see how we’ve classified it and you can kind of now know with us that we consider in these two categories to be about 10% of our overall revenues that we’re essentially managing hopefully transitionally to the newer products. A lot of 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, of this category now that we call legacy and sunsetting products.
OPERATOR
Thank you, Bobby. Thank you. Our next question comes from the line of Richard Close from Canaccord Genuity. Richard, your line is now open.
Richard Close (Analyst)
Yeah, thanks for the questions. Congratulations, excuse me, 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 A. Frist Jr. (Chief Executive Officer)
Right, right. Well, that’ll 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 definitely transitions to the newer products, which is a loss in the legacy category. But we haven’t talked about the ratios yet. I think that’s why we introduced the sunset category. I think as we move forward with the sunsetting strategy, we’ll then project because there’s kind of in a legacy category, there’s three 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 since there’s three options. It’s really hard to kind of forecast around there because legacy products, we try to renew until they get to a time where they want to change. And so there’s kind of three 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 two outcomes there, right? You can. Well sometimes they’re going to trail off because we’ve 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, the legacy products.
And so we renew a significant portion of the legacy products on a go forward basis. We lose some to the market and we transition some and we’ll pick pockets say in the next earnings call and we’ll talk about those ratios.
Richard Close (Analyst)
Okay, maybe housekeeping. Scotty, I thought you said 4.2% organic growth in the third quarter. Just curious if I heard that right. Seemed to have 4.7%.
Scotty Roberts (Chief Financial Officer)
It’s 4.7 for organic growth and 4.2 was the inorganic growth rate.
Richard Close (Analyst)
Okay, okay, thanks for clarifying that. And then just, you know, you guys are with the platform as a service. It’s highly subscription based, I guess, predictable revenues. So with the implied fourth quarter revenue range, looks like the low end is slightly below the third quarter’s. So anything to be aware of with that? What goes into that low end that you’re assuming,
Robert A. Frist Jr. (Chief Executive Officer)
Scotty? I’ll let you take.
Scotty Roberts (Chief Financial Officer)
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 fourth quarter. We generally kind of gravitate towards the midpoint, but we do like to put a range on it. So it just gives some leeway there.
Richard Close (Analyst)
Okay. I just wasn’t sure if any of the legacy sunsetting was a factor there that you’re expecting. Probably nothing more than
Scotty Roberts (Chief Financial Officer)
what we’ve seen.
Richard Close (Analyst)
Okay. And then just to follow on, on Konstantin’s question, appreciate the commentary on the AWS transition and you know, maybe three or four quarters there, but, you know, you called out some other expenses, higher labor costs. Obviously some of the investments I assume are, you know, hit in the income statement in terms of expenses as well. But just can you sort of comment on the other, you know, level of higher expenses and you know, maybe what you’re thinking in terms of duration of those expenses, are they, you know, somewhat, you know, permanent, you know, in the expense structure or how are you thinking about that?
Scotty Roberts (Chief Financial Officer)
Yeah, for Q4 in particular, I commented on a few categories of higher cost 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 three quarters of the year. So that’s just kind of a 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. Just seem to be a higher concentration of those in the fourth quarter of this year than what we’ve seen in the past. I think just 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, it’s just like I said, seasonal in nature. It’s hard to pin when they’re going to happen each year until we sign up for the conferences.
But there were more in Q4 than kind of the other three quarters.
Richard Close (Analyst)
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 significant expense associated with that?
Robert A. Frist Jr. (Chief Executive Officer)
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 yeah, we added what we call the Health Stream kickoff and the sales kickoff, 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. Three or four days we have in Nashville usually have over five or six hundred people here in town. So it is an expensive week and it is in January.
Richard Close (Analyst)
Okay, that’s helpful. My final question is just on the, you know, outside investment, the 40 million where you issued stock. I’m just curious, you know, what was the genesis of that transaction? Maybe if you can provide some background, it would be helpful for us to understand.
Robert A. Frist Jr. (Chief Executive Officer)
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 Empath 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 trajectory 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 that it would help HealthStream do well and vice versa. And so that investor took an interest in HealthStream directly and had a discussion. He’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 big shareholder with, you know, hopefully a longer term orientation, committed to the strategies we’re evolving as our platform links to Empath 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.
Richard Close (Analyst)
Okay, thank you.
OPERATOR
Thank you. Our next question comes from the line of Ryan Daniels from William Blair. Ryan, your line is now open.
Ryan Daniels (Analyst)
Thank you for taking the question, 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 A. Frist Jr. (Chief Executive Officer)
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 two or three 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’s building.
It has a good closing cadence. I haven’t noted particularly any longer sales cycles. And, you know, 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 the.
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 two things.
Ryan Daniels (Analyst)
Okay, that’s a very helpful color. And then maybe another.
Robert A. Frist Jr. (Chief Executive Officer)
And you know, just more comment on. Some of our bigger products had long sales cycles already, and so that’s, you know, 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, you know, easier to implement, easier to sell and have an economic value proposition. So again, just overall, I’d say pretty consistent cadence with our past.
We kind of always had long sales cycles on the bigger products anyway.
Ryan Daniels (Analyst)
That makes sense. And then maybe a philosophical or bigger picture question for you, Bobby. You know, if we think about AI coming in the healthcare 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 needs 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. Thanks.
Robert A. Frist Jr. (Chief Executive Officer)
Yeah, 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 that 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 you know, they’re adding the SIM labs now at school, 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 you know, 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.
Ryan Daniels (Analyst)
Great. Thank you for all the color. Appreciate it.
OPERATOR
Thank you. Our next question comes from the line of Jean Manheimer from Freedom Holdings. Jean, your line is now open.
Jean Manheimer (Analyst)
Thanks. Good morning and congrats on the good quarter, Bobby and team.
Robert A. Frist Jr. (Chief Executive Officer)
Thank you.
Jean Manheimer (Analyst)
Question. Yeah, question on the guidance. I mean, you know, you beat us by about a million dollars on the top line. I’m just. You raised your range. I’m just wondering if you want to call out any specific, you know, 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 the free cash flow. Looked like a strong quarter.
Can you talk about the seasonality of free cash flow and how that trends through the year? Thank you.
Robert A. Frist Jr. (Chief Executive Officer)
I’ll let Scotty do the seasonality of cash flow. I think from a selling standpoint, there’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 three 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 My Clinical Exchange growing as one of our top growers. But it’s also again, categorically kind of a medium sized product category, 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 four or five 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 Comp C suite is something we’re very optimistic for helping lead the way into next year. Great, thank you. And then the free cash flow. Scotty.
Scotty Roberts (Chief Financial Officer)
Yeah, hey Gene, I’ll speak about that one. That is a seasonal kind of trend for us. You look at our kind of probably last five 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 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 with cash flow generation and in Q2 and Q4 being weaker than those two quarters.
Jean Manheimer (Analyst)
Got it. Thanks very much.
OPERATOR
Thank you. Our next question comes from the line of Vincent Colicchio from Barrington Research. Vincent, your line is now open.
Vincent Colicchio (Analyst)
Yeah, just two. Most of my questions were asked. I’m just curious, Bobby, Versus 12 and Mission Care, those two deals, how are they performing relative to your original expectations?
Robert A. Frist Jr. (Chief Executive Officer)
I’d say they’re doing okay. We still have higher hopes for them, so not quite up to expectations, but okay. And you know, 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 Mission Care fits. And so, you know, 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, 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 the expectations and we can do better. And in fact, we’re making the investments to do better.
Vincent Colicchio (Analyst)
And then one follow up on the credentialing software side. Any progress with large payers?
Robert A. Frist Jr. (Chief Executive Officer)
Well, that’s a little bit of the Versus 12 suite of products is targeting that. And so again, I kind of. I guess I’ll give that at an okay, not exceptional right now, but still great optimism for it and making steady progress.
Vincent Colicchio (Analyst)
Thanks, Bobby. Nice quarter.
Robert A. Frist Jr. (Chief Executive Officer)
Thank you.
OPERATOR
Thank you. This concludes the question and answer session. I would now like to turn it back to CEO Robert Frist for closing remarks.
Robert A. Frist Jr. (Chief Executive Officer)
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.
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