HealthStream, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2017 cover HealthStream’s healthcare workforce, patient experience, and provider solutions businesses. Comparisons are with the corresponding 2016 periods. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $63.6 | $58.4 | $184.9 | $167.2 |
| Operating income | $4.0 | $1.3 | $8.7 | $6.1 |
| Net income | $2.5 | $1.2 | $6.1 | $4.1 |
| Diluted EPS | $0.08 | $0.04 | $0.19 | $0.13 |
| Adjusted EBITDA (non-GAAP) | $11.0 | $7.8 | $29.5 | $23.7 |
- Revenue grew 9% in Q3 and 11% for the first nine months; net income rose 115% and 49%, respectively. Operating margin was approximately 6.3% in Q3 versus 2.2%, and 4.7% year to date versus 3.6%.
- Cost of revenue, excluding depreciation and amortization, was 42% of Q3 revenue versus 43%; for the nine months it was 43% versus 42%. Depreciation and amortization increased 14% in Q3 and 22% year to date, mainly due to capitalized software and acquired MAI intangibles.
- Q3 segment revenue: Workforce Solutions $44.6 million (+4%); Patient Experience Solutions $8.8 million (-1%); Provider Solutions $10.1 million (+58%). For nine months, the respective totals were $132.6 million (+6%), $25.3 million (-2%), and $27.1 million (+60%). Provider growth reflected MAI and growth in other provider products.
- Workforce operating income declined to $8.5 million in Q3 from $9.4 million and to $25.8 million for nine months from $29.0 million, despite revenue growth. Provider Solutions shifted from a Q3 operating loss of $1.0 million to income of $0.9 million; Patient Experience Solutions Q3 income increased to $1.5 million from $0.5 million.
- Effective tax rate was 40% in Q3 versus 28%; year-to-date it was 33.7% versus 38.0%. The year-to-date rate benefited from stock-award tax benefits and lower state taxes.
Cash, liquidity, and debt
- Cash and cash equivalents were $60.5 million and marketable securities $62.9 million at September 30, 2017, totaling $123.4 million. Working capital was $94.5 million, compared with $82.5 million at December 31, 2016.
- Operating cash flow for the first nine months was $35.7 million, versus $15.0 million in 2016. The company attributed improved collections in Workforce Solutions to lower days sales outstanding: 55 days versus 70 days a year earlier.
- Investing cash outflow was $24.7 million, including $9.2 million for capitalized software development, $5.3 million for property and equipment, and $0.5 million for an equity investment. Financing cash outflow was $0.1 million. Cash increased $10.8 million during the period.
- No debt was outstanding. The $50 million revolving facility was fully available at quarter-end, but was due to mature November 24, 2017; management said it planned to renew on similar terms. The company reported compliance with covenants.
Changes, outlook, and risks
- Workforce growth was supported by courseware subscriptions and enterprise applications, partly offset by the expected wind-down of ICD-10 training revenue. Year-to-date ICD-10 revenue fell to $0.9 million from $7.4 million. Implemented subscribers grew 2.5% year over year to 4.50 million; annualized revenue per implemented subscriber rose 1.5% to $38.37.
- MAI, acquired in August 2016 for $48 million, contributed to Provider Solutions growth. A Q3 purchase-accounting measurement adjustment increased goodwill by approximately $0.5 million and did not affect earnings.
- The company gave no specific full-year revenue or earnings guidance in the provided filing text. Management believed cash, operating cash generation, securities, and available borrowing capacity would meet anticipated needs for at least 12 months.
- Laerdal notified HealthStream it does not intend to renew its HeartCode and RQI agreements after December 31, 2018. These products have generated significant revenue, although at below-average margins. HealthStream plans broader simulation offerings, including resuscitation programs after the agreements expire, but cautioned that failure to replace the revenue and earnings could adversely affect results.
- HealthStream was implementing ASC 606 for adoption January 1, 2018 using the modified retrospective method. It expected changes in revenue timing for certain services, including potentially earlier recognition of implementation services, and capitalization of qualifying sales commissions; the financial impact was not yet calculated. It anticipated an adjustment to retained earnings.
- Management noted increased bad debt, potentially related in part to challenging macroeconomic conditions affecting customers, and said it could further affect future bad debt expense. The revolving facility’s near-term maturity and the availability and terms of any future financing are also relevant liquidity considerations.
- Adoption of share-based payment guidance resulted in a $2.2 million opening retained-earnings adjustment for deferred tax assets. The filing reports no material commitments or contingencies amount.
Important facts for investors to verify
- Whether the revolving credit facility was renewed after its November 2017 maturity, and on what terms.
- How revenue, margins, and earnings develop as ICD-10 training revenue phases out and MAI acquisition effects normalize.
- Progress toward replacing HeartCode and RQI revenue before the Laerdal agreements expire, including expected economics of successor products.
- The quantified effects of ASC 606 adoption on revenue timing, retained earnings, and commission-cost capitalization.
- Whether bad debt expense and customer collection trends improve or deteriorate.
- Adjusted EBITDA is a non-GAAP measure; compare it with GAAP results and note that its calculation may not be comparable across companies.