HealthStream, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a filing limited to the fourth quarter. FY 2017 results include Workforce Solutions, Patient Experience Solutions (PX), and Provider Solutions. HealthStream sold PX on February 12, 2018; its sale and 2018 outlook therefore affect comparisons with the 2017 reported base.
Business context and financial performance
HealthStream provides healthcare workforce training, development and talent-management software, along with provider credentialing, privileging and enrollment solutions. Most workforce offerings are delivered through a subscription-based SaaS platform. At year-end, the company reported approximately 4.77 million total subscribers, including 4.65 million implemented subscribers.
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Revenue | $247.7 million | $226.0 million | Up 10% |
| Operating income | $9.8 million | $5.6 million | Up 76%; operating margin about 4.0% versus 2.5% |
| Net income | $10.0 million | $3.8 million | Up 166%; net margin about 4.0% versus 1.7% |
| Diluted EPS | $0.31 | $0.12 | Up from prior-year level |
| Adjusted EBITDA | $37.9 million | $29.9 million | Up 27%; non-GAAP measure |
| Cash from operations | $46.7 million | $24.2 million | Up 93% |
| Cash, cash equivalents and marketable securities | $131.1 million | $103.2 million | At December 31 |
| Debt | None | None | $50 million revolving facility available at year-end |
Cost of revenues, excluding depreciation and amortization, was 43% of revenue in both years, implying a roughly 57% gross margin on that basis. Depreciation and amortization rose 18% to $26.3 million. Working capital was $98.7 million, up from $82.5 million; the company reported $40.8 million of net accounts receivable and $75.3 million of current and noncurrent deferred revenue. DSO improved to 63 days from 66.
Cash used in investing activities was $11.6 million, compared with $56.7 million in 2016, when acquisitions were a major use of funds. FY 2017 investing included $11.9 million of capitalized software development and $6.0 million of property and equipment purchases. Financing cash flow was approximately break-even. The company reported positive working capital and said its cash, operating cash generation and undrawn facility should cover anticipated needs for at least 12 months.
Material changes versus the prior year
- Workforce Solutions: Revenue rose 6% to $178.1 million, driven by content subscriptions and enterprise applications. Implemented subscribers increased 4%. ICD-10 readiness revenue fell to $0.9 million from $8.5 million as the mandated transition had passed.
- Provider Solutions: Revenue rose 53% to $36.8 million. The 2016 Morrisey Associates acquisition contributed $8.1 million of the 2017 increase; other provider products contributed the remainder. The segment moved from a $2.4 million operating loss to $0.9 million operating income.
- Patient Experience: Revenue declined 3% to $32.8 million, reflecting survey product mix and fewer other survey, consulting and coaching engagements. PX generated $1.5 million of segment operating income in 2017.
- Tax and earnings: The effective tax rate fell to about 5% from 39%. The Tax Cuts and Jobs Act produced a $2.7 million fourth-quarter tax benefit from remeasuring deferred tax balances, materially supporting net income growth.
- Credit quality: Bad-debt expense rose to $1.8 million from $0.6 million, which management attributed to increased healthcare-provider bankruptcies and customer credit challenges.
Outlook, transactions and key risks
- 2018 guidance: Revenue growth of 6%–8%, Workforce Solutions growth of 4%–6%, Provider Solutions growth of 10%–20%, and operating-income growth of 20%–30%. Capital expenditures were expected to be about $20 million; the expected effective tax rate was 26%–28%. Guidance excludes acquisitions and is presented on the prior ASC 605 accounting basis, excluding PX results and the PX sale gain.
- PX sale: The company sold PX for $65.5 million cash, subject to working-capital adjustment, with $6.5 million held in escrow for indemnification claims. It expected a pretax book gain of $34 million–$38 million in Q1 2018 and declared a $1.00-per-share special dividend, approximately $32.5 million, payable April 3, 2018. PX historical results were to be reported as discontinued operations beginning in Q1 2018. The company retained certain PX liabilities and agreed to transition services and indemnification obligations.
- Laerdal agreements: HealthStream’s HeartCode and Resuscitation Quality Improvement agreements were scheduled to expire December 31, 2018, and Laerdal had indicated it would not renew. Related revenue had been significant, though at below-average margins; replacement offerings were not assured.
- Accounting transition: ASC 606 adoption began January 1, 2018 using the modified retrospective method. Management identified changes involving sales commissions, professional services and PX surveys, and warned that revenue timing could be affected. It anticipated retained-earnings adjustments of no more than $10 million for revenue recognition and $16 million for sales commissions, net of related tax effects; the final impact was still being determined.
- Other risks: Customer renewals and concentration, long sales and implementation cycles, competition, acquisition integration, cybersecurity and privacy incidents, service interruptions, provider credentialing or survey-data errors, healthcare-sector financial pressure, and regulatory changes. Goodwill and net identifiable intangible assets totaled about $179.1 million; impairment could reduce earnings.
- Capital and obligations: The $50 million revolving credit facility was undrawn and scheduled to mature in November 2018. The company had no debt at year-end and was in material compliance with its covenants. Contractual obligations included $40.0 million of operating lease commitments and $4.3 million of purchase obligations.
Most important facts for investors to verify
- Whether continuing workforce and provider growth and the stated 2018 operating-income outlook were achieved after excluding PX and applying the appropriate accounting basis.
- The realized PX proceeds after working-capital adjustments, release of the $6.5 million escrow, final gain, transition costs and any indemnification claims.
- Revenue and earnings exposure from the December 2018 end of the Laerdal arrangements and performance of replacement simulation products.
- The actual ASC 606 adoption effects on revenue timing, commissions, retained earnings and comparability with prior periods.
- Whether the rise in bad-debt expense persists, and whether customer renewals, collections and cash conversion remain sound.
- Facility renewal or replacement terms and liquidity needs, including the planned special dividend and approximately $20 million of 2018 capital and development spending.