HealthStream, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Business context
HealthStream provides workforce development, patient experience, and provider credentialing and related solutions to healthcare organizations. Results include HealthLine Systems (HLS), acquired in March 2015, in Provider Solutions.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $54.1 | $47.2 | +15% |
| Operating income | $2.5 | $4.8 | -48% |
| Net income | $1.5 | $2.7 | -45% |
| Diluted EPS | $0.05 | $0.10 | Lower |
| Adjusted EBITDA (non-GAAP) | $8.1 | $8.4 | -4% |
| Operating cash flow | $5.7 | $9.0 | Lower |
- Operating margin was approximately 4.6%, versus 10.2% a year earlier; cost of revenue was 42% of revenue in both periods. Net margin was approximately 2.8%, versus 5.8%.
- Cash and cash equivalents were $82.8 million and marketable securities were $67.7 million at March 31, totaling $150.5 million. Working capital was $122.1 million.
- No revolving-credit borrowings were outstanding. The $50 million facility was fully available; the company reported compliance with its covenants. The facility matures November 24, 2017.
- Investing cash outflow was $4.7 million, including $2.7 million for property and equipment and $2.0 million for capitalized software development. Financing cash outflow was $0.2 million.
- Effective tax rate was 40.1%, compared with 43.3%.
Material changes and operating drivers
- Workforce revenue rose 10% to $41.3 million, supported by subscription growth and higher courseware consumption. Implemented subscribers increased 1% to 4.33 million; annualized revenue per implemented subscriber rose 5% to $36.27.
- Provider revenue grew 205% to $4.8 million, primarily reflecting HLS. Patient Experience revenue was approximately flat at $8.0 million.
- ICD-10 readiness training revenue fell to $3.9 million from $7.1 million. With the CMS transition effective in October 2015, the company said sales of this product had ceased and that its revenue and operating income would decline significantly during 2016.
- Operating expenses rose faster than revenue: total operating costs and expenses increased 22% to $51.6 million. Product development increased 51% to $7.0 million; depreciation and amortization increased 58% to $5.1 million, partly due to HLS-related intangible amortization and software development.
- Operating cash flow declined partly because deferred revenue fell, including from the lack of ICD-10 product renewals. Days sales outstanding improved to 58 days from 66 days.
Outlook, risks, and unusual items
- Management said existing cash, investments, operating cash generation, and available credit should cover anticipated working capital, product development, and capital expenditure needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- In connection with an indemnification claim by HLS’s former owners, whose validity and amount HealthStream had not agreed to, the company recorded a $2.2 million measurement-period increase to goodwill. It stated this adjustment had no effect on current- or prior-period earnings.
- The HLS acquisition’s fair-value adjustment to deferred revenue continues to reduce GAAP revenue relative to the company’s non-GAAP presentation. Q1 2016 non-GAAP revenue was $55.0 million versus GAAP revenue of $54.1 million; non-GAAP net income was $2.1 million versus GAAP net income of $1.5 million.
- The board authorized a $25 million share-repurchase program in February 2016, expiring by December 31, 2016; no shares had been repurchased through March 31.
- Management cited potential risks from acquisitions and financing needs, covenant limits, and future tax payments. Federal net operating loss carryforwards were fully utilized by year-end 2015, so cash tax payments were expected to rise. A hypothetical 10% decrease in interest rates on invested balances was estimated to reduce annualized interest income by about $60,000.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether subscription growth and subscriber monetization continue to offset the loss of ICD-10 readiness revenue.
- Whether expense growth, including product development and HLS-related amortization, moderates enough to support margin recovery.
- The outcome and final financial or tax treatment of the disputed HLS indemnification claim.
- Future operating cash flow and deferred-revenue trends, alongside the company’s cash tax payments and any use of the credit facility.
- Whether the $25 million repurchase authorization is used, and the resulting effects on liquidity and share count.