HealthStream, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results; comparisons are to the corresponding 2015 periods. HealthStream provides workforce development, patient experience, and provider solutions to the healthcare industry. Amounts below are in millions, except per-share data and where noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $54.8 | $52.1 | $108.9 | $99.3 |
| Operating income | $2.3 | $2.6 | $4.8 | $7.4 |
| Net income | $1.4 | $1.5 | $2.9 | $4.2 |
| Diluted EPS | $0.04 | $0.05 | $0.09 | $0.15 |
| Adjusted EBITDA (non-GAAP) | $7.9 | $8.8 | $15.9 | $17.2 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $0.3 | $19.1 |
- Q2 revenue grew 5%, while operating income fell 10% and net income fell 5%. Six-month revenue rose 10%, but operating income declined 35% and net income 31%.
- Q2 cost of revenue, excluding depreciation and amortization, was about 41% of revenue versus 43% a year earlier. Operating margin was about 4.2% versus 4.9%; net margin was about 2.6% versus 2.8%.
- For the first half, operating margin was about 4.4% versus 7.4% in 2015. Adjusted EBITDA is a company-defined non-GAAP measure and is not comparable necessarily to similarly titled measures at other companies.
- First-half operating cash flow fell to $0.3 million, primarily reflecting higher receivables amid slower collections and lower deferred revenue. Days sales outstanding were 62, versus 60 a year earlier.
Segments and material changes
- Q2 Workforce revenue increased 1% to $40.2 million; Patient Experience increased 2% to $9.0 million; Provider increased 59% to $5.7 million. Provider growth was primarily attributable to the HealthLine Systems (HLS) acquisition.
- Workforce revenue benefited from subscription and enterprise application growth but was pressured by declining ICD-10 readiness sales. Those sales were $2.2 million in Q2, down from $6.8 million; first-half ICD-10 revenue was $6.1 million versus $13.9 million.
- Operating expenses increased, including product development (up 25% in Q2) and general and administrative costs (up 26%); sales and marketing declined 13%. Higher development spending reflected product initiatives, while G&A included technology infrastructure, business-development evaluation, and a new financial-systems implementation.
- Q2 operating income by segment: Workforce $9.2 million; Patient Experience loss of $0.1 million; Provider income of $0.4 million; unallocated corporate and other costs were $7.2 million.
Liquidity, debt, and capital allocation
- At June 30, 2016, cash and cash equivalents were $66.8 million and marketable securities were $72.0 million, totaling $138.8 million. Working capital was $122.8 million; current assets were $204.5 million and current liabilities $81.7 million.
- No revolving-credit-facility borrowings were outstanding during the first half. The company had a $50 million facility, all available at quarter-end, maturing November 24, 2017; it reported material compliance with covenants.
- Cash declined $15.2 million in the first half to $66.8 million. Investing used $15.3 million, including $4.3 million for capitalized software development and $3.2 million for property and equipment; financing used $0.2 million.
- Management stated that existing liquidity, operating cash generation, and available credit should cover anticipated needs for at least 12 months. A $25 million share-repurchase authorization remained unused through June 30, 2016.
Outlook, risks, and unusual items
- No quantified full-year earnings or revenue guidance is provided. Management expected ICD-10 readiness revenue and operating-income contributions to continue declining significantly during 2016.
- HLS-related tax indemnification claim: HealthStream recorded a $2.2 million goodwill measurement-period adjustment in Q1 2016, with no current or prior-period earnings impact. The claim amount had not been agreed; any difference from the recorded adjustment could affect earnings when settled.
- HealthStream acquired Performance Management Services, Inc. on June 30 for $4.0 million cash plus up to $0.5 million contingent consideration. On July 25, it acquired the remaining 68% of Nurse Competency for about $1.0 million plus up to $75,000 contingent consideration.
- The company cited slower customer collections, implementation of a new accounting system, possible dilution from stock-funded acquisitions or capital raising, and uncertainty about future financing availability as considerations. It reported disclosure controls effective; implementation of the new system required modifications to internal controls and processes.
- Federal net operating loss carryforwards were fully utilized by December 31, 2015; management expected actual income-tax payments to increase and more closely approximate the tax provision.
Most important facts for investors to verify
- Whether receivables collections and operating cash flow recover after the financial-systems implementation; monitor DSO and deferred revenue.
- How quickly ICD-10 revenue winds down and whether subscription and enterprise-product growth offsets the decline.
- Whether increased product-development and corporate costs produce revenue growth and improved operating profitability.
- Resolution and final earnings impact, if any, of the HLS tax indemnification claim; also review purchase accounting for recent acquisitions.
- Liquidity and covenant headroom, acquisition funding needs, and whether the authorized share-repurchase program is used.