HealthStream, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. HealthStream provides workforce development, patient experience, and provider solutions to healthcare organizations.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $52.1 million | $42.5 million | $99.3 million | $80.8 million |
| Operating income | $2.6 million | $4.1 million | $7.4 million | $7.4 million |
| Net income | $1.5 million | $2.4 million | $4.2 million | $4.3 million |
| Diluted EPS | $0.05 | $0.08 | $0.15 | $0.15 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $19.1 million | $22.1 million |
- Q2 revenue grew 23%, while operating income and net income each fell about 38%. Operating margin declined to about 4.9% from 9.7%; cost of revenue excluding depreciation and amortization was 43% of revenue versus 44%.
- First-half revenue rose 23%; operating income was approximately flat and net income declined about 3%. First-half operating margin was about 7.4% versus 9.2%.
- Adjusted EBITDA, a non-GAAP measure, increased 21% to $8.8 million in Q2 and 29% to $17.2 million for the first half.
- At June 30, cash and cash equivalents were $54.5 million and marketable securities were $85.4 million, totaling $139.9 million. Working capital was $111.9 million. No revolving-facility balance was outstanding; the $50 million facility was available, subject to covenants. Total debt at period-end was therefore zero.
Material changes and key drivers
- Growth by segment in Q2: Workforce revenue increased 20% to $39.8 million; Patient Experience rose 8% to $8.8 million; Provider rose 187% to $3.6 million. The Provider increase primarily reflects the HealthLine Systems (HLS) acquisition.
- Workforce subscription revenue benefited from more subscribers and courseware consumption. Implemented subscribers increased 18% year over year to 4.37 million; annualized revenue per implemented subscriber was essentially unchanged at $35.35.
- On March 16, HealthStream acquired HLS for approximately $88.1 million cash. HLS contributed $2.6 million of revenue and a $1.2 million operating loss from acquisition through June 30. Preliminary purchase accounting recorded $42.1 million goodwill and $47.2 million of intangible assets.
- The company raised approximately $98 million through a May public offering of 3.87 million shares and used proceeds in part to repay $28 million borrowed under its revolver. The share issuance increased outstanding shares and may dilute existing holders.
- Q2 operating results included approximately $1.65 million of employee stock-award compensation associated with the CEO’s contribution of shares. Acquisition-related deferred-revenue fair-value adjustments reduced Q2 revenue and operating income by approximately $2.7 million; the corresponding first-half reduction was $3.2 million.
Liquidity, outlook, and risks
- Management said cash, investments, operating cash generation, and available credit were expected to cover working capital, product development, and capital expenditures for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Investing cash outflow was $143.5 million in the first half, driven principally by the HLS acquisition ($88.1 million) and net purchases of marketable securities; financing cash inflow was $96.9 million, mainly from the stock offering. Operating cash flow declined from $22.1 million to $19.1 million.
- Management expects remaining tax-loss carryforwards to be fully used during 2015 and anticipates a significant increase in actual tax payments thereafter. The first-half effective tax rate was 42.7%.
- Risks noted include acquisition integration and preliminary valuation assumptions, potential future acquisition financing and equity dilution, compliance with revolver leverage and interest-coverage covenants, and exposure to changing interest rates. Management reported covenant compliance at June 30. The HLS purchase accounting includes an estimated $1.5 million contingent tax liability and $0.5 million indemnification asset.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- How much of reported growth reflects underlying organic demand versus acquired revenue, deferred-revenue accounting adjustments, and the changing subscriber base.
- Whether cost growth, stock-based compensation, acquisition expenses, and acquired-intangible amortization continue to pressure GAAP operating income and margins.
- Final HLS purchase-price allocation, including goodwill, intangible-asset values and useful lives, and the tax-related contingent liability.
- Cash conversion and liquidity after acquisition spending, and the effect of the expected expiration of tax-loss carryforwards on cash taxes.
- Share-count and per-share effects of the public offering and employee awards; evaluate adjusted EBITDA alongside GAAP results and cash flows.