HealthStream, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. HealthStream provides workforce-development and research/patient-experience products and services to the healthcare industry. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $38.35 | $29.65 | +29.4% |
| Operating income | $3.30 | $3.17 | +3.9% |
| Net income | $1.95 | $1.94 | Nearly flat |
| Diluted EPS | $0.07 | $0.07 | Unchanged |
| Adjusted EBITDA (non-GAAP) | $6.08 | $5.36 | +13.5% |
| Operating cash flow | $9.19 | $3.86 | Up |
Operating margin was approximately 8.6%, versus 10.7%; net margin was approximately 5.1%, versus 6.5%. Cost of revenue, excluding depreciation and amortization, rose to 44.1% of revenue from 42.2%, implying gross margin of 55.9% versus 57.8%. The effective tax rate increased to 41.7% from 39.7%.
Revenue drivers and material changes
- Workforce Development revenue increased 33.8% to $30.96 million; Research/Patient Experience revenue rose 13.6% to $7.39 million.
- Subscription-based workforce revenue benefited from more subscribers and courseware consumption. Implemented subscribers increased 18% to 3.58 million; total subscribers increased 21.5% to 3.85 million. Annualized revenue per implemented subscriber rose 17.1% to $33.33.
- ICD-10 training revenue was $6.6 million, versus $2.0 million a year earlier, a significant contributor to growth.
- Health Care Compliance Strategies (HCCS) was acquired on March 3 for approximately $13.0 million cash and 81,614 shares; up to $750,000 in additional contingent payments may be due. HCCS results are included from the acquisition date. Purchase-price allocation is preliminary, including approximately $7.0 million goodwill and $7.6 million identifiable intangible assets. Q1 included $350,000 of acquisition transaction costs.
- Expenses increased with royalties and personnel costs, product-development initiatives, sales and marketing investment, and acquisition-related costs. Operating income grew much more slowly than revenue; net income remained essentially flat.
Cash, liquidity, debt, and outlook
- At March 31, cash and cash equivalents were $59.05 million and marketable securities were $42.95 million, totaling approximately $102.0 million. Working capital was $80.5 million, down from $90.9 million at December 31, 2013, primarily due to the HCCS acquisition.
- Operating cash flow was $9.19 million. Investing cash outflow was $9.98 million, including $12.5 million for acquisitions net of acquired cash; financing cash inflow was $0.30 million. Cash declined $0.49 million during the quarter.
- No debt was outstanding. The $20.0 million revolving credit facility was fully available, and the company reported compliance with its covenants.
- Management said available cash, investments, operating cash generation, and credit availability should meet anticipated needs for working capital, product development, and capital expenditures for at least 12 months. The filing provides no specific numerical revenue or earnings guidance.
- Management expected remaining net operating loss carryforwards to be used within 12–24 months, after which cash tax payments were expected to increase significantly.
Risks, contingencies, and unusual items
- ICD-10 training contributed materially to current-period revenue growth; the filing does not quantify how much of that revenue is recurring or indicate future demand.
- Acquisition accounting remains preliminary. HCCS may generate up to $750,000 in milestone payments, and its purchase-price allocation may change during the measurement period.
- Acquisition-related deferred-revenue fair-value adjustments reduce reported revenue. The company reported a $369,000 Q1 2014 adjustment and presented non-GAAP revenue, operating income, and net income excluding the adjustment.
- DSO was 62 days, compared with 59 days in Q1 2013. The company also cited risks around future acquisition financing, possible stock dilution, credit-market availability, and cash-flow sufficiency.
- Marketable securities were available-for-sale investments; management reported no securities considered other-than-temporarily impaired. A hypothetical 10% decline in interest rates would reduce annualized interest income by approximately $51,000.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ICD-10-related sales and subscriber growth persist, and how revenue trends develop after the current period.
- HCCS’s contribution to revenue and earnings, final purchase-price allocation, integration progress, and any milestone payments.
- Whether expense growth moderates enough to improve operating and net margins.
- Receivables collection and DSO trends, alongside the drivers of operating cash flow and working-capital changes.
- The timing and impact of NOL exhaustion on cash taxes, and continued availability of the revolving facility under its covenants.