HealthStream, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2012. HealthStream provides online learning and research services to healthcare organizations and other healthcare-industry participants. Results are unaudited; dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Revenue | $26.4 | $20.6 | $75.9 | $60.2 |
| Operating income | $3.7 | $2.7 | $10.1 | $8.4 |
| Net income | $2.0 | $1.8 | $5.8 | $5.2 |
| Diluted EPS | $0.07 | $0.08 | $0.21 | $0.22 |
| Adjusted EBITDA (non-GAAP) | $5.7 | $4.4 | $15.7 | $12.8 |
- Q3 revenue grew 27.9%; Learning revenue rose 37.4%, while Research revenue increased 3.9%. Subscription learning growth reflected more subscribers and courseware consumption.
- Q3 operating margin was approximately 14.1%, versus 13.1% a year earlier. Cost of revenue, excluding depreciation and amortization, rose to 41.0% of revenue from 38.4%, reflecting royalties, personnel and project-service costs.
- For the first nine months, revenue increased 26.1% and operating income increased 21.0%; operating margin was approximately 13.3%, versus 13.9%. Cost of revenue, excluding depreciation and amortization, was 40.2% of revenue versus 37.6%.
- Net income rose 10.1% in Q3 and 13.0% year to date, but diluted EPS declined. The company attributed the per-share comparison primarily to approximately 3.6 million additional shares following its Q4 2011 stock offering; higher effective taxes also weighed on Q3 earnings.
- Operating cash flow was $15.6 million for the first nine months, compared with $14.5 million in 2011. Investing cash outflow was $69.6 million, principally reflecting net purchases of marketable securities, alongside the DCI acquisition, software development and capital expenditures.
- At September 30, cash and cash equivalents were $23.7 million and marketable securities were $72.2 million, totaling $95.9 million. Working capital was $86.8 million. There was no outstanding debt; the $20 million revolving facility was unused. Total assets were $161.9 million and shareholders’ equity was $129.0 million.
Material changes, outlook and risks
- HealthStream acquired Decision Critical, Inc. (DCI) on June 29 for approximately $3.4 million in cash and 22,124 shares, with up to $0.3 million of contingent payments. The preliminary allocation included $2.9 million of goodwill and $1.5 million of identifiable intangibles. Purchase accounting reduced acquired deferred revenue by $0.2 million; the company’s non-GAAP reconciliation added back $92,000 of the resulting revenue impact for the periods shown.
- After quarter-end, on October 19, the company acquired Sy.Med Development for approximately $7.1 million in cash, 34,060 shares and a $180,000 working-capital adjustment, with up to $1.5 million in contingent payments. Management did not expect a material impact on consolidated financial statements.
- Management expected a full-year 2012 effective tax rate of 41%–44%, compared with 39% in 2011. It anticipated federal and state net operating loss carryforwards would be fully utilized within 12 months, after which cash tax payments could increase significantly. No revenue or earnings guidance is provided in the supplied filing text.
- Management said existing liquidity, operating cash generation and available revolving credit were expected to meet anticipated needs for at least 12 months. Risks include execution and integration of acquisitions, potential share dilution from acquisition consideration, possible future financing constraints, and variability in operating results. A 10% decrease in interest rates was estimated to reduce annualized interest income by approximately $28,000.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Learning subscription growth continues and whether higher royalty and delivery costs constrain margins.
- The final DCI purchase-price allocation, contingent consideration and effect of deferred-revenue accounting on reported results.
- Sy.Med’s integration, actual acquisition costs and any contingent payments or share dilution.
- Timing of NOL exhaustion and the resulting increase in cash taxes relative to the recorded tax provision.
- Cash-flow and liquidity trends, including the company’s investment portfolio and use of its revolving facility.
- Adjusted EBITDA and other non-GAAP measures against GAAP results; these measures are not substitutes for GAAP performance or cash flow.