HealthStream, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. HealthStream provides online education and training products and services through HealthStream Learning, and survey and research services through HealthStream Research. This unaudited report covers the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $20.618 | $16.616 | $60.175 | $48.114 |
| Operating income | $2.694 | $1.690 | $8.357 | $5.449 |
| Net income | $1.796 | $0.796 | $5.152 | $2.950 |
| Diluted EPS | $0.08 | $0.04 | $0.22 | $0.13 |
| Operating margin | 13.1% | 10.2% | 13.9% | 11.3% |
| Net margin | 8.7% | 4.8% | 8.6% | 6.1% |
| Adjusted EBITDA | $4.388 | $3.000 | $12.829 | $9.718 |
- Q3 revenue increased 24.1%; operating income rose 59%, and net income rose 125.7%. For nine months, revenue increased 25.1% and net income rose 74.6%.
- Q3 revenue by segment: Learning $14.805 million, up 28.4%; Research $5.813 million, up 14.2%. Nine-month segment revenue was $42.248 million for Learning, up 27.8%, and $17.927 million for Research, up 19.2%.
- Cost of revenue excluding depreciation and amortization was 38.4% of revenue in Q3 2011 versus 37.8% a year earlier; for nine months, 37.6% versus 36.7%. Management attributed the increase principally to courseware royalties and higher survey volume.
- Nine-month operating cash flow was $14.488 million, versus $11.817 million. Investing cash outflow was $3.136 million and financing cash inflow was $1.016 million. Cash and cash equivalents ended the period at $30.236 million; working capital was $24.3 million.
- The company had no outstanding indebtedness and had the full $20 million revolving credit facility available. Current liabilities were $27.412 million, including $20.488 million of deferred revenue; current assets were $51.703 million. Management said available cash, operating cash generation, and facility capacity should meet anticipated needs for at least 12 months.
Material changes and management commentary
- Learning growth was led by internet-based subscriptions, whose Q3 revenue rose 29.4%, reflecting more subscribers and greater courseware consumption. Fully implemented HLC subscribers reached 2.536 million, compared with 2.175 million a year earlier; contracted subscribers were 2.653 million versus 2.365 million.
- Research growth was led by Patient Insights survey revenue, up 26.4% in both the quarter and nine-month comparison. Other survey revenue declined in Q3 but increased modestly for the nine-month period.
- Adjusted EBITDA is a non-GAAP measure defined by the company as net income before interest, taxes, stock-based compensation, and depreciation and amortization. Management cautions it is not a substitute for GAAP results and does not reflect capital spending or working-capital needs.
- Capitalized software development reached $7.746 million, up from $4.333 million at year-end 2010. Nine-month software development payments were $5.199 million; property and equipment purchases were $3.560 million, including approximately $1.8 million related to expansion of the Nashville office.
Outlook, risks and unusual items
- Management expected the full-year 2011 effective tax rate to be 38%–39%. Actual tax payments were expected to remain substantially below the provision while the company uses federal and state net operating loss carryforwards of approximately $18 million and $14 million, respectively.
- In 2011 the company paid $3.5 million for a 50% interest in Laerdal Medical’s Advanced Video System product through the SimVentures collaboration. SimVentures also launched SimStore; for nine months it generated approximately $0.5 million revenue and $0.9 million expense. The company reported about $4.0 million of related capitalized software development.
- Risks cited include uncertainty in forward-looking estimates, the possibility that financing may not be available on acceptable terms, and potential dilution if equity is issued for acquisitions or capital needs. The company noted that future borrowing would be subject to facility covenants and borrowing capacity. It reported exposure to interest-rate changes, but no foreign-currency or commodity-price risk.
- The filing states that interim results are not necessarily indicative of full-year results. Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription growth and increased courseware consumption continue, and how royalty costs affect margins.
- Progress, revenue contribution, and ongoing investment needs for SimVentures, SimStore, and the AVS product.
- Cash conversion and working-capital trends, including receivables and deferred revenue; reported nine-month operating cash flow benefited from a $3.748 million increase in deferred revenue.
- Actual full-year tax rate and timing of utilization of the disclosed tax-loss carryforwards.
- Capitalized software development, office expansion spending, and potential dilution from stock compensation or future capital raising.