HealthStream, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. HealthStream provides primarily SaaS applications and technology for healthcare organizations. Effective January 1, 2023, it reorganized under its One HealthStream platform strategy and now reports as one segment; prior-period results are presented on a consolidated basis.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $68.9 million | $65.4 million; up 5% |
| Subscription revenue | $66.0 million | $62.1 million; up 6% |
| Professional services revenue | $2.9 million | $3.3 million; down 11% |
| Operating income | $2.9 million | $4.0 million; down 28% |
| Net income | $2.6 million | $2.9 million; down 9% |
| Diluted EPS | $0.09 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $13.7 million | $14.0 million; down 2% |
| Operating cash flow | $20.5 million | $20.7 million |
- Operating margin was approximately 4.2%, versus 6.2% a year earlier; net margin was approximately 3.8%, versus 4.4%. Cost of revenue rose to 35% of revenue from 34%.
- Cash and cash equivalents were $48.8 million and marketable securities $9.8 million at March 31. The company had no borrowings and all $65 million of its revolving facility was available. The facility matures October 28, 2023.
- Working capital was positive $4.1 million, compared with negative $2.8 million at year-end 2022; current assets were $125.1 million and current liabilities $121.0 million. Deferred revenue was $94.3 million current and $2.6 million noncurrent.
- Investing cash outflow was $16.9 million, including $6.6 million paid for the eeds acquisition, $7.6 million of capitalized software development, and $0.9 million of property and equipment purchases. Financing cash outflow was $0.8 million, primarily employee payroll taxes on equity awards. No shares were repurchased in the quarter.
- Cash flow less capitalized software development and property/equipment purchases was approximately $12.1 million, calculated from reported figures; this is not a company-reported free-cash-flow measure.
Material changes and notable items
- Revenue growth reflected subscription products and recent acquisitions, partly offset by lower professional services revenue. Contracted hStream subscriptions increased to approximately 5.52 million from 5.13 million a year earlier.
- Operating costs rose 8% overall. The company cited higher personnel, contract labor, software, royalty, cloud-hosting, travel, and amortization costs; lower recruitment, professional services, and software costs partly offset general and administrative expense.
- A consolidation program eliminated 33 job roles as the business moved to a single-platform model. Q1 severance charges were approximately $1.0 million and reduced operating income by that amount, net income by approximately $0.8 million, and diluted EPS by approximately $0.03, according to management. Additional cash severance charges of $0.1–$0.2 million were expected in the remainder of 2023, mostly in Q2; some cash outlays may extend into 2024.
- The eeds acquisition, completed December 31, 2022 and funded in January, expanded healthcare continuing-education capabilities. Updated valuation information increased customer-relationship and non-compete intangibles and decreased developed-technology and trade-name values, reducing goodwill by a net $1.3 million.
- The company adopted its first quarterly cash dividend policy: $0.025 per share, with the initial payment scheduled for April 28, 2023 and a second $0.025 dividend approved for June 23. Management said it intended to declare and pay two more quarterly dividends in 2023; future dividends remain subject to board discretion and applicable restrictions.
Outlook, risks and contingencies
- No specific revenue, earnings, or margin guidance is provided. Management said cash, securities, operating cash generation, and available borrowing capacity should cover anticipated needs for at least the next 12 months.
- Management said delayed or postponed customer sales cycles during the pandemic affected 2022 results and Q1 2023, with a possible lesser impact for part of the remainder of 2023. It also cited inflation, elevated interest rates, labor-market challenges, supply-chain pressures, and banking-system instability as risks affecting the company and healthcare customers.
- Remaining performance obligations were approximately $504 million at March 31, with about 44% expected to be recognized over the next 12 months; timing is subject to contract performance and other factors.
- The company reported compliance with its revolving-credit covenants and no outstanding debt. The facility imposes leverage and interest-coverage tests. Management cautioned that future acquisitions or additional financing may require cash, stock, or borrowing and that financing may not be available on favorable terms.
- Market risks include interest-rate exposure on cash and investments, foreign-currency exposure, and volatility or impairment risk in strategic investments. A hypothetical 10% decrease in interest rates would reduce annualized interest income by approximately $0.2 million.
- The company stated there were no material changes to previously disclosed risk factors and no material change in internal control over financial reporting. Disclosure controls were reported effective.
- The filing disclosed that an exit-activity event requiring Form 8-K disclosure had not been reported timely; the company instead provided the information in this 10-Q. It described the 33-role reduction and related severance charges.
Important facts for investors to verify
- Whether subscription growth and hStream subscription expansion persist, and whether professional-services declines continue.
- How margins and earnings develop after the consolidation charges, including the expected additional severance costs and cash payments.
- Progress in converting the $504 million remaining performance obligations into revenue and cash collections; days sales outstanding rose to 51 days from 45 days.
- Renewal, amendment, or replacement of the $65 million revolving facility before its October 2023 maturity.
- Execution and cash-flow implications of the dividend policy, future acquisitions, and continuing investment in software development.