HealthStream, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Figures are unaudited; dollar amounts below are in millions unless noted. HealthStream provides workforce-development and provider-credentialing software and services to the healthcare industry. It reported approximately 3.82 million contracted hStream subscriptions, up from 2.78 million a year earlier.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $60.9 | $62.5 | $183.0 | $191.4 |
| Operating income | $3.1 | $3.7 | $14.7 | $11.4 |
| Income from continuing operations | $2.6 | $3.5 | $13.2 | $10.6 |
| Net income | $2.6 | $3.7 | $13.2 | $12.1 |
| Diluted EPS from continuing operations | $0.08 | $0.11 | $0.41 | $0.33 |
| Adjusted EBITDA from continuing operations | $11.1 | $11.5 | $34.9 | $35.7 |
| Cash from operating activities | Not separately reported for quarter | $30.8 | $52.5 |
Q3 cost of revenue, excluding depreciation and amortization, was 38% of revenue versus 41% a year earlier; reported operating margin was approximately 5.1% versus 6.0%. For the first nine months, these measures were 36% versus 41% and approximately 8.0% versus 5.9%, respectively.
At September 30, cash and cash equivalents were $107.0, with $42.7 of current marketable securities. Working capital was $104.1. The company had no borrowings outstanding under its $50.0 revolving credit facility and reported compliance with its covenants. Total assets were $476.6 and shareholders’ equity was $336.3.
Changes and business drivers
- Q3 revenue declined 3%; Workforce Solutions fell 4% to $49.2, while Provider Solutions grew 2% to $11.7. For the first nine months, revenue fell 4%, with Workforce down 6% and Provider up 4%.
- Declining legacy HeartCode and RQI resuscitation sales were a major headwind: revenue was $9.7 in Q3 versus $13.4, and $31.6 for nine months versus $46.3. HealthStream expected about $6.0 of legacy-agreement revenue in Q4 2020 and none in Q1 2021.
- Growth in other workforce platform and content subscriptions partly offset that decline. Provider Solutions benefited from CredentialMyDoc, acquired in December 2019, and new subscriptions and implementations.
- Nine-month operating income and continuing-operations income increased despite lower revenue, aided in part by lower costs and a $3.4 first-quarter reduction in royalty expense after a partner released HealthStream from liability. This was a nonrecurring contractual adjustment.
- Q3 continuing-operations income fell 24%, partly because a supplemental employee payroll payment and increased 401(k) match reduced operating income by approximately $1.9 after related tax effects.
- Cash from operations declined $21.8 year over year. Cash and cash equivalents decreased $24.5 from year-end, reflecting operating cash generation, acquisitions, repurchases and other investing and financing activity.
Outlook, risks and unusual items
- The filing gives no formal full-year revenue or earnings guidance. Remaining contracted performance obligations were $408; management expected to recognize 45% over the next 12 months and the balance thereafter.
- Management said COVID-19 had not significantly reduced revenue or net income in the first nine months, but had delayed or reduced bookings and renewals, hindered sales and implementations, increased collection risk, and could affect future results. DSO was 43 days in Q3 2020 versus 40 days a year earlier. Management warned that the duration and severity of these effects remained uncertain.
- COVID-related travel and trade-show reductions lowered expenses, while salary increases were forgone and hiring and spending were constrained. Management noted these savings were not necessarily sustainable and could accompany weaker future bookings.
- After quarter-end, HealthStream acquired ShiftWizard for $32.0 cash, subject to adjustments. On October 28, it amended its revolver, increasing capacity to $65.0 and extending maturity to October 28, 2023.
- The company repurchased 762,843 shares for $16.3 during the first nine months under a $30.0 authorization, leaving approximately $13.7 available at September 30. Management said cash, investments, operating cash flow and available borrowing were expected to cover needs for at least 12 months, while noting it could curtail development or repurchases if conditions worsened.
- Other notable items: NurseGrid was acquired in March for net cash consideration of approximately $21.5; its preliminary purchase accounting included $21.1 of goodwill. Interest income declined with lower rates. The company reported no outstanding debt at quarter-end.
Investor verification points
- Track whether subscription growth and new resuscitation offerings offset the scheduled run-off of legacy HeartCode and RQI revenue.
- Assess COVID-19 effects on bookings, renewals, customer collections, implementation timing and DSO, including whether temporary cost savings persist.
- Verify the final purchase accounting and operating contribution from NurseGrid and ShiftWizard, and integration costs or synergies.
- Monitor operating cash flow, cash and investments, share repurchases, and use of the expanded revolving credit facility.
- Distinguish recurring operating performance from the $3.4 royalty liability release, acquisition-related items and non-GAAP adjusted EBITDA adjustments.