HealthStream, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. HealthStream provides workforce development, patient experience, and provider credentialing and related solutions to healthcare organizations. This unaudited report covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial performance
Amounts below are in millions, except per-share data. Figures may not sum due to rounding.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $61.5 | $54.8 | $121.4 | $108.9 |
| Operating income | $2.9 | $2.3 | $4.7 | $4.8 |
| Net income | $2.3 | $1.4 | $3.6 | $2.9 |
| Diluted EPS | $0.07 | $0.04 | $0.11 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $9.9 | $7.9 | $18.5 | $15.9 |
- Q2 revenue grew 12%; operating income rose 23% and net income rose 62%. Six-month revenue rose 11%, while operating income declined about 2% and net income increased 22%.
- Approximate GAAP operating margin was 4.6% in Q2 2017 versus 4.2% in Q2 2016; for the first half it was 3.9% versus 4.4%. Net margin was approximately 3.7% versus 2.6% in Q2 and 2.9% versus 2.7% for the first half.
- Q2 revenue by segment: Workforce Solutions $44.3 million, up 10%; Patient Experience Solutions $8.6 million, down 5%; Provider Solutions $8.7 million, up 53%. Provider Solutions growth included about $2.6 million from the Morrisey Associates acquisition. For the first half, segment revenue growth was 8%, down 3%, and up 62%, respectively.
- Q2 cost of revenue, excluding depreciation and amortization, increased 17% to $26.4 million and was 43% of revenue versus 41%. Higher royalties and staffing costs contributed; the company also cited higher depreciation and amortization, including from capitalized software and acquired intangibles.
- For the six months, operating cash flow was $23.0 million versus $0.3 million. Improved collections and a $7.0 million positive change in accounts and unbilled receivables were important contributors; deferred revenue changes were a cash use of $2.8 million.
- At June 30, cash and cash equivalents were $54.6 million and marketable securities $61.1 million, totaling $115.7 million. Working capital was $88.9 million. The filing reports no debt outstanding and a fully available $50 million revolving facility. Total assets were $397.8 million and shareholders’ equity $292.6 million.
Changes, outlook, and risks
- Workforce Solutions growth reflected courseware subscriptions and enterprise applications, partly offset by the expected run-off of ICD-10 readiness training revenue: $0.2 million in Q2 2017 versus $2.2 million a year earlier, and $0.8 million versus $6.1 million for the first half.
- Workforce implemented subscribers increased 3% year over year to 4.48 million; annualized revenue per implemented subscriber rose 7% to $38.16. Patient Experience revenue declined, partly reflecting the shift toward lower-revenue e-surveys and the timing of consulting and other engagements.
- Management said existing liquidity, operating cash generation, and available borrowing capacity should meet anticipated working capital, product development, and capital expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided.
- The $50 million revolving facility matures November 24, 2017. HealthStream was in material compliance with its covenants at June 30; covenants include maximum funded-debt leverage of 3.0 times and minimum interest coverage of 3.0 times. Future borrowing availability depends on covenant calculations.
- Laerdal notified HealthStream that it does not intend to renew or replace its HeartCode and Resuscitation Quality Improvement agreements when they expire December 31, 2018. These products have generated significant revenue, though at below-average margins. HealthStream plans broader simulation offerings, including resuscitation programs after expiration, but cautioned that replacement revenue and earnings are not assured and results could be adversely affected.
- The company adopted share-based payment accounting guidance, recording an approximately $2.2 million increase to retained earnings. Excess tax benefits helped reduce the effective tax rate; the six-month rate was 28.7% versus 41.1% in 2016.
- HealthStream anticipated adopting the new revenue recognition standard in 2018 using the modified retrospective method. It identified potential changes to allocation of contract revenue and capitalization of sales commissions, but could not yet quantify the financial impact and anticipated an adjustment to retained earnings. It also expected systems and process investment.
- The filing identifies acquisitions as part of its growth strategy and warns that acquisition financing or stock issuance could affect liquidity or dilute shareholders. It reports no outstanding debt during the period and no quantified material contingency in the balance sheet; the detailed filing should be checked for any relevant commitments.
Investor verification points
- Assess the durability and profitability of subscription growth against higher royalties, sales and marketing costs, and increased amortization.
- Track the Laerdal agreement expiration and whether replacement simulation products can offset the revenue and earnings contribution.
- Review the November 2017 credit facility maturity and any renewal, refinancing, or borrowing terms.
- Monitor adoption of the revenue recognition standard, including potential revenue timing changes, commission capitalization, and the retained earnings adjustment.
- Evaluate the quality and repeatability of the first-half operating cash flow improvement, especially receivable collections and deferred revenue movements.
- Compare GAAP results with adjusted EBITDA and other non-GAAP measures; the filing cautions these measures are not substitutes for GAAP results and may not be comparable across companies.