HealthStream, Inc. — Q2 2011 Form 10-Q
Business and period: HealthStream provides online education and training (HealthStream Learning) and survey and research services (HealthStream Research) to healthcare organizations and related industries. This unaudited report covers the quarter and six months ended June 30, 2011, compared with the same 2010 periods.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $21.1 million | $16.7 million | $39.6 million | $31.5 million |
| Operating income | $3.1 million | $2.3 million | $5.7 million | $3.8 million |
| Net income | $1.8 million | $1.3 million | $3.4 million | $2.2 million |
| Diluted EPS | $0.08 | $0.06 | $0.14 | $0.10 |
| Operating margin | 14.8% | 14.1% | 14.3% | 11.9% |
| Operating cash flow | — | $8.8 million | $7.9 million |
- Q2 revenue increased 26.4%, operating income 32%, and net income 35.8% year over year. First-half revenue rose 25.6% and net income 55.8%.
- Q2 Learning revenue was $14.5 million, up 28.6%; Research revenue was $6.6 million, up 21.7%. Subscription learning growth reflected more subscribers and courseware use; Patient Insights survey revenue also grew.
- Q2 cost of revenue rose faster than revenue, to 36.3% of revenue from 35.5%, mainly from higher content royalties. First-half cost of revenue was 37.2% of revenue versus 36.1%.
- Adjusted EBITDA, a non-GAAP measure, was $4.6 million in Q2 versus $3.8 million; first-half adjusted EBITDA was $8.4 million versus $6.7 million.
Liquidity, capital and balance sheet
- At June 30, cash and cash equivalents were $24.4 million; short-term marketable securities were $2.0 million. Management cited approximately $26.5 million in cash, investments, restricted cash and interest receivable.
- Working capital was $21.9 million, versus $19.5 million at December 31, 2010. Operating cash flow of $8.8 million was partly offset by $4.6 million of capitalized software development and $1.8 million of property and equipment purchases.
- Debt was minimal: approximately $2,200 of capital lease obligations and no revolver borrowings. The full $20 million revolving credit facility was available at period-end.
- Deferred revenue increased to $19.9 million from $16.7 million at year-end. Accounts receivable days sales outstanding were approximately 54, versus 53 a year earlier.
Changes, outlook and risks
- Growth was broad-based across both segments. Sales and marketing expense rose 42.8% in Q2, including about $627,000 for the customer Summit, which was not held in Q2 2010; higher personnel, marketing and commissions also contributed.
- HealthStream acquired a 50% ownership interest in Laerdal Medical’s Advanced Video System for $3.5 million and launched SimStore through its SimVentures collaboration. First-half collaboration revenue was about $148,000 and expenses about $498,000; approximately $3.9 million was capitalized for SimVentures-related software and product assets.
- No specific revenue or earnings guidance is provided. Management believed available liquidity, operating cash generation and the revolver would cover anticipated working capital, development and capital needs for at least 12 months. Acquisitions could require additional financing and potentially dilute shareholders.
- Management cited financing availability, cash-flow generation and revolver covenants as risks. Market exposure is primarily interest-rate risk; the filing estimated that a hypothetical 10% rate decrease would reduce annualized net income by about $3,700. Federal and state net operating loss carryforwards were approximately $25 million and $20 million, respectively, at December 31, 2010; cash tax payments were expected to remain below the book tax provision while those carryforwards were used.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting. The interim statements include normal recurring adjustments; the filing cautions that first-half results are not necessarily indicative of full-year results.
Investor facts to verify
- Whether subscriber growth and courseware consumption continue to support Learning revenue, and whether the reported contracted subscriber base converts into fully implemented subscribers.
- Whether higher royalties and sales, marketing and development spending affect margins as revenue growth continues.
- Cash conversion, receivables/DSO and the composition and pace of capitalized software spending, including SimVentures investment.
- The timing and amount of NOL utilization, future cash taxes, and any use of the revolver or financing for acquisitions.
- Adjusted EBITDA is non-GAAP and excludes items including capital expenditures and working-capital changes; assess it alongside GAAP results and cash flows.