HealthStream, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request references 2011 Q4, this is an annual report; fourth-quarter results are highlighted separately below. HealthStream provides online healthcare workforce learning and survey/research services. Its HealthStream Learning Center had approximately 2.75 million contracted subscribers at year-end, including 2.57 million implemented.
Financial results and key metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $82.1 million | $65.8 million | +24.8% |
| Operating income | $11.3 million | $7.1 million | +60.6% |
| Operating margin | 13.8% | 10.7% | +3.1 percentage points |
| Net income | $6.9 million | $4.2 million | +67.2% |
| Diluted EPS | $0.29 | $0.18 | +$0.11 |
| Adjusted EBITDA | $17.5 million | $12.6 million | +39.2% |
| Cash from operations | $19.8 million | $16.1 million | +$3.6 million |
Learning revenue rose 28.6% to $58.1 million; Research revenue increased 16.5% to $24.0 million. Subscription-based learning revenue grew 28.4%, supported by subscriber growth and higher courseware consumption. Cost of revenue excluding depreciation and amortization rose 28.4% and increased to 37.9% of revenue from 36.8%, reflecting royalties and personnel costs. Net margin was approximately 8.5% in 2011 versus 6.3% in 2010.
Q4 2011: Revenue was $21.9 million versus $17.6 million in Q4 2010 (+24.1%); operating income was $3.0 million versus $1.6 million; net income was $1.8 million versus $1.2 million. Diluted EPS was $0.07 versus $0.05. Quarterly revenue and margins can vary with research survey timing and volume.
Liquidity and capital: Year-end cash and cash equivalents were $76.9 million and marketable securities were $12.5 million, totaling approximately $89.5 million. Working capital was $78.6 million. The company had no debt outstanding and had full availability under its $20 million revolving credit facility, which matured in July 2012. Financing cash flow included $55.1 million from a November stock offering of approximately 3.6 million shares. Investing cash flow was a use of $17.1 million, including $6.1 million of capitalized software development and $4.1 million of property and equipment purchases. Deferred revenue was $22.8 million. No dividend was anticipated.
Material changes versus the prior year
- Revenue growth accelerated to 24.8% from 14.6% in 2010; operating income and net income increased substantially.
- Fully implemented subscribers increased 14% to approximately 2.57 million; contracted subscribers rose 12% to approximately 2.75 million. HLC subscriber renewal was 99%, and renewal of annual contract value was 106%.
- Cash and investments increased sharply, principally following the $55.1 million equity offering. Year-end shares outstanding increased to 25.9 million from 21.8 million.
- The tax provision was $4.4 million compared with $2.9 million. The prior-year comparison is affected by a $8.9 million tax benefit recognized in 2009, making 2009 net income not directly comparable.
- Capitalized software development increased to $6.1 million from $2.0 million. The company acquired a 50% interest in Laerdal’s AVS product for $3.5 million and launched SimStore through its SimVentures collaboration.
Outlook, commentary, and risks
Management forecast FY 2012 revenue growth of 21%–25%: 28%–32% for Learning and approximately 6%–9% for Research. Operating income was expected to grow 20%–26%; diluted share equivalents were estimated at 27.4–27.6 million, and the effective book tax rate at 39%–40%. Planned 2012 capital expenditures, including hardware, software, capitalized development, and office space, were $8–$9 million. Management expected existing liquidity and operating cash generation to cover anticipated needs for at least 12 months. These are forward-looking estimates and actual results may differ.
- Growth depends on winning new customers, renewals, adoption of new products, and successful execution of the Laerdal collaboration; competition and long, variable sales cycles may constrain results.
- Customer concentration is material, though no single customer exceeded 10% of revenue in 2011. Subscription contracts generally require renewal, and customers may not renew or may reduce pricing or activity.
- Research revenue is affected by variable survey schedules and project timing. Revenue recognition for subscriptions and certain services depends on implementation, usage, survey activity, or performance milestones.
- Key exposures include healthcare spending pressure, privacy and cybersecurity regulation, service interruptions, data/reporting errors, third-party content and technology, and retention of skilled staff. The company also noted goodwill of $21.1 million and identifiable intangible assets of $2.0 million, which could be impaired if assumptions or business performance deteriorate.
- Federal and state net operating loss carryforwards were approximately $14.5 million and $12.6 million, respectively; management expected substantial utilization within about 24 months. Cash taxes may rise after these are used. The credit facility’s July 2012 maturity and renewal or replacement terms merit attention.
- SimVentures recorded $0.8 million in revenue and $1.3 million in expenses in 2011; the new simulation products were still in early commercialization.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing reported no material legal proceedings, while noting ordinary-course claims were possible and not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether 2012 segment growth and operating-income guidance was achieved, especially the relatively slower Research outlook.
- Subscriber additions, renewal rates, pricing, courseware consumption, and the conversion of contracted subscribers still being implemented.
- Cash generation and working-capital trends, including the increase in days sales outstanding from 57 to 60 days.
- Capitalized software spending and returns from SimVentures, AVS, SimStore, and related products; assess whether capitalization and amortization assumptions remain appropriate.
- Revolving-credit-facility renewal or replacement after July 2012, and the effect of share issuance and option dilution on per-share growth.
- Use and expiration limitations of tax attributes, and the potential impact of higher cash tax payments as NOLs are exhausted.