HealthStream, Inc. — Q1 2021 Form 10-Q
Business context and period: HealthStream provides SaaS-based workforce and provider solutions to healthcare organizations. This unaudited report covers the three months ended March 31, 2021, compared with Q1 2020. The company reported approximately 4.34 million contracted hStream subscriptions, up from 3.40 million a year earlier.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $63.5 million | $61.6 million | Up 3% |
| Operating income | $3.3 million | $7.2 million | Down 54% |
| Net income | $2.3 million | $7.1 million | Down 68% |
| Diluted EPS | $0.07 | $0.22 | Down $0.15 |
| Adjusted EBITDA (non-GAAP) | $13.6 million | $11.9 million | Up 14% |
| Operating cash flow | $19.1 million | $6.1 million | Up $13.0 million |
- Revenue mix: Workforce Solutions revenue was $51.2 million, up 3%; Provider Solutions revenue was $12.2 million, up 4%. Subscription services generated $60.4 million of total revenue.
- Margins: Operating margin was approximately 5.2%, versus 11.8% in Q1 2020; net margin was approximately 3.6%, versus 11.5%. Cost of revenue excluding depreciation and amortization was 33% of revenue in both periods.
- Cash and liquidity: Cash and cash equivalents were $45.3 million and marketable securities were $10.6 million at quarter-end, totaling approximately $56.0 million. Working capital was negative $1.9 million, improved from negative $4.7 million at December 31, 2020. Cash from operations benefited primarily from higher collections; DSO rose to 52 days from 44 days.
- Debt: No revolver borrowings were outstanding. The $65 million revolving facility, maturing October 28, 2023, was fully available; the company reported compliance with its covenants. The filing reports no outstanding debt at March 31.
Material changes and notable items
- Revenue growth reflected recent acquisitions and growth in other workforce products, partly offset by the run-off of legacy HeartCode and RQI revenue. Legacy product revenue was $1.8 million in Q1 2021 versus $11.2 million in Q1 2020.
- The Q1 2020 comparison included a one-time $3.4 million non-cash contractual reduction in royalty expense, which increased that period’s operating income; management estimates it increased 2020 net income by $2.6 million, or $0.08 per diluted share. Q1 2021 also included a $1.0 million non-cash reduction to paid-time-off expense.
- Q1 2021 operating costs included higher product development, general and administrative, and depreciation and amortization expenses. Depreciation and amortization increased to $9.2 million from $7.4 million, primarily due to capitalized software and acquisitions. Travel restrictions reduced operating expenses by $1.2 million year over year, benefiting operating income and adjusted EBITDA.
- Recent acquisitions expanded Workforce Solutions, including ComplyALIGN in January 2021; ShiftWizard and ANSOS were acquired in 2020. Acquisition accounting reduced deferred revenue to fair value, with a $1.6 million Q1 2021 adjustment included in the company’s adjusted EBITDA reconciliation.
- Operating cash flow improved, while investing cash use was $9.7 million, including $5.3 million for capitalized software development and $1.9 million for property and equipment. Financing cash use was $0.4 million; no share repurchases occurred in Q1 2021.
Outlook, commentary, and risks
- The filing gives no formal revenue or earnings guidance. Management expected legacy product revenue of approximately $0.7 million in Q2 2021 and de minimis revenue in the second half of 2021.
- At March 31, approximately $446 million of revenue was expected from remaining customer performance obligations; the company expected to recognize about 46% over the next 12 months.
- Management said COVID-19 began negatively affecting revenue in Q1 2021. Delayed or reduced bookings and renewals, implementation delays, and restrictions on in-person sales activity could weigh on revenue and earnings during the rest of 2021 and potentially thereafter. The company noted that the impact may lag bookings because subscriptions are multi-year.
- The company said it believed cash, marketable securities, operating cash flow, and available revolver borrowings would cover anticipated working capital, product development, and capital expenditure needs for at least 12 months. It cautioned that future acquisitions, financing availability, customer collections, and pandemic conditions could affect liquidity and results.
- Other risks include customer payment or renewal difficulties, acquisition integration and valuation assumptions, foreign currency movements, and volatility or impairment in strategic investments. Management reported no material changes to previously disclosed risk factors and no material Q1 changes in internal control over financial reporting.
Important facts for investors to verify
- Whether bookings, renewals, and customer implementations recover from the COVID-related delays and how those trends translate into future revenue.
- The pace of the legacy HeartCode/RQI revenue decline and growth, margins, and integration costs of recently acquired businesses.
- Cash collection trends and DSO, given the increase to 52 days, and the sustainability of Q1 operating cash flow.
- How reported GAAP results compare with adjusted EBITDA, including the treatment of acquisition-related deferred revenue write-downs and other excluded items.
- Final purchase-price allocations and goodwill/intangible valuations for acquisitions still subject to measurement-period adjustments.