HealthStream, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. HealthStream provides workforce development and provider credentialing, privileging, and enrollment solutions to the healthcare industry. It reported approximately 3.40 million contracted hStream subscriptions, versus 1.84 million a year earlier.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $61.6 million | $65.2 million | Down 6% |
| Operating income | $7.2 million | $5.4 million | Up 35%; includes a $3.4 million favorable royalty-liability release |
| Income from continuing operations | $7.1 million | $4.8 million | Up 48%; the favorable adjustment contributed $2.6 million after tax |
| Diluted EPS from continuing operations | $0.22 | $0.15 | Q1 2020 includes an estimated $0.08 per share benefit from the adjustment |
| Net income | $7.1 million | $6.0 million | 2019 included $1.2 million of after-tax discontinued-operations income |
| Adjusted EBITDA from continuing operations | $11.8 million | $12.5 million | Down 6%; non-GAAP measure |
| Operating cash flow | $6.1 million | $16.1 million | Down $10.0 million, primarily from receivables and royalty payments |
Cost of revenues, excluding depreciation and amortization, was 33% of revenue versus 41% a year earlier; the comparison benefited from the $3.4 million adjustment and lower legacy resuscitation royalties. Operating margin was approximately 11.8%, versus 8.2%. Depreciation and amortization increased to $7.4 million from $6.5 million. The effective tax rate was 21%, compared with 23%.
Segments and material changes
- Workforce Solutions: Revenue was $49.8 million, down 8%. Legacy HeartCode and RQI revenue fell to $11.2 million from $17.3 million; other Workforce Solutions products increased by $1.6 million.
- Provider Solutions: Revenue was $11.7 million, up 8%, primarily from VerityStream subscriptions, implementation services, and $0.4 million of CredentialMyDoc revenue.
- Acquisitions: HealthStream acquired NurseGrid on March 9 for a total purchase price of approximately $25.0 million, including its previously held investment; net cash consideration was approximately $21.4 million. NurseGrid contributed $28,000 in revenue and a $220,000 operating loss after acquisition during the quarter. Purchase accounting remains preliminary. CredentialMyDoc was acquired in December 2019.
- Unusual item: A partner released HealthStream from a disputed royalty liability, resulting in a $3.4 million reduction in cost of revenues. HealthStream also recorded a $1.2 million gain on remeasurement of its prior NurseGrid investment.
- Contract backlog: Approximately $402 million of revenue was expected from remaining performance obligations; management expected about 47% to be recognized over the next 12 months.
Liquidity, debt, and capital allocation
At March 31, cash and cash equivalents were $107.4 million and marketable securities were $34.6 million, totaling approximately $142.0 million. Working capital was $98.2 million, down from $119.4 million at year-end, primarily reflecting the NurseGrid acquisition and share repurchases. The company had no debt outstanding and had $50.0 million available under its revolving credit facility; it was in covenant compliance. The facility was scheduled to mature November 24, 2020. Investing activities used $19.9 million, including the NurseGrid acquisition, software development, and equipment purchases. Financing activities used $10.3 million, including $9.9 million of share repurchases.
The board authorized repurchases of up to $30.0 million through March 12, 2021. In Q1, HealthStream repurchased 438,142 shares for $9.9 million at an average $22.52 per share. Management stated that available liquidity, operating cash flow, and borrowing capacity were expected to cover anticipated needs for at least 12 months, while noting it could curtail development spending or repurchases if conditions worsened.
Outlook, commentary, and risks
- Management said COVID-19 had not significantly affected Q1 results but expected negative effects beginning in Q2; the extent and duration were uncertain. Risks included delayed implementations, weaker renewals and new sales, customer payment difficulties or bankruptcies, and increased bad debt. DSO was 44 days, versus 39 days in Q4 2019 and 52 days in Q1 2019; the company said pandemic-related pressure could persist.
- Management expected revenue from legacy HeartCode and RQI products under expired agreements to decline sequentially: approximately $10.5 million in Q2, $8.5 million in Q3, and $6.0 million in Q4 2020, with approximately zero expected in Q1 2021. The newer RQI Partners arrangement had not generated material revenue through quarter-end and was not expected to replace the legacy revenue runout.
- The company offered COVID-19 training and a Tennessee rapid-response program free of charge for 90 days, and moved its workforce to remote work beginning March 16. Expense measures included postponing salary increases, limiting hiring and the 401(k) match, seeking extended vendor payment terms, and evaluating capital-spending reductions.
- HealthStream was pursuing broader simulation-based offerings, including the American Red Cross Resuscitation Suite, but said there was no assurance these offerings would offset the decline in legacy products.
- The filing identifies customer and partner disruption, collections, implementation delays, sales limitations, remote-work productivity and security, and market volatility as risks. It gives no clear annual revenue or earnings guidance.
Most important facts for investors to verify
- How much of reported operating-income and EPS growth is attributable to the one-time $3.4 million royalty-liability release.
- Whether declines in legacy resuscitation revenue are offset by other Workforce Solutions products and new simulation offerings.
- COVID-19 effects on customer collections, DSO, implementations, renewals, new sales, and bad-debt expense.
- NurseGrid and CredentialMyDoc integration, final purchase-price allocations, and their contribution to revenue and profitability.
- Cash generation and capital allocation, including further buybacks and the status or renewal of the revolving credit facility before its November 2020 maturity.