HealthStream, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. HealthStream provides online learning and talent-management products and healthcare survey and research services. Amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $31.9 | $25.8 | $61.6 | $49.5 |
| Operating income | $4.1 | $4.0 | $7.3 | $6.4 |
| Net income | $2.4 | $2.4 | $4.4 | $3.8 |
| Diluted EPS | $0.09 | $0.09 | $0.16 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $6.4 | $5.9 | $11.7 | $10.0 |
- Q2 revenue rose 23.5%; operating income rose about 2%, while net income and diluted EPS were essentially unchanged. Operating margin was approximately 12.9%, down from 15.6%; net margin was approximately 7.6%, down from 9.4%.
- First-half revenue increased 24.3% and net income increased 13.4%. First-half operating margin was approximately 11.8%, versus 12.9% a year earlier.
- Learning & Talent Management revenue increased 30.2% in Q2 and 30.1% for the first half. Research revenue increased 3.9% and 7.1%, respectively. Growth drivers included more subscribers and courseware consumption, ICD-10 training, Patient Insights surveys, and acquired credentialing software.
- Cost of revenues, excluding depreciation and amortization, grew faster than revenue: 26.6% in Q2 and 28.6% in the first half. It represented 40.3% of Q2 revenue versus 39.3% a year earlier, and 41.2% versus 39.9% for the first half. Higher royalties, staffing and patient-survey costs contributed.
- Q2 general and administrative expense increased 50.5%, including higher corporate personnel, professional, software-maintenance and contingent earn-out costs. Depreciation and amortization also rose, partly due to acquired intangibles and office improvements.
- First-half operating cash flow was $11.0 million, versus $8.9 million. Cash and equivalents were $54.7 million; short-term marketable securities were $46.8 million, or $101.4 million combined. Working capital was $89.8 million. The company reported no outstanding debt and had the full $20 million revolving facility available.
- First-half investing cash flow was positive $0.7 million, reflecting marketable-security maturities and purchases, $2.0 million of capitalized software development, and $1.2 million of property and equipment purchases. Receivables increased and used $6.1 million of operating cash; deferred revenue increased $5.4 million.
Outlook, commentary and risks
- Management said existing cash, investments, operating cash generation and available revolver borrowings should cover anticipated working capital, product development and capital expenditures for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management expects remaining federal and state net operating loss carryforwards to be used within 12–18 months; cash tax payments may then increase significantly.
- Growth included ICD-10 courseware subscriptions, which positively influenced 2013 revenue. Project-based services revenue declined following completion of a large content-development project; other survey revenue also declined. These are relevant to assessing the durability and mix of growth.
- The filing identifies possible acquisition-related dilution, the risk that future financing may not be available on favorable terms, and dependence on cash generation. The revolver has financial covenants; management reported compliance at June 30, 2013.
- Marketable securities were available-for-sale; management did not consider any other-than-temporarily impaired. A hypothetical 10% decline in interest rates was estimated to reduce annualized interest income by about $49,000.
- Non-GAAP adjusted EBITDA was $6.4 million in Q2 and $11.7 million for the first half. The company cautions that this measure is not a substitute for GAAP results and excludes items including working-capital needs and capital expenditures. Non-GAAP revenue and income adjustments included deferred-revenue write-downs of $0.2 million for Q2 and $0.5 million for the first half.
- Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether subscription and ICD-10-related growth, subscriber additions, and higher revenue per implemented subscriber (up 13% to $29.40 annualized) persist after the period.
- Whether operating margins recover as cost of revenue and corporate expenses rise faster than sales, particularly research survey costs and contingent earn-out accruals.
- The sustainability of cash conversion given the increase in receivables, and the effect of NOL exhaustion on future cash taxes.
- The contribution and ongoing costs of the Sy.Med credentialing software acquisition and the SimVentures collaboration.
- How much of reported performance depends on non-GAAP adjustments, including acquired deferred-revenue write-downs, and the potential dilution from equity awards or future acquisitions.