HealthStream, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012, compared with the three months ended March 31, 2011, unless otherwise noted. HealthStream provides internet-based learning, education and training, survey, and research services primarily to healthcare organizations.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $23.7 million | $18.5 million | +27.9% |
| Operating income | $2.3 million | $2.6 million | Lower by $216,000 |
| Net income | $1.4 million | $1.5 million | -6.9% |
| Diluted EPS | $0.05 | $0.07 | Lower |
| Adjusted EBITDA | $4.1 million | $3.8 million | +8.4% |
| Operating cash flow | $3.4 million | $3.5 million | Lower by $129,000 |
Learning revenue rose 37.0% to $17.8 million, driven by subscription growth and consumption, project-based services, and SimVentures revenue. Fully implemented HLC subscribers increased to 2.659 million from 2.400 million; contracted subscribers increased to 2.790 million from 2.523 million. Research revenue rose 6.5% to $5.9 million: Patient Insights survey revenue grew, partly offset by fewer other survey engagements.
Operating costs and expenses increased 33.8% to $21.3 million, faster than revenue. Cost of revenues increased to 40.4% of revenue from 38.2%, reflecting higher royalties and service-delivery costs. Sales and marketing rose 57.8% to $5.5 million; depreciation and amortization rose 47.1% to $1.5 million. Operating margin was approximately 9.9%, versus 13.8%; net margin was approximately 6.0%, versus 8.2%. Adjusted EBITDA is a non-GAAP measure; the filing cautions it is not a substitute for GAAP results or cash flow.
Liquidity, cash flow, and debt
At March 31, 2012, cash and cash equivalents were $24.3 million and marketable securities were $67.3 million, totaling approximately $91.6 million. Cash declined by $52.6 million during the quarter, primarily as the company purchased $58.4 million of marketable securities; investing cash outflow was $56.6 million. The filing reports working capital of $80.7 million, compared with $78.6 million at December 31, 2011.
Operating cash flow was $3.4 million. The company had no outstanding debt and all $20.0 million of its revolving credit facility was available. Management stated existing liquidity, operating cash generation, and available borrowing capacity should meet anticipated needs for at least 12 months. The company reported compliance with credit-facility covenants.
Material changes, outlook, and risks
- Net income and operating income declined despite strong revenue growth, reflecting higher operating costs and expenses. EPS was also affected by approximately 3.6 million additional shares from the fourth-quarter 2011 stock offering.
- The timing of the annual customer Summit affected the comparison: it was held in Q1 2012 versus Q2 2011. Q1 2012 included approximately $300,000 of Summit registration revenue and about $870,000 of Summit-related sales and marketing expense; management cited approximately $520,000 in net Summit costs.
- SimVentures, the 50%-profit/loss collaborative arrangement with Laerdal Medical, generated approximately $374,000 of revenue and $0.5 million of expense in Q1 2012; it had no revenue and $0.1 million of expense in Q1 2011. Approximately $0.4 million of related software development was capitalized in Q1 2012.
- No specific revenue or earnings forecast was provided. Management noted that remaining federal and state net operating loss carryforwards could be fully utilized within about 24 months; cash tax payments may rise significantly thereafter.
- Risks discussed include uncertainty in future results, availability and terms of future financing, potential dilution from stock-funded acquisitions, interest-rate exposure, and execution of growth and product-development plans. The company reported no material debt, foreign-currency risk, or commodity-price risk. A hypothetical 10% decline in interest rates would reduce annualized interest income by approximately $16,000.
Important facts for investors to verify
- Whether Learning subscription growth and subscriber implementation continue, and how much revenue growth depends on courseware consumption and project-based services.
- Whether operating costs—especially royalties, sales and marketing, and amortization—moderate relative to revenue growth.
- The effect of Summit timing on future quarter comparisons and the underlying recurring profitability of the business.
- Cash generation and the composition, maturities, and risk profile of the marketable-securities portfolio.
- The timing of NOL utilization and the resulting change in cash taxes, as well as the potential dilution from share issuance or acquisitions.