Business context and reporting period
HealthStream, Inc. provides primarily SaaS-based applications for healthcare organizations. Its Workforce Solutions business supports workforce learning, development, scheduling and related needs; Provider Solutions provides credentialing, privileging and enrollment services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $67.3m | $64.1m | $198.3m | $192.4m |
| Operating income | $2.4m | $1.8m | $9.4m | $8.5m |
| Net income | $3.7m | $1.5m | $9.6m | $6.2m |
| Diluted EPS | $0.12 | $0.05 | $0.31 | $0.20 |
| Adjusted EBITDA (non-GAAP) | $12.7m | $12.5m | $39.8m | $40.6m |
| Operating margin | 3.5% | 2.8% | 4.7% | 4.4% |
- Q3 revenue increased 5%; Workforce Solutions grew 6% and Provider Solutions 2%. Nine-month revenue rose 3%, with Workforce Solutions up 3% and Provider Solutions up 5%.
- Q3 net income included a $2.7m gain on sale of a non-marketable equity investment; management said the gain increased net income by $2.1m after tax and diluted EPS by $0.07. Nine-month other income also included a $0.9m gain from remeasuring HealthStream’s prior CloudCME interest.
- Q3 adjusted EBITDA increased 2%, while nine-month adjusted EBITDA declined 2%. Adjusted EBITDA is a non-GAAP measure; the company’s reconciliation includes adjustments for items such as investment gains, stock compensation and depreciation and amortization.
- Operating cash flow was $43.1m for the nine months, compared with $36.4m in 2021. Investing used $18.0m and financing used $23.7m, including $23.1m for share repurchases. Cash and cash equivalents ended at $48.3m, versus $46.9m at year-end 2021.
- At September 30, 2022, marketable securities were $3.6m; working capital was negative $1.0m, compared with positive $6.5m at December 31, 2021. The company had no revolving-credit borrowings and was in covenant compliance. Its $65m facility was available, with maturity on October 28, 2023.
- For the nine months, cost of revenue excluding depreciation and amortization was 34% of revenue versus 35% a year earlier. Operating margin improved year over year in both comparison periods. The filing does not provide a separately stated gross margin.
Material changes and notable items
- Revenue growth reflected acquisition contributions and subscription growth, partially offset by declines in legacy resuscitation products: $0.4m in Q3 and $3.1m for the nine months. The company said the legacy declines were expected.
- HealthStream acquired the remaining approximately 82% of CloudCME on May 18 for about $4.0m cash and $4.1m in HealthStream shares. CloudCME results are included in Workforce Solutions from the acquisition date; the acquisition was reported as not material to the financial statements.
- The company repurchased $23.1m of common stock during the first nine months. No repurchases occurred in Q3. The expanded authorization had approximately $1.9m remaining at September 30 and was scheduled to terminate by March 13, 2023, or when exhausted.
- hStream contracted subscriptions were approximately 5.35m at September 30, 2022, versus 4.92m a year earlier. Revenue expected from remaining performance obligations was approximately $473m; about 44% was expected to be recognized over the next 12 months.
Outlook, commentary and risks
- The company provided no specific revenue, profit or other numeric financial guidance in this filing. Management said existing cash, operating cash generation and available credit should cover anticipated working capital, product development and capital expenditure needs for at least 12 months.
- Management reported increased bookings in the first nine months versus the prior year and expected a positive revenue contribution during the remainder of 2022. It also said pandemic-era delayed bookings and renewals continued to weigh on 2022 revenue growth.
- Healthcare staffing shortages and higher labor costs have delayed some elective-product sales. Inflation, recessionary concerns, supply-chain disruption and difficult labor conditions may adversely affect the company and its customers. Management noted that some learning and compliance activity had returned to or exceeded pre-pandemic levels.
- Other risks include execution of the hStream platform strategy, acquisition and integration outcomes, possible dilution from stock-funded acquisitions or capital raising, investment valuation volatility and foreign-currency exposure. The company reported no material changes to risk factors disclosed in its 2021 Form 10-K.
Important facts for investors to verify
- How much reported earnings growth depends on the non-marketable investment sale and CloudCME remeasurement gains, and how underlying operating performance trends without those items.
- Whether bookings convert to revenue as anticipated, and whether labor constraints, legacy resuscitation declines or customer spending conditions affect growth.
- The sustainability of adjusted EBITDA and operating-margin trends alongside higher development, sales and marketing expenses; review the non-GAAP reconciliation and its adjustments.
- Working-capital movement, cash requirements for software development and repurchases, and the availability or renewal of the credit facility before its October 2023 maturity.
- CloudCME integration and contribution, remaining performance obligations, and progress in growing hStream subscriptions and the broader platform strategy.