HealthStream, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results. HealthStream provides workforce development and provider credentialing solutions to healthcare organizations. Patient Experience (PX) is presented as discontinued operations following its February 12, 2018 sale.
Financial performance
Amounts below are in millions of dollars, except per-share data. Continuing-operations comparisons are year over year.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $57.0 | $52.9 | $111.9 | $104.9 |
| Operating income | $4.3 | $2.8 | $8.0 | $5.2 |
| Continuing-operations income | $3.7 | $2.2 | $7.3 | $3.9 |
| Net income | $2.5 | $2.3 | $26.4 | $3.6 |
| Diluted EPS, continuing operations | $0.11 | $0.07 | $0.23 | $0.12 |
| Diluted EPS, total | $0.08 | $0.07 | $0.82 | $0.11 |
- Q2 revenue rose 8%; Workforce Solutions revenue grew 6% to $47.0 million, and Provider Solutions grew 16% to $10.0 million. Implemented Workforce subscribers increased 6% year over year to 4.748 million.
- Q2 operating margin was approximately 7.5%, versus 5.3% a year earlier; cost of revenue excluding depreciation and amortization was 41% of revenue versus 40%. Continuing-operations income increased 64%.
- Six-month continuing-operations adjusted EBITDA, a non-GAAP measure, was $20.9 million, up 17%. Q2 adjusted EBITDA from continuing operations was $10.7 million, up 16%. Total six-month net income and adjusted EBITDA include the PX disposal and should not be read as recurring operating performance.
- Continuing operating cash flow was $16.2 million for the six months, down from $21.2 million. Cash and cash equivalents were $122.6 million and marketable securities $43.0 million at June 30. Working capital was $128.4 million.
- No revolving-credit borrowings were outstanding. The $50 million facility was available, subject to covenants, and scheduled to mature November 24, 2018. The filing reports compliance with covenants. No other debt balance is reported.
Changes, unusual items, and accounting
- PX was sold to Press Ganey for $65.5 million cash, subject to working-capital adjustment. The company reported a $19.1 million after-tax gain for the six months; $6.55 million of sale proceeds was held in escrow. Q2 discontinued-operations loss of $1.1 million primarily reflected a reduction in the previously recognized sale gain.
- A special $1.00-per-share dividend, declared in February and paid April 3, used $32.4 million of cash. Six-month net income of $26.4 million includes the PX gain; continuing-operations income was $7.3 million.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. It increased reported Q2 revenue by $456,000 and continuing-operations income by $256,000; six-month revenue by $448,000 and continuing-operations income by $1.3 million, compared with prior accounting. Capitalized deferred commissions were $13.0 million at June 30.
- Management attributed revenue growth to subscription-based products and Provider Solutions growth. Comparisons also benefited from lower deferred-revenue write-downs: $30,000 in Q2 2018 versus $548,000 in Q2 2017; $76,000 for six months versus $1.4 million.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance is provided. Management stated cash, investments, operating cash generation, and available credit should cover anticipated needs for at least the next 12 months.
- About $365 million of revenue was expected from remaining customer performance obligations at June 30; approximately 48% was expected to be recognized in the following 12 months. This is a contracted-obligation estimate, not company guidance.
- Laerdal notified HealthStream it would not renew its HeartCode and Resuscitation Quality Improvement (RQI) agreements after December 31, 2018. The products have generated significant revenue, though at below-average margins. HealthStream plans broader simulation offerings, including resuscitation programs after expiration, but states there is no assurance these offerings will replace revenue or earnings from the agreements.
- The credit facility’s November 2018 maturity, covenant limits, and the potential need for additional financing are liquidity considerations. The company also identifies interest-rate exposure; a hypothetical 10% fall in rates would reduce annualized interest income by about $409,000.
- Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. The filing describes ordinary forward-looking-statement risks and says actual results may differ.
Important facts for investors to verify
- Recurring growth and margins excluding ASC 606 effects, lower acquired deferred-revenue write-downs, and the PX disposal.
- PX escrow and working-capital adjustments, including subsequent changes to the contingent sale proceeds.
- Renewal or replacement revenue and earnings for HeartCode and RQI after the Laerdal agreements expire.
- Renewal, amendment, or replacement of the $50 million credit facility before its November 24, 2018 maturity.
- Cash conversion, deferred commissions, and the timing of the $365 million remaining performance obligations.