HealthStream, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. HealthStream provides SaaS-based workforce training and talent solutions and provider credentialing, privileging, and enrollment solutions to healthcare organizations. Following its February 2018 sale of Patient Experience (PX), the company reported two continuing segments: Workforce Solutions and Provider Solutions.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $231.6 million | $214.9 million | +8% |
| Operating income | $15.5 million | $9.4 million | +65% |
| Continuing-operations income | $13.3 million | $8.8 million | +50% |
| Net income | $32.2 million | $10.0 million | +222% |
| Diluted EPS | $1.00 | $0.31 | — |
| Operating cash flow, consolidated | $43.2 million | $46.7 million | Lower |
Operating margin was approximately 6.7%, up from 4.4%; continuing-operations net margin was approximately 5.7%, versus 4.1%. The $19.0 million after-tax gain on the PX sale was the primary reason net income rose substantially more than continuing-operations income. Adjusted EBITDA from continuing operations, a non-GAAP measure, was $41.5 million, up from $35.2 million. The filing also reports total adjusted EBITDA of $71.1 million; that measure includes discontinued-operation results and should not be read as recurring continuing-business earnings.
- Segments: Workforce Solutions revenue was $190.1 million (+7%); Provider Solutions revenue was $41.5 million (+13%). Workforce Solutions accounted for 82% of revenue and Provider Solutions 18%.
- Fourth quarter: Revenue was $59.8 million, operating income $2.8 million, continuing-operations income $2.9 million, and net income $2.8 million. The PX sale gain was recorded in the first quarter.
- Cash and debt: Cash and cash equivalents were $134.3 million and marketable securities $34.5 million at year-end, totaling $168.8 million. No debt was outstanding; the $50 million revolving facility was fully available and the company was covenant-compliant.
- Liquidity: Working capital was $134.6 million, versus $98.7 million a year earlier. Continuing-operations operating cash flow was $44.3 million; consolidated operating cash flow, including discontinued operations, was $43.2 million. DSO improved to 59 days from 64.
Material changes versus prior year
- PX was sold to Press Ganey for $65.2 million in cash; $6.55 million of proceeds was held in escrow. The sale generated a $29.5 million pretax gain and $19.0 million gain after tax. HealthStream paid a one-time $1.00-per-share special dividend, totaling approximately $32.4 million.
- Revenue growth continued in both remaining segments. Workforce implemented subscribers rose 4% to 4.82 million; total subscribers reached 4.93 million. The company introduced hStream subscriptions as a new progress measure, reporting 1.51 million under contract.
- ASC 606 was adopted in 2018 using the modified retrospective method; prior-year figures were not restated. Compared with the prior accounting method, adoption increased 2018 revenue by $0.7 million, operating income by $3.7 million, and net income by $3.0 million, largely reflecting capitalization of sales commissions. Comparisons are therefore not fully like-for-like.
- Provider Solutions benefited from higher product sales and lower deferred-revenue write-downs. Overall sales and marketing expense fell partly because ASC 606 capitalizes eligible contract acquisition commissions.
- The 2018 effective tax rate was approximately 20%, compared with 13% in 2017; 2017 included a $1.7 million tax benefit from the Tax Act’s deferred-tax revaluation.
Outlook, commentary, and risks
- 2019 guidance: Revenue of $251–$258 million, comprising Workforce Solutions of $207–$213 million and Provider Solutions of $44–$45 million; operating income of $10.0–$12.4 million; capital expenditures of approximately $35 million; and an effective tax rate of 26%–28%. Guidance includes the January 2019 Providigm acquisition and excludes any other 2019 acquisitions.
- Management expects higher 2019 costs for the Nashville office consolidation, product development, resuscitation-product sales, and Providigm integration and growth initiatives. Approximately $15 million of planned capital expenditures relates to the office move.
- Legacy Laerdal agreements for HeartCode and RQI expired at year-end 2018 and will not be renewed. These products generated approximately $55 million of 2018 revenue; management expected 2019 legacy-agreement revenue to modestly exceed that level, peak near midyear, and run down to zero in the first quarter of 2021. The RQI Partners arrangement provides delivery-related fees but is not expected to replace the legacy revenue. New American Red Cross resuscitation offerings may create opportunities, but success is uncertain.
- The January 2019 Providigm acquisition cost $18 million in cash, with up to $0.5 million additional contingent consideration. The filing says acquisition accounting was incomplete.
- Key risks include the expected runoff of legacy resuscitation revenue; customer renewal, pricing, and lengthy sales-cycle uncertainty; customer financial distress and collection risk; healthcare-sector concentration; cybersecurity, privacy, and regulatory exposure; and execution, integration, and impairment risks. PX-sale indemnities and transition arrangements may also expose the company to claims. Bad-debt expense was $1.0 million in 2018, down from $1.6 million in 2017.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The filing reports no material pending legal proceedings, while noting ordinary-course litigation and possible risks associated with such matters.
Important facts for investors to verify
- Track the pace and margin impact of the HeartCode/RQI revenue runoff and whether new resuscitation products replace lost revenue.
- Assess the quality and sustainability of earnings by separating continuing operations from the PX sale gain and reviewing ASC 606’s commission-capitalization effect.
- Monitor segment growth, subscriber and hStream subscription trends, customer renewals, and Provider Solutions implementation timing.
- Verify performance against 2019 guidance, including office-relocation spending, Providigm integration, and the higher projected tax rate.
- Review customer credit quality, remaining PX escrow and indemnification exposure, and compliance with privacy, security, and credit-facility requirements.