HealthStream, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. HealthStream provides workforce development, patient experience, and provider credentialing and related solutions to healthcare organizations. This unaudited filing covers the three and nine months ended September 30, 2016; comparisons are with the same 2015 periods unless noted. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $58.4 | $53.8 | $167.2 | $153.1 |
| Operating income | $1.3 | $4.3 | $6.1 | $11.7 |
| Net income | $1.2 | $2.6 | $4.1 | $6.8 |
| Diluted EPS | $0.04 | $0.08 | $0.13 | $0.23 |
| Adjusted EBITDA (non-GAAP) | $7.8 | $9.3 | $23.7 | $26.5 |
- Q3 revenue grew 8%, while operating income fell 70% and net income fell about 56%. Nine-month revenue grew 9%, while operating income declined 48% and net income declined 40%.
- Q3 operating margin was approximately 2.2%, versus 8.0% a year earlier. Cost of revenue excluding depreciation and amortization was 43% of revenue in both quarters; product development, sales and marketing, and general and administrative expense increased.
- For the first nine months, operating cash flow was $15.0 million, down from $25.5 million. Investing cash outflow was $57.6 million and financing cash inflow was $0.4 million. Cash and cash equivalents ended the period at $39.8 million.
- At September 30, cash plus marketable securities totaled $100.6 million. Working capital was $77.8 million, down from $120.4 million at December 31, 2015. The company had no revolver borrowings and reported material compliance with covenants; its facility provided up to $50 million, subject to its terms and covenants.
Material changes and business developments
- Workforce revenue rose 5% in Q3 and 5% year to date. Subscription and enterprise application growth was partly offset by the expected wind-down of ICD-10 readiness products: related revenue decreased $5.0 million in Q3 and $12.8 million year to date. Implemented subscribers fell 1% year over year to 4.39 million, while annualized revenue per implemented subscriber increased to $37.80 from $35.82.
- Patient Experience revenue increased 2% in Q3 and 1% year to date. Q3 Patient Insights survey revenue declined 5%, partly offset by growth in other survey and consulting engagements.
- Provider revenue rose 63% in Q3 and 85% year to date, principally reflecting the HealthLine Systems and Morrisey Associates acquisitions. Morrisey Associates (MAI) was acquired in August for $48 million cash; it contributed $0.8 million revenue and a $1.0 million operating loss from acquisition through quarter-end. The company also acquired Performance Management Services and the remaining interest in Nurse Competency during 2016.
- Expense growth, including higher development and selling costs, acquisition-related amortization, and corporate costs, contributed to lower profitability. Q3 included approximately $0.85 million of costs associated with evaluating business development opportunities. Nine-month corporate expense also included $0.6 million for a new financial systems platform.
Outlook, risks, and unusual items
- The filing gives no quantified revenue, earnings, or margin guidance. Management said available cash, securities, operating cash generation, and the unused credit facility should cover anticipated working capital, product development, and capital expenditure needs for at least 12 months.
- Management cited slower customer collections and reduced deferred revenue as factors in lower operating cash flow. Days sales outstanding increased to 68 days from 57 a year earlier, primarily due to slower Provider Solutions collections.
- Acquisition accounting reduced acquired deferred revenue to fair value, lowering revenue recognized after acquisitions. MAI’s preliminary deferred revenue fair-value adjustment was $4.9 million; the HLS acquisition included a $9.0 million write-down. The company’s non-GAAP measures exclude certain deferred-revenue write-down effects and should not be treated as GAAP results.
- The HLS tax-indemnification claim was settled for approximately $2.4 million. A $0.2 million difference from the earlier measurement-period estimate was charged to Q3 net income. The company also recorded a $0.2 million gain on remeasuring its previously held Nurse Competency interest.
- The company identified risks from acquisition integration and financing needs, potential dilution from issuing shares for acquisitions or capital, and collection and cash-flow variability. Its $50 million revolver matures November 24, 2017 and includes leverage and interest-coverage covenants.
- The filing says disclosure controls were effective. Implementation of a new enterprise accounting system in Q2 required changes to certain internal controls; management reported no other material control changes during the quarter.
Most important facts for investors to verify
- Whether subscription growth can offset the continued loss of ICD-10 readiness revenue, and whether subscriber and revenue-per-subscriber trends persist.
- Provider Solutions collections, DSO, and operating performance as MAI and other acquisitions are integrated.
- Whether operating cash flow improves and working capital remains adequate after acquisition spending.
- The eventual purchase-accounting valuations, amortization burden, and revenue effects of acquired deferred-revenue write-downs.
- Future margins and earnings compared with GAAP results, including the effect of non-GAAP adjustments and acquisition-related costs.