HealthStream, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 27, 2017. HealthStream provides SaaS-based workforce development, patient experience, and provider credentialing and enrollment solutions for healthcare organizations. Its platform had approximately 4.55 million subscribers, including 4.47 million implemented subscribers, at year-end.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $226.0 million | $209.0 million | +8% |
| Operating income | $5.6 million | $13.6 million | -59% |
| Operating margin | 2.5% | 6.5% | Down 4.0 percentage points |
| Net income | $3.8 million | $8.6 million | -56% |
| Diluted EPS | $0.12 | $0.28 | Lower |
| Adjusted EBITDA (non-GAAP) | $29.9 million | $33.8 million | -12% |
| Operating cash flow | $24.2 million | $34.9 million | Lower |
- Revenue by segment: Workforce Solutions $168.0 million (+4%); Patient Experience $33.9 million (-1%); Provider Solutions $24.1 million (+78%). Provider growth primarily reflected the HealthLine Systems and Morrisey Associates acquisitions.
- Workforce subscription revenue remained the largest source of sales. ICD-10 readiness revenue fell $18.2 million to $8.5 million after the October 2015 coding-system transition. Implemented subscribers slipped to 4.47 million from 4.48 million; annualized revenue per implemented subscriber rose 1% to $37.28.
- Operating expenses grew faster than revenue, including higher product development, sales and marketing, general and administrative, and depreciation and amortization costs. Cost of revenues excluding depreciation and amortization was 43% of revenue in both years.
- Fourth-quarter 2016 revenue was $58.7 million; the company recorded an operating loss of $0.5 million and net loss of $0.3 million. This compared with fourth-quarter 2015 operating income of $1.9 million and net income of $1.8 million.
Liquidity, cash flow, and debt
- Year-end cash and cash equivalents were $49.6 million and marketable securities were $53.5 million, totaling approximately $103.2 million. Working capital was $82.5 million, down from $120.5 million in 2015.
- Operating cash flow declined to $24.2 million, with slower collections in Provider Solutions and lower deferred-revenue-related cash contribution cited as factors. Days sales outstanding rose to 66 from 61.
- Investing cash outflow was $56.7 million, including $55.3 million net cash for acquisitions, $9.7 million of capitalized software development, and $5.1 million of property and equipment purchases.
- No debt was outstanding at year-end. The company had full availability under its $50 million revolving credit facility, which matures in November 2017 and is subject to covenants; the company reported compliance at year-end.
- Goodwill was $109.8 million and identifiable intangible assets were $78.4 million. No impairment charges were recorded in 2016.
Material changes, outlook, and risks
- HealthStream acquired Performance Management Services, acquired the remaining interest in Nursing Registry Consultants, and acquired Morrisey Associates in 2016. MAI contributed $2.6 million of revenue and an operating loss of $2.4 million from its August acquisition date through year-end. Acquisition accounting reduced acquired deferred revenue, lowering subsequent GAAP revenue recognition.
- Management’s 2017 outlook: consolidated revenue growth of 10%–14%; Workforce growth of 3%–7%; Patient Experience growth of 5%–8%; Provider growth of 66%–72%; and operating-income growth of 50%–65%. Forecast excludes potential 2017 acquisitions. Planned 2017 capital expenditures, software development, and content purchases were $15 million–$17 million; expected effective tax rate was 39%–41%.
- Key risks include customer renewals and concentration, competition, long and variable sales and implementation cycles, acquisition integration and goodwill/intangible impairment, healthcare regulatory or reimbursement changes, privacy and cybersecurity incidents, service interruptions, and dependence on third-party content and technology.
- The company expected to adopt revenue-recognition standard ASC 606 on January 1, 2018, using the modified retrospective approach. It had not quantified the effect and anticipated a retained-earnings adjustment; implementation could require changes to revenue allocation, commission accounting, systems, and controls.
- Management and Ernst & Young reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion. Management said pending or threatened litigation was not expected to have a material adverse effect. The 2016 share-repurchase authorization expired without repurchases; no cash dividend was anticipated.
Important facts for investors to verify
- Whether the 2017 revenue and operating-income guidance was achieved, particularly the high forecast growth for Provider Solutions.
- Whether customer collections and DSO improved after the 2016 increase, and whether operating cash flow recovered.
- How much of revenue and profit growth came from acquired businesses versus organic performance, including acquisition integration costs and deferred-revenue accounting effects.
- Whether subscriber counts stabilized and revenue per subscriber continued to increase following the end of ICD-10 readiness sales.
- The eventual impact of ASC 606 adoption and the refinancing or replacement of the revolving facility ahead of its November 2017 maturity.