HealthStream, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. HealthStream provides workforce development solutions and research/patient-experience services to healthcare organizations. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $42.5 | $31.9 | $80.8 | $61.6 |
| Operating income | $4.1 | $4.1 | $7.4 | $7.3 |
| Net income | $2.4 | $2.4 | $4.3 | $4.4 |
| Diluted EPS | $0.08 | $0.09 | $0.15 | $0.16 |
| Adjusted EBITDA (non-GAAP) | $7.3 | $6.4 | $13.3 | $11.7 |
- Q2 revenue increased 33.1%; six-month revenue increased 31.3%. Workforce Development generated $34.4 million in Q2 revenue, up 36.9%; Research/Patient Experience generated $8.1 million, up 19.1%.
- Cost of revenue, excluding depreciation and amortization, rose to 44.1% of revenue in both the quarter and first half, from 40.3% and 41.2%, respectively. Corresponding gross margins were 55.9% versus 59.7% in Q2 and 55.9% versus 58.8% for the first half. Operating margins were 9.7% versus 12.9% in Q2 and 9.2% versus 11.8% for the first half.
- Management attributed higher cost of revenue primarily to courseware royalties and personnel costs, including costs associated with BLG and higher patient-survey volume. Product development and depreciation/amortization also increased.
- Q2 annualized revenue per implemented subscriber rose 20.3% to $35.39. Implemented subscribers reached 3.69 million, up 18.4%; total subscribers were 3.98 million, up 22.0%.
- ICD-10 training revenue was $7.2 million in Q2 and $13.8 million for the first half, versus $2.9 million and $4.9 million in the comparable 2013 periods.
Cash, liquidity, and capital
- Six-month operating cash flow was $22.1 million, versus $11.4 million in 2013; management cited higher cash receipts. DSO was 66 days, compared with 63 days a year earlier.
- Cash and cash equivalents were $60.9 million and marketable securities were $50.9 million at June 30, totaling $111.8 million. Working capital was $85.3 million, down from $90.9 million at year-end 2013.
- Investing activities used $20.8 million, including $12.5 million net cash for acquisitions, $2.7 million for capitalized software development, and $2.4 million for property and equipment. Cash ended the period at $60.9 million.
- The company had no outstanding debt and full availability under its $20 million revolving credit facility, which was due to expire August 21, 2014. It was in compliance with covenants and intended to renew the facility on equal or better terms.
- Management believed available liquidity and operating cash flow would meet anticipated needs for at least 12 months. It expected remaining tax-loss carryforwards to be used within 12–24 months, after which cash tax payments were expected to increase significantly.
Material developments, outlook, and risks
- HealthStream acquired Health Care Compliance Strategies (HCCS) on March 3 for approximately $13.0 million cash and 81,614 shares; up to $750,000 of additional consideration is contingent on performance milestones. HCCS contributed $1.1 million of Q2 revenue and $1.2 million for the first half. Purchase accounting remained preliminary, including valuations of intangible assets, goodwill, deferred revenue, contingent consideration, and working capital.
- The company recorded approximately $500,000 of HCCS transaction costs, including $350,000 in the first half. The preliminary purchase allocation included $7.5 million goodwill and $7.6 million identifiable intangible assets. Acquired-contract deferred-revenue write-downs reduced reported revenue; management also presented non-GAAP results adding back these adjustments.
- No specific full-year financial guidance was provided in the supplied filing text. Management cited subscriber growth, courseware consumption, and new-product investment; the filing also highlights acquisition plans and potential dilution from issuing stock for acquisitions or capital raising.
- Risks noted include uncertainty in forward-looking results, financing availability for acquisitions, revolving-facility covenants, and reliance on cash generation. The filing states that the HCCS purchase allocation is subject to revision. Management also disclosed an immaterial cash-flow classification correction, moving acquisition earn-out payments from operating to financing activities.
- The company adopted no new revenue-recognition standard in this period; it was assessing the impact of ASU 2014-09, effective for annual periods beginning after December 15, 2016, with early adoption prohibited. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether subscriber and courseware growth, particularly ICD-10-related revenue, is sustainable as training demand changes.
- Whether rising delivery costs and investment spending constrain operating-margin improvement despite rapid revenue growth.
- Final HCCS purchase accounting, contingent consideration, integration results, and the acquired business’s contribution to earnings and cash flow.
- Renewal terms and availability of the $20 million revolving credit facility, and the timing and effect of tax-loss carryforward exhaustion.
- Reconciliation and comparability of management’s non-GAAP adjusted EBITDA and revenue measures with GAAP results.