HealthStream, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. HealthStream provides workforce-development and research/patient-experience products and services to healthcare organizations and other healthcare-industry customers. Figures below are in millions of dollars except per-share data and subscriber counts.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $44.5 | $33.7 | $125.4 | $95.2 |
| Operating income | $4.7 | $3.9 | $12.1 | $11.2 |
| Net income | $3.4 | $2.3 | $7.7 | $6.7 |
| Diluted EPS | $0.12 | $0.08 | $0.28 | $0.24 |
| Adjusted EBITDA (non-GAAP) | $7.9 | $6.3 | $21.3 | $18.0 |
| Operating cash flow | Not separately presented for quarter | $28.7 | $23.2 |
- Q3 revenue increased 32.3%, operating income 22%, net income 49.7%, and adjusted EBITDA 26.2% year over year. Nine-month revenue rose 31.6%, while net income rose 16.4%.
- Q3 cost of revenue was 42.9% of revenue versus 41.9% a year earlier; for the nine-month period it was 43.7% versus 41.5%. Operating margin, calculated from reported figures, was approximately 10.6% in Q3 versus 11.5%; nine-month margin was approximately 9.7% versus 11.7%.
- Workforce Development generated $36.3 million of Q3 revenue, up 36.6%; Research/Patient Experience generated $8.2 million, up 16.3%. Nine-month segment revenues were $101.6 million and $23.7 million, respectively.
- Q3 revenue growth reflected subscription growth and courseware consumption. ICD-10 training revenue was $7.4 million, versus $3.9 million a year earlier; HCCS contributed $1.9 million. Implemented subscribers reached 3.83 million, up 19.7%, and annualized revenue per implemented subscriber rose 16% to $35.91.
- Nine-month operating cash flow increased 23.5%. Investing used $23.6 million, including $12.3 million net for acquisitions, $4.0 million for capitalized software development, and $3.0 million for property and equipment. Cash and equivalents increased to $64.9 million from $59.5 million at year-end 2013.
Financial position and liquidity
- At September 30, 2014, cash and equivalents were $64.9 million and marketable securities were $51.5 million, totaling $116.4 million. Working capital was $88.5 million, compared with $90.9 million at December 31, 2013.
- The company reported no outstanding debt and full availability under its $20 million revolving credit facility. The facility was due to expire November 19, 2014; management intended to renew it on equal or better terms. The company stated existing liquidity and expected operating cash flows should meet anticipated needs for at least 12 months.
- Management reported compliance with credit-facility covenants. The facility has financial covenants and borrowing availability depends on covenant calculations.
Changes, outlook, and notable items
- Revenue and costs both grew substantially. Higher royalties and personnel costs contributed to increased cost of revenue; research/patient-experience costs also rose as a share of segment revenue. Product-development spending increased, primarily for workforce-development products.
- Q3 effective tax rate was 28.3%, compared with 41.5%, principally due to approximately $670,000 of research-and-development tax credits. The nine-month effective rate was 36.8%, versus 41.0%. Management expected remaining federal and state net operating loss carryforwards to be used within 12 months, after which cash tax payments were expected to increase significantly.
- On March 3, 2014, HealthStream acquired HCCS for approximately $12.8 million cash and 81,614 shares; up to $750,000 of additional contingent payments may be due. The preliminary allocation included $6.9 million goodwill and $8.4 million identifiable intangible assets. The allocation remained subject to change. A $1.5 million acquired deferred-revenue write-down will reduce revenue otherwise recognizable for those services; acquisition transaction costs included $365,000 in the first nine months of 2014.
- Management provided no specific financial guidance in the supplied filing text. It cited continued product development and potential complementary acquisitions as part of its growth strategy. It cautioned that acquisitions and additional financing may not be available on acceptable terms, and that issuing shares could dilute EPS.
- ICD-10 courseware was a significant contributor to current-period growth. Investors should assess the durability of this contribution and subscriber growth. The filing also notes that actual results may differ from forward-looking statements and identifies revenue recognition, taxes, software-development costs, goodwill and intangibles, receivables, and stock compensation as critical accounting areas.
- The company reclassified acquisition earn-out payments from operating to financing cash flows and revised comparative 2013 cash-flow presentation, describing the corrections as immaterial. The reclassification increased reported nine-month 2013 operating cash flow by $357,000 and reduced financing cash flow by the same amount; it did not change total cash flow.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscriber growth, revenue per implemented subscriber, and courseware consumption persist, including the contribution and timing of ICD-10 training revenue.
- HCCS integration, the final purchase-price allocation, contingent consideration, and the effects of acquired deferred-revenue write-downs on reported revenue.
- Whether operating-cost growth moderates and margins recover, particularly royalties, personnel costs, product development, and research/patient-experience delivery costs.
- Renewal terms and continued availability of the $20 million revolving credit facility, along with covenant compliance and liquidity needs.
- The timing and cash-flow effect of NOL exhaustion and the resulting increase in cash taxes; also distinguish GAAP results from management’s non-GAAP adjusted EBITDA.