HealthStream, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. HealthStream provides online learning and talent-management products and research services to healthcare organizations and related industries. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $33.7 | $26.4 | $95.2 | $75.9 |
| Operating income | $3.9 | $3.7 | $11.2 | $10.1 |
| Net income | $2.3 | $2.0 | $6.7 | $5.8 |
| Diluted EPS | $0.08 | $0.07 | $0.24 | $0.21 |
| Adjusted EBITDA (non-GAAP) | $6.3 | $5.7 | $18.0 | $15.7 |
- Q3 revenue grew 27.6%; operating income rose 4% and net income rose 16.1%. Nine-month revenue grew 25.5%, operating income 10.3%, and net income 14.3%.
- Q3 cost of revenue, excluding depreciation and amortization, was 41.9% of revenue versus 41.0% a year earlier. For the nine-month period it was 41.5% versus 40.2%.
- Operating cash flow for the first nine months was $22.9 million, up from $15.6 million. Cash and cash equivalents were $55.1 million; marketable securities were $49.6 million. Working capital was $86.3 million.
- No debt was outstanding; the full $20 million revolving credit facility was available. Management described the balance sheet as unleveraged and said liquidity should cover anticipated needs for at least 12 months.
- Accounts receivable days sales outstanding increased to 61 days from 55 days in Q3 2012.
Material changes and operating drivers
- Learning & Talent Management revenue increased 30.6% in Q3 and 30.3% for the nine months. Research revenue increased 17.3% and 10.5%, respectively.
- Internet-based subscription revenue benefited from subscriber growth and greater courseware consumption. Fully implemented subscribers reached 3.19 million, versus 2.87 million a year earlier; contracted subscribers were 3.41 million versus 2.98 million.
- ICD-10 training revenue was $3.9 million in Q3, up $3.3 million year over year, and $8.8 million for the nine months, up $7.8 million. A majority of new Q3 contracts for this offering were for 24-month subscriptions.
- Cost of revenue and product-development costs rose faster than revenue in Q3. Management attributed cost growth largely to courseware royalties, personnel and higher patient-survey volume. Nine-month sales and marketing expense as a share of revenue declined, partly reflecting the timing of the customer Summit.
- Other general and administrative expense rose 43.7% for the nine months, driven mainly by higher unallocated corporate personnel, professional fees, recruiting, stock compensation, rent and other costs.
Outlook, risks, and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management expects cash, investments, operating cash flow and available borrowing capacity to fund anticipated needs for at least the next 12 months.
- HealthStream acquired substantially all assets of Baptist Leadership Group on September 9 for about $7.2 million cash and 15,230 shares. The preliminary allocation included $4.6 million goodwill and $3.2 million identifiable intangibles; valuation of goodwill, intangibles and deferred revenue remained subject to change. Transaction costs were about $110,000.
- Acquisition-related deferred-revenue fair-value reductions lowered reported revenue by $0.167 million in Q3 and $0.667 million for the nine months. Management presented non-GAAP adjustments for these amounts; those measures are not substitutes for GAAP results.
- Management said remaining federal and state net operating loss carryforwards may be fully used within 12–24 months, after which cash tax payments may increase. The nine-month effective tax rate was 41.0%, compared with 42.9% in 2012.
- Key exposures include sustaining growth in subscriptions and ICD-10 training, cost pressures, acquisition integration and valuation, and potential financing availability if additional capital is needed. The company reported compliance with credit-facility covenants.
Important facts for investors to verify
- How much future subscription demand and revenue depend on ICD-10 training, and the renewal and revenue-recognition profile of 24-month contracts.
- Whether accounts receivable growth and the increase in DSO affect collections or cash conversion.
- Final purchase-price allocation and the acquired business’s contribution to Research revenue and results.
- Whether rising delivery, development and corporate costs moderate, and how that affects operating margins.
- The timing and cash-tax impact of exhausting net operating loss carryforwards.