HealthStream, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. HealthStream provides workforce development and provider credentialing, privileging, and enrollment solutions to healthcare organizations. Results are unaudited. Unless noted, amounts are in millions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $62.5 | $59.9 | $191.4 | $171.8 |
| Operating income | $3.7 | $4.7 | $11.4 | $12.7 |
| Continuing-operations income | $3.5 | $3.0 | $10.6 | $10.3 |
| Net income | $3.7 | $3.0 | $12.1 | $29.4 |
| Diluted EPS | $0.11 | $0.09 | $0.37 | $0.91 |
| Adjusted EBITDA from continuing operations (non-GAAP) | $11.5 | $11.1 | $35.7 | $32.1 |
- Q3 revenue grew 4%; Workforce Solutions rose 4% to $51.0 million and Provider Solutions rose 6% to $11.4 million. Nine-month revenue grew 11%, with both segments contributing.
- Q3 operating income fell 20%, and operating margin was approximately 6.0%, versus 7.8% a year earlier. Management cited higher personnel, product development, administrative, depreciation and amortization costs. Q3 continuing income rose despite lower operating income, with other income improving year over year.
- Nine-month net income and EPS were substantially lower than 2018 mainly because 2018 included the gain on the sale of the Patient Experience business. Continuing-operations income and adjusted EBITDA from continuing operations increased year over year.
- Operating cash flow was $52.5 million for the first nine months, versus $29.8 million in 2018. Cash and cash equivalents were $133.9 million at September 30; marketable securities were $38.7 million. Working capital was $123.3 million.
- No revolving-facility borrowings were outstanding. The company had a $50 million facility available, with maturity on November 24, 2020, and reported compliance with its covenants.
Material changes and notable items
- HealthStream acquired Providigm for $18.0 million in cash in January 2019. It contributed $5.2 million of revenue for the first nine months and recorded an operating loss of $0.5 million over that period. Purchase accounting remains preliminary; up to $0.5 million of additional consideration may be payable based on performance.
- Legacy HeartCode and Resuscitation Quality Improvement (RQI) products generated $13.4 million of Q3 revenue, down from $15.0 million, but $46.3 million for the first nine months, up from $40.5 million. Management expects legacy-agreement revenue to decline sequentially through the remainder of 2019 and throughout 2020, approximate $12.6 million in Q4 2019, and reach zero in Q1 2021.
- The new RQI Partners arrangement does not replace the expired legacy agreements; HealthStream does not market or sell those products under it and had recognized no material revenue under the arrangement as of quarter-end. The new American Red Cross resuscitation offering was in early marketing and implementation, with de minimis revenue to date.
- The CEO donated shares for employee awards in June. The company recorded approximately $2.0 million of stock-based compensation and $0.2 million of payroll-tax expense in Q2; nine-month stock-based compensation expense was $3.6 million, versus $1.3 million in 2018.
- Adoption of the lease accounting standard added operating lease right-of-use assets and liabilities. At quarter-end, lease liabilities totaled $33.8 million, including a new corporate-headquarters lease; the weighted-average remaining lease term was 10.8 years.
- The 2018 Patient Experience divestiture generated a $1.4 million after-tax gain in the first nine months of 2019 from release of escrow funds. In 2018, the sale produced most of the $19.1 million of discontinued-operations income reported for the comparable nine-month period.
Outlook, risks and contingencies
- Management stated that cash, marketable securities, operating cash flow and available borrowing capacity should be sufficient for anticipated working capital, product development and capital expenditure needs for at least 12 months. No broader revenue or earnings guidance was provided in the filing.
- The company expects legacy HeartCode/RQI revenue to run off as described above. Management believes replacement simulation products may create additional, higher-margin opportunities, but cautions there is no assurance these offerings will offset the legacy revenue decline; failure to do so could adversely affect revenue and results.
- Remaining performance obligations were $420 million at September 30; approximately 48% was expected to be recognized over the next 12 months. These contracted amounts are not a guarantee of future results.
- Risks discussed include execution of new product and acquisition strategies, the possibility that additional financing may not be available on acceptable terms, and potential dilution from issuing stock for acquisitions or capital. The company also disclosed exposure to interest-rate changes; a hypothetical 10% decrease in rates would reduce annualized interest income by an estimated $375,000.
- The Providigm purchase-price allocation remains subject to adjustment, including valuation of intangible assets and indemnification-related items. The filing reports no outstanding debt and no material foreign-exchange or commodity-price risk.
Investor verification priorities
- Track the pace of legacy HeartCode/RQI revenue declines and whether new resuscitation and simulation offerings produce meaningful replacement revenue and margins.
- Assess the quality and sustainability of operating cash flow, including working-capital movements, and the growth in operating costs relative to revenue.
- Review Providigm’s post-acquisition performance, final purchase accounting, and any contingent earn-out payment.
- Separate recurring operating performance from discontinued-operation gains, non-GAAP adjustments, and the unusual employee stock award expense.
- Monitor lease obligations, the revolver’s November 2020 maturity, covenant compliance, and the company’s capacity for planned investment or acquisitions.