HealthStream, Inc. — Q1 2013 Form 10-Q
Business and period: HealthStream provides internet-based learning and talent management products, along with survey and research services for healthcare organizations. This unaudited report covers the three months ended March 31, 2013, compared with Q1 2012; balance-sheet comparisons are with December 31, 2012. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $29.65 | $23.67 | +25.2% |
| Operating income | $3.17 | $2.34 | +35.5% |
| Net income | $1.94 | $1.42 | +36.6% |
| Diluted EPS | $0.07 | $0.05 | Higher |
| Adjusted EBITDA (non-GAAP) | $5.36 | $4.12 | +30.2% |
Operating margin increased to approximately 10.7% from 9.9%; net margin was approximately 6.5% versus 6.0%. Cost of revenues excluding depreciation and amortization rose to 42.2% of revenue from 40.4%, reducing the corresponding gross margin to 57.8% from 59.6%. The effective tax rate was 39.7%, essentially unchanged from 39.8%.
- Revenue by segment: Learning & Talent Management revenue was $23.14 million, up 30.0%; Research revenue was $6.51 million, up 10.7%. Segment operating income before unallocated costs was $6.82 million and $0.30 million, respectively; unallocated operating costs were $3.94 million.
- Cash flow: Operating activities provided $3.86 million, versus $3.41 million. Investing activities used $2.07 million, including $1.07 million of capitalized software development and $0.74 million of property and equipment purchases; marketable-security purchases and maturities were nearly offsetting. Financing activities provided $0.74 million, principally from stock-plan activity.
- Liquidity and debt: Cash and cash equivalents were $43.89 million and short-term marketable securities were $51.71 million at March 31, totaling approximately $95.6 million. Working capital was $86.0 million, versus $83.3 million at year-end. No debt was outstanding; the $20 million revolving facility was fully available, and the company reported covenant compliance.
- Other measures: Fully implemented subscribers rose to 3.03 million from 2.66 million year over year; contracted subscribers increased to 3.17 million from 2.79 million. Annualized revenue per implemented subscriber was $28.47, up 16%. DSO was 59 days versus 63 days.
Material changes and management commentary
Learning and Talent Management subscription revenue grew $5.1 million, attributed to more subscribers and increased courseware consumption. Research growth was led by Patient Insights surveys. Project-based services revenue declined, and Q1 2012 included approximately $0.3 million of Summit registration revenue; the 2013 Summit was scheduled for Q4.
Expenses grew unevenly: cost of revenues increased with royalties, personnel and higher survey volumes; product development rose 39.5% as the company maintained its platform and pursued new products. Other general and administrative expense increased 51.5%, including higher corporate personnel, professional fees, recruiting, stock compensation, rent and other costs. Sales and marketing declined 6.1%, partly because Summit-related expense was absent from Q1 2013; Q1 2012 included approximately $0.87 million of Summit expense.
Management said existing cash, securities, operating cash generation and available credit should meet anticipated needs for at least the next 12 months. It expects remaining federal and state net operating loss carryforwards to be used within 12–24 months, after which cash tax payments may rise significantly. The company continues to review potential acquisitions; any stock consideration could dilute EPS and affect the share price.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Forward-looking statements are subject to risks described in the company’s 2012 Form 10-K; the company disclaims an obligation to update them except as required by law.
- Accounts and unbilled receivables increased to $23.97 million from $16.51 million at year-end. The cash-flow statement shows a $7.49 million use of cash from accounts and unbilled receivables, partly offset by higher deferred revenue. Management cited increased receivables as a factor in working-capital growth.
- Non-GAAP results add back a $0.331 million acquired deferred-revenue write-down in Q1 2013; adjusted EBITDA is not a GAAP measure and has limitations. Non-GAAP net income was $2.14 million versus GAAP net income of $1.94 million.
- Marketable securities had a $10,000 net unrealized loss in Q1; management did not consider any securities other-than-temporarily impaired. A hypothetical 10% decrease in interest rates would reduce annualized interest income by approximately $43,000. Management reported no foreign-exchange or commodity-price risk and no outstanding debt.
- The collaborative SimVentures arrangement with Laerdal Medical generated approximately $0.4 million of revenue and $0.4 million of expense in Q1 2013; approximately $0.3 million of related software development was capitalized.
Important facts for investors to verify
- Whether subscriber growth and higher subscription usage continue to support revenue growth, and how much growth depends on courseware royalties and personnel costs.
- Whether receivables and deferred revenue convert to cash as expected; receivables rose materially quarter over quarter despite improved DSO year over year.
- Whether operating-cost growth, particularly cost of revenue, product development and corporate G&A, affects margins in subsequent quarters.
- The timing and cash-tax impact of NOL exhaustion, and the assumptions underlying the $0.331 million non-GAAP deferred-revenue adjustment.
- Future acquisition or credit-facility use, potential share dilution, and continued compliance with facility covenants.