HealthStream, Inc. — FY 2012 Form 10-K
Business context and reporting period. HealthStream provides online learning, talent-management and survey/research solutions primarily to U.S. healthcare organizations. This filing reports the fiscal year ended December 31, 2012; it is an annual report, with fourth-quarter results also presented. At year-end, the company had approximately 3,000 healthcare-organization customers and 3.1 million contracted HLC subscribers, including 2.94 million implemented subscribers.
Key financial results
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $103.7 million | $82.1 million |
| Operating income | $13.5 million | $11.3 million |
| Net income | $7.6 million | $6.9 million |
| Diluted EPS | $0.28 | $0.29 |
| Cash from operations | $22.5 million | $19.8 million |
- Revenue grew 26.4%; Learning & Talent Management revenue rose 35.3% to $78.6 million, while Research revenue grew 4.9% to $25.2 million.
- Operating income increased 18.7% and net income increased 10.1%. Operating margin was approximately 13.0%, versus 13.8% in 2011; net margin was approximately 7.4%, versus 8.5%.
- Cost of revenue, excluding depreciation and amortization, increased to 40.2% of revenue from 37.9%, reflecting higher royalties, staffing and survey costs.
- Adjusted EBITDA, a non-GAAP measure, was $21.2 million, up 21.1%. The company also reported $490,000 of non-GAAP revenue and operating-income adjustments for acquisition-related deferred-revenue write-downs.
- Fourth-quarter 2012 revenue was $27.8 million, operating income $3.3 million and net income $1.8 million, compared with $21.9 million, $3.0 million and $1.8 million, respectively, in Q4 2011.
Liquidity, cash flow and debt
- Year-end cash, cash equivalents and marketable securities totaled approximately $93.3 million; working capital was $83.3 million.
- Cash from operations was $22.5 million. Investing activities used $59.0 million, including net acquisition spending of $9.9 million, software development of $4.4 million and property and equipment purchases of $4.3 million; securities purchases and maturities also drove investing cash flows.
- No debt was outstanding. The company had a fully available $20 million revolving credit facility, maturing July 2014, and reported covenant compliance.
- Deferred revenue was $23.1 million. The company reported no cash dividends and no material off-balance-sheet arrangements beyond leases, contractual commitments and the facility.
Changes, outlook and notable items
- Growth was led by HLC subscriptions: subscription learning and talent-management revenue rose 32.2%, and implemented subscribers increased 14%. HLC renewal rates were 98.7% by subscribers and 99.5% by annual contract value up for renewal.
- Research growth was uneven: Patient Insights revenue increased 10.1%, while other survey revenue declined 10.5% due to fewer engagements.
- HealthStream acquired Decision Critical, Inc. in June and Sy.Med Development, Inc. in October 2012. The acquisitions added goodwill and intangible assets; fair-value accounting reduced acquired deferred revenue by a combined $1.108 million. Up to $1.8 million of contingent additional payments may be due if specified targets are achieved.
- Diluted EPS declined despite higher net income, principally because the 2011 stock offering increased the 2012 weighted-average share count by approximately 3.6 million shares.
- Management projected 2013 revenue growth of 20%–22% (including the acquisitions), operating-income growth of approximately 6%–10%, and a 42%–44% effective tax rate. The outlook includes investment spending and costs to enter the post-acute-care market; planned 2013 capital spending was $9–$10 million.
- Management identified risks including customer renewals and concentration, variable research survey timing, competition, acquisition integration, system availability and cybersecurity, changing healthcare privacy rules, and maintaining survey and education accreditations. The company expected NOL carryforwards to be used up within 12–24 months, potentially increasing cash tax payments. Goodwill and intangible assets totaled approximately $38.1 million and are subject to impairment estimates.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing reports no Item 3 legal proceedings, while noting routine legal matters were not expected to have a material adverse effect.
Investor facts to verify
- Whether the projected 2013 growth and operating-income ranges were achieved, particularly after acquisition-related effects and post-acute-care investment.
- Organic growth, subscriber additions and renewal pricing apart from DCI and Sy.Med contributions.
- Whether operating-cost growth, especially royalties and Research delivery costs, affects margins as revenue expands.
- Integration progress, contingent acquisition payments, and the carrying value and amortization of acquired goodwill and intangibles.
- Cash conversion and tax payments as NOL carryforwards expire, alongside the status and terms of the revolving credit facility.