HealthStream, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Figures are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. HealthStream provides SaaS workforce and provider solutions to healthcare organizations. It reported approximately 4.92 million contracted hStream subscriptions, up from 3.82 million a year earlier.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $64.1 | $60.9 | $192.4 | $183.0 |
| Operating income | $1.8 | $3.1 | $8.5 | $14.7 |
| Net income | $1.5 | $2.6 | $6.2 | $13.2 |
| Diluted EPS | $0.05 | $0.08 | $0.20 | $0.41 |
| Adjusted EBITDA (non-GAAP) | $12.5 | $11.2 | $40.6 | $35.2 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $36.4 | $30.8 |
- Revenue grew 5% in both the quarter and year-to-date period. Q3 Workforce Solutions revenue rose 4% to $51.2 million; Provider Solutions rose 11% to $12.9 million. Subscription services generated $60.7 million of Q3 revenue.
- Operating income fell 43% in Q3 and 42% year to date. Operating margin was approximately 2.8% in Q3 versus 5.1%; year-to-date margin was 4.4% versus 8.0%. Higher product development and depreciation/amortization costs contributed to the pressure.
- Cost of revenues, excluding depreciation and amortization, was 35% of revenue in Q3 versus 38%, and 35% year to date versus 36%. Adjusted EBITDA increased despite lower GAAP net income; it is a company-defined non-GAAP measure.
- Cash and cash equivalents were $55.5 million and marketable securities $5.1 million at September 30, 2021. Working capital was positive $10.3 million, versus negative $4.7 million at year-end 2020. Total assets were $494.7 million.
- No revolving-credit borrowings were outstanding. The company had a $65 million revolving facility available, maturing October 28, 2023, and reported compliance with its covenants. Operating lease liabilities were $26.9 million noncurrent; the filing reports no outstanding debt under the facility.
Material changes and unusual items
- Legacy HeartCode and RQI revenue fell sharply: $0.5 million in Q3 2021 versus $9.7 million in Q3 2020, and $3.2 million year to date versus a $28.3 million decline described against the prior-year period. Acquisitions and growth in other offerings offset the decline at the consolidated revenue level. Management expects legacy-product revenue to be minimal in Q4 2021.
- Recent acquisitions contributed revenue and expenses, including ShiftWizard, ANSOS, myClinicalExchange, and ComplyALIGN. Amortization associated with acquired intangibles and capitalized software increased depreciation and amortization.
- 2021 included a $1.0 million non-cash reduction to paid-time-off expense following a policy change. 2020 included a $3.4 million non-cash royalty-expense reduction from resolution of a past partnership disagreement and a $1.2 million gain related to the NurseGrid investment. These items affect period comparisons.
- Net cash provided by operations increased to $36.4 million, primarily due to higher collections; days sales outstanding improved to 40 days from 43. Investing cash outflow was $17.0 million, including $16.6 million for capitalized software development. Financing cash outflow was $0.5 million; there were no stock repurchases in the 2021 period, compared with $16.4 million in 2020.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management expects existing cash, securities, operating cash flow, and available credit to fund anticipated working capital, product development, and capital expenditures for at least 12 months.
- Remaining performance obligations were approximately $446 million at September 30, 2021; management expects to recognize about 46% over the next 12 months. This is contracted performance obligation value, not a forecast of recognized revenue.
- Management said COVID-19 and the Delta variant continued to affect healthcare customers. Sales cycles, bookings, renewals, and some implementations were delayed or reduced; effects could weigh on revenue and earnings through the remainder of 2021 and into 2022. Reduced travel and event spending benefited operating income and adjusted EBITDA by about $1.0 million in the first nine months; resumed travel may increase costs before related sales benefits occur.
- Key risks include customer ability and willingness to pay, implement, renew, or buy solutions; pandemic uncertainty; execution and integration of acquisitions; and possible volatility or impairment in strategic private-company investments. Management reported no material changes to previously disclosed risk factors. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether new bookings and renewals recover from pandemic-related delays, and how those trends translate into future revenue.
- Whether growth in subscription and acquired products can offset the continuing run-off of legacy resuscitation revenue.
- Drivers of lower GAAP operating income and net income despite revenue and adjusted EBITDA growth, including product investment, acquisition-related amortization, and nonrecurring comparison items.
- The timing and conversion of the $446 million remaining performance obligations into revenue, and the assumptions behind management’s liquidity outlook.
- Acquisition integration, goodwill and intangible-asset assumptions, and the performance and valuation of strategic investments.