HealthStream, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. HealthStream provides workforce development and provider credentialing, privileging, and enrollment solutions to healthcare organizations. Its two segments are Workforce Solutions and Provider Solutions. The company reported approximately 3.48 million contracted hStream subscriptions, compared with 2.34 million a year earlier.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $60.6 million | $63.8 million | $122.1 million | $129.0 million |
| Operating income | $4.3 million | $2.3 million | $11.5 million | $7.6 million |
| Net income | $3.4 million | $2.4 million | $10.5 million | $8.4 million |
| Diluted EPS | $0.11 | $0.07 | $0.33 | $0.26 |
| Adjusted EBITDA (non-GAAP) | $12.0 million | $11.8 million | $23.8 million | $25.9 million |
Q2 gross margin, calculated as revenue less cost of revenue excluding depreciation and amortization, was approximately 62%, versus 58% a year earlier; first-half gross margin was approximately 65%, versus 58%. Operating margin was approximately 7.1% in Q2 (3.6% in Q2 2019) and 9.5% in the first half (5.9% in first-half 2019). The first-half comparison in net income includes $1.2 million of discontinued-operations income in 2019; continuing-operations income was $10.5 million versus $7.2 million.
Operating cash flow for the first half was $13.5 million, down from $36.6 million. Investing cash outflow was $22.1 million and financing cash outflow was $10.4 million, including $10.0 million of share repurchases. Cash and cash equivalents were $112.5 million at June 30, down from $131.5 million at year-end; marketable securities were $32.0 million. Working capital was $106.2 million. The company had no revolver borrowings and no outstanding debt disclosed; $50 million of revolving capacity was available, with the facility scheduled to expire November 24, 2020. The company reported compliance with its credit covenants.
Material changes and drivers
- Revenue fell 5% in both the quarter and first half. Workforce Solutions revenue declined 7% in Q2 and 8% in the first half, principally because legacy resuscitation-product revenue fell $4.8 million in Q2 and $10.9 million in the first half. Provider Solutions revenue rose 3% in Q2 and 5% in the first half, helped by CredentialMyDoc and new subscriptions.
- Operating income improved despite lower revenue. Lower costs included a $3.4 million first-quarter reduction in cost of revenue after a royalty partner released the company from a disputed liability, along with lower travel, trade-show, and other costs and reduced year-over-year stock-based compensation.
- Q2 net income benefited from comparison with the $1.7 million after-tax employee stock award charge in Q2 2019. First-half 2020 results also included a $1.2 million gain related to remeasurement of the existing NurseGrid investment before acquisition.
- HealthStream acquired NurseGrid in March 2020 for net cash consideration of approximately $21.5 million, plus the fair value of its prior investment. The preliminary purchase allocation included $21.1 million of goodwill and remains subject to measurement-period adjustments.
Outlook, risks, and unusual items
- The filing does not provide formal full-year financial guidance. Management expected revenue from legacy HeartCode and RQI products under expired agreements to decline sequentially, to approximately $8.5 million in Q3 and $6.0 million in Q4 2020, and to reach zero in Q1 2021. The replacement RQI Partners arrangement had not generated material revenue through June 30, 2020.
- Management said COVID-19 had not significantly reduced revenue or net income in the first half, but had delayed or reduced sales, implementations, renewals, and collections, with possible effects extending beyond 2020. Customers’ financial health, lower in-person selling activity, partner disruption, and remote-work risks were identified as uncertainties. Q2 operating expenses benefited from pandemic-related travel and event reductions, which management also said reflected lost sales opportunities.
- First-half DSO was 47 days in Q2, compared with 44 days in Q1 and 47 days in Q2 2019. Management reported lower customer cash receipts year over year and warned that further deterioration in collections could hurt results.
- The board authorized repurchases of up to $30 million through March 12, 2021; $10.0 million had been used in the first half. Management said cash, investments, operating cash flow, and available borrowing capacity were expected to cover needs for at least 12 months, but that prolonged COVID-19 impacts could prompt cuts to development spending or repurchases.
- Other notable items include $14.6 million of first-half depreciation and amortization and a $1.2 million NurseGrid-related fair-value gain. The filing identifies customer receivables, revenue recognition, software development costs, taxes, and goodwill and intangibles as areas involving significant estimates.
Investor verification priorities
- Assess whether subscription growth and Provider Solutions expansion can offset the continuing runoff in legacy resuscitation revenue.
- Review customer collections, DSO, receivables impairment, renewals, and implementation timing as COVID-19 conditions evolve.
- Verify the NurseGrid acquisition’s finalized purchase allocation, integration costs, and contribution to revenue and operating performance.
- Separate recurring operating performance from the $3.4 million royalty-liability release, acquisition-related fair-value gain, and comparative 2019 stock-award and discontinued-operation items; consider the company’s non-GAAP EBITDA adjustments.
- Confirm renewal or replacement of the revolving credit facility before its November 2020 maturity and monitor remaining buyback authorization against liquidity needs.