HEALTHSTREAM INC quarterly report, Q1 FY2019

Full document

HealthStream, Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. HealthStream provides workforce development and provider credentialing, privileging, and enrollment solutions for healthcare organizations. The former Patient Experience business is reported as discontinued operations.

Financial results

  • Revenue: $65.2 million, up 19%. Workforce Solutions revenue rose 21% to $54.3 million; Provider Solutions revenue rose 10% to $10.9 million. Subscription/SaaS revenue was $61.9 million.
  • Profitability: Operating income was $5.4 million, up 44%; operating margin was approximately 8.2%, versus 6.8%. Income from continuing operations was $4.8 million, up 32%, and diluted continuing-operations EPS was $0.15, versus $0.11. Adjusted EBITDA from continuing operations, a non-GAAP measure, was $12.5 million, up 22%.
  • Margins and costs: Cost of revenues was 41% of revenue in both periods; implied gross margin was approximately 58.8%, versus 59.4%. Higher courseware royalties contributed to workforce cost growth. General and administrative expense rose 29%, including higher headquarters facilities, personnel, software, professional-services, and administrative costs.
  • Net income: $6.0 million, versus $23.8 million. The prior-year result included substantial income from the Patient Experience sale; discontinued-operations income was $1.2 million in Q1 2019 versus $20.2 million in Q1 2018.
  • Cash flow and liquidity: Operating cash flow from continuing operations was $16.1 million, versus $9.6 million. Cash and cash equivalents were $110.6 million and marketable securities were $36.3 million at quarter-end. Working capital was $112.8 million. Cash declined $23.7 million during the quarter, principally as investing outflows exceeded operating cash generation.
  • Investing: Continuing-operations investing cash outflow was $39.4 million, including $18.0 million for the Providigm acquisition, $11.3 million of property and equipment, $4.9 million of capitalized software development, and $3.3 million of cost-method investments.
  • Debt: No revolving-credit borrowings were outstanding. The $50.0 million facility was fully available; it matures November 24, 2020. The company reported compliance with its covenants.

Material changes and unusual items

  • Workforce Solutions growth reflected subscription-based products, including HeartCode and Resuscitation Quality Improvement (RQI), growth in proprietary compliance products, and $1.5 million of revenue from Providigm, acquired January 10, 2019. Provider Solutions growth was attributed primarily to organic growth.
  • HealthStream recorded a $1.2 million after-tax gain in Q1 2019 from release of most escrow funds related to the 2018 Patient Experience divestiture. Approximately $328,000 remained in escrow through August 12, 2019 for potential indemnification claims.
  • The company identified prior-period royalties due under a content-partner arrangement. It recognized $861,000 of additional revenue and $119,000 of lower operating expense in Q1 2019, increasing continuing-operations income by $744,000 and receivables by $861,000. Management concluded the correction was immaterial to Q1 2019 and prior affected periods.
  • Providigm was acquired for approximately $18.0 million in cash, with up to $500,000 additional consideration contingent on performance. Its preliminary purchase-price allocation included $9.1 million of goodwill and $8.2 million of identifiable intangibles; valuations remain subject to finalization.
  • Adoption of the new lease standard on January 1, 2019 resulted in recognition of right-of-use assets and lease liabilities. At March 31, operating lease liabilities totaled $33.7 million, including a new corporate-headquarters lease. Q1 operating lease cost was approximately $1.2 million.

Outlook, management commentary, and risks

  • Management said existing cash, investments, operating cash generation, and available credit should meet anticipated working-capital, product-development, and capital-expenditure needs for at least 12 months. No specific company-wide revenue or earnings guidance is provided in the filing.
  • Revenue from HeartCode and RQI under the legacy Laerdal agreements was $17.3 million in Q1 2019, versus $12.3 million a year earlier. Management expected full-year 2019 legacy-agreement revenue of approximately $59–$60 million, declining sequentially by quarter, and expected it to reach zero in Q1 2021. The replacement RQI Partners arrangement provides delivery fees but is not expected to replace the legacy revenue runout.
  • HealthStream launched the American Red Cross Resuscitation Suite under a seven-year collaboration and had eight customers under contract. Implementation was expected to begin for certain customers in Q2; revenue would not be recognized until implementation is complete. Management cautioned that new simulation offerings may not replace legacy revenue or earnings.
  • Risks highlighted include execution of new products and acquisitions, the runoff of legacy resuscitation revenue, availability and terms of future financing, and the possibility that operating cash flow or borrowing capacity may be insufficient for future needs. Management also noted sensitivity of investment income to interest rates.
  • The effective tax rate on continuing operations increased to 23% from 10%, partly reflecting changes in tax benefits from stock-based awards. Management identified revenue recognition, taxes, software-development costs, goodwill and intangible assets, and receivable allowances as critical accounting estimates.

Investor verification priorities

  • Track the pace of HeartCode/RQI legacy revenue runoff and whether new resuscitation products generate replacement revenue and margins.
  • Assess organic growth and profitability separately from Providigm’s contribution and the one-time royalty correction.
  • Monitor Providigm integration, contingent consideration, and final purchase-price allocation.
  • Verify cash generation and capital spending, particularly headquarters costs, and the company’s continued covenant compliance and credit-facility availability.
  • Follow collection of the remaining divestiture escrow and any related indemnification claims.