HealthStream, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. HealthStream provides workforce development and provider credentialing, privileging, and enrollment solutions to healthcare organizations. The results are unaudited. Unless noted, financial amounts are in millions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue from continuing operations | $59.9 | $54.7 | $171.8 | $159.6 |
| Operating income | $4.7 | $2.7 | $12.7 | $7.9 |
| Income from continuing operations | $3.0 | $1.7 | $10.3 | $5.7 |
| Net income | $3.0 | $2.5 | $29.4 | $6.1 |
| Diluted EPS from continuing operations | $0.09 | $0.06 | $0.32 | $0.18 |
| Adjusted EBITDA from continuing operations* | $11.1 | $9.1 | $32.1 | $27.0 |
Q3 revenue grew 9%; operating income rose 71%. Workforce Solutions revenue was $49.1 million, up 10%, and Provider Solutions revenue was $10.8 million, up 6%. For the nine months, those segments grew 6% and 14%, respectively. Workforce subscription growth included resuscitation and compliance products; implemented subscribers increased 7% year over year to 4.827 million.
Q3 operating margin was approximately 7.8%, versus 5.0% a year earlier; cost of revenue was 42% of revenue versus 41%. For the first nine months, operating margin was approximately 7.4%, versus 4.9%. Management attributed expense movements to factors including courseware royalties, staffing and hosting costs, and lower sales and marketing expense.
Continuing operating cash flow was $29.8 million for the nine months, down from $32.4 million. Total operating cash flow, including discontinued operations, was $28.8 million, versus $35.7 million. Capitalized software development and property and equipment purchases were $8.0 million and $4.3 million, respectively. Cash and equivalents were $130.3 million and marketable securities $44.0 million at September 30; working capital was $133.2 million.
No revolving credit borrowings were outstanding. The company reported $315.7 million of shareholders’ equity and no debt balance. Its $50 million revolving facility was available, subject to covenants, and scheduled to mature November 24, 2018; management said it planned to renew it before maturity on similar terms.
Material changes and unusual items
- HealthStream sold its Patient Experience (PX) business to Press Ganey on February 12, 2018 for $65.5 million in cash before working-capital adjustments. The sale generated a $19.1 million after-tax gain, included in discontinued operations. The nine-month net income increase therefore substantially reflects the disposal; continuing-operations income is a more informative indicator of ongoing results.
- The company paid a special cash dividend of $1.00 per share, totaling approximately $32.4 million, on April 3, 2018.
- HealthStream adopted ASC 606 on January 1, 2018 using the modified retrospective method. It increased Q3 revenue by $634,000 and operating income by $1.109 million; for the nine months, it increased revenue by $738,000 and operating income by $2.506 million. It also led to capitalization and amortization of qualifying sales commissions. Prior-year results remain under ASC 605, so comparisons are not fully on the same accounting basis.
- Q3 other expense included a $1.3 million fair-value reduction in a minority cost-method investment, partly offset by higher interest income. The company’s effective tax rate on continuing operations was 20% for the first nine months, versus 32%, primarily reflecting the federal corporate tax rate reduction and excess tax benefits from stock-option exercises.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said available cash, investments, operating cash flow, and credit availability should be sufficient for anticipated needs for at least 12 months.
- Remaining performance obligations were approximately $370 million at September 30; the company expected to recognize about 46% over the following 12 months. This is contracted revenue, not a company-wide forecast.
- Laerdal notified HealthStream it would not renew the HeartCode and Resuscitation Quality Improvement (RQI) agreements when they expire December 31, 2018. HealthStream could offer licenses extending through December 31, 2020, but its existing sales exclusivity and restrictions also run through the agreement expiration. Management planned broader simulation offerings, including resuscitation programs, but cautioned that replacement offerings may not offset revenue or earnings impacts. These products had significant revenue but below-average margins.
- The credit facility includes leverage and interest-coverage covenants; the company said it was compliant at quarter-end. Management cautioned that additional financing, if needed, may not be available on favorable terms or at all.
- The company was still completing its accounting for the Tax Cuts and Jobs Act and expected to complete it in Q4 2018. Adoption of the lease standard was planned for January 1, 2019; the principal expected effect was recognition of right-of-use assets and lease liabilities, but the financial impact had not been completed.
- Management identified forward-looking statements as subject to risks and uncertainties and referred investors to its 2017 Form 10-K risk factors. Disclosure controls were assessed as effective, with no material third-quarter change in internal control over financial reporting.
*Adjusted EBITDA is a non-GAAP measure; the filing cautions it may not be comparable across companies and should not be considered in isolation.
Important facts for investors to verify
- Assess ongoing growth and profitability excluding the PX sale gain, and account for the differing ASC 606/ASC 605 bases in year-over-year comparisons.
- Track the post-Laerdal transition: replacement product launch, customer retention, and any resulting revenue or margin changes after December 31, 2018.
- Confirm renewal and terms of the revolving credit facility, which was due to mature November 24, 2018.
- Monitor the $6.55 million PX sale escrow, post-closing working-capital adjustment, and any indemnification claims.
- Review the assumptions behind the $370 million remaining performance obligations and the timing of expected recognition.
- Evaluate the quality and repeatability of earnings, including the investment fair-value loss, deferred-revenue accounting effects, and the one-time special dividend.