HealthStream, Inc. — FY 2013 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. HealthStream provides subscription-based workforce development software and healthcare research/patient-experience services. At year-end, it served approximately 4,000 healthcare organizations and reported 3.71 million subscribers, including 3.39 million implemented subscribers.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $132.3 million | $103.7 million |
| Operating income | $14.7 million | $13.5 million |
| Net income | $8.4 million | $7.6 million |
| Diluted EPS | $0.30 | $0.28 |
| Operating cash flow | $26.3 million | $22.5 million |
| Cash, cash equivalents and marketable securities at year-end | $108.2 million | $93.3 million |
- Revenue grew 27.5%; operating income rose 9.0% and net income rose 10.1%. Operating margin narrowed to approximately 11.1% from 13.0%; net margin was approximately 6.4% versus 7.4%.
- Workforce Development revenue was $103.8 million, up 32.1%; Research/Patient Experience revenue was $28.5 million, up 13.1%.
- Cost of revenue excluding depreciation and amortization rose to 42.0% of revenue from 40.2%, reflecting higher royalties, delivery costs and personnel expenses.
- Adjusted EBITDA, a non-GAAP measure, increased 12.7% to $23.9 million. The company cautions that it is not a substitute for GAAP results and may not be comparable across companies.
- Working capital was $90.9 million, versus $83.3 million. No debt was outstanding; the $20 million revolving facility was fully available at year-end and matures in July 2014.
- Capitalized software development was $4.3 million. Capital expenditures, software development and content purchases were expected to total $9–$12 million in 2014.
Material changes and notable items
- Workforce Development subscription revenue increased $22.5 million, supported by subscriber growth and higher courseware consumption. Implemented subscribers grew 15.4%, and annualized revenue per implemented subscriber increased 19.9% to $32.41.
- ICD-10 training revenue was approximately $13.9 million, up $11.5 million from 2012. Management said this boosted 2013 results and expected continued benefit in 2014, but warned that subscriptions expiring in 2014–2015 could contribute to lower revenue in 2015.
- HealthStream acquired Baptist Leadership Group in September 2013 for approximately $7.4 million in cash and 15,230 shares. Earlier acquisitions included Decision Critical and Sy.Med in 2012. Acquisition accounting reduced acquired deferred revenue, lowering recognized revenue; the 2013 non-GAAP reconciliation adds back $839,000 for these write-downs.
- After year-end, on March 3, 2014, HealthStream acquired Health Care Compliance Strategies for approximately $13 million in cash and 81,614 shares, with up to $750,000 in contingent payments.
- The company reported an unqualified audit opinion and effective internal control over financial reporting. It did not declare or pay cash dividends.
Outlook, risks and contingencies
- For 2014, including HCCS, management projected consolidated revenue growth of 25%–29%, Workforce Development growth of 27%–31%, and Research/Patient Experience growth of approximately 18%–22%.
- Management projected 2014 operating income to decline 2%–11% from 2013. The estimate includes $2.5–$3.0 million of combined HCCS-related deferred revenue write-downs, intangible amortization and planned investments, plus approximately $450,000 of transaction costs. Guidance excludes other potential 2014 transactions.
- Management expected a 42%–44% effective tax rate in 2014. It anticipated federal and state net operating loss carryforwards would be fully used within 12–24 months, after which cash tax payments could rise significantly.
- Key risks include customer renewals and pricing, competition, long and variable sales cycles, integration and execution of acquisitions, product and service interruptions, cybersecurity and privacy compliance, and the ability to maintain CMS survey-vendor and continuing-education accreditations.
- Subscription contracts generally run one to five years and are not automatically renewed. The reported 2013 HLC renewal rate was 97% for both subscribers and annual contract value up for renewal.
- Management said existing cash, investments, operating cash flow and available borrowing capacity should meet anticipated needs for at least 12 months. The credit facility’s July 2014 maturity and covenant limits remain relevant to liquidity planning.
- The filing’s Item 3 reports no legal proceedings; a financial-statement note describes ordinary-course pending or threatened matters that management did not expect to have a material adverse effect.
Most important facts for investors to verify
- How much 2014 growth and subsequent-period revenue depends on ICD-10 subscriptions, and the renewal or replacement outlook as those subscriptions expire.
- Whether subscriber growth, per-subscriber revenue and 97% HLC renewal performance continue, and whether rising delivery costs constrain margins.
- Actual HCCS integration costs, purchase-accounting effects, contribution to revenue and operating income, and any additional acquisition activity.
- Renewal and survey-cycle trends in Research/Patient Experience, including the contribution and integration of Baptist Leadership Group.
- Cash conversion and working-capital movements, especially receivables and deferred revenue; confirm the extension or replacement of the revolving facility before its July 2014 maturity.
- Performance against the 2014 revenue, operating-income, capital-spending and tax-rate outlook, which is forward-looking and subject to the risks disclosed in the filing.