HealthStream, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. HealthStream provides primarily SaaS applications and technology for healthcare organizations. It began managing the business as one reportable segment under its One HealthStream strategy on January 1, 2023; prior-period financials are presented on a consolidated basis.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $69.2 million | $65.6 million | $138.1 million | $131.0 million |
| Operating income | $4.0 million | $3.0 million | $6.9 million | $7.0 million |
| Net income | $4.1 million | $3.1 million | $6.8 million | $6.0 million |
| Diluted EPS | $0.13 | $0.10 | $0.22 | $0.19 |
| Adjusted EBITDA (non-GAAP) | $15.3 million | $13.1 million | $29.1 million | $27.1 million |
- Q2 revenue grew 5%; subscription revenue rose 6% to $66.5 million, while professional services revenue fell 15% to $2.7 million. Subscriptions represented 96% of Q2 revenue.
- Q2 operating margin was approximately 5.8%, up from 4.5%; net margin was approximately 6.0%, up from 4.7%. For the first half, operating margin was approximately 5.0% versus 5.3%, while net margin was approximately 4.9% versus 4.6%.
- First-half operating cash flow was $25.5 million, down from $28.0 million, primarily reflecting $2.6 million of income tax payments versus $0.4 million in the prior-year period. Investing cash outflow was $43.3 million, including $32.0 million of marketable-security purchases, $13.3 million of capitalized software development, and $6.6 million paid for the eeds acquisition. Financing cash outflow was $2.3 million, including $1.5 million in dividends.
- At June 30, cash and cash equivalents were $25.8 million and marketable securities were $30.2 million, totaling approximately $56.0 million. Working capital was $8.9 million, compared with a $2.8 million deficit at year-end 2022. No revolving-credit borrowings were outstanding. The $65 million facility was available but scheduled to mature October 28, 2023.
- Deferred revenue was $81.8 million current and $2.3 million noncurrent. Remaining performance obligations were approximately $511 million; the company expects to recognize about 44% within 12 months.
Changes versus prior period
- Q2 revenue increased 5%, driven by subscription growth across several product categories and acquisitions; recent acquisitions contributed $0.8 million, or 1%, of Q2 growth. Professional services revenue declined.
- Q2 operating income rose 36% and net income rose 34%. First-half operating income was slightly lower year over year despite higher revenue, while net income increased 13%.
- Cost of revenue as a share of revenue remained 34% in both comparison periods. Q2 operating expenses included higher royalties, cloud-hosting, contract-labor and software costs; depreciation and amortization increased, primarily from capitalized software.
- Other income was lower in Q2 than in 2022, when it included a $0.9 million gain related to the remeasurement of the previously held CloudCME interest. First-half other income increased, mainly reflecting higher interest income and reduced equity-investment losses.
- The company adopted its first quarterly cash-dividend policy in February 2023, initially $0.025 per share per quarter. Two dividends totaling $1.5 million were paid in the first half.
Outlook, commentary and risks
- No formal revenue, earnings or margin guidance is provided in this filing. Management expects existing cash, marketable securities, operating cash generation and available credit to cover anticipated needs, dividends and capital spending for at least the next 12 months.
- Management said pandemic-related customer booking delays may continue to weigh on revenue and earnings to a lesser extent during part of the remainder of 2023. It also cited inflation, elevated interest rates, labor-market conditions, supply-chain disruption and potential banking-system instability as pressures affecting the company and healthcare customers.
- The company eliminated 33 roles in Q1 as part of its consolidation program. It recorded $1.0 million of related severance in Q1 and $0.1 million in Q2, and expected up to $40,000 more during the rest of 2023.
- The effective tax rate was 8% in Q2 and 12% for the first half, compared with 15% and 19%, respectively, in 2022. The 2023 periods benefited from discrete tax items, primarily changes to Tennessee apportionment rules; uncertain-tax-position reserves partly offset the benefit.
- The eeds purchase-price allocation was updated following a third-party valuation, reducing goodwill by $1.3 million on a net basis. Management reported compliance with credit-facility covenants and no material changes to previously disclosed risk factors. The dividend policy remains subject to Board discretion.
- Market risks include interest-rate exposure on cash and investments, foreign-currency exposure, and volatility or impairment risk in strategic investments in privately held companies. The company had no outstanding debt at quarter-end and had not entered into foreign-currency hedges.
Key facts for investors to verify
- Whether subscription growth and hStream adoption continue: contracted hStream subscriptions were 5.59 million, versus 5.30 million a year earlier.
- Whether operating profitability improves as revenue grows, given first-half operating income was slightly below the prior year and expenses increased in several categories.
- Cash conversion and receivables: operating cash flow declined, and days sales outstanding increased to 50 days from 45 days as some customers paid later than usual.
- Renewal, extension or replacement of the $65 million revolving facility before its October 28, 2023 maturity.
- Execution and costs of the One HealthStream consolidation, including remaining severance, and the ongoing impact of macroeconomic and healthcare-customer pressures.
- Adjusted EBITDA is a non-GAAP measure, excludes specified items, and may not be comparable to similarly titled measures at other companies. Q2 and first-half values were $15.3 million and $29.1 million, respectively.