HealthStream, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. HealthStream provides subscription-based workforce training and talent solutions and provider credentialing, privileging, and enrollment software to healthcare organizations.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change or context |
|---|---|---|---|
| Revenue | $254.1 million | $231.6 million | Up 10%; Workforce Solutions rose 10% to $208.6 million and Provider Solutions rose 10% to $45.5 million. |
| Operating income | $14.7 million | $15.5 million | Down 5%; operating margin was about 5.8%, versus 6.7%. |
| Income from continuing operations | $14.2 million; diluted EPS $0.44 | $13.3 million; diluted EPS $0.41 | Income rose 7%. |
| Net income | $15.8 million; diluted EPS $0.49 | $32.2 million; diluted EPS $1.00 | Down 51%, primarily because 2018 included a larger after-tax gain on the Patient Experience business sale. |
| Adjusted EBITDA from continuing operations | $46.9 million | $41.5 million | Up 13%; non-GAAP measure. |
| Cash from continuing operating activities | $65.7 million | $44.3 million | Up 48%; days sales outstanding improved to 47 from 59. |
| Cash and marketable securities | $172.9 million | — | Cash alone was $131.5 million; marketable securities were $41.3 million. |
| Working capital | $119.4 million | $134.6 million | Declined year over year. |
| Debt | No debt outstanding | No debt outstanding | $50 million revolving facility was fully available at year-end; it matured in November 2020. |
Fourth-quarter revenue was $62.7 million versus $59.8 million a year earlier; operating income was $3.3 million versus $2.8 million, and income from continuing operations was $3.6 million versus $2.9 million.
Material changes and notable items
- HealthStream acquired Providigm in January 2019 for approximately $18.0 million and substantially all CredentialMyDoc assets in December 2019 for $9.0 million. Both acquisitions added goodwill and identifiable intangible assets; acquisition valuations relied on estimates of growth, attrition, margins, discount rates, and technology replacement costs.
- Contracted hStream subscriptions increased to approximately 3.15 million from 1.51 million at year-end 2018. Management described the platform transition as a multi-year process.
- Revenue from legacy HeartCode and Resuscitation Quality Improvement products was $58.9 million in 2019. Those legacy agreements expired at the end of 2018; management expected about $36 million of related revenue in 2020 and approximately zero beginning in Q1 2021.
- In June 2019, the CEO contributed personally owned shares for employee awards. The grants resulted in approximately $2.0 million of compensation expense, plus employer costs; total stock-based compensation expense increased to $4.2 million from $1.8 million.
- The 2018 divestiture of the Patient Experience business generated a $65.2 million cash sale price. The reported after-tax gain was $19.0 million in 2018 and $1.6 million in 2019, reflecting a subsequent adjustment.
Outlook, risks, and contingencies
- For 2020, management projected revenue of $247.5–$255.5 million, operating income of $12.0–$14.5 million, capital expenditures of $24.0–$26.0 million, and an effective tax rate of 23%–25%.
- Guidance included approximately $36.0 million from legacy resuscitation products, approximately $1.5 million from CredentialMyDoc, and a one-time favorable $3.4 million royalty expense adjustment expected in Q1 2020. Management also anticipated a $1.0 million operating loss related to CredentialMyDoc.
- Management said existing cash, operating cash generation, and available credit were expected to cover anticipated needs for at least 12 months. The credit facility was subject to financial covenants, which the Company met at year-end.
- Key risks include the decline in legacy resuscitation revenue, customer renewals and concentration, competition, healthcare-sector spending and consolidation, acquisition integration and valuation, and execution of the hStream platform strategy. Cybersecurity, privacy, and regulatory compliance risks are significant given the sensitive health and provider information handled by the business.
- The filing discussed uncertainty around the coronavirus outbreak, 2020 elections, and healthcare legislation; it did not provide a quantified financial impact. The Company reported no material legal proceedings in Item 3, while noting that ordinary-course legal matters could have uncertain outcomes and were not expected to materially affect financial position or results.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether new resuscitation offerings replace the revenue and earnings contribution lost as legacy product revenue runs off.
- Whether hStream subscription growth converts into durable revenue and improved operating profitability.
- Integration progress and performance of Providigm and CredentialMyDoc, including final purchase accounting for CredentialMyDoc.
- Whether 2020 guidance assumptions, including the $3.4 million royalty adjustment and CredentialMyDoc losses, were realized.
- Cash conversion, capital spending, and liquidity after acquisitions; also verify the status and terms of the credit facility that matured in November 2020.