HealthStream, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. HealthStream provides workforce-development and provider credentialing, privileging, and enrollment solutions to healthcare organizations. The Patient Experience business, sold in February 2018, is reported as discontinued operations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $63.8 million (+12%) | $57.0 million | $129.0 million (+15%) | $111.9 million |
| Operating income | $2.3 million | $4.3 million | $7.6 million | $8.0 million |
| Income from continuing operations | $2.4 million | $3.7 million | $7.2 million | $7.3 million |
| Net income | $2.4 million | $2.5 million | $8.4 million | $26.4 million |
| Diluted EPS from continuing operations | $0.07 | $0.11 | $0.22 | $0.23 |
| Adjusted EBITDA from continuing operations | $11.8 million (+10%) | $10.7 million | $24.2 million (+16%) | $20.9 million |
Q2 revenue growth came from both segments: Workforce Solutions rose 12% to $52.4 million, and Provider Solutions rose 13% to $11.4 million. For the first half, segment growth was 16% and 12%, respectively. Subscription/SaaS revenue was $60.4 million in Q2 and $122.3 million in the first half.
Cost of revenue excluding depreciation and amortization rose to 42% of revenue in both the quarter and first half, from 41% in the comparable periods. Operating income declined despite revenue growth; management attributed much of the Q2 pressure to a $2.2 million employee stock-award and related payroll-tax charge. That charge reduced continuing-operations diluted EPS by approximately $0.05. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
First-half net income fell sharply year over year mainly because 2018 included a $19.1 million after-tax gain from the Patient Experience sale. First-half 2019 included $1.2 million of after-tax gain recognized when sale proceeds were released from escrow.
Cash flow, liquidity, and debt
- Net cash from continuing operating activities was $36.6 million for the first half, compared with $16.2 million a year earlier. The company cited working-capital changes and improved collections; Q2 days sales outstanding declined to 47 from 54.
- Cash and cash equivalents were $120.8 million and marketable securities were $40.7 million at June 30, 2019. Working capital was $116.2 million, versus $134.6 million at year-end 2018.
- Investing activities used $49.2 million, including $18.0 million for the Providigm acquisition, $19.6 million for property and equipment, and $8.4 million for capitalized software development. Cash also funded $3.3 million of cost-method investments.
- No borrowings were outstanding under the $50 million revolving credit facility; the full amount was available. The facility matures November 24, 2020. The company reported covenant compliance and said current liquidity and expected operating cash flows should cover anticipated needs for at least 12 months.
- Operating lease liabilities totaled $33.7 million following adoption of the lease accounting standard and commencement of the new headquarters lease. No scheduled principal debt payments were reported; lease payments are separate obligations.
Material developments, outlook, and risks
- Providigm acquisition: Acquired January 10, 2019 for $18.0 million cash, with up to $0.5 million additional contingent consideration. Providigm contributed $3.3 million of revenue and an operating loss of $0.5 million through June 30. Purchase-price allocations remained preliminary, including intangible-asset valuations.
- HeartCode and RQI transition: Legacy agreements expired December 31, 2018. These products generated $32.8 million of revenue in the first half of 2019, versus $25.5 million in the prior-year period. Management expected legacy-agreement revenue to decline sequentially, with approximately $26–$27 million in the second half of 2019 and none in Q1 2021. A separate RQI Partners arrangement provides delivery fees, but management said these will not replace the legacy revenue runout. The American Red Cross Resuscitation Suite had begun implementation, but revenue was de minimis in Q2; success in replacing legacy revenue is uncertain.
- Contracted revenue: Remaining performance obligations were $436 million at June 30; the company expected to recognize 47% over the following 12 months and the balance thereafter. This is not a full-year revenue forecast.
- Unusual equity award: CEO Robert A. Frist, Jr. contributed personally owned shares for awards to approximately 820 employees. The shares were issued in July 2019; the company recognized about $2.0 million of stock compensation and $0.2 million of related payroll expense in Q2. The filing states that Mr. Frist was the only shareholder diluted by the transactions.
- Contingency: Approximately $328,000 of Patient Experience sale proceeds remained in escrow through August 12, 2019 for potential indemnification claims. Providigm’s purchase agreement also includes indemnification provisions and contingent consideration.
- Risks and outlook: The filing gives no specific overall full-year revenue or earnings guidance. It cautions that legacy resuscitation revenue may not be replaced by new offerings and identifies acquisition execution, access to additional financing, and interest-rate exposure as relevant risks. A hypothetical 10% fall in interest rates would reduce annualized interest income by about $396,000.
Key facts for investors to verify
- Whether HeartCode/RQI revenue declines as expected and whether new simulation offerings can offset the runout.
- Underlying operating-cost trends and profitability excluding the one-time employee award charge; compare GAAP results with the company’s non-GAAP Adjusted EBITDA reconciliation.
- Providigm’s subsequent operating performance, contingent payment exposure, and final purchase-price allocation.
- Cash generation and planned capital spending, including the new headquarters lease obligations.
- Resolution of the remaining Patient Experience escrow and any Providigm indemnification matters.