HealthStream, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. HealthStream provides workforce-development and provider-credentialing solutions to healthcare organizations. On February 12, 2018, it sold its Patient Experience (PX) business; PX is presented as discontinued operations.
Financial results
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Continuing-operations revenue | $54.9 | $52.0 | Up 6% |
| Operating income | $3.7 | $2.4 | Up 58%; operating margin approximately 6.8% vs. 4.6% |
| Income from continuing operations | $3.6 | $1.7 | Diluted EPS $0.11 vs. $0.05 |
| Net income | $23.8 | $1.3 | Includes $20.2 of income from discontinued operations, principally the PX-sale gain |
| Adjusted EBITDA from continuing operations | $10.2 | $8.7 | Non-GAAP; Q1 2018 includes a $1.4 benefit from ASC 606 adoption |
| Net cash from continuing operating activities | $9.6 | $15.1 | Down $5.5 |
Workforce Solutions revenue was $44.9 million, up 3%; Provider Solutions revenue was $9.9 million, up 20%. Cost of revenues was 41% of revenue in both periods, implying a 59% gross margin. Cash and equivalents were $156.0 million and marketable securities were $39.3 million at quarter-end. Working capital was $118.9 million. There was no debt outstanding; the company had the full $50 million revolving facility available, which matures November 24, 2018. Total cash from operating activities, including discontinued operations, was $8.5 million; investing activities provided $60.7 million, largely reflecting PX-sale proceeds.
Material changes and unusual items
- PX was sold for $65.5 million in cash, subject to working-capital adjustment; $6.55 million was placed in escrow. The company reported a $31.0 million pretax gain and a $20.3 million after-tax gain. Net proceeds reported in investing cash flow were $58.2 million.
- The Board declared a $1.00-per-share special cash dividend, totaling $32.5 million. It was accrued at March 31 and paid April 3, 2018.
- HealthStream adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased Q1 continuing-operations income by $1.0 million and operating income by $1.4 million, while reducing reported revenue by approximately $8,000. It also changed the timing of commission expense by capitalizing eligible contract-acquisition costs. Prior-period results remain under ASC 605, limiting direct comparability.
- Revenue growth reflected courseware and enterprise-application growth, Provider Solutions customer/product growth, and MAI revenue growth. Workforce implemented subscribers rose 6% to 4.74 million. Workforce revenue was partly offset by a $0.6 million decline in ICD-10 readiness revenue.
- The effective tax rate on continuing operations was 10.2%, versus 31.5%, reflecting the lower federal corporate tax rate and $0.6 million in excess tax benefits, primarily from stock-option exercises.
Outlook, risks, and controls
- Management gave no specific numerical revenue or earnings guidance. It said cash, investments, operating cash generation, and available borrowing capacity should cover anticipated working capital, product-development, and capital-expenditure needs for at least 12 months.
- Laerdal notified HealthStream that it does not intend to renew agreements for HeartCode and RQI after December 31, 2018. These products have generated significant revenue, though at below-average margins. HealthStream plans broader simulation offerings, including resuscitation programs after expiration, but cautioned that replacement revenue and earnings are not assured and results could be adversely affected.
- The revolving facility has leverage and interest-coverage covenants; HealthStream reported compliance at March 31, 2018. Management noted future acquisition funding and financing availability are not assured. A hypothetical 10% decline in interest rates would reduce annualized interest income by approximately $323,000.
- Disclosure controls were judged effective. The company implemented process and control changes for ASC 606 during the quarter. The filing says adoption of the lease standard is planned for January 1, 2019 and its impact was still being evaluated.
Important facts for investors to verify
- How the Laerdal agreement expiration affects revenue, margins, customer relationships, and the timing and economics of replacement products.
- PX-sale closing adjustments, escrow release and any indemnification claims, and the ultimate use and ongoing impact of the special dividend.
- Underlying continuing-business performance after separating the ASC 606 timing effects, deferred-revenue write-downs, and the PX divestiture.
- Operating cash-flow trends and the remaining liquidity and covenant capacity as the $50 million credit facility approaches its November 2018 maturity.
- Whether reported growth in Provider Solutions and subscriber counts translates into sustained revenue and profitability.