HealthStream, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone Q4 filing; selected fourth-quarter results are included. HealthStream provides primarily SaaS-based workforce development, patient experience, and provider solutions to healthcare organizations. At year-end, it reported 4.62 million subscribers, including 4.48 million implemented subscribers.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $209.0 million | $170.7 million | +22% |
| Operating income | $13.6 million | $16.4 million | -17% |
| Net income | $8.6 million | $10.4 million | -17% |
| Diluted EPS | $0.28 | $0.37 | Down |
| Operating margin | 6.5% | 9.6% | Down 3.1 percentage points |
| Net margin | 4.1% | 6.1% | Down 2.0 percentage points |
| Operating cash flow | $34.9 million | $34.3 million | +2% |
- Revenue by segment: Workforce $161.3 million (+20%); Patient Experience $34.2 million (+7%); Provider $13.5 million (+197%). Provider growth primarily reflected the HealthLine Systems acquisition.
- Workforce implemented subscribers grew 9% to 4.48 million, while annualized revenue per implemented subscriber rose 7% to $36.96. Subscription-based solutions represented approximately 74% of consolidated revenue.
- Adjusted EBITDA, a non-GAAP measure, increased 17% to $33.8 million. GAAP operating income and net income declined despite revenue growth as operating expenses rose, including product development and depreciation and amortization.
- Cash and marketable securities totaled approximately $149.0 million; working capital was $120.5 million. The company had no debt outstanding at year-end and had full availability under its $50 million revolver, which matures in November 2017. Operating cash flow was nearly flat year over year.
- Investing cash outflow was $134.9 million, including $88.1 million (net of cash acquired) for business combinations. Financing cash inflow was $100.0 million, principally from a May 2015 stock offering that raised $98.0 million.
- Q4 2015 revenue was $55.9 million versus $45.3 million in Q4 2014; operating income was $1.9 million versus $4.2 million, and net income was $1.8 million versus $2.6 million.
Material changes and unusual items
- HealthStream acquired HealthLine Systems (HLS) in March 2015 for approximately $88.1 million. HLS contributed $8.5 million of reported revenue from acquisition through year-end and an operating loss of $2.5 million. Acquisition accounting reduced acquired deferred revenue; the filing reports a $9.0 million HLS deferred-revenue write-down and a $6.8 million 2015 consolidated revenue adjustment in its non-GAAP reconciliation.
- ICD-10 readiness training had provided significant revenue through 2015. Revenue from this training was approximately $26.8 million in 2015 and is expected to fall by approximately $20 million in 2016 as the transition-related demand subsides.
- Stock-based compensation expense increased to $3.3 million from $1.6 million. In June 2015, the CEO contributed shares that supported stock awards to more than 600 employees; the company recorded approximately $1.5 million of compensation expense for those awards.
- Goodwill and identifiable intangible assets increased substantially following HLS, to $83.1 million and $56.0 million, respectively. The company reported no impairment charges in 2015.
Outlook, risks, and other disclosures
- For 2016, management projected consolidated revenue growth of 8%–12%, operating income growth of 10%–14%, and a 39%–41% effective tax rate. Segment revenue growth outlook: Workforce 2%–6%, Patient Experience approximately 8%–12%, and Provider 80%–84%. Guidance excludes acquisitions and includes the anticipated ICD-10 training decline.
- Expected 2016 capital expenditures, software development, and content purchases were $14–$16 million. Management said available cash, investments, operating cash generation, and revolver capacity should fund anticipated needs for at least 12 months.
- Principal risks include customer renewals and pricing, concentration in healthcare, competition, variable survey timing and sales cycles, integration and execution of acquisitions, cybersecurity and privacy breaches, service interruptions, and errors in credentialing or survey data. The company also noted that customer survey timing can make revenue less predictable.
- Federal net operating loss carryforwards were fully utilized by year-end; management expected cash tax payments to rise and more closely approximate the tax provision. The company was in material compliance with its credit facility covenants.
- The board authorized a share repurchase program of up to $25 million in February 2016, after the reporting period. No cash dividends were anticipated. Management reported no legal proceeding expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether 2016 guidance is achieved after the expected ICD-10 revenue decline, particularly the assumptions behind segment growth and operating income growth.
- How much of reported growth reflects organic performance versus acquisitions, and whether HLS can improve profitability after its reported 2015 operating loss.
- Whether subscriber growth and revenue per subscriber can offset renewals, pricing pressure, and the fading of temporary training demand.
- The effect of deferred-revenue purchase accounting, amortization, and rising operating costs on GAAP earnings and margins; assess non-GAAP adjustments alongside GAAP results.
- Capital allocation and dilution following the 2015 stock offering, including use of the newly authorized repurchase program and any future acquisition financing.