HealthStream, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the same 2011 periods. Figures below are in millions of dollars unless noted. HealthStream provides internet-based learning and research products and services to healthcare organizations and other healthcare-industry customers.
Financial results
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $25.8 (+22.8%) | $21.1 | $49.5 (+25.2%) | $39.6 |
| Operating income | $4.0 (+30.1%) | $3.1 | $6.4 (+12.7%) | $5.7 |
| Net income | $2.4 (+32.6%) | $1.8 | $3.8 (+14.6%) | $3.4 |
| Diluted EPS | $0.09 | $0.08 | $0.14 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $5.9 (+27.3%) | $4.6 | $10.0 (+18.8%) | $8.4 |
| Operating cash flow | — | $8.9 | $8.8 |
Q2 operating margin was approximately 15.6%, versus 14.8% a year earlier; first-half operating margin was approximately 12.9%, versus 14.3%. Cost of revenue excluding depreciation and amortization rose to 39.3% of revenue in Q2 from 36.3%, and to 39.9% for the first half from 37.2%, weighing on gross margin. The company attributed the increase chiefly to royalties, personnel costs, and project-service costs. First-half net margin was approximately 7.8%, versus 8.5%.
Business trends and material changes
- Learning: Q2 revenue grew 33.5% to $19.3 million; first-half revenue rose 35.2% to $37.1 million. Subscription-learning revenue increased with subscriber growth and higher courseware consumption. Fully implemented subscribers reached 2.783 million, up from 2.486 million; contracted subscribers totaled 2.908 million, up from 2.586 million.
- Research: Q2 revenue was $6.5 million, down 0.9%; first-half revenue was $12.4 million, up 2.5%. Patient Insights survey revenue grew, while other survey revenue declined due to fewer engagements.
- Q2 net income and diluted EPS improved year over year, but first-half diluted EPS was flat despite revenue and net-income growth. The company cited approximately 3.6 million additional shares outstanding following its Q4 2011 follow-on offering.
- Q2 cost-of-revenue pressure and higher operating expenses limited first-half operating-income growth relative to revenue growth. First-half sales and marketing expense increased 29.9%; depreciation and amortization increased 29.6%.
Liquidity, debt, and cash flows
At June 30, 2012, cash and cash equivalents were $27.3 million and marketable securities were $64.5 million, totaling $91.9 million in cash and investments. Working capital was $85.2 million. The company reported no outstanding debt and had the full $20.0 million revolving credit facility available; it stated that available resources should cover anticipated needs for at least 12 months. Total assets were $162.2 million and shareholders’ equity was $126.6 million.
First-half operating cash flow was $8.9 million. Investing activities used $59.2 million, including $72.3 million of marketable-security purchases, $2.9 million for the DCI acquisition (net of cash acquired), $2.0 million for capitalized software development, and $2.0 million for property and equipment; security maturities provided $20.0 million. Cash declined to $27.3 million from $76.9 million, largely reflecting investment purchases and the reallocation of cash into marketable securities. Days sales outstanding increased to 65 from 54 a year earlier; management cited receivable growth and some customers taking longer to pay.
Acquisition, outlook, and risks
- On June 29, HealthStream acquired all of Decision Critical, Inc. (DCI), which provides learning and competency-management products for acute-care hospitals. Consideration was approximately $3.4 million in cash and 22,124 shares, with up to $0.3 million of contingent additional payments. The preliminary allocation included $3.0 million of goodwill, $1.8 million of identifiable intangible assets, $0.145 million of net tangible assets, and $0.7 million of deferred tax liabilities; the allocation may change during the one-year measurement period.
- No specific revenue or earnings guidance is provided. Management expects liquidity to meet anticipated needs for at least 12 months. It estimated remaining federal and state net operating loss carryforwards could be used up within 18–24 months, after which cash tax payments may increase significantly.
- Risks highlighted include the possibility that operating cash flow or external financing may be insufficient or unavailable on acceptable terms; revolving-facility borrowing is subject to covenants and capacity limits. The company also cautioned that acquisition-related stock issuance could dilute EPS. Forward-looking statements are subject to risks described in the 2011 Form 10-K.
- Other notable items: the company recorded $0.8 million of SimVentures revenue and $0.9 million of expenses for the first half, and capitalized $0.7 million of related software development. A customer content-rights arrangement involves $0.5 million of assigned value and annual service credits through 2016.
Investor verification points
- Track whether subscriber growth and courseware consumption sustain Learning revenue growth, and whether royalty and delivery costs moderate.
- Review DSO and receivable collections, and distinguish cash from marketable securities when assessing liquidity.
- Monitor the final DCI purchase-price allocation, acquisition performance, and any contingent payment.
- Assess the effect of the larger share count on per-share results and dilution from future stock-based compensation or acquisitions.
- Verify the pace of NOL utilization and the resulting timing of higher cash tax payments; compare adjusted EBITDA with GAAP cash flow and earnings.