HealthStream, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. HealthStream provides workforce development, patient experience, and provider credentialing solutions to healthcare organizations. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $59.9 million | $54.1 million | Up 11% |
| Operating income | $1.8 million | $2.5 million | Down 26% |
| Net income | $1.3 million | $1.5 million | Down 14% |
| Diluted EPS | $0.04 | $0.05 | Down $0.01 |
| Adjusted EBITDA (non-GAAP) | $8.7 million | $8.1 million | Up 7% |
| Operating cash flow | $16.5 million | $5.7 million | Up $10.8 million |
Margins: Cost of revenue was 44% of revenue versus 42% a year earlier, implying gross margin of approximately 56% versus 58%. Operating margin was approximately 3.1% versus 4.6%; net margin was approximately 2.1% versus 2.8%.
Cash, debt, and liquidity: At March 31, cash and cash equivalents were $53.0 million and marketable securities were $62.3 million, totaling $115.3 million. Working capital was $85.9 million. No revolving-facility borrowings were outstanding during the quarter; the full $50 million facility was available at quarter-end and matures November 24, 2017. The company reported compliance with facility covenants. Management stated existing liquidity, operating cash generation, and available borrowings should cover anticipated needs for at least 12 months.
Investing cash outflow was $12.9 million, including $3.0 million of capitalized software development and $1.0 million of property and equipment purchases; purchases of marketable securities were $28.2 million, partly offset by $19.3 million of maturities. Quarter-end cash increased by $3.4 million from year-end 2016.
Material changes and operating drivers
- Workforce Solutions: Revenue rose 6% to $43.7 million. Subscription revenue grew 6%, supported by more subscribers and courseware consumption. Implemented subscribers grew 3% to 4.47 million, and annualized revenue per implemented subscriber increased 4% to $37.68. ICD-10 readiness training revenue fell to about $0.5 million from $3.9 million.
- Patient Experience Solutions: Revenue slipped 1% to $7.9 million. Adoption of lower-priced e-surveys and reduced phone-survey volume affected results; the company said recurring Patient Insights survey revenue was comparable year over year.
- Provider Solutions: Revenue increased 72% to $8.3 million, including approximately $2.3 million from Morrisey Associates, acquired in August 2016. The segment remained loss-making, with an operating loss of $0.6 million versus $0.2 million a year earlier.
- Higher cost of revenue, sales and marketing, and depreciation and amortization pressured GAAP operating income. Increased royalty costs and personnel contributed to cost growth; sales and marketing expense rose 27%, while depreciation and amortization rose 24%, partly reflecting acquired intangibles and capitalized software.
- Operating cash flow benefited in part from working-capital movements, including a $3.7 million increase in deferred revenue and $5.0 million from accounts and unbilled receivables. Days sales outstanding rose to 63 from 58, primarily reflecting higher receivables and slower Provider Solutions collections.
Outlook, accounting matters, and risks
The filing provides no specific revenue, earnings, or margin guidance. Management said results for the quarter are not necessarily indicative of full-year results and cited acquisitions as part of its growth strategy. It cautioned that acquisition financing needs may exceed available resources and that additional financing may not be available on acceptable terms.
- GAAP results included the effects of acquired deferred-revenue fair-value write-downs. The company added back $0.8 million to operating income and $0.6 million to net income, net of tax, in its respective non-GAAP measures. These adjustments are not GAAP results and should not be viewed as replacements for them.
- Adoption of ASU 2016-09 generated a $2.2 million cumulative adjustment to opening retained earnings for deferred tax assets related to prior stock-based compensation tax benefits. The company also recognized $57,000 of excess tax benefits in the Q1 income tax provision.
- The company expects to adopt the new revenue-recognition standard (ASC 606) on January 1, 2018 using the modified retrospective approach. It had not quantified the financial impact, but anticipated changes to policies, systems, processes, and controls, as well as a retained-earnings adjustment. Potentially affected areas include allocating contract value across performance obligations and capitalizing contract-acquisition costs.
- Marketable securities were available-for-sale and management did not consider any other-than-temporarily impaired. A hypothetical 10% decline in interest rates was estimated to reduce annualized interest income by about $90,000. The company reported no foreign-currency or commodity-price exposure.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether recurring Workforce subscription growth can offset the continued decline in ICD-10 training revenue, and how subscriber monetization develops.
- Whether Provider Solutions growth and integration of Morrisey Associates translate into improved segment profitability; note that the acquisition contributed materially to reported growth.
- Whether elevated DSO and slower Provider Solutions collections reverse, and whether operating cash flow remains strong after working-capital effects.
- How the November 2017 revolving-credit-facility maturity is addressed, despite no balance outstanding at quarter-end.
- The eventual quantified impact and implementation readiness for ASC 606, including contract commission capitalization and revenue allocation effects.
- GAAP performance alongside non-GAAP measures, especially the impact of acquired deferred-revenue write-downs and rising operating costs.