HealthStream, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. HealthStream provides workforce development, patient experience, and provider solutions for healthcare organizations. Unless otherwise indicated, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior period | Change |
|---|---|---|---|
| Revenue | $47.2 million | $38.4 million | Up 23% |
| Operating income | $4.8 million | $3.3 million | Up 45% |
| Net income | $2.7 million | $1.9 million | Up 40% |
| Diluted EPS | $0.10 | $0.07 | Increased |
| Adjusted EBITDA (non-GAAP) | $8.4 million | $6.1 million | Up 39% |
| Operating cash flow | $9.0 million | $9.2 million | Lower by $0.2 million |
Operating margin was approximately 10.2%, compared with 8.6% a year earlier. Cost of revenues, excluding depreciation and amortization, was 42.8% of revenue versus 44.1%; higher product development, general and administrative, and depreciation and amortization expenses partly offset the improved cost-of-revenue ratio. The effective tax rate increased to 43.3% from 41.7%.
At March 31, 2015, cash and cash equivalents were $34.8 million and marketable securities were $29.6 million, totaling $64.4 million. Working capital was $36.4 million, down from $97.4 million at December 31, 2014, primarily because of the HealthLine Systems acquisition. Debt was $28.0 million under a $50.0 million revolving facility, leaving $22.0 million available. The facility’s weighted average interest rate was 1.67%; the company reported compliance with its covenants. Total assets were $299.4 million, including $88.8 million of goodwill and $56.6 million of net intangible assets.
Investing activities used $84.3 million, principally reflecting the $88.1 million HealthLine Systems acquisition, partly offset by marketable-security maturities. Financing activities provided $28.0 million, largely from revolving-credit borrowings. Management said cash, investments, operating cash generation, and available borrowing capacity should meet anticipated needs for at least 12 months.
Material changes and operating drivers
- HealthStream acquired HealthLine Systems, LLC (HLS) on March 16 for approximately $88.1 million in cash, including $6.75 million held in escrow. HLS contributed $342,000 of revenue and a $163,000 net loss from acquisition through quarter-end.
- The HLS acquisition established the Provider Solutions segment, combining HLS with Sy.Med. Provider revenue was $1.6 million; Workforce revenue was $37.6 million, up 25%; and Patient Experience revenue was $8.0 million, up 8%.
- Workforce growth reflected more subscribers and courseware consumption. Implemented subscribers increased 19.4% to 4.27 million; annualized revenue per implemented subscriber rose 3.9% to $34.63. ICD-10 training revenue was $7.1 million versus $6.6 million.
- HCCS, acquired in March 2014, contributed approximately $2.1 million of Q1 2015 revenue, compared with $89,000 in Q1 2014.
- Q1 2015 included approximately $965,000 of HLS transaction costs. Depreciation and amortization increased 35.5% to $3.3 million, primarily due to software development, acquired intangibles, and capital expenditures.
Outlook, risks, and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expected remaining net operating loss carryforwards to be fully utilized during 2015 and anticipated cash tax payments to rise significantly thereafter.
- HLS purchase accounting was preliminary and subject to revision during the measurement period. Identifiable intangible assets were preliminarily valued at $42.6 million; goodwill of $46.9 million was recorded for HLS. Acquired deferred revenue was written down by approximately $9.2 million, which will reduce revenue recognized on those contracts. Management’s non-GAAP comparisons add back certain deferred-revenue write-down effects; these measures are not substitutes for GAAP results.
- The revolving facility requires a funded-debt leverage ratio no greater than 3.0 to 1.0 and an interest-coverage ratio of at least 3.0 to 1.0. Management cautioned that future borrowing capacity and access to additional financing are not assured.
- Risks highlighted include acquisition integration and valuation, possible dilution from stock issued for acquisitions or capital raising, and the possibility that operating cash flow or financing may be insufficient. The company also identified revenue recognition, taxes, software development costs, goodwill and intangibles, doubtful accounts, and stock compensation as critical accounting areas.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company was assessing the impact of the new revenue-recognition standard, which was scheduled to take effect for annual periods beginning after December 15, 2016.
Key facts for investors to verify
- HLS integration, final purchase-price allocation, contingent tax-related items, and the timing and amount of the deferred-revenue effects.
- Whether subscriber growth, courseware consumption, and ICD-10-related revenue persist beyond the reported quarter.
- Cash generation and working-capital trends after the acquisition, including the anticipated increase in cash taxes as tax-loss carryforwards are used.
- Debt levels, covenant headroom, interest costs, and remaining borrowing capacity as acquisition spending and operations evolve.
- GAAP performance alongside adjusted EBITDA and other non-GAAP measures, including the adjustments used in those measures.