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| HSTM > SEC Filings for HSTM > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
Special Cautionary Notice Regarding Forward-Looking Statements
This Quarterly Report includes various forward-looking statements that are
subject to risks and uncertainties. Forward-looking statements include without
limitation, statements preceded by, followed by, or that otherwise include the
words "believes," "expects," "anticipates," "intends," "estimates" or similar
expressions. For those statements, HealthStream, Inc. claims the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
The following important factors, in addition to those discussed elsewhere in
this Quarterly Report and in our Annual Report on Form 10-K for the year ended
December 31, 2007, could affect our future financial results and could cause
actual results to differ materially from those expressed in forward-looking
statements contained in this document:
• our ability to effectively implement our growth strategy, as well as manage
growth of our operations and infrastructure;
• fluctuation in quarterly operating results caused by a variety of factors including the timing of sales, revenue recognition, customer renewals, and customer scheduling and acceptance;
• variability and length of our sales cycle;
• our ability to maintain and continue our competitive position against current and potential competitors;
• our ability to obtain proper distribution rights from content partners to support growth in courseware subscriptions;
• our ability to develop enhancements to our existing products and services, achieve widespread acceptance of new features, or keep pace with technological developments;
• loss of a significant customer and concentration of a significant portion of our revenue with a relatively small number of customers;
• our ability to accurately forecast results of operations due to certain revenue components being subject to significant fluctuations and an increase in the percentage of our business subject to renewal;
• our ability to address and resolve in a timely manner any customer concerns with the new version of our HealthStream Learning Center® ("HLC") platform;
• our ability to adequately address our customers' needs regarding their use of our products and services;
• our ability to adequately maintain our network infrastructure, computer systems, software and related security;
• our ability to protect our intellectual property;
• the effect of governmental regulation on us, our business partners and our customers, including, without limitation, changes in federal, state and international laws or other regulations regarding education, training and Internet transactions; and
• other risk factors detailed in our Annual Report on Form 10-K for the year ended December 31, 2007, and our other filings with the Securities and Exchange Commission.
Overview
HealthStream's services are focused on the professionals who work within
healthcare organizations, and include the delivery of education and training
products and services ("HealthStream Learning"), as well as survey and research
services ("HealthStream Research"). HealthStream Learning products and services
are used by healthcare organizations to meet a broad range of their training and
assessment needs, while HealthStream Research products and services provide our
customers valuable insight into measuring quality and satisfaction of patients,
physicians, employees, and members of the community. Across both our
HealthStream Learning and HealthStream Research segments, our customers include
approximately 2,500 healthcare organization facilities (predominately acute-care
facilities) throughout the United States.
We provide HealthStream Learning products and services to approximately 1,800
healthcare facilities. The Company's flagship learning product is the HLC, our
proprietary, Internet-based learning platform. We deliver educational and
training courseware to our customers through the HLC platform. HealthStream
Learning products and services are focused on education and training initiatives
designed to reach hospital-based healthcare professionals, as well as physicians
and medical device and pharmaceutical device industry sales representatives. We
offer a variety of online educational and training courseware and also provide
traditional seminar and paper-based educational activities. We also deliver
Internet-based medical device training within hospitals through our
HospitalDirect® platform.
We provide HealthStream Research products and services to approximately 1,000
healthcare facilities. These products include quality and satisfaction surveys,
data analyses of survey results, and other research-based measurement tools
focused on patients, physicians, employees, and members of the community.
HealthStream Research services are designed to provide customers thorough
analyses that provide insightful recommendations for change; to provide
benchmarking capability using our comprehensive databases; and to provide
consulting services to identify solutions for our customers based on their
survey results. As a certified vendor designated by the Centers for Medicare &
Medicaid Services, we offer our customers CAHPS® (Consumer Assessment of Health
Plan Survey) Hospital Survey services.
Key financial and operational indicators for the third quarter of 2008 include:
• Revenues of $13.7 million in the third quarter of 2008, up 16% over the
third quarter of 2007
• Net income of $609,000 in the third quarter of 2008, compared to $739,000 in the third quarter of 2007; annual customer Summit costs of $720,000 incurred in the third quarter of 2008 versus the second quarter of 2007
• 1,692,000 healthcare professional subscribers fully implemented on our Internet-based learning network at September 30, 2008, up from 1,457,000 at September 30, 2007
• $3.0 million stock repurchase plan completed resulting in a cumulative total of 1,119,900 shares purchased at an average price of $2.68 per share
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("US GAAP"). These
accounting principles require us to make certain estimates, judgments and
assumptions during the preparation of our financial statements. We believe the
estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time they are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and
liabilities as of the date of the financial statements, as well as the reported
amounts of revenues and expenses during the periods presented. To the extent
there are material differences between these estimates, judgments or assumptions
and actual results, our financial statements will be affected.
The accounting policies and estimates that we believe are the most critical in
fully understanding and evaluating our reported financial results include the
following:
• Revenue recognition
• Accounting for income taxes
• Product development costs and related capitalization
• Goodwill, intangibles, and other long-lived assets
• Allowance for doubtful accounts
• Accrual for service interruptions
• Stock based compensation
• Nonmonetary exchange of content rights and deferred service credits
In many cases, the accounting treatment of a particular transaction is
specifically dictated by US GAAP and does not require management's judgment in
its application. There are also areas in which management's judgment in
selecting among available alternatives would not produce a materially different
result. See Notes to Consolidated Financial Statements in our Annual Report on
Form 10-K for the year ended December 31, 2007 filed with the Securities and
Exchange Commission, which contains additional information regarding our
accounting policies and other disclosures required by US GAAP. There have been
no changes in our critical accounting policies and estimates from those reported
in our Annual Report on Form 10-K for the year ended December 31, 2007.
Revenues and Expense Components
The following descriptions of the components of revenues and expenses apply to
the comparison of results of operations.
Revenues. Revenues for our HealthStream Learning business segment consist of the
provision of services through our Internet-based HLC, authoring tools, a variety
of courseware subscriptions (add-on courseware), implementation and consulting
services, maintenance of 3rd party content, online sales training courses
(RepDirect™), online training and content development, HospitalDirect®, and a
variety of other educational activities for physicians, nurses and other
professionals within healthcare organizations. Revenues for our HealthStream
Research business segment consist of quality and satisfaction surveys, data
analyses of survey results, and other research-based measurement tools focused
on physicians, patients, employees, and other members of the community.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues
(excluding depreciation and amortization) consists primarily of salaries and
employee benefits, stock based compensation, employee travel and lodging,
royalties paid by us to content providers based on a
percentage of revenues, materials, outsourced phone survey support, contract
labor, hosting costs, as well as other direct expenses associated with revenues.
Personnel costs within cost of revenues are associated with individuals that
facilitate product delivery, provide services, conduct, process and manage phone
and paper-based surveys, handle customer support calls or inquiries, manage the
technology infrastructure for our hosted applications, manage content and survey
services, coordinate content maintenance services, and provide training or
implementation services.
Product Development. Product development expenses consist primarily of salaries
and employee benefits, stock based compensation, content acquisition costs
before technological feasibility is achieved, costs associated with the
development of content and expenditures associated with maintaining, developing
and operating our training, delivery and administration platforms. In addition,
product development expenses are associated with the development of new software
feature enhancements and new products. Personnel costs within product
development include our systems, application development, and quality assurance
teams, product managers, and other personnel associated with content and product
development.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
salaries, commissions and employee benefits, stock based compensation, employee
travel and lodging, advertising, trade shows, promotions, and related marketing
costs. Annually, we host a national customer conference in Nashville known as
"The Summit," a portion of the costs of which are included in sales and
marketing expenses. Personnel costs within sales and marketing include our
Learning and Research sales teams, strategic account management, marketing
personnel, as well as our account management group.
Depreciation and Amortization. Depreciation and amortization consist of
depreciation of property and equipment, amortization of intangibles considered
to have definite lives, amortization of content development fees, and
amortization of capitalized software feature enhancements.
Other General and Administrative Expenses. Other general and administrative
expenses consist primarily of salaries and employee benefits, stock based
compensation, employee travel and lodging, facility costs, office expenses, fees
for professional services, and other operational expenses. Personnel costs
within general and administrative expenses include individuals associated with
normal corporate functions (accounting, legal, human resources, administrative,
internal information systems, and executive management) as well as personnel who
maintain our accreditation status with various organizations.
Other Income/Expense. The primary component of other income is interest income
related to interest earned on cash, cash equivalents and investments in
marketable securities. The primary component of other expense is interest
expense related to a promissory note, capital leases and our revolving credit
facility.
Three Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007
Revenues. Revenues increased approximately $1.9 million, or 15.7%, to
$13.7 million for the three months ended September 30, 2008 from $11.8 million
for the three months ended September 30, 2007. Revenues for the three months
ended September 30, 2008 consisted of $8.5 million, or 62% of total revenue, for
HealthStream Learning and $5.2 million, or 38% of total revenue, for
HealthStream Research. In the three months ended September 30, 2007, revenues
consisted of $6.8 million, or 58% of total revenue, for HealthStream Learning
and $5.0 million, or 42% of total revenue, for HealthStream Research.
HealthStream Learning revenue growth of $1.7 million, or 24.4%, over the prior
year quarter included $1.8 million from our Internet-based subscription learning
products, which includes revenue increases from the HLC of $883,000 and $874,000
from increased courseware subscriptions and online training services. Revenues
from these products collectively increased 32% over the prior year third quarter
and approximated $7.3 million for the third quarter of 2008. This revenue growth
is a result of both an increase in the number of HLC subscribers and an increase
in sales of add-on courseware subscriptions. These revenue increases were
partially offset by a revenue decrease from live events, study guides and
association activities, which collectively declined $333,000 from the prior year
third quarter, primarily due to decreasing demand for such services.
HealthStream Research revenue for the third quarter of 2008 increased
approximately $187,000, or 3.7%, when compared to the third quarter of 2007.
Revenue mix changes over the prior year quarter included increases of $601,000
from patient and community surveys, but were partially offset by revenue
declines of $493,000 from physician and employee surveys. The decrease in
revenue is partially attributable to the loss of one significant physician
survey contract.
We expect revenues for the fourth quarter of 2008 to range between $13.0 and
$13.5 million, an increase of approximately eight to 12 percent over the prior
year fourth quarter. We expect revenues from HealthStream Learning to increase
between nine and 11 percent over the prior year fourth quarter resulting from
growth in our HLC subscriber base and add-on courseware subscriptions. These
expected revenue increases are anticipated to be partially offset by continued
declines in several of our project-based products such as live events and study
guides. We expect revenues from HealthStream Research to increase between 10 and
12 percent compared to the prior year fourth quarter associated with expected
growth in revenues from patient and community surveys, which will be partially
offset by lower revenues from physician and employee survey revenues.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues
(excluding depreciation and amortization) increased approximately $817,000, or
18.8%, to $5.2 million for the three months ended September 30, 2008 from
$4.3 million for the three months ended September 30, 2007. Cost of revenues as
a percentage of revenues increased to 37.7% of revenues for the three months
ended September 30, 2008 from 36.7% of revenues for the three months ended
September 30, 2007. Cost of revenues for HealthStream Learning increased
approximately $334,000 to $2.7 million and approximated 31.3% and 34.1% of
revenues for the three months ended September 30, 2008 and 2007, respectively.
The expense increase was primarily associated with increased royalties paid by
us resulting from growth in courseware subscription revenues as well as
increased costs associated with the revenue growth in implementation,
development, and consulting services. These expense increases were partially
offset by lower expenses associated with declines in live event, study guides,
and association revenues. Cost of revenues for HealthStream Research increased
approximately $483,000 to $2.5 million and approximated 48.2% and 40.3% of
revenues for the three months ended September 30, 2008 and 2007, respectively.
The increase in the amount of cost of revenues resulted primarily from increased
revenues from patient and community surveys which have higher fulfillment costs.
The expense increase as a percentage of revenues resulted from changes in
revenue mix, primarily lower revenues from our higher margin physician and
employee surveys when compared to the prior year quarter.
Gross Margin (excluding depreciation and amortization). Gross margin (which we
define as revenues less cost of revenues divided by revenues) declined to 62.3%
for the three months ended September 30, 2008 from 63.3% for the three months
ended September 30, 2007. This decline is primarily a result of the change in
revenue mix and related cost of revenues for HealthStream Research discussed
above. Gross margins for HealthStream Learning were 68.7% and 65.9% for the
three months ended September 30, 2008 and 2007, respectively. This increase is
primarily a result of growth in subscription based revenues over the prior year
quarter. Gross margins for HealthStream Research were 51.8% and 59.7% for the
three months ended September 30, 2008 and 2007, respectively. The decline
resulted from the change in survey revenue mix and related cost of revenues
mentioned above. We expect gross margins for the fourth quarter of 2008 to be up
slightly compared to the prior year fourth quarter.
Product development. Product development expenses increased approximately
$366,000, or 31.4%, to $1.5 million for the three months ended September 30,
2008 from $1.2 million for the three months ended September 30, 2007. Product
development expenses as a percentage of revenues increased to 11.2% of revenues
for the three months ended September 30, 2008 compared to 9.9% of revenues for
the three months ended September 30, 2007. The increase in both amount and as a
percentage of revenues primarily resulted from increased maintenance and support
costs of our HealthStream Learning products, as well as a redesignation of
personnel within HealthStream Research to product development from general and
administrative expense.
Product development expenses for HealthStream Learning increased approximately
$288,000 and approximated 15.1% and 14.6% of revenues for the three months ended
September 30, 2008 and 2007, respectively. This expense increase is associated
with maintenance and support of our learning platform products. Product
development expenses for HealthStream Research increased approximately $113,000
and approximated 4.8% and 2.7% of revenues for the three months ended
September 30, 2008 and 2007, respectively. This expense increase relates
primarily to a redesignation of personnel from general and administrative
expense compared to the prior year quarter. We expect product development
expenses for the fourth quarter of 2008 to increase in amount and as a
percentage of revenues over the prior year fourth quarter consistent with the
factors previously discussed.
Sales and Marketing. Sales and marketing expenses, including personnel costs,
increased approximately $828,000, or 36.1%, to $3.1 million for the three months
ended September 30, 2008 from $2.3 million for the three months ended
September 30, 2007. Approximately $550,000 of the increase resulted from our
annual Summit, which occurred during the third quarter of 2008, but was held
during the second quarter of 2007. The remaining increase resulted from
additional personnel and related expenses from both the HealthStream Learning
and HealthStream Research sales teams. Sales and marketing expenses approximated
22.8% and 19.4% of revenues for the three months ended September 30, 2008 and
2007, respectively.
Sales and marketing expenses for HealthStream Learning increased $623,000 and
approximated 25.2% and 22.3% of revenues for the three months ended
September 30, 2008 and 2007, respectively. Sales and marketing expenses for
HealthStream Research increased approximately $176,000, and approximated 17.9%
and 15.0% of revenues for the three months ended September 30, 2008 and 2007,
respectively. The expense increase for both HealthStream Learning and
HealthStream Research resulted from our annual Summit and additional sales
personnel and related expenses. We expect sales and marketing expenses for the
fourth quarter of 2008 to increase in amount and as a percentage of revenues
over the prior year fourth quarter.
Depreciation and Amortization. Depreciation and amortization decreased
approximately $142,000, to $1.2 million for the three months ended September 30,
2008 from $1.3 million for the three months ended September 30, 2007.
Depreciation, which is included in the unallocated corporate function, decreased
$39,000 resulting from assets reaching the end of their depreciable life and
fewer asset replacements. Amortization expense decreased $104,000, primarily due
to lower amortization of intangible assets. Amortization for HealthStream
Learning decreased $19,000, and approximated 4.8% and 6.2% of revenues for the
three months ended September 30, 2008 and 2007, respectively. Amortization for
HealthStream Research decreased $85,000 and approximated 4.8% and 6.6% of
revenues for the three months ended September 30, 2008 and 2007, respectively.
This decrease is primarily associated with lower amortization of TJO intangible
assets resulting from a reduction in the carrying value of such assets upon
completion of the valuation analysis during the fourth quarter of 2007. We
expect depreciation and amortization for the fourth quarter of 2008 to increase
compared to the prior year fourth quarter, resulting from capital expenditures
during the 2nd half of 2008 and intangible asset amortization.
Other General and Administrative. Other general and administrative expenses
increased approximately $124,000, or 6.3%, to $2.1 million for the three months
ended September 30, 2008 from $2.0 million for the three months ended
September 30, 2007. Other general and administrative expenses as a percentage of
revenues decreased to 15.3% for the three months ended September 30, 2008 from
16.7% for the three months ended September 30, 2007. The percentage decrease is
a result of the revenue increases mentioned above.
Other general and administrative expenses for HealthStream Learning increased
$193,000 compared to the prior year quarter primarily due to increased personnel
expenses associated with executive administration. Other general and
administrative expenses for HealthStream Research decreased approximately
$187,000 from the prior year quarter, primarily resulting from combining certain
functions at the corporate level and the redesignation of certain personnel to
product development. The unallocated corporate portion of other general and
administrative expenses increased $118,000 over the prior year quarter resulting
from increased personnel expenses, professional fees, and various other
corporate expenses. We expect other general and administrative expenses for the
fourth quarter of 2008 to increase in amount, but decrease as a percentage of
revenues when compared to the prior year fourth quarter.
Other Income (Expense). Other income, net decreased approximately $8,000 or
30.0%, to $19,000 for the three months ended September 30, 2008 from $27,000 for
the three months ended September 30, 2007. Interest income decreased $16,000 due
to lower invested cash balances compared to the prior year third quarter, and
was partially offset by lower interest expense of $8,000.
Provision for Income Taxes. The Company's income tax provision primarily
consists of the alternative minimum tax. Taxable income for 2008 is expected to
be substantially offset by the utilization of our NOL carryforwards.
Net Income. Net income was approximately $609,000 for the three months ended
September 30, 2008, down from $739,000 for the three months ended September 30,
2007, primarily due to the cost associated with our annual Summit and other
factors mentioned above. Net income per share during the fourth quarter of 2008
is expected to range between $0.04 and $0.06 per diluted share.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
Revenues. Revenues increased approximately $6.1 million, or 19.2%, to
$38.1 million for the nine months ended September 30, 2008 from $32.0 million
for the nine months ended September 30, 2007. Revenues for the nine months ended
September 30, 2008 consisted of $24.2 million for HealthStream Learning and
$13.9 million for HealthStream Research. In the nine months ended September 30,
2007, revenues consisted of $19.8 million for HealthStream Learning and
$12.2 million for HealthStream Research. HealthStream Learning experienced
growth in revenues from our HLC subscriber base of $2.7 million, increased
add-on courseware subscriptions of $2.1 million, and $845,000 from
implementation, development, and consulting services. These revenue increases
reflect year over year growth in our HLC subscriber base by 235,000 subscribers,
or 16%, and year over year revenue growth of 54% from courseware subscriptions.
HealthStream Learning's revenue growth was partially offset by a decline in
revenues from live events, study guides, and associations of $1.5 million,
primarily due to decreasing demand for these services. HealthStream Research
revenue growth of $1.7 million resulted primarily from the TJO acquisition, and
included revenue increases of $2.2 million from patient and community surveys,
but was partially offset by a revenue decrease of $489,000 from physician and
employee surveys, which primarily resulted from the loss of one significant
customer contract.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues
(excluding depreciation and amortization) increased approximately $2.9 million,
or 25.3%, to $14.5 million for the nine months ended September 30, 2008 from
$11.6 million for the nine months ended September 30, 2007. Cost of revenues as
a percentage of revenue approximated 38.2% and 36.3% of revenues for the nine
months ended September 30, 2008 and 2007, respectively. Cost of revenues for
HealthStream Learning increased $1.1 million and approximated 32.6% and 34.2% of
revenues for the nine months ended September 30, 2008 and 2007, respectively.
This expense increase primarily resulted from increased royalties paid by us
associated with the increase in courseware subscription revenues, as well as
increased personnel and related expenses, but was partially offset by lower
costs associated with live events, study guides and association projects. Cost
of revenues for HealthStream Research increased $1.8 million and approximated
47.9% and 39.8% of revenues for the nine months ended September 30, 2008 and
2007, respectively. The primary expense increase resulted from the full year
impact of personnel expenses associated with the TJO acquisition. The expense
increase as a percentage of revenues primarily resulted from the increase in
patient and community surveys over the prior year, which have higher fulfillment
costs, in addition to the decrease in revenues from physician surveys.
Gross Margin (excluding depreciation and amortization). Gross margin (which we define as revenues less cost of revenues divided by revenues) was 61.8% and . . .
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