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| HSTM > SEC Filings for HSTM > Form 10-Q on 12-May-2009 | All Recent SEC Filings |
12-May-2009
Quarterly Report
• Net income of $878,000 in the first quarter of 2009, up from $66,000 in the first quarter of 2008
• Earnings per share (EPS) of $0.04, up from $0.00 for the same period last year
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 credits
• 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, 2008 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, 2008.
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 third 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. Personnel costs within sales and marketing include our HealthStream
Learning and HealthStream Research sales teams, strategic account management,
and 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 and cash equivalents. The primary component
of other expense is interest expense related to a promissory note, capital
leases and our revolving credit facility.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Revenues. Revenues increased approximately $2.2 million, or 19.2%, to
$13.6 million for the three months ended March 31, 2009 from $11.4 million for
the three months ended March 31, 2008. Revenues for 2009 consisted of
$9.0 million, or 66% of total revenue, for HealthStream Learning and $4.6
million, or 34% of total revenue, for HealthStream Research. In 2008, revenues
consisted of $7.5 million, or 66% of total revenue, for HealthStream Learning
and $3.9 million, or 34% of total revenue, for HealthStream Research.
Revenues for HealthStream Learning increased $1.5 million, or 20.0%, over the
first quarter of 2008. Revenues from our Internet-based subscription learning
products accounted for $1.1 million of the increase, and were comprised of
revenue increases from the HLC of $498,000 and from courseware subscriptions and
online training services of $591,000. Revenues from these products increased 17
percent over the prior year quarter and approximated $7.6 million for the first
quarter of 2009. These revenue increases resulted from continued growth in our
HLC subscriber base and additional courseware sales to our customers. Revenues
associated with implementation, development, and consulting services increased
$559,000 over the prior year quarter due to increased courseware development
service revenues compared to the prior year . These increases in revenues were
partially offset by a decline in revenues from live events, study guides, and
other project-based activities, which collectively declined $151,000 from the
same quarter in the prior year.
Revenues for HealthStream Research increased $701,000, or 17.8%, over the first
quarter of 2008. HealthStream Research provides four survey product lines:
patient, physician, employee and community. This revenue growth is attributable
to increased volumes for these product lines when compared to the prior year
quarter.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues
increased approximately $740,000, or 16.3%, to $5.3 million for the three months
ended March 31, 2009 from $4.5 million for the three months ended March 31,
2008. Cost of revenues as a percentage of revenues were 38.7% of revenues for
the three months ended March 31, 2009 down from 39.6% of revenues for the three
months ended March 31, 2008. Cost of revenues for HealthStream Learning
increased approximately $548,000 to $3.0 million and approximated 33.4% and
32.8% of revenues for the three months ended March 31, 2009 and 2008,
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 to support the growth in implementation, development,
and consulting revenues. Cost of revenues for HealthStream Research increased
approximately $192,000 to $2.3 million and approximated 48.9% and 52.7% of
revenues for the three months ended March 31, 2009 and 2008, respectively. The
increase in cost of revenues for HealthStream Research is primarily a result of
the costs associated with increased survey volumes compared to the same quarter
in the prior year. The decrease in cost of revenues as a percentage of revenues
resulted from improved operating efficiencies compared to the same quarter in
the prior year.
Gross Margin (excluding depreciation and amortization). Gross margin (which we
define as revenues less cost of revenues divided by revenues) improved to 61.3%
for the three months ended March 31, 2009 from 60.4% for the three months ended
March 31, 2008. This improvement is primarily associated with the improved
performance within HealthStream Research compared to the same quarter in the
prior year. Gross margins for HealthStream Learning were 66.6% and 67.2% for the
three months ended March 31, 2009 and 2008, respectively. Gross margins for
HealthStream Research were 51.1% and 47.3% for the three months ended March 31,
2009 and 2008, respectively.
Product Development. Product development expenses increased approximately
$250,000, or 19.5%, to $1.5 million for the three months ended March 31, 2009
from $1.3 million for the three months ended March 31, 2008. Product development
expenses as a percentage of revenues were 11.3% and 11.2% of revenues for the
three months ended March 31, 2009 and 2008, respectively.
Product development expenses for HealthStream Learning increased approximately
$200,000 and approximated 13.8% and 13.9% of revenues for the three months ended
March 31, 2009 and 2008, respectively. This expense increase resulted from
additional personnel and contract labor associated with maintenance and support
of our learning platform products. Product development expenses for HealthStream
Research increased approximately $50,000 associated with additional personnel
and approximated 6.4% and 6.2% of revenues for the three months ended March 31,
2009 and 2008, respectively.
Sales and Marketing. Sales and marketing expenses, including personnel costs,
increased approximately $161,000, or 6.3%, to $2.7 million for the three months
ended March 31, 2009 from $2.6 million for the three months ended March 31,
2008. Sales and marketing expenses approximated 19.9% and 22.3% of revenues for
the three months ended March 31, 2009 and 2008, respectively.
Sales and marketing expenses for HealthStream Learning increased $230,000 and
approximated 20.4% and 21.4% of revenues for the three months ended March 31,
2009 and 2008, respectively. This expense increase primarily resulted from
additional sales personnel and related expenses. Sales and marketing expenses
for HealthStream Research decreased approximately $85,000, and approximated
17.6% and 22.9% of revenues for the three months ended March 31, 2009 and 2008,
respectively. This decrease resulted primarily from fewer sales and marketing
personnel and related expenses when compared to the prior year quarter.
Other General and Administrative. Other general and administrative expenses
increased approximately $134,000, or 7.6%, and approximated $1.9 million for the
three months ended March 31, 2009 compared to $1.8 million for the three months
ended March 31, 2008. Other general and administrative expenses as a percentage
of revenues decreased to 14.0% for the three months ended March 31, 2009 from
15.5% for the three months ended March 31, 2008. The percentage decrease is a
result of the revenue increases mentioned above.
Other general and administrative expenses for HealthStream Learning increased
$136,000 compared to the prior year quarter, primarily due to additional
personnel expenses and bad debt expense. Other general and administrative
expenses for HealthStream Research increased approximately $20,000 over the
prior year quarter, primarily due to office expenses and bad debt expense. The
unallocated corporate portion of other general and administrative expenses
decreased $21,000 from the prior year quarter, primarily due to lower facility
costs.
Depreciation and Amortization. Depreciation and amortization increased
approximately $20,000, or 1.6%, to $1.3 million for the three months ended
March 31, 2009 from $1.2 million for the three months ended March 31, 2008.
Other Income (Expense). Other income (expense) decreased approximately $23,000,
or 104.1%, to an expense of $1,000 for the three months ended March 31, 2009
from income of $22,000 for the three months ended March 31, 2008. Interest
income decreased $37,000 from the prior year quarter resulting from lower yield
rates on cash and cash equivalents. Interest expense decreased $15,000 from the
prior year quarter due to reductions in debt and capital lease balances.
Provision for Income Taxes. The Company's income tax provision primarily
consists of the federal alternative minimum tax and state income taxes. Taxable
income for 2009 is expected to be substantially offset by the utilization of our
operating loss carryforwards.
Net Income. Net income was approximately $878,000 for the three months ended
March 31, 2009, up from $66,000 for the three months ended March 31, 2008. Net
income per share was $0.04 per share for the three months ended March 31, 2009,
up from $0.00 per share for the three months ended March 31, 2008. This
improvement is a result of the factors mentioned above.
Liquidity and Capital Resources
Net cash provided by operating activities was approximately $1.7 million during
both the three months ended March 31, 2009 and 2008. Our primary sources of cash
were generated from receipts from the sales of our products and services. Our
days sales outstanding ("DSO") which we calculate by dividing the accounts
receivable balance, excluding unbilled and other receivables, by average daily
revenues for the quarter, approximated 69 days for the first quarter of 2009
compared to 57 days for the first quarter of 2008. The increase in DSO is due to
payment delays from customers, as well as higher balances with several customers
that were billed in advance for annual fees rather than on a monthly
subscription basis. The primary uses of cash to fund our operations for the
quarter ended March 31, 2009 included personnel expenses, sales commissions,
royalty payments, payments for contract labor and other direct expenses
associated with delivery of our products and services, and general corporate
expenses. The increase in accounts receivable and prepaid royalties negatively
impacted our cash flows from operations for the three months ended March 31,
2009.
Net cash used in investing activities approximated $813,000 for the three months
ended March 31, 2009 compared to $385,000 during the three months ended
March 31, 2008. The primary uses of cash for the quarter ended March 31, 2009
were associated with property and equipment purchases of $541,000 and
capitalized software feature enhancements of $272,000. These uses of cash were
associated with technology investments in our platform products.
Cash used in financing activities was approximately $190,000 and $187,000 for
the three months ended March 31, 2009 and 2008, respectively. The primary uses
of cash for the quarter ended March 31, 2009 related to payments under a
promissory note and capital lease obligations.
Our revenues increased and our operating income improved over the prior year
quarter, and our balance sheet reflects positive working capital at March 31,
2009. Current assets increased approximately $3.0 million during the first
quarter of 2009 primarily due to increases in accounts receivable, cash
balances, and prepaid royalties, while current liabilities also increased
approximately $2.2 million during the first quarter of 2009 resulting from
increases in deferred revenue. Our primary source of liquidity was $4.8 million
of cash and cash equivalents, restricted cash, and interest receivable. We also
have a $15.0 million revolving credit facility loan agreement, all of which was
available at March 31, 2009.
We believe that our existing cash and cash equivalents, restricted cash, related
interest receivable, and cash generated from operations will be sufficient to
meet anticipated cash needs for working capital, new product development and
capital expenditures for at least the next 12 months. Our revolving credit
facility expires in July 2009, and we are in the process of renewing or
replacing this credit facility, which may be difficult in the current economic
environment. If we are unable to renew this credit facility on acceptable terms,
we believe we will have sufficient liquidity to meet our anticipated needs for
at least the next 12 months. As part of our growth strategy, we review possible
strategic alliances and acquisitions that complement our products and services.
We anticipate that future strategic alliances and acquisitions, if any, would be
effected through a combination of stock and cash consideration. We may need to
raise additional capital through the issuance of equity or debt securities
and/or borrowings under our revolving credit facility, or another facility, to
finance any future acquisitions. The issuance of our stock as consideration for
an acquisition would have a dilutive effect and could adversely affect our stock
price. The credit markets have been experiencing extreme volatility and
disruption, and we cannot assure you that if we need additional financing that
it will be available on terms favorable to us, or at all. Failure to generate
sufficient cash flow from operations or raise additional capital when required
in sufficient amounts and on terms acceptable to us could harm our business,
financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates. We do not have any
foreign currency exchange rate risk or commodity price risk. As of March 31,
2009, our outstanding indebtedness included a promissory note of approximately
$852,000 and approximately $23,000 of capital lease obligations. We may become
subject to interest rate market risk associated with borrowings under our
revolving credit facility, which bears interest at a variable rate based on the
30 Day LIBOR Rate plus 150 basis points. We are also exposed to market risk with
respect to our cash balances. At March 31, 2009, the Company had cash and cash
equivalents, restricted cash, and related interest receivable totaling
approximately $4.8 million. Current investment rates of return approximate 1.00%
- 1.50%. Assuming a 1.25% rate of return on $4.8 million, a hypothetical 10%
decrease in interest rates would decrease interest income and decrease net
income on an annualized basis by approximately $6,000.
The above market risk discussion and the estimated amounts presented are
forward-looking statements of market risk assuming the occurrence of certain
adverse market conditions. Actual results in the future may differ materially
from those projected as a result of actual developments in the market.
Item 4T. Controls and Procedures
Evaluation of Controls and Procedures
HealthStream's chief executive officer and principal financial officer have
reviewed and evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the
period covered by this Quarterly Report. Based on that evaluation, the chief
executive officer and principal financial officer have concluded that
HealthStream's disclosure controls and procedures were effective to ensure that
the information required to be disclosed by the Company in the reports the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and the information required to be
disclosed in the reports the Company files or submits under the Exchange Act was
accumulated and communicated to the Company's management, including its
principal executive and principal financial officer, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in HealthStream's internal control over financial reporting
that occurred during the period covered by this Quarterly Report that has
materially affected, or that is reasonably likely to materially affect,
HealthStream's internal control over financial reporting.
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