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HSTM > SEC Filings for HSTM > Form 10-Q on 30-Jul-2013All Recent SEC Filings

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Form 10-Q for HEALTHSTREAM INC


30-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Cautionary Notice Regarding Forward-Looking Statements

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report and our audited consolidated financial statements and the notes thereto for the year ended December 31, 2012, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission ("SEC") on March 1, 2013, (the "2012 Form 10-K"). Statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements that the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," " projects," "should," "will," "would," and similar expressions are forward-looking statements.

The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

In evaluating any forward-looking statement, you should specifically consider the information regarding forward-looking statements and the information set forth under the caption "Item 1A. Risk Factors" in our 2012 Form 10-K and the information regarding forward-looking statements in our earnings releases, as well as other cautionary statements contained elsewhere in this report, including the matters discussed in "Critical Accounting Policies and Estimates." We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.

Overview

HealthStream provides Internet-based learning, talent management and research solutions for healthcare organizations - all designed to assess and develop the people that deliver patient care which, in turn, supports the improvement of business and clinical outcomes. Our learning and talent management products are used by healthcare organizations to meet a broad range of their training, certification, assessment and development needs, while our research products provide our customers information about patients' experiences, workforce engagement, physician relations, and community perceptions of their services. HealthStream's customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry.

Key financial indicators for the second quarter of 2013 include:

• Revenues of $31.9 million in the second quarter of 2013, up 24% from revenues of $25.8 million in the second quarter of 2012

• Operating income of $4.1 million in the second quarter of 2013, up 2% from operating income of $4.0 million in the second quarter of 2012

• Net income of $2.4 million in both the second quarter of 2013 and the second quarter of 2012, and earnings per share (EPS) of $0.09 per share (diluted) in both the second quarter of 2013 and the second quarter of 2012

• Adjusted EBITDA(1) of $6.4 million in the second quarter of 2013, up 8% from $5.9 million in the second quarter of 2012

• Annualized revenue per implemented subscriber(2) of $29.40 in the second quarter of 2013, up 13% from $25.95 in the second quarter of 2012

(1) Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of adjusted EBITDA to net income is included in this report.

(2) Annualized revenue per implemented subscriber represents the quarter's revenue for internet-based subscription products, annualized, then divided by the quarter's average total implemented subscribers.

Critical Accounting Policies and Estimates

The Company's 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

• Software development costs

• Goodwill, intangibles, and other long-lived assets

• Allowance for doubtful accounts

• Stock based compensation

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 where management's judgment in selecting among available alternatives would not produce a materially different result. See Notes to Consolidated Financial Statements in our 2012 Form 10-K, 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 2012 Form 10-K.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Revenues, net. Revenues increased approximately $6.1 million, or 23.5%, to $31.9 million for the three months ended June 30, 2013 from $25.8 million for the three months ended June 30, 2012. Revenues for 2013 consisted of $25.1 million, or 79% of total revenue, for HealthStream Learning & Talent Management and $6.8 million, or 21% of total revenue, for HealthStream Research. In 2012, revenues consisted of $19.3 million, or 75% of total revenue, for HealthStream Learning & Talent Management and $6.5 million, or 25% of total revenue, for HealthStream Research.

Revenues for HealthStream Learning & Talent Management increased $5.8 million, or 30.2%, over the second quarter of 2012. Revenues from our Internet-based subscription learning and talent management products increased by $5.0 million, or 28.3%, over the prior year second quarter due to a higher number of subscribers and more courseware consumption by subscribers. Revenues for 2013 were positively influenced by courseware subscriptions associated with International Classification of Diseases, 10th Edition (ICD-10) training. Our subscriber base increased to 3.12 million fully-implemented subscribers and 3.26 million contracted subscribers at June 30, 2013 compared to 2.78 million fully-implemented subscribers and 2.91 million contracted subscribers at June 30, 2012. Revenues from SimVentures, our collaborative arrangement with Laerdal Medical, increased by $410,000, due, in part, to the fulfillment of backorders of a recently upgraded product, and approximated $802,000 during the second quarter of 2013 compared to $392,000 during the second quarter of 2012. Revenues from our credentialing software product (which was acquired through the Sy.Med Development, Inc. acquisition in October 2012 and is not an internet-based product) contributed $1.1 million during the second quarter of 2013. Revenues from project-based services decreased by $636,000 compared to the prior year second quarter due to the completion of a large content development project.

Revenues for HealthStream Research increased $257,000, or 3.9%, over the second quarter of 2012. Revenues from Patient Insights™ surveys, our survey research product that generates recurring revenues, increased by $606,000, or 12.8%, over the prior year second quarter. Revenues from other surveys, which are conducted on annual or bi-annual cycles, decreased $349,000, or 19.2%, compared to the prior year second quarter.

Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $2.7 million, or 26.6%, to $12.9 million for the three months ended June 30, 2013 from $10.2 million for the three months ended June 30, 2012. Cost of revenues as a percentage of revenues was 40.3% of revenues for the three months ended June 30, 2013 compared to 39.3% of revenues for the three months ended June 30, 2012. Cost of revenues for HealthStream Learning & Talent Management increased approximately $2.3 million to $9.3 million and approximated 36.9% and 36.4% of revenues for HealthStream Learning & Talent Management for the three months ended June 30, 2013 and 2012, respectively. The increase is primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues and increased personnel costs, but was partially offset by lower costs associated with project-based services. Cost of revenues for HealthStream Research increased approximately $450,000 to $3.6 million and approximated 52.9% and 48.1% of revenues for HealthStream Research for the three months ended June 30, 2013 and 2012, respectively. The increase in both amount and as a percentage of revenue is primarily the result of additional costs associated with the growth in patient survey volume over the prior year second quarter. In addition, the decline in other survey revenues contributed to the increase as a percentage of revenue.

Product Development. Product development expenses increased approximately $596,000, or 27.3%, to $2.8 million for the three months ended June 30, 2013 from $2.2 million for the three months ended June 30, 2012. Product development expenses as a percentage of revenues were 8.7% and 8.4% of revenues for the three months ended June 30, 2013 and 2012, respectively.

Product development expenses for HealthStream Learning & Talent Management increased approximately $665,000 and approximated 9.7% and 9.1% of revenues for HealthStream Learning & Talent Management for the three months ended June 30, 2013 and 2012, respectively. The increase is due to additional personnel expenses associated with the maintenance of our platform and new product development initiatives. Product development expenses for HealthStream Research decreased approximately $69,000 and approximated 5.2% and 6.4% of revenues for HealthStream Research for the three months ended June 30, 2013 and 2012, respectively. This expense decrease was due to lower personnel expenses.


Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $772,000, or 16.5%, to $5.5 million for the three months ended June 30, 2013 from $4.7 million for the three months ended June 30, 2012. Sales and marketing expenses were 17.1% and 18.1% of revenues for the three months ended June 30, 2013 and 2012, respectively.

Sales and marketing expenses for HealthStream Learning & Talent Management increased $834,000 and approximated 15.8% and 16.3% of revenues for HealthStream Learning & Talent Management for the three months ended June 30, 2013 and 2012, respectively. This increase was associated with additional personnel and related expenses and increased commissions associated with higher sales performance compared to the prior year second quarter. Sales and marketing expenses for HealthStream Research decreased approximately $17,000, and approximated 20.5% and 21.6% of revenues for HealthStream Research for the three months ended June 30, 2013 and 2012, respectively.

Other General and Administrative Expenses.Other general and administrative expenses increased approximately $1.6 million, or 50.5%, to $4.8 million for the three months ended June 30, 2013 from $3.2 million for the three months ended June 30, 2012. Other general and administrative expenses as a percentage of revenues were 15.1% and 12.4% of revenues for the three months ended June 30, 2013 and 2012, respectively.

Other general and administrative expenses for HealthStream Learning & Talent Management increased $425,000 over the prior year second quarter primarily due to additional personnel, rent, and other support costs, while other general and administrative expenses for HealthStream Research decreased $13,000 compared to the prior year second quarter. The unallocated corporate portion of other general and administrative expenses increased $1.2 million over the prior year second quarter, primarily associated with additional personnel, professional fees, software maintenance renewal fees, taxes, contingent earn-out accruals associated with prior business combinations, and other general expenses.

Depreciation and Amortization. Depreciation and amortization increased approximately $325,000, or 20.7%, to $1.9 million for the three months ended June 30, 2013 from $1.6 million for the three months ended June 30, 2012. The increase primarily resulted from amortization of intangible assets within HealthStream Learning & Talent Management and higher depreciation expense associated with leasehold improvements to our Nashville, Tennessee office space.

Other Income, Net. Other income, net was approximately $28,000 for the three months ended June 30, 2013 compared to $26,000 for the three months ended June 30, 2012.

Income Tax Provision. The Company recorded a provision for income taxes of $1.7 million for the three months ended June 30, 2013 compared to $1.6 million for the three months ended June 30, 2012. The Company's effective tax rate was 41.4% for the second quarter of 2013 compared to 40.3% for the second quarter of 2012.

Net Income. Net income approximated $2.4 million for both the three months ended June 30, 2013 and 2012. Earnings per diluted share were $0.09 per share for both the three months ended June 30, 2013 and 2012.

Adjusted EBITDA (which we define as net income before interest, income taxes, stock based compensation, and depreciation and amortization) increased by 8.0% to approximately $6.4 million for the three months ended June 30, 2013 compared to $5.9 million for the three months ended June 30, 2012. This improvement is consistent with the factors mentioned above. See Reconciliation of Non-GAAP Financial Measures in Management's Discussion and Analysis of Financial Condition and Results of Operations for our reconciliation of this calculation to measures under US GAAP.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Revenues, net. Revenues increased approximately $12.1 million, or 24.3%, to $61.6 million for the six months ended June 30, 2013 from $49.5 million for the six months ended June 30, 2012. Revenues for 2013 consisted of $48.3 million, or 78% of total revenue, for HealthStream Learning & Talent Management and $13.3 million, or 22% of total revenue, for HealthStream Research. In 2012, revenues consisted of $37.1 million, or 75% of total revenue, for HealthStream Learning & Talent Management and $12.4 million, or 25% of total revenue, for HealthStream Research.

Revenues for HealthStream Learning & Talent Management increased $11.2 million, or 30.1%, over 2012. Revenues from our Internet-based subscription learning and talent management products increased by $10.1 million, or 29.9%, over the prior year due to a higher number of subscribers and more courseware consumption by subscribers. 2013 revenues were positively influenced by courseware subscriptions associated with ICD-10 training. Revenues from SimVentures, our collaborative arrangement with Laerdal Medical, increased by $463,000 and approximated $1.2 million during 2013 compared to $766,000 during 2012. Revenues from our credentialing software product contributed $2.0 million during 2013. Revenues from project-based services decreased by $1.4 million compared to the prior year due to the completion of a large content development project.

Revenues for HealthStream Research increased $887,000, or 7.1%, over 2012. Revenues from Patient Insights™ surveys, our survey research product that generates recurring revenues, increased by $1.2 million, or 12.7%, over the prior year. Revenues from other surveys, which are conducted on annual or bi-annual cycles, decreased $326,000, or 11.3%, compared to the prior year.


Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $5.7 million, or 28.6%, to $25.4 million for the six months ended June 30, 2013 from $19.7 million for the six months ended June 30, 2012. Cost of revenues as a percentage of revenues was 41.2% of revenues for the six months ended June 30, 2013 compared to 39.9% of revenues for the six months ended June 30, 2012. Cost of revenues for HealthStream Learning & Talent Management increased approximately $4.4 million to $17.8 million and approximated 36.9% and 36.0% of revenues for HealthStream Learning & Talent Management for the six months ended June 30, 2013 and 2012, respectively. The increase is primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues and increased personnel costs, but was partially offset by lower costs associated with project-based services. Cost of revenues for HealthStream Research increased approximately $1.2 million to $7.6 million and approximated 57.0% and 51.3% of revenues for HealthStream Research for the six months ended June 30, 2013 and 2012, respectively. The increase in both amount and as a percentage of revenue is primarily the result of additional costs associated with the growth in patient survey volume over the prior year. In addition, the decline in other survey revenues contributed to the increase as a percentage of revenue.

Product Development. Product development expenses increased approximately $1.3 million, or 32.9%, to $5.4 million for the six months ended June 30, 2013 from $4.1 million for the six months ended June 30, 2012. Product development expenses as a percentage of revenues were 8.7 % and 8.2% of revenues for the six months ended June 30, 2013 and 2012, respectively.

Product development expenses for HealthStream Learning & Talent Management increased approximately $1.4 million and approximated 9.7% and 8.7% of revenues for HealthStream Learning & Talent Management for the six months ended June 30, 2013 and 2012, respectively. The increase is due to additional personnel expenses associated with the maintenance of our platform and new product development initiatives. Product development expenses for HealthStream Research decreased approximately $121,000 and approximated 5.2 % and 6.6% of revenues for HealthStream Research for the six months ended June 30, 2013 and 2012, respectively. This expense decrease was due to lower personnel expenses.

Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $436,000, or 4.3%, to $10.6 million for the six months ended June 30, 2013 from $10.2 million for the six months ended June 30, 2012. Sales and marketing expenses were 17.3% and 20.6% of revenues for the six months ended June 30, 2013 and 2012, respectively. The increase in amount was primarily due to additional personnel and related expenses and increased commissions associated with higher sales performance compared to the prior year. These expense increases were partially offset by a reduction of expenses associated with the timing of our customer Summit, which was held in the first quarter of 2012, but is scheduled for the fourth quarter of 2013. Sales and marketing expenses for 2012 included approximately $870,000 of expenses associated with Summit.

Sales and marketing expenses for HealthStream Learning & Talent Management increased $595,000 and approximated 16.2% and 19.5% of revenues for HealthStream Learning & Talent Management for the six months ended June 30, 2013 and 2012, respectively. This increase was associated with additional personnel and related expenses and increased commissions associated with higher sales performance compared to the prior year, but was partially offset by the timing of our customer Summit. Sales and marketing expenses for HealthStream Research decreased approximately $107,000, and approximated 20.0% and 22.3% of revenues for HealthStream Research for the six months ended June 30, 2013 and 2012, respectively. The expense decrease was primarily due to the costs associated with our customer Summit, but was partially offset by increased commissions.

Other General and Administrative Expenses. Other general and administrative expenses increased approximately $3.1 million, or 51.0%, to $9.1 million for the six months ended June 30, 2013 from $6.0 million for the six months ended June 30, 2012. Other general and administrative expenses as a percentage of revenues were 14.8% and 12.2% of revenues for the six months ended June 30, 2013 and 2012, respectively.

Other general and administrative expenses for HealthStream Learning & Talent Management increased $793,000 over the prior year primarily due to additional personnel, rent, and other support costs, while other general and administrative expenses for HealthStream Research decreased $26,000 compared to the prior year. The unallocated corporate portion of other general and administrative expenses increased $2.3 million over the prior year, primarily associated with additional personnel, software maintenance renewal fees, professional fees, taxes, contingent earn-out accruals associated with prior business combinations, and other general expenses.

Depreciation and Amortization. Depreciation and amortization increased approximately $667,000, or 21.5%, to $3.8 million for the six months ended June 30, 2013 from $3.1 million for the six months ended June 30, 2012. The increase primarily resulted from amortization of intangible assets within HealthStream Learning & Talent Management and higher depreciation expense associated with capital expenditures and leasehold improvements to our Nashville, Tennessee office space.

Other Income, Net. Other income, net was approximately $75,000 for the six months ended June 30, 2013 compared to $45,000 for the six months ended June 30, 2012. The improvement over the prior year is associated with higher interest income from investments in marketable securities.

Income Tax Provision. The Company recorded a provision for income taxes of $3.0 million for the six months ended June 30, 2013 compared to $2.6 million for the six months ended June 30, 2012. The Company's effective tax rate was 40.7% for 2013 compared to 40.1% for 2012.


Net Income. Net income increased approximately $515,000, or 13.4%, to $4.4 million for the six months ended June 30, 2013 from $3.8 million for the six months ended June 30, 2012. Earnings per diluted share were $0.16 per share for the six months ended June 30, 2013, compared to $0.14 per diluted share for the six months ended June 30, 2012.

Adjusted EBITDA (which we define as net income before interest, income taxes, stock based compensation, and depreciation and amortization) increased by 17.1% to approximately $11.7 million for the six months ended June 30, 2013 compared to $10.0 million for the six months ended June 30, 2012. This improvement is consistent with the factors mentioned above. See Reconciliation of Non-GAAP Financial Measures in Management's Discussion and Analysis of Financial Condition and Results of Operations for our reconciliation of this calculation to measures under US GAAP.

Reconciliation of Non-GAAP Financial Measures

This report contains certain non-GAAP financial measures, including, non-GAAP net income, non-GAAP operating income, non-GAAP revenue and adjusted EBITDA, which are used by management in analyzing its financial results and ongoing operational performance. These non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with US GAAP and may be different from non-GAAP financial measures used by other companies.

In order to better assess the Company's financial results, management believes that adjusted EBITDA is an appropriate measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for non-cash and non-operating items. Adjusted EBITDA is also used by many investors and securities analysts to assess the Company's results from current operations. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under US GAAP. Because adjusted EBITDA is not a measurement determined in accordance with US GAAP, it is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.

The Company understands that, although adjusted EBITDA is frequently used by investors and securities analysts in their evaluation of companies, this measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for an analysis of the Company's results as reported under US GAAP. For example, adjusted EBITDA does not reflect cash expenditures, or future requirements for capital expenditures or contractual commitments; it does not reflect non-cash components of employee compensation; it does not reflect changes in, or cash requirements for, our working capital needs; and due to the Company's utilization of federal and state net operating loss carryforwards in 2012 and 2013, actual cash income tax payments have been significantly less than the tax provision recorded in accordance with US GAAP, and income tax payments will continue to be less than the income tax provision until our existing federal and state net operating loss carryforwards have been fully utilized or have expired.

Management compensates for the inherent limitations associated with using adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with US GAAP, and reconciliation of adjusted EBITDA to net income, the most directly comparable US GAAP measure.

In order to provide more accurate trends and comparisons of the Company's revenues, operating income, and net income, management believes that adding back the deferred revenue write-down associated with fair value accounting for acquired businesses provides a better indication of the ongoing performance of the Company. The revenue for the acquired contracts is deferred and typically recognized over a one year period, so our US GAAP revenues for the one year period after the acquisition will not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value.

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