HEALTHSTREAM, INC. The following discussion of the financial condition and results of operations of
The following discussion addresses our 2021 and 2020 results and year-to-year
comparisons between 2021 and 2020. A discussion of year-to-year comparisons
between 2020 and 2019 can be found in our Annual Report on Form 10-K for the
fiscal year ended
OVERVIEW
We are in the process of more completely unifying the Company under a single
platform strategy that will serve as the foundation for the entire
enterprise. By enabling our applications through a common technology platform
known as hStream, we believe that stand-alone applications, which already
provide a powerful value proposition, will begin to leverage each other to more
efficiently and effectively empower our customers to manage their businesses and
improve their outcomes. As we continue to achieve this goal of orienting
multiple applications in relation to a single technology platform, distinctions
between our current reporting segments of Workforce Solutions and Provider
Solutions may become less applicable, or even obsolete, in terms of how we
operate and report on the Company's business. At the current time, what we
characterize and report on as Workforce Solutions products are used by
healthcare organizations to meet a broad range of their clinical development,
learning and performance, certification, scheduling, safety and compliance, and
competency assessment needs. Provider Solutions products are used by healthcare
organizations for provider credentialing, privileging, and enrollment needs.
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Revenues for the year ended
Since the beginning of 2020, we have completed six acquisitions. We acquired
NurseGrid in
IMPACT AND RESPONSE TO COVID-19 PANDEMIC
The COVID-19 pandemic persists and continues to cause uncertainty and potential economic volatility, including with regard to the pandemic's various and unpredictable impacts on our healthcare customers and our business.
Our business is focused on providing solutions to healthcare organizations, and as such the pandemic's adverse impact on healthcare organizations has resulted in an adverse impact on our Company. We believe that certain developments related to the pandemic negatively impacted our business in 2021, and are expected to continue to negatively impact our business during 2022 and potentially thereafter, as described below. In particular, sales cycles have been delayed or postponed such that declines in sales bookings by customers since the beginning of the pandemic will result in a negative impact to revenue and earnings in 2022 and potentially thereafter.
Similar to the year ended
When travel restrictions lessen and travel resumes at a more normal level, we expect operating expenses associated with travel to have a negative impact on our operating results, and we do not expect revenue generated from such activities to begin offsetting such increases to operating expenses at the same time we incur such expenses. However, the uncertain trajectory of the pandemic may impact when and to what extent normal operating expenses, including expenses related to sales travel and in-person tradeshows, increases or remains abated.
We continue to closely monitor developments related to the pandemic that may have an adverse impact on our operational and financial performance. We also continue to take actions focused on the safety and well-being of our employees, assisting our customers in this time of need, and mitigating operational and financial impacts to our business. We intend to continue serving our customers both in their battle to defeat the coronavirus and across the continuum of their other workforce and provider solution needs.
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Additionally, to promote the safety and well-being of our employees, we required
our entire workforce to begin working remotely from home beginning
Many healthcare organizations have been, and may continue to be, substantially adversely impacted by the pandemic. The period of time over which this adverse impact continues, the extent to which certain healthcare organizations continue to receive and/or are eligible to utilize governmental funds as the result of federal stimulus and relief measures, and ongoing public health conditions related to the pandemic are important factors that may impact our business.
In light of adverse developments with respect to healthcare organizations as noted above, we are continuing to monitor the ability or willingness of our customers to:
• pay for our solutions in a timely manner, in full, or at all; • implement solutions they have purchased from us; and • renew existing or purchase new products or services from us.
We monitor our cash position and credit exposure by evaluating, among other things, weekly cash receipts, days sales outstanding (DSO), customer requests to modify payment or contract terms, and bankruptcy notices. We experienced modest decreases in DSO during 2021 compared to 2020 as a result of faster payments from customers, and bad debts were not significantly different from pre-pandemic levels. However, while we have not experienced any adverse impacts to customer defaults resulting from COVID-19, we are unable to know whether or to what extent future negative trends related to the pandemic may arise or increase over time. Any deterioration in the collectability (or the timing of payments) of our accounts receivable could adversely impact our financial results.
The timing of implementation of our services is also relevant to our business
because our software solutions do not result in revenue recognition until they
are made available for use. To the extent our customers delay or fail to
implement products they have previously purchased, our financial results will be
adversely impacted. While we have experienced a negative impact from certain
implementation delays related to COVID-19, these delays have not been consistent
across products or across customers. In fact, we have become more efficient in
implementing certain products during the pandemic, particularly with regard
to products focused on workforce development solutions such as hStream and the
The
Conditions related to the pandemic have caused, and may continue to cause, some customers to delay purchasing decisions they otherwise would have made. Such conditions also adversely impacted the ability or willingness of some customers to renew their contracts with us or to renew contracts at the same levels. Pandemic-related conditions have also delayed or otherwise adversely impacted our ability to enter into contracts with new potential customers, as some potential customers have been focused on dealing with the impact and demands that the pandemic is having on their businesses. In addition, the limitations noted above on onsite sales meetings and in-person trade shows, as well as our customers' ongoing uncertainties due to the pandemic, have reduced, and may continue to reduce, the ability of our sales team to make sales they otherwise would likely make but for the impact of the pandemic. As the pandemic has persisted, we have, however, continued to evolve our sales approach such that our sales representatives are in frequent contact with customers via video conference and other remote means that do not require physical travel or onsite visits to our customers' facilities. The timing and extent of the resumption of in-person activities will be dependent on the prevalence and severity of future COVID-19 outbreaks, including with regard to new variants of COVID-19 that may emerge.
Given the uncertainty surrounding the adverse impacts that the pandemic could
have on our business, we took certain expense management measures in 2020 as
previously disclosed. For the year ended
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Table of Contents CRITICAL ACCOUNTING ESTIMATES
Preparation of our Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period, and related disclosures. In the Notes to our Consolidated Financial Statements, we describe our significant accounting policies used in preparing the Consolidated Financial Statements. Our policies are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. Our management has identified the following critical accounting policies for the areas that are materially impacted by estimates and assumptions.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled in exchange for transferring those goods or services. Our contracts with customers often contain promises for multiple goods and services. For these contracts, the Company accounts for the promised goods and services in its contracts as separate performance obligations if they are distinct. The contract price, which represents transaction price when the contract reflects a fixed fee arrangement, or management's estimate of variable consideration including application of the constraint when the contract does not have a fixed fee, is allocated to the separate performance obligations on a relative standalone selling price basis. We generally determine standalone selling prices based on the standard list price for each product, taking into consideration certain factors, including contract length and the number of subscriptions within the contract. Judgment is required in determining whether performance obligations are distinct, standalone selling prices, and the amount of variable consideration to reflect as transaction price.
Accounting for Income Taxes
The Company accounts for income taxes using the asset and liability method,
whereby deferred tax assets and liabilities are determined based on the
temporary differences between the financial statement and tax bases of assets
and liabilities measured at tax rates that will be in effect for the year in
which the differences are expected to affect taxable income. Management
evaluates all available evidence, both positive and negative, to determine
whether, based on the weight of that evidence, a valuation allowance is needed.
We assess the realizability of our deferred tax assets, and to the extent that
we believe a recovery is not likely, we establish a valuation allowance to
reduce the deferred tax asset to the amount we estimate will be recoverable. As
of
Goodwill
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Table of Contents RESULTS OF OPERATIONS
Revenues and Expense Components
The following descriptions of the components of revenues and expenses apply to the comparison of results of operations.
Revenues, net. Revenues for our Workforce Solutions business segment primarily consist of the following products and services: provision of services through our platform, learning management applications, a variety of training and development content subscriptions, staff scheduling software solutions, competency tools, training, implementation and onboarding, and consulting services to serve professionals that work within healthcare organizations. Revenues for our Provider Solutions business segment are generated from our proprietary software and SaaS-based applications to help facilitate provider credentialing, privileging, and enrollment administration for healthcare organizations.
Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consist primarily of salaries and employee benefits, stock-based compensation, employee travel and lodging, materials, contract labor, hosting costs, third party software licensing costs, and other direct expenses associated with revenues, as well as royalties paid by us to content providers. Personnel costs within cost of revenues are associated with individuals that facilitate product delivery, provide services, handle customer support calls or inquiries, manage the technology infrastructure for our applications, manage content, and provide training or implementation services.
Product Development. Product development consists primarily of salaries and employee benefits, contract labor, stock-based compensation, costs associated with the development of new software feature enhancements, new products, third party software licensing costs, and costs associated with maintaining and developing our products. Personnel costs within product development include our systems teams, application development, quality assurance teams, product managers, and other personnel associated with software and product development.
Sales and Marketing. Sales and marketing consist primarily of salaries and employee benefits, commissions, stock-based compensation, employee travel and lodging, third party software licensing costs, advertising, trade shows, customer conferences, promotions, and related marketing costs. Personnel costs within sales and marketing include our sales teams and marketing personnel.
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 expenses, office expenses, fees for professional services, business development and acquisition-related costs, third party software licensing costs, and other operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate functions (accounting, legal, business development, human resources, administrative, internal information systems, and executive management).
Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized software development.
Other (Loss) Income, Net. The primary components of other income is interest income related to interest earned on cash and cash equivalents and investments in marketable securities. The primary component of other expense is interest expense related to our revolving credit facility. In addition, the income or loss attributed to equity method investments and fair value adjustments related to non-marketable equity investments is included in this category.
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Table of Contents 2021 Compared to 2020 Revenues, net. Revenues increased approximately$11.9 million , or 5%, to$256.7 million for 2021 from$244.8 million for 2020. AtDecember 31, 2021 , the Company had 5.04 million contracted subscriptions to hStream, our emerging technology platform, as compared to 4.22 million contracted subscriptions atDecember 31, 2020 . A comparison of revenues by business segment is as follows (in thousands): Year Ended December 31, Revenues by Business Segment: 2021 2020 Percentage Change Workforce Solutions$ 205,443 $ 197,587 4 % Provider Solutions 51,269 47,239 9 % Total revenues, net$ 256,712 $ 244,826 5 % % of Revenues Workforce Solutions 80 % 81 % Provider Solutions 20 % 19 %
Revenues for Workforce Solutions, which are primarily subscription-based,
increased
Revenues for Provider Solutions increased
Cost of Revenues (excluding depreciation and amortization). Cost of revenues
increased
Cost of revenues for Workforce Solutions increased
Product Development. Product development expenses increased
Product development expenses for Workforce Solutions increased
Sales and Marketing. Sales and marketing expenses, including personnel costs,
increased
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Sales and marketing expenses for Workforce Solutions increased
Other General and Administrative Expenses. Other general and administrative
expenses decreased
Other general and administrative expenses for Workforce Solutions
decreased
Depreciation and Amortization. Depreciation and amortization
increased
Other (Loss) Income, Net. Other (loss) income, net was a loss of
Income Tax Provision. The Company recorded a provision for income taxes of
Net Income. Net income decreased
Adjusted EBITDA increased 15% to
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Table of Contents Key Business Metrics
Our management utilizes the following financial and non-financial metrics in connection with managing our business.
• Revenues, net. Revenues, net, reflect income generated by the sales of goods
and services related to our operations and reflect deferred revenue write-downs associated with fair value accounting for acquired businesses. Revenues, net, were$256.7 million for the year endedDecember 31, 2021 compared to$244.8 million for the year endedDecember 31, 2020 . Management utilizes revenue in connection with managing our business and believes that this metric provides useful information to investors as a key indicator of the growth and success of our products.
• Operating Income. Operating income represents the amount of profit realized
from our operations and is calculated as the difference between revenues, net and operating costs and expenses. Operating income was$8.1 million for the year endedDecember 31, 2021 , compared to$15.8 million for the year endedDecember 31, 2020 . Management utilizes operating income in connection with managing our business as a key indicator of profitability. We also believe that operating income is useful to investors as a key measure of our profitability.
• Adjusted EBITDA. Adjusted EBITDA, calculated as set forth below under
"Reconciliation of Non-GAAP Financial Measures," is utilized by our management in connection with managing our business and provides useful information to investors because adjusted EBITDA reflects net income adjusted for certain GAAP accounting, non-cash and non-operating items, as more specifically set forth below, which may not fully reflect the underlying operating performance of our business. Management further believes that adjusted EBITDA from continuing operations is a useful measure for evaluating the operating performance of the Company because such measure excludes the gain on sale in connection with the sale of the PX business inFebruary 2018 included in our results of operations during the year endedDecember 31, 2019 and thus reflects the Company's ongoing business operations and assists in comparing the Company's results of operations between periods. We believe that adjusted EBITDA and adjusted EBITDA from continuing operations are useful to many investors to assess the Company's ongoing results from current operations. Adjusted EBITDA was$52.7 million for the year endedDecember 31, 2021 , compared to$46.0 million for the year endedDecember 31, 2020 . In addition, beginning in 2021, executive bonuses are based on the achievement of adjusted EBITDA targets.
• hStream Subscriptions. hStream subscriptions are determined as the number of
subscriptions under contract for hStream. Our management utilizes hStream subscriptions in connection with managing our business and believes this metric provides useful information to investors as a measure of our progress in growing the value of our customer base. AtDecember 31, 2021 , we had approximately 5.04 million contracted subscriptions to hStream compared to 4.22 million as ofDecember 31, 2020 . 35
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Reconciliation of Non-GAAP Financial Measures
This report presents adjusted EBITDA and adjusted EBITDA from continuing operations, both of which are non-GAAP financial measures used by management in analyzing our financial results and ongoing operational performance.
In order to better assess the Company's financial results, management believes
that net income excluding the impact of the deferred revenue write-downs
associated with fair value accounting for acquired businesses and before
interest, income taxes, stock-based compensation, depreciation and amortization,
changes in fair value of non-marketable equity investments, the de-recognition
of non-cash expense resulting from the paid time off expense reduction in the
first quarter of 2021, and the resolution of a mutual disagreement related to
various elements of a past partnership which resulted in a reduction to cost of
sales in the first quarter of 2020 (adjusted EBITDA) is a useful measure for
evaluating the operating performance of the Company because adjusted EBITDA
reflects net income adjusted for certain GAAP accounting, non-cash, and/or
non-operating items which may not, in any such case, fully reflect the
underlying operating performance of our business. Management also believes that
adjusted EBITDA from continuing operations is a useful measure for evaluating
the operating performance of the Company because such measure excludes the gain
on sale in connection with the sale of the PX business in
As noted above, the definition of adjusted EBITDA and adjusted EBITDA from continuing operations includes an adjustment for the impact of the deferred revenue write-downs associated with fair value accounting for acquired businesses. Following the completion of any acquisition by the Company, the Company must record the acquired deferred revenue at fair value as defined in GAAP, which may result in a write-down of deferred revenue. If the Company is required to record a write-down of deferred revenue, it may result in lower recognized revenue, operating income, and net income in subsequent periods. Revenue for any such acquired business is deferred and is typically recognized over a one-to-two year period following the completion of any particular acquisition, so our GAAP revenues for this one-to-two year period 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. Management believes that including an adjustment in the definition of adjusted EBITDA and adjusted EBITDA from continuing operations for the impact of the deferred write-downs associated with fair value accounting for acquired businesses provides useful information to investors because the deferred revenue write-down recognized in periods after an acquisition may, given the nature of this non-cash accounting impact, cause our GAAP financial results during such periods to not fully reflect our underlying operating performance and thus adjusting for this amount may assist in comparing the Company's results of operations between periods.
Adjusted EBITDA and adjusted EBITDA from continuing operations are non-GAAP financial measures and should not be considered as measures of financial performance under GAAP. Because adjusted EBITDA and adjusted EBITDA from continuing operations are not measurements determined in accordance with GAAP, such non-GAAP financial measures are susceptible to varying calculations. Accordingly, adjusted EBITDA and adjusted EBITDA from continuing operations, as presented, may not be comparable to other similarly titled measures of other companies.
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.
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A reconciliation of adjusted EBITDA and adjusted EBITDA from continuing
operations to the most directly comparable GAAP measures for the years ended
2021 2020 2019
GAAP income from continuing operations
4,040 1,274 280
Interest income (80 ) (993 ) (3,272 )
Interest expense 132 96 102
Income tax provision 1,921 3,732 3,733
Stock-based compensation expense 5,303 2,218 4,244
Depreciation and amortization 36,813 30,189 27,869
Non-cash paid time off expense (1,011 ) - -
Change in fair value of non-marketable
equity investments (279 ) (1,181 ) -
Non-cash royalty expense - (3,440 ) -
Adjusted EBITDA from continuing operations
GAAP net income$ 5,845 $ 14,091 $ 15,770 Deferred revenue write-down 4,040 1,274 280 Interest income (80 ) (993 ) (3,272 ) Interest expense 132 96 102 Income tax provision 1,921 3,732 4,212 Stock-based compensation expense 5,303 2,218 4,244 Depreciation and amortization 36,813 30,189 27,869 Non-cash paid time off expense (1,011 ) - - Change in fair value of non-marketable equity investments (279 ) (1,181 ) - Non-cash royalty expense - (3,440 ) - Adjusted EBITDA$ 52,684 $ 45,986 $ 49,205
Liquidity and Capital Resources
Net cash provided by operating activities was
Net cash used in investing activities was approximately
Cash used in financing activities was
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Our balance sheet reflects positive working capital of
The Company's contractual obligations arising in the normal course of business
primarily consist of operating lease obligations and purchase obligations. The
amounts included as contractual obligations represent the non-cancelable portion
of agreements or the minimum cancellation fee. As further discussed in Note 15
to the Company's Consolidated Financial Statements, as of
The Company's growth strategy includes acquiring businesses that provide
complementary products and services. It is anticipated that future acquisitions,
if any, would be affected through cash consideration, stock consideration, or a
combination of both. The issuance of our stock as consideration for an
acquisition or to raise additional capital could have a dilutive effect on
earnings per share and could adversely affect our stock price. The revolving
credit facility contains financial covenants and availability calculations
designed to set a maximum leverage ratio of outstanding debt to consolidated
EBITDA (as defined in our credit facility) and an interest coverage ratio of
consolidated EBITDA to interest expense. Therefore, the maximum borrowings
against the revolving credit facility would be dependent on the covenant values
at the time of borrowing. As of
Recent Accounting Pronouncements
In
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