HEALTHSTREAM, INC. Special Cautionary Notice Regarding ForwardLooking 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
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 set forth above and the
risks set forth under the caption Part I, Item 1A. Risk Factors in our 2020 Form
10-K and other disclosures in our 2020 Form 10-K, earnings releases and other
filings with the
Business Overview
Significant financial metrics for the second quarter of 2021 are set forth in the bullets below.
• Revenues of
from
decline in legacy resuscitation revenues.
• Operating income of
• Net income of
million in the second quarter of 2020.
• Earnings per share ("EPS") of
of 2021 compared to
• Adjusted EBITDA1 of
(1) Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of adjusted
EBITDA to net income and disclosure regarding why we believe adjusted EBITDA
provides useful information to investors is included later in this report.
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Impact of and Response to COVID-19 Pandemic
The COVID-19 pandemic, which spread throughout the world and
Our business is focused on providing workforce and provider solutions to
healthcare organizations, and as such, the pandemic's adverse impact on
healthcare organizations has resulted in an adverse impact on our Company.
Although we believe that COVID-19 did not have a significant negative impact on
our revenues or net income during 2020, we believe that it began to have a
negative impact on our revenues during the six months ended
Our operating results have benefited from a temporary reduction of operating
expenses related to COVID-19 conditions, but the operating expense reduction
itself-despite its positive impact on operating income and adjusted EBITDA-is
indicative of the negative impact the pandemic has had, and may continue to have
on new bookings and renewals. We have experienced, and expect to continue to
experience, delayed and reduced bookings and renewals due to the pandemic. Given
that we sell multiple year subscriptions to our solutions, the revenue impact of
lost or delayed sales in a given period generally does not manifest until future
periods, just as the revenue we recognize in a given period is generally the
result of sales from a prior period. Since
As travel restrictions lessen and travel begins to accelerate, we expect operating expenses associated with them to have a negative impact on operating income and EBITDA for the second half of 2021 and do not expect revenue generated from such activities to begin offsetting such increases to operating expenses until next year. However, the uncertain trajectory of COVID-19 may impact when and to what extent normal operating expenses, including expenses related sales travel and in-person tradeshows, accelerate or remain abated.
We continue to closely monitor developments related to COVID-19 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.
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 COVID-19 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.
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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 improvements in DSO during the second quarter of 2021 compared to the second quarter of 2020. Additionally, 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 in the future. 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 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. Our Provider Solutions business segment has, in some instances, been more sensitive to implementation delays than our Workforce Solutions segment as the result of complexities associated with implementing certain of the solutions offered through that business segment.
Conditions related to the pandemic have 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 COVID-19 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 COVID-19 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 COVID-19. As the pandemic has persisted, we have, however, continued to evolve our sales approach such that our sales representatives have been 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. Moreover, there has begun to be a resumption of certain in-person activities as COVID-19 conditions have improved. Whether this resumption of in-person activities will continue and increase or falter and decrease may be dependent on the prevalence of future COVID-19 outbreaks, including with regard to new variants that continue to emerge.
Given the uncertainty surrounding the adverse impacts that COVID-19 could have on our business, we took certain expense management measures in 2020 as previously disclosed. We have generally discontinued these expense management measures taking into account the improved economic environment and current conditions related to the pandemic, provided that certain expenses such as those associated with travel and tradeshows remain significantly lower than pre-pandemic levels due to limitations on our ability to engage in such activities at the same levels as prior to the pandemic. However, we are continuing to monitor developments related to the COVID-19 pandemic and will continue to make such expense management adjustments as we deem necessary.
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 reflects deferred revenue
write-downs associated with fair value accounting for acquired businesses.
Revenues, net were $64.8 million and $128.3 million for the three and six
months ended June 30, 2021 compared to $60.6 million and $122.1 million for
the three and six months ended June 30, 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 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 $3.4 million and
$6.7 million for the three and six months ended June 30, 2021 compared to
$4.3 million and $11.5 million for the three and six months ended June 30,
2020 . Management utilizes operating income in connection with managing our
business and believes that our operating income provides useful information
to investors as a key indicator of 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 non-cash and non-operating items. We also believe that
adjusted EBITDA is useful to investors to assess the Company's ongoing
operations. Additionally, beginning in 2021, executive bonuses are based on
the achievement of adjusted EBITDA targets. Adjusted EBITDA was $14.5
million and $28.1 million for the three and six months ended June 30, 2021 ,
compared to $12.1 million and $24.0 million for the three and six months
ended June 30, 2020 .
• hStream Subscriptions. hStream subscriptions are determined as the number of
subscriptions under contract for hStream, our Platform-as-a-Service
technology that enables healthcare organizations and their respective
workforces to easily connect to and gain value from the growing HealthStream
ecosystem of applications, tools, and content. Management
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utilizes hStream subscriptions in connection with managing our business and
believes that this metric provides useful information to investors as a
measure of our progress in growing the value of our customer base. At June
30, 2021 , we had approximately 4.52 million contracted subscriptions to
hStream, compared to 3.48 million as of June 30, 2020 .
Critical Accounting Policies and Estimates
The Company's Condensed Consolidated Financial Statements are prepared in accordance with 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
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 the Consolidated Financial Statements in our 2020 Form 10-K and the Notes to the Condensed Consolidated Financial Statements herein which contain 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 2020 Form 10-K.
Impact on Comparability of Operating Results
The comparability of our operating results for the six months ended
Between
Our legacy agreements with Laerdal (Legacy Agreements) for the HeartCode and
Resuscitation Quality Improvement (RQI) products expired pursuant to their terms
on
During the six months ended
Three Months Ended
Revenues, net. Revenues increased approximately
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A comparison of revenues by business segment is as follows (in thousands):
Three Months Ended June 30,
Percentage
Revenues by Business Segment: 2021 2020 Change
Workforce Solutions $ 52,158 $ 48,888 7 %
Provider Solutions 12,658 11,665 9 %
Total revenues, net $ 64,816 $ 60,553 7 %
% of Revenues
Workforce Solutions 80 % 81 %
Provider Solutions 20 % 19 %
Revenues for Workforce Solutions increased
Revenues for Provider Solutions increased
Cost of Revenues (excluding Depreciation and Amortization). Cost of revenues
decreased
Cost of revenues for Workforce Solutions decreased
Product Development. Product development expenses increased
Product development expenses for Workforce Solutions increased
Sales and Marketing. Sales and marketing expenses, including personnel costs,
increased
Sales and marketing expenses for Workforce Solutions increased
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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 expense was
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 was approximately
Adjusted EBITDA was
Six Months Ended
Revenues, net. Revenues increased
A comparison of revenues by business segment is as follows (in thousands):
Six Months Ended
June 30,
Percentage
Revenues by Business Segment: 2021 2020 Change
Workforce Solutions $ 103,405 $ 98,712 5 %
Provider Solutions 24,879 23,413 6 %
Total revenues, net $ 128,284 $ 122,125 5 %
% of Revenues
Workforce Solutions 81 % 81 %
Provider Solutions 19 % 19 %
Revenues for Workforce Solutions increased
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2021 for a small group of customers. Workforce revenues also benefited from a
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
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
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Depreciation and Amortization. Depreciation and amortization increased
Other (Loss) Income, Net. Other (loss) income, net was loss of
Income Tax Provision. The Company recorded a provision for income taxes of
Net Income. Net income was
Adjusted EBITDA increased
Other Developments
Our legacy agreements with Laerdal (Legacy Agreements) for the HeartCode and
Resuscitation Quality Improvement (RQI) products expired pursuant to their terms
on
On
We remain actively engaged in efforts to broaden the scope and utilization of
our simulation-related offerings to include a range of clinical competencies
that extend beyond resuscitation, and we intend to bring to market a broadened
scope of simulation-based offerings, including resuscitation programs. On
Reconciliation of Non-GAAP Financial Measures
This report presents adjusted EBITDA, which is a non-GAAP financial measure 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,
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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 non-operating items which may not, in any such case, fully reflect the underlying operating performance of our business. We also believe that adjusted EBITDA is useful to many investors to assess the Company's ongoing operating performance and to compare the Company's operating performance between periods. Additionally, beginning in 2021, executive bonuses are based on the achievement of adjusted EBITDA targets.
As noted above, the definition of adjusted EBITDA also adjusts 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 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 is a non-GAAP financial measure and should not be considered as a measure of financial performance under GAAP. Because adjusted EBITDA is not a measurement determined in accordance with GAAP, adjusted EBITDA is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies and have limitations as analytical tools. In addition, adjusted EBITDA should not be considered a substitute for, or superior to, measures of financial performance which are prepared in accordance with GAAP.
A reconciliation of adjusted EBITDA to the most directly comparable GAAP measure is set forth below (in thousands).
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
GAAP net income $ 2,441 $ 3,442 $ 4,732 $ 10,533
Deferred revenue write-down 1,231 135 2,852 279
Interest income (22 ) (237 ) (40 ) (831 )
Interest expense 33 25 65 50
Income tax provision 925 1,061 1,847 2,920
Stock based compensation expense 782 557 1,398 1,107
Depreciation and amortization 9,149 7,150 18,302 14,599
Non-cash paid time off expense - - (1,011 ) -
Change in fair value of non-marketable
equity investments - (29 ) - (1,181 )
Non-cash royalty expense - - - (3,440 )
Adjusted EBITDA $ 14,539 $ 12,104 $ 28,145 $ 24,036 Liquidity and Capital Resources
Net cash provided by operating activities increased by
Net cash used in investing activities was
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Company paid
Net cash used in financing activities was approximately
Our balance sheet reflects positive working capital of
We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated working capital needs, new product development, and capital expenditures for at least the next 12 months.
In addition, the Company's growth strategy includes acquiring businesses or
making strategic investments in businesses that complement or enhance our
business. It is anticipated that future acquisitions or strategic investments,
if any, would be effected 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. Our revolving
credit facility contains financial covenants and availability calculations
designed to set a maximum leverage ratio of outstanding debt to adjusted EBITDA
and an interest coverage ratio of adjusted EBITDA to interest expense.
Therefore, the maximum borrowings against our revolving credit facility would be
dependent on the covenant calculations at the time of borrowing. As of
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