HealthStream Solid Subscriber Additions and Growing ARPU Fuel the Recurring Revenue Model

After the markets closed on Monday, HealthStream reported solid first quarter 2014 results. More specific, sales rose 29% year-over-year, to $38.3 million, nearly spot on the consensus target of $38.5 million; adjusted EBITDA—the key profit metric we monitor—were $6.1 million, modestly above the $5.8 million Street estimate; and GAAP EPS were $0.07, $0.01 above the $0.06 consensus forecast.

During the quarter, the company also incurred roughly $350,000 in transaction-related expenses associated with its March 2014 acquisition of Health Care Compliance Strategies (HCCS), which affected GAAP EPS by almost $0.01; thus, earnings per share were even stronger than they appear at first blush, in our view.

SaaS-based subscription revenue grew a strong 37% year-over-year (roughly in line with the 36% growth last quarter), and the company added roughly 140,000 novel subscribers to its subscription-based solutions (easily topping management’s 20,000 to 50,000 target), reaching a record 3.874 million total contracted subscribers at the end of the quarter. The company’s more-volatile research/patient experience solutions segment increased by roughly 14% year-over-year, with patient insights surveys increasing by roughly 7%.

The company also reported another strong quarter of subscriber implementations, at 187,000 subscribers—up nearly 97% year-over-year and, we believe, the secondstrongest subscriber implementation quarter in company history. We believe strong core business trends, as well as initial success in the post-acute market and the recent signing of a top-five health system, accounted for the strong subscriber momentum this quarter. Customer billings (which we define as the sequential change in deferred revenue plus reported sales) also were solid at $44.7 million (up 36.4%), as deferred revenue hit $47.5 million—up a strong 67% year-over-year.

Lastly, the company reiterated its 2014 guidance of revenue growth between 25% and 29% (despite a modest downtick to its survey/patient experience segment sales guidance) and operating income declining between 11% and 2%—with margin pressure resulting from the company’s investments in new products and markets as well as dilution from the recent HCCS acquisition (prior to the acquisition, management expected 10% to 15% operating income growth).

Overall, we believe the guidance reiteration will be viewed favorably, as many investors were concerned that the recent ICD-10 coding mandate delay (from October 1, 2014 to at least October 1, 2015) would negatively affect HealthStream’s 2014 results. Still, management indicated that the ICD-10 delay could add noise to the year, stating that it is not yet fully clear how the postponement would affect results, so we will look for more color on this topic during Tuesday morning’s conference call.

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