HealthStream fourth quarter 2013 revenues up 33%

HealthStream, Inc. (NASDAQ: HSTM), a leading provider of workforce development (which we have previously referred to as "learning and talent management") and research / patient experience solutions for the healthcare industry, announced today results for the fourth quarter and full year ended December 31, 2013.

Highlights:

Fourth Quarter

• Revenues of $37.1 million in the fourth quarter of 2013, up 33% from $27.8 million in the fourth quarter of 2012
• Operating income of $3.5 million in the fourth quarter of 2013, up 5% from $3.3 million in the fourth quarter of 2012
• Net income of $1.8 million in both the fourth quarter of 2013 and the fourth quarter of 2012, and earnings per share (EPS) of $0.06 per share (diluted) in the fourth quarter of 2013, compared to $0.07 per share (diluted) in the fourth quarter of 2012
• Adjusted EBITDA¹ of $5.9 million in the fourth quarter of 2013, up 7% from $5.5 million in the fourth quarter of 2012

Full Year

• Revenues of $132.3 million for 2013, up 28% from $103.7 million in 2012
• Operating income of $14.7 million in 2013, up 9% from $13.5 million in 2012
• Net income of $8.4 million in 2013, up 10% from $7.6 million in 2012, and EPS of $0.30 per share (diluted) for 2013, compared to $0.28 per share (diluted) in 2012
• Adjusted EBITDA of $23.9 million in 2013, up 13% from $21.2 million in 2012
• 3.39 million healthcare professional subscribers fully implemented on one or more of our subscription-based solutions at December 31, 2013, up 15% from 2.94 million at December 31, 2012

Financial Results:

Fourth Quarter 2013 Compared to Fourth Quarter 2012

Revenues for the fourth quarter of 2013 increased $9.2 million, or 33 percent, to $37.1 million, compared to $27.8 million for the fourth quarter of 2012.

Revenues from the HealthStream Workforce Development Solutions segment increased by $7.9 million, or 37 percent, when compared to the fourth quarter of 2012. Revenues from our subscription-based solutions increased by approximately $7.1 million, or 36 percent, over the prior year fourth quarter due to a higher number of subscribers and more courseware consumption by subscribers. Revenues in the fourth quarter of 2013 were positively influenced by courseware subscriptions associated with, among other products, ICD-10 training. Revenues from ICD-10 training products were approximately $5.0 million in the fourth quarter of 2013, up $3.7 million over the prior year fourth quarter. Revenues from our credentialing software product, an installed solution, increased by $385,000 during the fourth quarter of 2013 compared to the prior year fourth quarter. Revenues from our annual customer Summit contributed $332,000 during the fourth quarter of 2013. In 2012, the customer Summit was held in the first quarter.

Revenues from the HealthStream Research / Patient Experience Solutions segment increased by $1.4 million, or 20 percent, when compared to the fourth quarter of 2012. Revenues from Patient Insights™ surveys—a survey research product that generates recurring revenues—increased by $566,000, or 11 percent, when compared to the fourth quarter of 2012. Revenues from other surveys, which are conducted on annual or bi-annual cycles, decreased $163,000 compared to the fourth quarter of 2012. The financial results for Baptist Leadership Group (BLG) have been included in the Company's financial statements from the date of acquisition by the Company (September 9, 2013) and are included in the HealthStream Research / Patient Experience Solutions segment. BLG revenues approximated $1.0 million during the fourth quarter of 2013.

Generally accepted accounting principles (GAAP) require companies to write down beginning balances of acquired deferred revenue balances as part of "fair value" accounting as defined by GAAP. During the fourth quarter of 2013, HealthStream reported a $172,000 reduction to GAAP revenues and a corresponding $172,000 reduction to operating income and $85,000 reduction to net income as a result of deferred revenue write-downs for the Sy.Med Development and Baptist Leadership Group acquisitions in October 2012 and September 2013, respectively. The table reconciling GAAP to non-GAAP financial measures included in this release shows the impact of beginning balance deferred revenue write-downs on financial results.

Operating income for the fourth quarter of 2013 increased by five percent to $3.5 million, compared to $3.3 million for the fourth quarter of 2012. The growth in revenues was mostly offset by increased operating expenses associated with higher royalties, personnel additions, sales commissions, costs associated with our annual customer Summit, depreciation and amortization, and other general expenses. Expenses related to our annual customer Summit decreased operating income by approximately $330,000 in the fourth quarter of 2013.

Net income was approximately $1.8 million for both the fourth quarter of 2013 and the fourth quarter of 2012. Earnings per share were $0.06 per share (diluted) for the fourth quarter of 2013 compared to $0.07 per share (diluted) for the fourth quarter of 2012.

Adjusted EBITDA (which we define as net income before interest, income taxes, share-based compensation, and depreciation and amortization) increased by seven percent to $5.9 million for the fourth quarter of 2013, compared to $5.5 million for the fourth quarter of 2012.

At December 31, 2013, the Company had cash and marketable securities of $108.2 million. Capital expenditures totaled $3.3 million for the fourth quarter of 2013 and $8.7 million for the full-year 2013.

Full Year 2013 Compared to Full Year 2012

For 2013, revenues were $132.3 million, an increase of 28 percent over revenues of $103.7 million in 2012. Operating income for 2013 improved by nine percent to $14.7 million, compared to $13.5 million for 2012. Net income for 2013 increased by 10 percent to $8.4 million, compared to $7.6 million for 2012. Earnings per share were $0.30 per share (diluted) for 2013, up from $0.28 per share (diluted) for 2012.

Other Business Updates

Updated nomenclature and performance metric: Given the expansion of HealthStream's suite of solutions over the last several years, we have updated our metric for indicating our number of subscribers. Historically, our HealthStream Learning Center (HLC) was the single application on our SaaS-based platform, and therefore, we have reported the number of subscribers—both contracted and implemented—to the HLC as well as renewal rates associated with the HLC as general indicants of the size of our customer base and market penetration. As a result of the growth in the number of our subscription-based solutions, we have updated our "subscriber count" metric to better reflect our current business.

We are now reporting the total number of individual end-users of HealthStream's subscription-based solutions, which will be referred to as "total subscribers." Each individual end-user who utilizes at least one HealthStream subscription-based solution will be counted as one subscriber, regardless the number of subscriptions contracted by or for that end-user. For example, if one of our hospital clients purchases for each of its 1,000 nurses a subscription to the HLC, the HCC, the resuscitation and ICD-10 solutions, those 1,000 nurses will count as 1,000 total subscribers, despite the fact that each of them is contracted for four HealthStream subscriptions.

At December 31, 2013, we had approximately 3.39 million total subscribers implemented to use and 3.71 million total subscribers contracted to use our subscription-based solutions. "Contracted subscribers" include both those already implemented and those in the process of implementation. Revenue recognition commences when a contract is fully implemented.

Since our "total subscribers" metric encompasses the entire scope of our workforce development solutions, it provides a more comprehensive view of our business than the HLC renewal rate, which is by definition limited solely to HLC subscriptions. Together with the "revenue per implemented subscriber" metric, our "total subscriber" metric provides a more representative means for assessing our workforce development business than the previously reported HLC subscriber and contract value renewal rates.

Retiring HLC renewal metrics: Based on the number of HLC subscribers, our renewal rate was 101 percent in the fourth quarter of 2013. Our renewal rate for the number of HLC subscribers reflects the number of subscribers that were up for renewal in the quarter that chose to renew plus the addition of new subscribers on these accounts, compared to previously contracted amounts. The HLC renewal rate based on subscribers for the fourth quarter of 2013 compares to a renewal rate of 92 percent during the fourth quarter of 2012.

Based on HLC contract value, our renewal rate was 98 percent in the fourth quarter of 2013. Our HLC renewal rate for contract value reflects any pricing adjustment that may occur at renewal along with increases in contract value due to the addition of new subscribers as compared to previously contracted amounts. Our calculation of this renewal rate includes only the base subscriptions to our platform; it does not include the purchase of additional products or content purchased prior to or at the time of renewal. The HLC renewal rate based on contract value for the fourth quarter of 2013 compares to a renewal rate of 96 percent during the fourth quarter of 2012.

For the trailing four quarters ended December 31, 2013, customers representing approximately 97 percent of HLC subscribers that were up for renewal did renew, while our HLC renewal rate based on the annual contract value was approximately 97 percent. The trailing four quarter renewal measurements are calculated on the same basis as the quarter results.

Annualized revenue per implemented subscriber: "Annualized Revenue per Implemented Subscriber" is a measure of our progress in growing the value of our customer base. Annualized Revenue per Implemented Subscriber represents the quarter's revenue from our subscription-based solutions annualized, then divided by the quarter's average total number of implemented subscribers. The following table shows the metric for the fourth quarter of 2013 and the preceding seven quarters.

Note: Our subscription-based solutions include subscriptions to our platform applications, plus courseware/content subscriptions. The above metric does not include revenues from SimCenter. The Company reports those revenues separately as part of our SimVentures collaborative arrangement.

Update on ICD-10 Training Solution: The requirement mandated by CMS for healthcare organizations to transition to the ICD-10 coding system goes into effect in October 2014. As an initiative-based solution, we believe that sales of our ICD-10 training suite will be patterned according to our customers' needs to comply with this deadline. Since 2011, approximately 1.2 million healthcare professionals have contracted for our ICD-10 training solution through their respective organizations. Revenues from ICD-10 training were approximately $5.0 million in the fourth quarter of 2013 and approximately $13.9 million for full-year 2013. The vast majority of organizations that have purchased our ICD-10 training are also consumers of other HealthStream solutions. Of our 3.71 million total contracted subscribers at December 31, 2013, only approximately seven percent subscribe solely to the ICD-10 training solution.

Financial Outlook for 2014

The Company anticipates that consolidated revenues for full year 2014 will grow by 22 percent to 26 percent as compared to 2013. We anticipate revenue growth in the Workforce Development Solutions segment to be in the 23 percent to 27 percent range and the Research / Patient Experience Solutions segment's revenue to increase by approximately 18 percent to 22 percent, part of which growth includes revenues from the BLG acquisition which we closed in September 2013. The foregoing guidance does not include the impact from any other transactions that we may complete during 2014.

We anticipate that the Company's 2014 full-year operating income will increase approximately 10 to 15 percent over full-year 2013. Similar to our revenue guidance, this estimate does not include the impact from any other transactions that we may complete during 2014.

We anticipate that our 2014 capital expenditures will be between $9.0 million and $12.0 million. We expect our effective tax rate to range between 42 and 44 percent for the full-year of 2014.

Robert A. Frist, Jr., chief executive officer of HealthStream, commented, "Compared to the prior year, revenues increased 28 percent, operating income grew nine percent, and net income increased 10 percent. Moreover, we contracted over 600,000 new subscribers to our platform in 2013, which is an increase of 73 percent above the new subscribers in the prior year."

"We are well positioned to make strategic investments in 2014 that we believe will deliver significant value to our customers and that, in turn, will position us for long-term growth," said Frist. "I look forward to reporting continued progress throughout 2014 as we execute our business strategy and strive to deliver superior results for all of our stakeholders."