Healthstream ( Nasdaq - HSTM ) -- Excellent Q1 Results

Healthstream (HSTM $9.25) reported better than expected Q1 results.  The health care learning segment posted a 27% revenue increase to $13.1 million.  The research business regained momentum in the period, as well, climbing 22% to $5.4 million.  Total revenue of $18.5 million was up 25% year to year.  Margins improved despite a final dose of start-up costs associated with the high potential Sim Ventures line.  Non-GAAP earnings advanced 60% to $.08 a share.  Healthstream still has approximately $20 million of unused tax loss carryforward benefits to apply against future income.  For financial reporting purposes the company applied a 41% tax rate.

The Sim Ventures line will begin rolling out in May.  That business is an equally owned joint venture between Healthstream and the worldwide leader in computer-controlled patient simulator mannequins (Laerdal Medical).  The venture plans to hook up those mannequins to remote computers via the Internet to evaluate how well a particular task is performed.  The interactive software will enable video replays, detailed analysis, demonstrations of correct technique, and other feedback in addition to scoring and record keeping.  Laerdal's dummies currently contain electronics but aren't linked to external software programs.  Healthstream holds 40%-45% of the U.S. hospital training market and will be responsible for marketing the new technology to that base.  Laerdal is well established internationally.  Incremental revenue is likely to be modest in 2011 as the software hook-ups are completed and customers familiarize themselves with the new approach.  Substantial growth is possible in subsequent years, reinforced by the absence of direct competition.

Meantime, the core business remains vibrant.  Existing hospitals are adding more software modules to their training programs.  The trend towards certification continues to increase, moreover, prompting more health care workers to take the courses.  Pricing is firm.  Market share is rising, fueled by Healthstream's superior delivery system (Internet versus CDs and books).  Margins probably won't expand to their maximum potential in the short run as technology upgrades are pursued and the sales force expands.  But profitability is likely to widen in 2011, nonetheless.  We are raising our full year earnings estimate 7% to $.30 a share.  We also have raised our sales estimate 4% to $80 million.  The new figures represent year to year gains of 36% and 23%, respectively.

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