Tuesday, October 25, 2011

Healthstream ( Nasdaq - HSTM ) -- Plenty of Operating Room

Healthstream (HSTM $14.00) reported excellent on target Q3 results.  Non-GAAP earnings (fully taxed) advanced 80% to $.09 a share.  The company netted an additional $.03 a share in tax benefits.  Revenues improved 24% to $20.6 million.  Performance dipped slightly on a sequential basis due to summer related seasonal factors.  Healthstream is the leading provider of e-learning solutions to the health care industry, serving more than 2.5 million workers with a recurring SAAS ("software as a service") delivery format.  The company's Internet platform enables third party content providers to sell state of the art instructional material to both medical and administrative employees in a more convenient and productive manner than traditional CD-based and classroom approaches.  Healthstream books the revenue and pays royalties to the authors.  The company also provides research surveys and other data services, representing about 33% of revenues.  Most of that business is performed on a subscription basis, too. 

A joint venture with industry giant Laerdal Medical is advancing the technology into the simulation area.  Laerdal is the leading producer of medical mannequins.  The two companies have teamed up to computerize those models so health workers can practice their skills and receive immediate feedback on how well they're doing.  Currently, a teacher usually has to supervise the performance.  The core e-learning business is growing due to market share gains, the addition of more content per subscriber, and continued growth in the market's overall size.  The simulation segment is just getting off the ground but promises to deliver substantial leverage in upcoming years.  Expansion into international markets has been modest to date but the combination with Norway-based Laerdal could provide a sizable boost in that direction, as well.

Mobile applications are slated for introduction in Q4.  That technology will enable users to obtain content on phones and tablets, in addition to personal computers and notebooks.  The mobile links also may facilitate access to databases for everyday reference, moreover, besides just studying.  Additional simulation components will be launched over the next two quarters.  Healthstream also recently gained exclusive access to several high potential accreditation programs.  Those packages will be available only through the company's e-learning platform.  Revenues should benefit directly from the captive audience.  Being the sole source for that material also could attract new customers to Healthstream's other offerings.

We estimate 2011 income will finish in the $.35-$.37 a share range.  (See "Accounting Notes.")  Hiring is slated to accelerate in Q4 to prepare for a major expansion next year.  So margins may not widen in the period despite further sales gains.  Next year $.45-$.50 a share remains a realistic target.  Faster gains are possible in subsequent years as margins continue to improve, international markets are exploited, and the simulation line becomes a bigger factor.  Periodic bursts could amplify results.  In 2013, for instance, new hospital billing procedures are scheduled to take effect as a result of the national health insurance law.  Healthstream will distribute a series of courses designed to train administrative personnel in the revised scheme.

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