Thursday, March 1, 2012

Healthstream ( Nasdaq - HSTM ) -- Preparing for National Health Care

Healthstream (HSTM $20.00) reported excellent on target Q4 results.  Healthstream is the leading provider of Internet based training software for health care workers.  The company also operates a research service that helps hospitals identify their strengths and weaknesses.  Healthstream controls 45%-50% of the U.S. health care training market.  Most of its competition is provided by classroom instruction and disk based computer courses.  The company spent the past decade perfecting its authoring tools and delivery systems.  Those enabling technologies attracted the industry's leading content providers, who now earn handsome royalties from Healthstream's wide-ranging customer base.  Other on-demand software companies participate in the health care segment.  Those providers are general purpose technology companies that address a wide variety of industries.  Healthstream focuses on health care exclusively, which helps on the marketing front in addition to content acquisition and management.

Revenues improved 24% to $21.9 million in the December quarter.  Non-GAAP earnings improved 33% to $.08 a share.  The research survey business grew by a modest 9% and accounted for 29% of the total.  The key learning operation showed a 31% improvement and represented the balance.  Healthstream reinvigorated its research business during the last two years but that segment probably will level off somewhat.  The company ties those surveys in with its learning products, so as more customers are added the overall number of surveys promises to climb.  But unlike the learning unit same-store growth probably won't expand much.  Existing customers are increasing their learning business with Healthstream on a regular basis as products are enhanced, new courses are introduced, and more employees are hired.  Pricing has remained steady.  Revenue gains primarily are being driven by higher volume.

New simulation products offer substantial potential.  Most hands-on training currently is performed on mannequins or other students.  A joint venture with Norway based Laerdal is combining computerized dummies with the Internet to create measurable feedback so performance can be accurately assessed.  That project was in development for most of 2011 and was commercialized on a limited basis in Q4.  Revenue contributions are likely to be modest in 2012, as well, as the inventory of lessons builds up and marketing efforts expand.  Major contributions could emerge in the following year.

Software designed to teach administrative personnel how to deal with the new health care law holds additional leverage.  Procedures and codes are slated to change.  A plethora of other regulations will start to take effect in 2013, as well.  Healthstream now is developing the required software with its many content partners to facilitate the process.  Some cannibalization is possible but most of the upcoming products are likely to generate incremental revenue.

A recent stock offering bolstered Healthstream's financial position.  Internally generated cash flow has been sufficient to finance growth to date.  That trend probably will continue.  The additional funds likely are targeted for acquisitions.  Technology enhancements, specialized content, distribution, and international expansion are possibilities.  Absent a deal 2012 income growth will be slowed by the dilution stemming from the offering.  We estimate earnings will rise 18% to $.40 a share.  If Healthstream invests the money well and reestablishes its traditional return on equity metrics income could move up into the $.60 a share range.

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