Tuesday, April 24, 2012

Healthstream ( Nasdaq - HSTM ) -- Margin Haitus

Healthstream (HSTM $23.00) reported solid Q1 results.  Revenues advanced more rapidly than expected, rising 28% to $23.7 million.  Earnings declined 25%, however, to $.06 a share (excluding non cash acquired amortization and stock option expense).  Dilution from a 3.6 million share public offering last November accounted for two-thirds of the earnings setback.  An annual customer conference represented the balance.  That meeting occurred in Q2 last year.  Operating margins were affected by higher employee costs.  That spending is likely to pay dividends in the future.  Product development efforts were accelerated.  Sales and marketing were expanded, as well.  Still, margins are unlikely to rebound materially in upcoming quarters.  Absent that leverage 2012 income is likely to be relatively flat with the year before, due to the offering's dilution.  We are reducing our full year estimate by a nickel to $.35 a share, accordingly. 

The long term outlook remains favorable.  Organic revenue growth is likely to be sustained at a 20%-25% rate well into the decade.  A simulation based joint venture promises additional impetus.  And the cash horde obtained from the offering could be applied towards accretive acquisitions.  Until those inflection points are realized these shares may trend in a sideways manner, though.  Downside risk is limited by Healthstream's own appeal as a potential takeover candidate.

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