Friday, December 21, 2012

Healthstream ( Nasdaq - HSTM ) -- Margins Set to Expand

Healthstream (HSTM $23.00) appears on track to produce excellent on target Q4 results.  The company is the leading provider of Internet based education, training, and certification programs for acute care hospitals in the United States.  That segment represents 77% of revenues.  Healthstream also performs market research surveys for the same clientele, to help them improve customer satisfaction and overall performance.  That business accounts for remaining 23% of sales.  The learning business is growing at a 35% rate.  The research portion has been relatively flat of late.  Healthstream has penetrated approximately 50% of the U.S. learning market, covering nearly 3 million hospital employees.  More hospitals are being added, both via direct sales and indirectly as a result of acquisitions by large hospital chains that already are Healthstream customers.  The number of courses taken by existing customers is rising, too.  And more workers per hospital are being trained these days, to comply with proliferating regulation.  Average revenue per user is up an estimated 15% in 2012.  Third quarter income was stifled by an unusually steep tax rate (48%).  Healthstream's reported tax rate is likely to stay elevated in the December period as the company works off most of its remaining tax loss carryforwards.  Still, the hit is likely to be less severe than the third quarter's.

New products are gaining momentum.  The core learning platform still is exhibiting superior growth.  But that line is bound to slow down as Healthstream fully saturates the market.  Three new areas were launched in 2012 that could pyramid on that large installed base.  The competency (assessment) and performance (performance reviews) platforms were bought by 12 hospitals in the September quarter.  Faster gains are anticipated.  Talent management (certification and workforce management) was bolstered by a pair of acquisitions this year and is being adopted even more quickly.  And a joint venture with medical mannequin producer Laerdal Medical is exhibiting steady gains.  The two companies are developing a high potential simulation technology that computerizes Laerdal's mannequins to grade how well a procedure is done automatically.  So while the core line's growth may start to moderate, the overall software business could keep expanding at a 25%-40% rate well into the decade.

Rising government regulation is fueling that growth.  Healthstream is ramping up for a major change in U.S. billing procedures scheduled for 2014.  In addition, more OSHA, HIPPA, and HCAHPS rules are forcing administrators to update their personnel's knowledge of the laws to ensure compliance.  Overall performance could be reinforced by a rebound in research surveys.  Healthstream is beefing up marketing to exploit existing customer relationships it already has in the education area.

We estimate 2012 sales will finish around $105 million to provide income of $.35 a share.  A 29% gain to $135 million appears attainable in 2013.  Higher margins and lower tax rates could yield a faster improvement in earnings.  Our estimate is $.50 a share (+43%).  Another strong performance could develop in 2014 as the new billing codes ("ICD-10") go into effect and the full sweep of the new national health insurance law kicks in.  The health care industry as a whole is certain to feel cost pressure as a result of that legislation.  Healthcare technology may be left unregulated, though, on the presumption it will improve productivity and performance.

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