Healthstream ( Nasdaq - HSTM ) -- Tax Adjustment Hits EPS

Healthstream (HSTM $27.00) reported excellent on target Q3 results.  Earnings were flat with the year ago quarter at $.09 a share.  Average shares outstanding increased 17%, mainly due to a stock offering earlier in 2012.  The tax rate also impacted profitability, coming in at 48% for the period.  Healthsteam made several adjustments at the state tax level which were non-recurring, sending the rate temporarily above the customary 40% mark.  Income additionally was affected by merger related expenses associated with two small acquisitions.  Revenues advanced 28% to $26.4 million.  Learning software grew 37%, representing 77% of the total.  Research business increased 4% and accounted for the balance.  That segment complements the core software operation, is more volatile, and follows a lower growth trajectory.

Government regulation continues to drive adoption.  Healthstream is the leading provider of computer based instruction and certification programs for the health care industry.  The company holds more than 50% of the market, which is mostly hospital based.  Subscriber growth was 13% in the September quarter.  Revenue per user, bolstered by new product introductions and wider use of existing packages, reinforced the uptrend.  New products continue to be added.  Most courseware is created by outside authors who earn royalties.  Healthstream also has made two small acquisitions in 2012, raising revenue directly.

The outlook remains positive.  Product development, marketing, and customer support costs are likely to keep rising over the next few years as Healthstream tries to cement its competitive position.  Royalties may creep higher as a percentage of sales, too, as more high value courses and programs are brought in.  Operating costs promise to decline on rising volume, though, keeping overall margins on the upswing.  We estimate 2013 income will rise 29% to $.45 a share on a 24% hike in revenue ($130 million).

Margins have the potential to widen substantially.  Pretax profitability could move into the 25% range over the long haul.  Sales also promise to keep rising at above average rates as Healthstream's market share expands further, average revenue per user rises, and penetration of related markets (clinics, outpatient surgery centers) is achieved.  International expansion is possible though it's not immediately on the horizon.

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