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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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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Healthstream ( Nasdaq - HSTM ) -- Market Share Keeps Expanding

Healthstream (HSTM $27.00) reported excellent on target Q2 results.  Earnings advanced 12% to $.09 a share despite 18% greater average shares outstanding.  The company sold stock earlier in the year.  Sales climbed 23% to $25.8 million.  The learning segment expanded 34%, accounting for most of the increase.  Healthstream also provides surveys and related research services, which experienced an unanticipated slowdown in the period.  The core learning segment is gaining as hospitals realize that computer based systems improve employee performance, reduced costs, and enhance compliance.  New subscriptions beat the company's target in the period.  Average order size expanded.  And backlog widened, laying the foundation for further gains in the future.  More high level content providers joined Healthstream's distribution system.  The company uses its platform to distribute that know-how to hospital employees. 

The long term outlook remains positive.  Healthstream controls about 50% of the U.S. hospital market.  That share is poised to keep expanding as more content providers are added and marketing efforts are enhanced.  New products are rolling out.  A joint venture with Norway based Laerdal Medical could provide substantial leverage.  Ultimately, Healthsteam is well positioned to help the U.S. medical industry improve productivity through computerized instruction and other automation technologies.  Expansion into related markets like surgery centers could reinforce growth.  International opportunities provide further potential.  The stock is trading at a high price in relation to earnings.  But Healthstream remains a small company with key advantages in an enormous industry.  Further appreciation is possible.

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Healthstream ( Nasdaq - HSTM ) -- Supreme Court Ruling Solidifies Outlook

Healthstream (HSTM $26.25) appears on track to report excellent on target Q2 results.  The company has accelerated spending on sales and marketing to amplify future performance.  So margins may narrow a bit.  Healthstream also sold stock earlier in the year, increasing dilution.  Earnings comparisons are likely to be muted as a result.  Momentum is likely to build in subsequent periods as new products start contributing, market share expands further, and Healthstream's complementary research services perk up again.  A recent acquisition isn't likely to boost results materially, although the software obtained promises to reinforce the company's current line up.

The Supreme Court decision to uphold the Affordable Care Act promises to boost demand.  Most of Healthstream's sales currently are generated from hospitals that use the technology to train personnel.  More patient traffic at those facilities promises to reinforce what already is an upward trend in demand.  Our estimates are unchanged.  New products and acquisitions hold the potential for faster growth in future periods.

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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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