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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Healthstream ( Nasdaq - HSTM ) -- Plenty of Operating Room

Healthstream (HSTM $14.00) reported excellent on target Q3 results.  Non-GAAP earnings (fully taxed) advanced 80% to $.09 a share.  The company netted an additional $.03 a share in tax benefits.  Revenues improved 24% to $20.6 million.  Performance dipped slightly on a sequential basis due to summer related seasonal factors.  Healthstream is the leading provider of e-learning solutions to the health care industry, serving more than 2.5 million workers with a recurring SAAS ("software as a service") delivery format.  The company's Internet platform enables third party content providers to sell state of the art instructional material to both medical and administrative employees in a more convenient and productive manner than traditional CD-based and classroom approaches.  Healthstream books the revenue and pays royalties to the authors.  The company also provides research surveys and other data services, representing about 33% of revenues.  Most of that business is performed on a subscription basis, too. 

A joint venture with industry giant Laerdal Medical is advancing the technology into the simulation area.  Laerdal is the leading producer of medical mannequins.  The two companies have teamed up to computerize those models so health workers can practice their skills and receive immediate feedback on how well they're doing.  Currently, a teacher usually has to supervise the performance.  The core e-learning business is growing due to market share gains, the addition of more content per subscriber, and continued growth in the market's overall size.  The simulation segment is just getting off the ground but promises to deliver substantial leverage in upcoming years.  Expansion into international markets has been modest to date but the combination with Norway-based Laerdal could provide a sizable boost in that direction, as well.

Mobile applications are slated for introduction in Q4.  That technology will enable users to obtain content on phones and tablets, in addition to personal computers and notebooks.  The mobile links also may facilitate access to databases for everyday reference, moreover, besides just studying.  Additional simulation components will be launched over the next two quarters.  Healthstream also recently gained exclusive access to several high potential accreditation programs.  Those packages will be available only through the company's e-learning platform.  Revenues should benefit directly from the captive audience.  Being the sole source for that material also could attract new customers to Healthstream's other offerings.

We estimate 2011 income will finish in the $.35-$.37 a share range.  (See "Accounting Notes.")  Hiring is slated to accelerate in Q4 to prepare for a major expansion next year.  So margins may not widen in the period despite further sales gains.  Next year $.45-$.50 a share remains a realistic target.  Faster gains are possible in subsequent years as margins continue to improve, international markets are exploited, and the simulation line becomes a bigger factor.  Periodic bursts could amplify results.  In 2013, for instance, new hospital billing procedures are scheduled to take effect as a result of the national health insurance law.  Healthstream will distribute a series of courses designed to train administrative personnel in the revised scheme.

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Healthstream ( Nasdaq - HSTM) -- Separating from the Pack

Healthstream (HSTM $13.50) reported excellent on target Q2 results.  Earnings advanced 50% to $.09 a share.  Our figures exclude non cash stock option expense and amortization of acquired intangibles.  (See "Accounting Notes" for a complete explanation.)  Margins were reduced by the cost associated with the company's annual user conference.  Healthstream also is adding personnel at a healthy pace to support future growth.  On the other hand margins are starting to benefit from lower per-unit royalties paid to outside content providers.  Healthstream provides the leading computer based learning platform for the health care industry.  Hospital workers take courses over the Internet to keep their skills sharp, learn about new products and procedures, and earn certifications.  Healthstream also is developing a new simulation platform that promises to expand the potential market dramatically over the next several years.  That effort is being done in combination with Laerdal Medical, the leading provider of medical mannequins.  

Revenues climbed 26% to $21.1 million.  The learning division posted a 29% gain.  The smaller research unit, which conducts surveys and other market research programs, posted a 22% advance.  The renewal rate exceeded 100%.  That means renewing hospitals added more personnel to the contracts.  Some customers also signed up for additional courses.  The total number of subscribers rose 63,000 to 2.49 million.  Depending on how the calculation is made, Healthstream ended the period with 42%-45% of the market.  Competition consists mainly of large training and workforce management software providers who address a wide range of industries.  Those companies are performing well but are likely to keep losing market share to Healthstream in the health care segment, primarily because that's only area Healthstream focuses on.

The long term outlook remains bright.  Spending on training by hospitals could keep expanding as the payback improves further.  Content quality continues to improve, fueled by ongoing improvements to the Internet, declining computer costs, and better software features.  The addition of simulation could yield further leverage.  And more third party content providers are likely to adopt Healthstream's platform as a distribution vehicle.  Penetration into related markets like rehab hospitals, surgery centers, and home nursing companies offers additional potential.  Growth could be sustained at a high level well into the decade.  Meantime, we are raising our 2011 earnings estimate by a nickel to $.35 a share.  Next year $.45 a share represents a realistic target.

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Healthstream ( Nasdaq - HSTM ) -- Outlook Positive

Healthstream (HSTM $11.15) is on track to produce excellent on target Q2 results.  The share price fell yesterday in response to a downgrade by a Wall Street research firm.  The fundamentals at the company remain intact.  The change in opinion reflected a concern about the stock's high P/E ratio.  Healthstream is continuing to gain market share in its core learning business.  The company also is starting to broaden its horizon in that segment, diversifying beyond the acute care hospital segment.  The research business is continuing to gain momentum, moreover.  And while the high potential simulation partnership with Laerdal Medical still is in an early stage of development, that effort is on schedule.  Major acceleration is likely over the next several years.  That revenue contribution will be accretive to Healthstream's existing business, moreover, so overall results should benefit.

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Healthstream ( Nasdaq - HSTM ) -- Simulation Launch on Schedule

Healthstream (HSTM $12.50) appears on track to produce excellent on target Q2 results.  The company continues to gain market share in the health care education industry.  Healthstream provides an Internet platform that lets hospital workers study instructional material at their convenience, unlike competitive offerings that rely on classwork, books, and compact disks.  The computer format also enables hospitals to develop proprietary courses which they can use internally or make money from by licensing them to outside users.  Healthstream currently serves 40%-45% of the U.S. market.  It doesn't operate overseas.  The company also has a research arm that conducts surveys to help hospitals measure performance and customer satisfaction.  That segment has rebounded following a beefed up marketing effort that was implemented last year.  We continue to estimate full year earnings (excluding stock option expense) will reach $.30 a share (+30%) in 2011 on sales of $80 million (+22%).

Simulation could be the wave of the future in health care education.  Last year Healthstream formed an equally owned joint venture with Laerdal Medical, the industry leader in medical mannequins.  The companies have begun to computerize those models and link them up to the Internet.  Students will get measurable feedback on how well they perform different techniques.  That could improve performance (quantifiable data) and speed up class work (instructors won't have to make every observation).  The companies have developed authoring systems and related support tools which experts now are using to develop specific courses and applications.  The commercial rollout is expected to begin this year.  As the inventory of simulation products expands revenues promise to pyramid higher, bolstering recurring revenue and income growth well into the decade. 

Meantime, the core business promises to keep expanding.  Further market share gains are likely.  The number of hospital workers may rise in future years, as well, fueled by government regulation.  And compliance rules may force workers to take more courses, and get certified more frequently.  We estimate 2012 earnings will reach $.40 a share, bolstered to a modest extent by the high potential simulation line.  (Healthstream will split revenue and earnings 50-50 with Laerdal.)  That venture could open up the international market over the long haul, since Laerdal is well established outside the U.S.  (Please click on the "labels" button below to bring up all the reports on file about the company.)

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Healthstream ( Nasdaq - HSTM ) -- Excellent Q1 Results

Healthstream (HSTM $9.25) reported better than expected Q1 results.  The health care learning segment posted a 27% revenue increase to $13.1 million.  The research business regained momentum in the period, as well, climbing 22% to $5.4 million.  Total revenue of $18.5 million was up 25% year to year.  Margins improved despite a final dose of start-up costs associated with the high potential Sim Ventures line.  Non-GAAP earnings advanced 60% to $.08 a share.  Healthstream still has approximately $20 million of unused tax loss carryforward benefits to apply against future income.  For financial reporting purposes the company applied a 41% tax rate.

The Sim Ventures line will begin rolling out in May.  That business is an equally owned joint venture between Healthstream and the worldwide leader in computer-controlled patient simulator mannequins (Laerdal Medical).  The venture plans to hook up those mannequins to remote computers via the Internet to evaluate how well a particular task is performed.  The interactive software will enable video replays, detailed analysis, demonstrations of correct technique, and other feedback in addition to scoring and record keeping.  Laerdal's dummies currently contain electronics but aren't linked to external software programs.  Healthstream holds 40%-45% of the U.S. hospital training market and will be responsible for marketing the new technology to that base.  Laerdal is well established internationally.  Incremental revenue is likely to be modest in 2011 as the software hook-ups are completed and customers familiarize themselves with the new approach.  Substantial growth is possible in subsequent years, reinforced by the absence of direct competition.

Meantime, the core business remains vibrant.  Existing hospitals are adding more software modules to their training programs.  The trend towards certification continues to increase, moreover, prompting more health care workers to take the courses.  Pricing is firm.  Market share is rising, fueled by Healthstream's superior delivery system (Internet versus CDs and books).  Margins probably won't expand to their maximum potential in the short run as technology upgrades are pursued and the sales force expands.  But profitability is likely to widen in 2011, nonetheless.  We are raising our full year earnings estimate 7% to $.30 a share.  We also have raised our sales estimate 4% to $80 million.  The new figures represent year to year gains of 36% and 23%, respectively.

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Healthstream ( Nsadaq - HSTM ) -- Expands Laerdal Medical Partnership

Healthstream (HSTM $7.40) acquired a 50% stake in Laerdal's "Advanced Video System."  The two companies formed an equal partnership in 2010 to develop a simulation based health care education business.  Healthstream paid $3.5 million in cash to Laerdal so the video technology would be added to the partnership.  The video system uses up to four cameras to record students (hospital workers) as they perform various procedures on patient simulators (computerized mannequins).  The partnership originally was established to develop a next generation instruction system that combined Healthstream's courseware with Laerdal's mannequins.  As students perform different actions the results are transmitted over the Internet and evaluated.  The video provides additional feedback, showing the students and instructors exactly where they went right and wrong.  Healthstream and Laerdal are in the early stages of rolling out the new product line.  So the video business is not expected to generate a direct boost to results this year.  The technology's availablity promises to reinforce overall demand as more courses become available in the future.  For now we are maintaining our current estimates.  (Please click on the "Labels" button below to bring up all the reports on file about Healthstream.)

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Healthstream ( Nasdaq - HSTM ) -- Organic Growth Accelerates

Healthstream (HSTM $7.50) reported excellent on target Q4 results.  Non-GAAP earnings advanced 50% to $.06 a share.  Revenues increased 17% to $17.6 million.  The subscriber base expanded 14% to 2.25 million healthcare professionals.  The backlog of new subscribers who haven't been implemented yet rose more quickly (+125%) to 225,000.  Pricing remained solid.  The renewal rate was nearly 100%.  New educational materials are in the pipeline, which promise to increase average revenue per subscriber.  The company's research business regained momentum, as well, fueled by beefed up marketing efforts.  For the entire year income advanced 28% to $.23 a share.  Revenues improved 15% to $65.8 million.

New products will reinforce growth in 2011.  Organic gains in the core acute hospital market promise to be amplified by Healthstream's high potential Sim Ventures partnership with Laerdal Medical (Norway).   That product line will enable employees to acquire techniques and certifications using computerized mannequins, that relay what's happening over the Internet to an instructor or interactive computer program.  Healthstream is rolling out two additional products, which could yield further impetus.  Initial contributions are likely to be modest but substantial contributions could develop over the next several years.

We estimate 2011 income will climb 22% to $.28 a share.  Sales could reach $77-$80 million, depending on the new products' contribution.  Those lines probably won't generate significant income in 2011, due to start up costs.  But leverage could become sizable down the road.  (Please click on the "Labels" button to bring up previous reports about the company.)

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Healthstream ( HSTM - Nasdaq ) - Solid Q3 Results

Healthstream (HSTM $6.00) reported excellent on target Q3 results.  Earnings advanced 50% to $.06 a share, excluding non cash stock option and intangible amortization expense.  (Please refer to out "Accounting Notes" button.)  Sales improved 18% to $16.6 million.  Educational and training products gained 22% and represented 66% of total revenues.  The number of medical workers covered by subscriptions increased by 99,000.  The renewal rate was 100%.  Prices increased by an average of 6% year to year.  Most of that reflected the addition of more content by existing customers.  Healthstream's struggling research business bounced back as expected in the quarter, fueled by beefed up marketing efforts.  That line grew 10% year to year and could post faster gains in upcoming periods.  Project revenues declined, holding back the size of the overall advance.  That segment varies from period to period and is less profitable than the core learning business. 

For the entire year we estimate earnings will finish at $.22 a share, up 22%.  Next year initial contributions from the high potential SimVentures line will emerge.  That should offset the drag exerted this year by the program's development costs, and perhaps generate some incremental profit.  Both the learning and research segments are poised to keep expanding at above average rates.  Overhead expenses are likely to remain steady, enabling earnings to once again grow faster than sales.  We estimate 2011 earnings will attain $.28-.30 a share.  Longer term, explosive gains are achievable if the SimVentures effort realizes its potential.

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Healthstream ( HSTM - Nasdaq )

Healthstream (HSTM $5.25) is the leading provider of Internet based learning systems used by the health care industry.  Hospitals, drug companies, and medical device manufacturers sign deals covering most of their employees so they can take the courses and access a wide range of educational material.  Healthstream currently covers about 40% of the five million workers comprising the U.S. market.  Applications cover a lot of territory, including OSHA training, various certification programs, compliance, and best practices training.  Courseware usually is supplied by independent experts, although Healthstream does produce some mainstream products internally.  The company's Internet based delivery system sets it apart from most of its competition, which still rely on printed materials and CD based instruction.  Demand has been fueled by 3%-4% annual increases in the health care workforce over the past several years.  That dynamic has stalled with the recent recession.  But growth has been sustained in the 15% range by providing new products to existing customers, and by persuading hospitals to switch from older technologies.

Healthstream also provides research services for hospitals.  That line produces patient, physician, employee and community surveys, data analysis, and other measurement tools to keep hospitals abreast of the market, and how their own organizations are performing.  That segment has stumbled of late, registering growth in the 4%-6% vicinity.  Broad-based research companies have been gaining market share at Healthstream's expense.  Investments in sales and marketing are beginning to bear fruit, however, re-establishing momentum.  Growth is poised to pick up speed in upcoming periods.

A joint venture aimed at the simulation market could transform the industry over the next 5-10 years.  Healthstream and Norway based Laerdal Medical recently formed a 50%-50% partnership to develop training dummies that link to the Internet.  Currently, when a student practices resuscitation on a dummy, for example, there isn't any direct feedback or method to evaluate how well the job was done.  The simulation technology now in development will allow those measurements to be taken, making it easier for students to correct mistakes in technique.  Initial applications will be launched early in 2011.  A wide range of products are slated to follow over the next several years.  Those products promise to generate significant incremental revenue directly.  They also could pull in demand for Healthstream's traditional business if customers elect to buy from a single source.

We estimate 2010 sales will advance 13% to $65 million.  Overall growth will be retarded by the research unit, which represents about one-third of revenue.  Earnings appear on track to rise 22% on a fully taxed (40% rate) basis to $.22 a share, excluding amortization of intangibles and non cash stock option costs.  Next year, excluding the simulation partnership, revenue and income gains of 15% and 35% appear achievable, respectively.  That would put revenues at $75 million; earnings at $.30 a share.  Earnings should benefit from a decline in start-up costs associated with the simulation venture, which are expected to cost 2010 results approximately $.02 a share.  As the simulation line picks up momentum overall growth could accelerate as time goes on.  In 2-3 years sales could reach $100 million to produce earnings of $.50 a share.  A stronger showing is possible if simulation is broadly adopted.  Applying a P/E multiple of 20x suggests a target price of $10 a share, potential appreciation of 90% from the current quote.