2014 Annual Report
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LETTER TO 2014 SHAREHOLDERS Robert A. Frist, Jr. Michael Shmerling Chief Executive Officer, President, and Chairman Chairman of the Board of Directors XMi Holdings, Inc. HealthStream, Inc. Dale W. Polley Jeffrey L. McLaren Past President and Vice Chairman Chief Executive Officer First American Corporation DIRECTORS Medaxion, Inc. C. Martin Harris, M.D. Thompson S. Dent Chief Information Officer, Chairman Chairman and Chief Executive Officer Information Technology Division Urgent Team Staff Physician, Internal Medicine Cleveland Clinic William W. Stead, M.D. Associate Vice Chancellor for Health Affairs / Deborah Taylor Tate, J.D. Chief Strategy Officer Former Commissioner Vanderbilt University Medical Center Federal Communications Commission Director Linda E. Rebrovick State of Tennessee / Administrative Past Chief Executive Officer and President Office of the Courts Consensus Point, Inc. Special Envoy to the International Telecommunications Union Frank E. Gordon Managing Partner Crofton Capital Robert A. Frist, Jr. Chief Executive Officer, President, and Chairman of the Board of Directors J. Edward Pearson Chief Operating Officer and Senior Vice President Gerard M. Hayden, Jr. Chief Financial Officer and Senior Vice President Arthur E. Newman Executive Vice President EXECUTIVE OFFICERSEXECUTIVE Jeffrey S. Doster Senior Vice President and Chief Technology Officer Michael J. Sousa Senior Vice President Thomas B. Schultz Senior Vice President Year Ended December 31, 2014 2013 (In thousands, except per share amounts) Statement of Income Data: Revenues $ 170,690 $ 132,274 Operating costs and expenses 154,315 117,608 Income from operations 16,375 14,666 Other income, net 146 176 Income before income taxes 16,521 14,842 Income tax provision 6,127 6,424 Net income $ 10,394 $ 8,418 Net income per share: Basic $ 0.38 $ 0.31 Diluted $ 0.37 $ 0.30 FINANCIAL HIGHTLIGHTS Weighted average shares of common stock outstanding: Basic 27,570 26,853 Diluted 28,023 27,663 Income before interest, taxes, share-based compensation, depreciation, and amortization (“adjusted EBITDA”(1)): Net income $ 10,394 $ 8,418 Interest, income taxes, share-based compensation, depreciation, and amortization 18,474 15,522 Income before interest, income taxes, share-based compensation, depreciation, and amortization $ 28,868 $ 23,940 (1)In order to better assess the Company’s financial results, management believes that income before interest, income taxes, share-based compensation, depreciation, and amortization (“adjusted EBITDA”) is an appropriate measure for evaluating the operating performance of the Company at this stage in its life cycle because adjusted EBITDA reflects net income adjusted for non-cash and non-operating items. Adjusted EBITDA is also used by many investors to assess the Company’s results from current operations. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under generally accepted accounting principles. Because adjusted EBITDA is not a measurement determined in accordance with generally accepted accounting principles, it is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. Year Ended December 31, 2014 2013 (In thousands) Balance Sheet Data: Cash and cash equivalents $ 81,995 $ 59,537 Investments in marketable securities 38,973 48,659 Accounts receivable, net 33,167 25,314 Goodwill and intangible assets 56,709 44,616 Working capital 97,352 90,912 Total assets 257,262 212,594 Deferred revenue – current and noncurrent 57,373 38,168 Shareholders’ equity 167,859 149,433 TOTAL REVENUES (in $ millions) 2010 65.8 2011 82.1 2012 103.7 2013 132.3 2014 170.7 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 At HealthStream, we are inspired by the millions of requirements, improve resuscitation outcomes, develop dedicated healthcare professionals who work every day their clinical workforce, prepare for the transition to the to improve the health and wellbeing of patients in their ICD-10 coding system, improve patients’ experience, care. To support this process, healthcare organizations and better manage their workforce. are increasingly adopting HealthStream’s solutions to manage, develop, and maintain a knowledgeable, HealthStream’s enterprise talent management platform highly skilled and competent workforce. In an era of offers several healthcare-specific applications, including the healthcare reform, dialogue has focused on a wide range HealthStream Learning Center™ (HLC), HealthStream of well-intentioned proposals to improve the delivery of Competency Center™ (HCC), HealthStream Performance healthcare—from new federal government policies to Center™ (HPC), SimManager™, and Authoring Center™, new technologies. However, we believe that the actual among others. In 2014, we added CE Center™ and quality of care provided to patients is most dependent on Checklist Management™ to our platform offerings the competence, skills, and compassion of the healthcare and, in the first quarter of 2015, we also launched the professionals responsible for delivering care. We are HealthStream Recruiting Center™. LETTER TO SHAREHOLDERS LETTER TO passionate at HealthStream about supporting them— At year-end 2014, our solutions and platform applications as we believe every patient deserves the best developed were contracted by healthcare organizations for, workforce. collectively, their approximately 4.3 million healthcare Our 2014 financial performance was solid. Year-end results employees in the U.S. For full-year 2014, we added for 2014 included annual revenues of $170.7 million, up approximately 570,000 newly contracted subscribers 29 percent over 2013 revenues. Operating income for 2014 to our platform and we implemented approximately was $16.4 million, up 12 percent over 2013, while adjusted 760,000 new subscribers, which increased our number EBITDA (earnings before interest, income taxes, share- of implemented subscribers by 22 percent over the based compensation, depreciation, and amortization) prior year. improved to $28.9 million, which is 21 percent higher HealthStream’s ecosystem features approximately 130 than 2013. We ended 2014 well capitalized with a cash healthcare industry partners, which includes highly and marketable securities balance of $121.0 million and regarded professional medical and nursing associations full availability of our $50.0 million line of credit, which and other best-in-class providers that offer healthcare positioned us well to complete the largest transaction in organizations a broad and diverse array of content and our Company’s history during the first quarter of 2015. courseware to meet their regulatory, clinical, and business HealthStream’s target market is a workforce of learning needs. Our roster of distinguished partners approximately eight million healthcare professionals, include, among others, Precyse, Wolters Kluwer Health, which includes five million employees working in the Laerdal Medical, and the Association of periOperative nation’s acute-care hospitals and three million employees Registered Nurses, and the American Academy of in the post-acute care market. As the most recently added Pediatrics—with whom we signed a renewed, five-year sector to our target market, in 2014 we expanded our post- agreement in 2014, making HealthStream the industry’s acute sales efforts and increased our post-acute content exclusive provider of the Neonatal Resuscitation Program offerings, which includes topics such as preventing (NRP) exam. On average, our customers completed patient falls, reducing re-admissions to hospitals, hospice approximately 130,000 online courses through our training, and treating patients with Alzheimer’s disease platform each weekday in 2014. and dementia. Demand for many of HealthStream’s solutions is driven By combining the capabilities of our enterprise talent by a range of government regulations. For example, our management platform with leading content and superior solution—provided in conjunction with our partner, data and analytics, HealthStream is delivering solutions Precyse—to help healthcare organizations achieve ICD- to healthcare organizations that help to meet compliance 10 readiness has been one of our fastest growing areas. At year-end 2014, approximately 1.8 million healthcare In March 2015, HealthStream completed an professionals, cumulatively, have contracted for our acquisition of San Diego-based HealthLine Systems, ICD-10 readiness training solution through their a leading healthcare credentialing and privileging respective organizations. company. HealthStream’s innovative approach to talent management supports healthcare organizations’ need This new government mandated transition to the to manage their workforce along multiple dimensions, ICD-10 coding system has delivered a meaningful including management of their qualifications and opportunity for HealthStream, while also creating some competencies. The acquisition of HealthLine Systems uncertainty in customer buying patterns due to several enables HealthStream to provide an expanded solution changes in the government deadline for compliance. set for both of these needs. Over 1,000 healthcare While demand for our ICD-10 readiness training is facilities have implemented and are currently using primarily deadline-driven, focused on the current HealthLine’s installed or SaaS-based credentialing and October 2015 transition date, we are working with