HealthStream Announces Second Quarter 2010 Results

HealthStream, Inc. (NASDAQ: HSTM), a leading provider of learning and research solutions for the healthcare industry, announced results for the second quarter ended June 30, 2010.

Highlights:

* Revenues of $16.7 million in the second quarter of 2010, up 14% over the second quarter of 2009
* Operating income of $2.3 million in the second quarter of 2010, up 26% over the second quarter of 2009
* Net income of $1.3 million and earnings per share (EPS) of $0.06 per share in the second quarter of 2010—which is the amount after deducting $1.0 million, or $0.04 per share, of income tax provision, compared to net income of $1.7 million and EPS of $0.08 per share in the second quarter of 2009—which included an income tax provision of $132,000.
* Adjusted EBITDA of $3.8 million in the second quarter of 2010, up 15% from $3.3 million in the second quarter of 2009
* Multi-year renewal agreements signed with key accounts, including HCA and Catholic Health Initiatives
* SimVentures, new joint venture formed between HealthStream and Laerdal Medical

Financial Results:

Second Quarter 2010 Compared to Second Quarter 2009

Revenues for the second quarter of 2010 increased $2.1 million, or 14 percent, to $16.7 million, compared to $14.6 million for the second quarter of 2009. The Company’s revenue mix during the second quarter of 2010 was comprised of 68 percent of revenues from HealthStream Learning and 32 percent from HealthStream Research. This compares to 64 percent from HealthStream Learning and 36 percent from HealthStream Research during the second quarter of 2009.

Revenues from HealthStream Learning increased by $1.9 million, or 21 percent, when compared to the second quarter of 2009. Revenues from our Internet-based subscription products increased by $2.3 million over the prior year quarter, and were comprised of revenue increases from the HealthStream Learning Center® (HLC) of $1.2 million and from courseware subscriptions of $1.1 million. Revenues from Internet-based subscription products increased 28 percent over the prior year quarter due to a higher number of subscribers and more courseware consumption by subscribers. Revenues associated with implementation, development, and consulting services decreased $248,000 from the prior year quarter, impacted primarily by lower revenues associated with fewer project-based activities.

Revenues from HealthStream Research increased by $153,000, or three percent, when compared to the second quarter of 2009. Revenues from patient surveys—a product that generates recurring revenues—increased by $344,000, or 11 percent. Revenues from surveys conducted on annual or bi-annual cycles—namely employee, physician, and community surveys—decreased by $191,000, primarily due to declines in physician and community surveys, which more than offset an increase in employee surveys.

Cost of revenues (excluding depreciation and amortization) approximated 36 percent of revenues for both the second quarter of 2010 and 2009. The increase in cost of revenues of $678,000 resulted primarily from increased royalties paid by us associated with growth in courseware subscription revenues as well as an increase in capacity to support the growth in revenues from patient surveys. These increases were partially offset by lower costs associated with the decline in project-based revenues compared to the prior year quarter.

In the aggregate, all other operating expenses increased by 12 percent over the prior year same quarter. Product development expenses increased by $275,000 (of which $180,000 related to SimVentures) compared to the prior year quarter due to the hiring of additional personnel to support our platform products as well as our portion of expenses associated with the SimVentures joint venture with Laerdal Medical (see section entitled “Joint Venture: SimVentures” for details about SimVentures). Sales and marketing expenses increased $448,000 compared to the prior year quarter due to the hiring of additional sales personnel and related expenses. Other general and administrative expense increased $204,000 primarily due to increased contract labor expenses, professional fees, and rent expense.

Operating income for the second quarter of 2010 improved by 26 percent to $2.3 million compared to $1.9 million for the second quarter of 2009, primarily resulting from the strong revenue growth mentioned above.

In the fourth quarter of 2009, we released substantially all of the remaining balance of our valuation allowance against our deferred tax assets in accordance with generally accepted accounting principles (“GAAP”), which resulted in a non-cash $9.1 million tax benefit in net income, or approximately $0.41 per share.

Our effective income tax rate in the quarter ended June 30, 2010 was 42.5 percent. Because the Company previously maintained a full valuation allowance for its deferred tax assets, net income for the second quarter of 2009 did not include deferred income tax expense. Therefore, because of the changes in income tax accounting between 2009 and 2010, net income is not comparable between periods due to the valuation allowance maintained during the prior year.

Net income for the second quarter of 2010 was $1.3 million, or $0.06 per share (diluted), compared to $1.7 million, or $0.08 per share (diluted), for the second quarter of 2009. Net income for 2010 includes an income tax provision of $1.0 million, or $0.04 per share (diluted).

Adjusted EBITDA (which we define as net income before interest, income taxes, share-based compensation, and depreciation and amortization) was $3.8 million for the second quarter of 2010, compared to $3.3 million for the second quarter of 2009. This improvement is consistent with the factors mentioned above. Our reconciliation of this calculation to measures under GAAP is attached in the Summary Financial Data.