Healthstream Inc. (HSTM) is a small healthcare software company with a market capital of $700 million. It provides a web-based solution for healthcare organizations allowing them to train professionals, employees. In addition the software monitors their credential and privilege records. The company has achieved annual sales revenue growth and free cash flow growth at a 20% clip Y/Y over past the five years. Healthstream has an attractive profile with 71% institutional ownership and 20% insider ownership as well. Healthstream has minor liabilities without long-term debt and all of its three top shareholders added shares steadily in the recent quarter.

Healthstream Headwinds

Healthstream’s stock price soared from $4 in 2010 to $40 per share in 2014 and then slid gradually towards $20 after Healthstream’s net income suffered significant setbacks last year.

According to the 10-K for FY 2015, revenues were up 22% to $209M, while operating income was down 17.2% to 13.5 million. Net income was down 17% to $8.6 million, and EPS was 0.28 comparing with 0.37 in 2014.

HSTM data by YCharts

In 2015, Healthstream maintained $34 million cash flow from operating activities, a similar figure to 2014 levels. However, the company paid $88M cash to buy HealthLine Systems last year. A key reason for the acquisition of HealthLine was because the U.S. Center for Medicare and Medicaid Service requires hospital systems to monitor credentials and privileges as a prerequisite for federal reimbursement. HealthLine tracks healthcare provider credentials and privileges such as specialties and the facilities where they are licensed to practice. The Heathline systems acquisition is expected to bring in sustainable revenue growth for Healthstream over the long term. Healthstream issued $98M stock in 2015 to fund the $88M acquisition.

In addition to the acquisition cost, increased R&D, and Sales expenses related to launching new products were also accounted for the decrease in net income in last year.