HealthStream Announces Second Quarter 2008 Results

NASHVILLE, Tenn.--(Business Wire)--
HealthStream, Inc. (NASDAQ: HSTM), a leading provider of learning
and research solutions for the healthcare industry, announced today
results for the second quarter ended June 30, 2008.

Highlights:

-- Revenues of $13.0 million in the second quarter of 2008, up 8%
over the second quarter of 2007

-- Net income of $739,000 in the second quarter of 2008, up from
$425,000 in the second quarter of 2007

-- Adjusted EBITDA of $2.2 million in the second quarter of 2008,
up from $1.9 million in the second quarter of 2007

-- 1,639,000 healthcare professional subscribers fully
implemented on our Internet-based learning network at June 30,
2008, up from 1,422,000 at June 30, 2007

-- Approximately $1.0 million invested in stock repurchase plan
during the second quarter, ending the quarter with a cash
balance of $5.8 million, up from $3.6 million at December 31,
2007.

Financial Results:

Second Quarter 2008 Compared to Second Quarter 2007

Revenues for the second quarter of 2008 increased $966,000, or 8
percent, to $13.0 million, compared to $12.0 million for the second
quarter of 2007. The Company's revenue mix during the second quarter
of 2008 was comprised of 63 percent of revenues from HealthStream
Learning and 37 percent from HealthStream Research. This compares to
54 percent from HealthStream Learning and 46 percent from HealthStream
Research during the second quarter of 2007.

Revenues from HealthStream Learning increased by $1.7 million when
compared to the second quarter of 2007. Of this increase, $1.6 million
was derived from our Internet-based subscription learning products,
which includes revenue increases from the HealthStream Learning
Center(R) (HLC) of $900,000 and from courseware subscriptions and
online training services of $666,000. Revenues from these products
increased 30 percent over the prior year quarter and approximated $6.8
million for the second quarter of 2008. Revenues associated with
implementation, development, and consulting services increased
$481,000 over the prior year quarter. Our increase in revenues was
partially offset by a decrease in revenues from live events, study
guides, and association activities, which collectively declined
$328,000 from the prior year quarter, primarily due to lack of
customer demand for such services.

Revenues from HealthStream Research decreased $708,000 when
compared to the second quarter of 2007. Revenue mix changes over the
prior year quarter included an increase of $232,000 from patient
surveys. This increase was offset by revenue declines of $333,000 from
employee surveys, $325,000 from community surveys, and $282,000 from
physician surveys as a result of fewer survey projects being completed
during the second quarter of 2008 as compared to the same quarter in
the prior year.

Gross margin, which we define as revenues less cost of revenues
(excluding depreciation and amortization) divided by revenues,
declined to 63 percent for the second quarter of 2008 from 64 percent
for the second quarter of 2007. The decline in gross margin resulted
from changes in revenue mix and related cost of revenues. In
HealthStream Research, we experienced lower gross margins as a result
of lower revenues from physician and employee surveys, which have
higher gross margins than patient and community surveys. In
HealthStream Learning, gross margins improved slightly compared to the
prior year quarter due to the increase in HLC revenues, but were
somewhat offset by increased personnel expenses and increased
royalties paid by us associated with increased revenues from a portion
of our courseware subscription products.

Overall, other operating expenses, which include product
development, sales and marketing, depreciation and amortization, and
other general and administrative expenses increased over the prior
year quarter. Product development grew by $230,000, which was
primarily associated with maintenance and support of our HealthStream
Learning products, as well as a reclassification of personnel to
product development from general and administrative expenses within
HealthStream Research. Sales and marketing decreased by $127,000,
partly due to a $421,000 decrease associated with our Annual Learning
Summit. That event occurred in last year's second quarter but will
take place in this year's third quarter. Additions of sales personnel
to both HealthStream Learning and HealthStream Research accounted for
the offsetting increases in sales and marketing expenses. The
depreciation and amortization and other general and administrative
categories increased modestly over the same quarter of last year.

Net income for the second quarter of 2008 was $739,000, or $0.03
per share (diluted), up from $425,000, or $0.02 per share (diluted),
for the second quarter of 2007.

Adjusted EBITDA (which we define as net income before interest,
income taxes, share-based compensation, and depreciation and
amortization) was $2.2 million for the second quarter of 2008,
compared to $1.9 million for the second quarter of 2007. This
improvement is consistent with the factors mentioned above. Our
reconciliation of this calculation to measures under generally
accepted accounting principles is attached in the Summary Financial
Data.

Other Financial Indicators

At June 30, 2008, the Company had cash and related interest
receivable of $5.8 million, compared to $4.8 million at March 31,
2008. The increase in cash primarily resulted from improved cash
receipts from customers, but was partially offset by $1.0 million of
cash used during the quarter to repurchase shares of our common stock
pursuant to our stock repurchase plan. Capital expenditures and
capitalized feature enhancement development totaled approximately $0.4
million for the second quarter of 2008.

Our days sales outstanding (DSO), which we calculate by dividing
the accounts receivable balance, excluding unbilled and other
receivables, by average daily revenues for the quarter, approximated
48 days for the second quarter of 2008 compared to 57 days for the
second quarter of 2007. The improvement over the prior year quarter is
associated with improved collections from customers during the
quarter.

Stock Repurchase Plan Update

During the second quarter of 2008, we purchased approximately $1.0
million of our common stock through the open market. Our board of
directors authorized the repurchase of up to $3.0 million during the
twelve-month period ending on September 20, 2008, of which we have
invested approximately $1.1 million as of June 30, 2008.

HealthStream Learning Update

HealthStream supports healthcare organizations in delivering
quality patient care, creating safer hospitals, meeting regulatory
training requirements, and developing professional skills through our
innovative learning solutions. To this end, we provide a range of
learning solutions that include: the HLC--our Internet-based learning
platform, a wide range of professional, clinical, and regulatory
content subscriptions, an online authoring/self-publishing tool, and
learning activities for healthcare professionals sponsored by
pharmaceutical and medical device companies.

In collaboration, HealthStream Research and HealthStream Learning
launched the HealthStream HCAHPS Preparation and Improvement Library
Courseware in the second quarter of 2008. Four multi-facility health
systems contracted to receive this library for their employees during
the second quarter. This online course of study, which focuses
hospital staffs at all levels and functions on behaviors that improve
how patients perceive their hospital experience, correlates directly
to the HCAHPS (Hospital Consumer Assessment of Health Plan Survey) of
patient perspectives on hospital care. The Centers for Medicare and
Medicaid (CMS) require hospitals to institute and publicly report
results of this survey as a condition for full reimbursement.

At June 30, 2008, approximately 1,639,000 healthcare professionals
were fully implemented to use our Internet-based HLC for training and
education. This number is up from approximately 1,594,000 at March 31,
2008. The total number of contracted subscribers at June 30, 2008 was
approximately 1,758,000, up from 1,530,000 at June 30, 2007.
"Contracted subscribers" include both those already implemented
(1,639,000) and those in the process of implementation (119,000).
Revenue recognition commences when a contract is fully implemented.

Customers representing approximately 86 percent of subscribers
that were up for renewal did renew in the second quarter of 2008,
while our renewal rate based on the annual contract value was
approximately 88 percent. The renewal rates for the second quarter of
2008 compare to a subscriber renewal rate of 98 percent and an annual
contract value renewal rate of 113 percent during the second quarter
of 2007. During the second quarter of 2008, quarterly renewal rates
were negatively impacted, in part, due to the decision of one
non-acute care customer, representing approximately 9,000 subscribers,
or 10 percent of the subscribers up for renewal, who chose not to
renew due to its acquisition by a company using another learning
system.

HealthStream Research Update

We support healthcare organizations with research solutions that
provide valuable insight about patients' experiences, workforce
engagement, physician relations, and community perceptions of hospital
services. This insight, in turn, provides data-driven roadmaps for
organizational and workforce development--which can be achieved
through HealthStream's learning solutions. Our primary research
solutions include physician, employee, patient, and community surveys
that deliver insight, analyses, and industry benchmarks to healthcare
organizations.

During the second quarter of 2008, HealthStream Research
contracted with several new healthcare organization customers,
including Banner Health System, Rockdale Hospital & Health System, and
Pikeville Medical Center.

A couple of factors during the second quarter 2008 affected our
performance in HealthStream Research, compared to the second quarter
of 2007. One customer elected to not repeat an interim survey
conducted in the same quarter last year and a few of our larger
customers delayed--until later this year--certain research projects
originally scheduled for completion during the second quarter.
Although we have increased our sales team for HealthStream Research by
approximately one-third during the first half of the year, sales
production is behind schedule--which we expect to continue through the
remainder of 2008.

Financial Expectations

Revenues for the third quarter of 2008 are expected to range
between $13.0 and $13.5 million, an increase of approximately $1.2 to
$1.7 million, or 10 to 14 percent, over the same quarter in the prior
year. We expect revenues from HealthStream Learning to increase
between 13 and 16 percent over the third quarter of the prior year
resulting from continued growth in our HLC subscriber base and
courseware subscriptions, which we anticipate will be partially offset
by continued declines in several of our project-based products. We
expect revenues from HealthStream Research to increase between seven
and 10 percent, compared to the third quarter of 2007.

We anticipate gross margins for the third quarter of 2008 to be
down slightly compared to the same quarter in the prior year, but be
comparable to the second quarter of 2008. Product development expenses
are expected to be comparable to the second quarter of 2008 but
increase in amount and as a percentage of revenue compared to the
prior year third quarter. Sales and marketing expenses are also
expected to increase in amount and as a percentage of revenue compared
to both the second quarter of 2008 and the prior year third quarter. A
significant portion of this increase is expected to occur from our
Annual Summit to be held in September 2008. Depreciation and
amortization are expected to remain comparable to both the second
quarter of 2008 and the prior year third quarter. General and
administrative expenses are expected to increase in amount but
decrease as a percentage of revenues compared to the third quarter of
2007. We expect net income for the third quarter of 2008 to range
between $0.03 and $0.04 per diluted share.

Primarily as a result of slower than anticipated sales acitivity
in HealthStream Research, we are revising our full year 2008 revenue
growth expectation to range between 16 and 20 percent over 2007. We
expect revenues to increase in each remaining quarter of 2008 over the
same quarter from the prior year. Revenues from HealthStream Learning
are expected to increase for the full year 2008 over the full year
2007. Revenues from HealthStream Research are expected to increase for
the full year 2008 over the full year 2007 on an as reported basis but
remain comparable to 2007 on a pro forma basis (as if revenues from
The Jackson Organization were included in our operating results as of
January 1, 2007). We are also revising our expectation of net income
per diluted share for the full year of 2008 to be in the range between
$0.11 and $0.13. Our estimates for the third quarter and full year of
2008 do not reflect an income tax benefit associated with the
realization of additional deferred tax assets. We will continue to
evaluate the need for a valuation allowance on our remaining deferred
tax assets based on whether they will more likely than not be realized
in the future.

Capital expenditures and content purchases are expected to
approximate $4.5 million in 2008.

"We delivered $739,000 of net income and an adjusted EBITDA of
$2.2 million on a record $13.0 million of revenues in the second
quarter of 2008. Our balance sheet strengthened as our cash balance
improved to $5.8 million--even while increasing investment in our
sales teams for both Research and Learning and executing $1.0 million
of our share repurchase program during the second quarter," said
Robert A. Frist, Jr., chairman and chief executive officer,
HealthStream.

A conference call with Robert A. Frist, Jr., chief executive
officer, Gerard M. Hayden, Jr., senior vice president and chief
financial officer, and Mollie Condra, senior director of
communications, research, and investor relations will be held on
Wednesday, July 23, at 9:00 a.m. (EST). To listen to the conference,
please dial 877-440-5796 (no passcode needed) if you are calling
within the domestic U.S or Canada. If you are an international caller,
please dial 719-325-4886 (no passcode needed). The conference may also
be accessed by going to http://ir.healthstream.com/events.cfm for the
simultaneous Webcast of the call, which will subsequently be available
for replay. The replay telephone numbers are 888-203-1112 (passcode
#5424932) for U.S. and Canadian callers and 719-457-0820 (passcode
#5424932) for international callers.

About HealthStream

HealthStream (NASDAQ: HSTM) is a leading provider of research and
learning solutions for the healthcare industry, transforming insight
into action to deliver outcomes-based results for healthcare
organizations. Through HealthStream's learning solutions--which have
been contracted by over 1.7 million hospital-based healthcare
professionals--healthcare organizations create safer environments for
patients, increase clinical competencies of their workforces, and
facilitate the rapid transfer of the latest knowledge and
technologies. Through our research products, executives from
healthcare organizations gain valuable insight about patients'
experiences, workforce challenges, physician relations, and community
perceptions of their services. Based in Nashville, Tennessee,
HealthStream has two satellite offices. For more information about
HealthStream's learning and research solutions, visit
www.healthstream.com or call us at 800-933-9293.

-0-
*T
HEALTHSTREAM, INC.
Summary Financial Data
(In thousands, except per share data)

Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
--------- -------- ------- --------
Revenues $ 13,013 $ 12,046 $24,435 $ 20,148

Operating expenses:
Cost of revenues (excluding
depreciation and amortization) 4,863 4,359 9,391 7,274
Product development 1,330 1,100 2,615 2,179
Sales and marketing 2,694 2,821 5,251 4,555
Depreciation and amortization 1,209 1,198 2,455 2,054
Other general and administrative 2,193 2,160 3,955 3,769
--------- -------- ------- --------
Total operating expenses 12,289 11,638 23,667 19,831

Operating income 724 408 768 317
Other income, net 23 22 45 161
--------- -------- ------- --------
Income before income taxes 747 430 813 478
Income tax provision 8 5 8 9
--------- -------- ------- --------
Net income $ 739 $ 425 $ 805 $ 469
========= ======== ======= ========

Net income per share:
Net income per share, basic $ 0.03 $ 0.02 $ 0.04 $ 0.02
========= ======== ======= ========
Net income per share, diluted $ 0.03 $ 0.02 $ 0.04 $ 0.02
========= ======== ======= ========

Weighted average shares
outstanding:
Basic 21,961 21,970 22,024 21,953
========= ======== ======= ========
Diluted 22,579 22,782 22,653 22,692
========= ======== ======= ========
*T

-0-
*T
Summary Financial Data - Continued
(In thousands, except per share data)

Income before interest, taxes, share-based compensation, depreciation
and amortization, or adjusted EBITDA(1):

Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
--------- -------- ------- --------
Net income $ 739 $ 425 $ 805 $ 469
Interest income (40) (34) (86) (182)
Interest expense 16 12 35 20
Income taxes 8 5 8 9
Share-based compensation expense 273 341 426 488
Depreciation and amortization 1,209 1,198 2,455 2,054
--------- -------- ------- --------
Income before interest, taxes,
share-based compensation,
depreciation and amortization $ 2,205 $ 1,947 $3,643 $ 2,858
========= ======== ======= ========

(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.
*T

-0-
*T
HealthStream, Inc.
Condensed Consolidated Balance Sheets
(In thousands)

June 30, December 31,
2008 2007(1)
--------- ------------
ASSETS
Current assets:
Cash and related interest receivable $ 5,783 $ 3,630
Accounts and unbilled receivables, net (2) 8,396 9,719
Prepaid and other current assets 2,183 1,969
Deferred tax assets, current 360 360
--------- ------------
Total current assets 16,722 15,678

Capitalized software feature enhancements, net 4,198 4,459
Property and equipment, net 3,808 4,383
Goodwill and intangible assets, net 26,358 26,851
Deferred tax assets, non current 1,630 1,630
Other assets 222 360
--------- ------------
Total assets $ 52,938 $ 53,361
========= ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued and other
liabilities $ 5,068 $ 6,260
Deferred revenue 10,241 9,493
Current portion of long-term debt and capital
lease obligations 769 831
--------- ------------
Total current liabilities 16,078 16,584

Long-term debt and capital lease obligations,
net of current portion 690 1,064
--------- ------------
Total liabilities 16,768 17,648

Shareholders' equity:
Common stock 96,778 97,126
Accumulated deficit (60,608) (61,413)
--------- ------------
Total shareholders' equity 36,170 35,713
--------- ------------

Total liabilities and shareholders'
equity $ 52,938 $ 53,361
========= ============

(1) Derived from audited financial statements contained in the
Company's filing on Form 10-K for the year ended December 31, 2007.
(2) Includes unbilled receivables of $1,508 and $1,051 and other
receivables of $5 and $0 at June 30, 2008 and December 31, 2007,
respectively.
*T

This press release includes certain forward-looking statements
(statements other than solely with respect to historical fact),
including statements regarding expectations for the financial
performance for 2008 that involve risks and uncertainties regarding
HealthStream. These statements are based upon management's beliefs, as
well as assumptions made by and data currently available to
management. This information has been, or in the future may be,
included in reliance on the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that
such results or events predicted in these statements may differ
materially from actual future events or results. The forward-looking
statements are subject to significant uncertainties and other risks
referenced in the Company's Annual Report on Form 10-K and in the
Company's other filings with the Securities and Exchange Commission.
Consequently, such forward-looking information should not be regarded
as a representation or warranty by the Company that such projections
will be realized. Many of the factors that will determine the
Company's future results are beyond the ability of the Company to
control or predict. Readers should not place undue reliance on
forward-looking statements, which reflect management's views only as
of the date hereof. The Company undertakes no obligation to update or
revise any such forward-looking statements.

HealthStream, Inc.
Gerard M. Hayden, Jr., 615-301-3163
Chief Financial Officer
ir@healthstream.com
or
Media:
Mollie Condra, 615-301-3237
Senior Director, Communications,
Research & Investor Relations
mollie.condra@healthstream.com

Copyright Business Wire 2008