HealthStream Announces Second Quarter 2008 Results

Business Wire, July 22, 2008

NASHVILLE, Tenn. -- 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.