HealthStream : 2018 Annual Report

2018

LETTER TO SHAREHOLDERS

FINANCIAL HIGHLIGHTS

Year Ended December 31,			2018		2017
(In thousands, except per share amounts)
Statement of Income Data:
Revenues, net		$	231,616	$	214,899
Operating costs and expenses			216,125		205,492
Operating income			15,491		9,407
Other income, net			1,084		733
Income from continuing operations before income taxes			16,575		10,140
Income tax provision			3,324		1,302
Income from continuing operations			13,251		8,838
Discontinued operations			18,966		1,166
Net income		$	32,217	$	10,004
Net income per share - diluted:
Continuing operations		$	0.41	$	0.27
Discontinued operations			0.59		0.04
Net income per share - diluted		$	1.00	$	0.31
Weighted average shares of common stock outstanding:			32,335		32,196
Balance Sheet Data:
Cash and cash equivalents		$	134,321	$	84,768
Investments in marketable securities			34,497		46,350
Accounts receivable, net			38,124		36,691
Goodwill and intangible assets, net			145,522		154,641
Working capital			134,580		98,662
Total assets			441,948		411,119
Deferred revenue - current and noncurrent			68,929		71,225
Shareholders' equity			318,947		300,170
Reconciliation of GAAP income from continuing operations to
Adjusted EBITDA from continuing operations:
GAAP income from continuing operations		$	13,251	$	8,838
Interest income			(2,444)		(870)
Interest expense			130		132
Income tax provision			3,324		1,302
Stock based compensation expense			1,777		1,736
Depreciation and amortization			24,231		24,047
Change in fair value of cost method investments			1,271		--
Adjusted EBITDA		$	41,540	$	35,185

In order to better assess the Company's financial results, management believes that net income before interest, income taxes, stock-based compensation, depreciation and amortization, and changes in fair value of cost method investments ("Adjusted EBITDA") from continuing operations is a useful measure for evaluating the operating performance of the Company because adjusted EBITDA from continuing operations reflects net income from the Company's ongoing business operations adjusted for non-cash and non-operating items. In this regard, Adjusted EBITDA for continuing operations excludes the results of operations of the Patient Experience business which the Company sold in February 2018 and thus reflects the Company's ongoing business operations and assists in comparing the Company's results of operations between periods. Adjusted EBITDA from continuing operations 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 from continuing operations is not a measurement determined in accordance with generally accepted accounting principles, it is susceptible to varying calculations. Accordingly, adjusted EBITDA from continuing operations, as presented, may not be comparable to other similarly titled measures of other companies.

TOTAL REVENUES*

(in $ millions)

2014							138.8
2015									174.8
2016										192.1
2017											214.9
2018												231.6
0	20	40	60	80	100	120	140	160	180	200	220	240	260

*Full-year revenue metrics are adjusted retroactively to exclude HealthStream's Patient Experience business, which was divested in February 2018.

DEAR SHAREHOLDERS

At HealthStream, we see the brave, caring actions of those on the frontlines of healthcare delivery-and we are honored to support them with our innovative solutions that help them improve patient care. 2018 was a year of core operational actions that I believe position the Company for exceptional growth opportunities in the future. During 2018, we divested a business unit; launched a new PaaS platform; developed a new, high profile, potentially disruptive resuscitation solution suite; expanded our executive team; and immersed our R&D into new innovative technologies-like machine learning; virtual and augmented reality; and artificial intelligence. It is a great time to be at HealthStream-and I am excited about the solutions we are delivering to healthcare professionals to improve the quality of healthcare delivery.

Our 2018 financial performance was solid. Year-end results for 2018 included annual revenues of $231.6 million, up eight percent over 2017 revenues. Operating income for 2018 was $15.5 million, up 65 percent over 2017. Our Patient Experience (PX) business was divested in February 2018 and it is, therefore, excluded from these financial results. From the proceeds received from this transaction, the board of directors declared a special cash dividend, which was paid to shareholders in April 2018.

HealthStream ended 2018 well capitalized with a cash and marketable securities balance of $168.8 million and full availability of our $50 million line of credit-which remains untapped. This strong capital position allows us to utilize multiple strategies for creating shareholder value, such as developing and launching new products and pursuing an active M&A pipeline.

Our target market is a workforce of approximately 10.5 million healthcare professionals, which includes approximately

5.2 million employees working in the nation's acute-care hospitals and 5.3 million employees in a more broadly defined continuum of care market, which we recently expanded. We define the continuum of care as ambulatory services- including physician offices; health & human services- including behavioral care facilities; and post-acute care- including skilled nursing facilities. By combining the capabilities of our enterprise workforce development platform with leading content, superior data and analytics, and innovative credentialing applications, we are equipping healthcare organizations with powerful solutions to optimize the impact of their workforce in delivering outstanding patient-centered care. Every day, we help our customers support their respective workforces to meet compliance requirements, develop their clinical performance, improve resuscitation outcomes, manage revenue cycles, and ensure that they maintain all required credentials.

HealthStream is focused on delivering innovative solutions that drive positive outcomes in healthcare-and we are increasingly seeing that happen. Our Checklist Management™ and Learning Center™ applications, for example, were effectively used by Kettering Health Network as key components of its initiative to reduce the impact of central line-associated bloodstream infections (CLABSIs) in its hospitals and outpatient facilities. Checklist Management was used to support clinicians in adhering to new treatment protocols, while the HealthStream Learning Center was utilized to deploy required education to nursing units, networkwide. The result of this initiative was impressive. In the period from January 2017 to April 2018, Kettering Health Network's CLABSIs decreased 90 percent.

Along with multiple enterprise workforce applications on our platform, we have amassed an ecosystem of over 100 healthcare industry partners, which include highly regarded professional medical and nursing associations, many best-in-class content providers, and a variety of specialty application, solution, and service providers. In 2018, some of our new industry partners included: Innosonian America, Inc., MedTrainer, Kaltura, Nucleus Medical Media, United States Pharmacopeial Convention, and Astute Doctor Education, Inc., among others. Also in 2018, some of our existing partners, including EBSCO Health, chose to expand their partnership by increasing their number of offerings to our customers.

With over 4.9 million healthcare professional subscribers at year-end 2018, HealthStream's software-as-a-service based (SaaS) platform has long been one of the most adopted workforce development platforms in healthcare. To facilitate innovation and growth of our ecosystem, HealthStream's new platform-as-a-service (PaaS) technology, hStream™, was launched in April 2018. As of February 2019, healthcare organizations representing 1.51 million subscriptions have contracted for hStream™.

As a leading provider of healthcare workforce solutions, HealthStream is uniquely positioned to bring choice and competition to the market on behalf of the thousands of hospitals and health systems that we serve on a daily basis. While our historical practice has been to select one partner only for a specific solution area-like we did for over a decade for our resuscitation solutions-we now aim to offer multiple, competing product/solution options for customers.

Our movement toward a marketplace approach is demonstrated clearly in our resuscitation solutions business. HealthStream's reseller partnership with the American Heart Association (AHA) and Laerdal Medical A/S expired at year-end 2018 and, therefore, we ceased the selling of their resuscitation suite at that time, although we will continue to service customers'

agreements for those solutions throughout their contracts- which may extend to year-end 2020. While we are no longer selling, marketing, or servicing these solutions, we are committed to the open marketplace concept. As such, we signed an agreement in December 2018 with RQI Partners, a joint venture between Laerdal and the AHA, to allow connectivity of RQI Partners' content for our HealthStream Learning Center customers-for a fee paid by RQI Partners.

In January 2019, HealthStream announced the launch of the American Red Cross Resuscitation Suite, which marked the beginning of a seven-year collaboration with one of the most trusted and recognizable organizations, worldwide. The new resuscitation suite is comprised of a comprehensive competency-development curricula. It brings an updated, highly adaptive, competency-based solution to healthcare professionals, offering certification to those who successfully demonstrate proficiency of life-saving resuscitation knowledge and skills. Our new collaboration with the Red Cross is one of several long-term relationships we have formed to develop and launch new resuscitation solutions for healthcare professionals.

HealthStream is fully committed to making the next 10 years a period of great improvement in the quality of resuscitation. We firmly believe improving resuscitation technologies through innovation should drive quality up and cost down for our healthcare customers-and we are excited about our new partnerships that we believe will help us do that in the coming months and years.

HealthStream's Provider Solutions business now serves over 2,400 hospitals and over 1,000 medical groups, making us a market-leading credentialing, privileging, and enrollment company in the United States. In January 2018, we introduced "Verity, a HealthStream Company™" as our newly formed business that combined our SyMed Development, HealthLine, and Morrisey Associates acquired businesses. We simultaneously launched our SaaS-based provider credentialing, privileging, and enrollment solutions, also referred to as Verity™. We believe that our Verity™ offering combines the best platform, content, data, services, and community to deliver a foundational source of truth for healthcare organizations.

To press forward on our momentum as we grow the Company, we have recently invested in leadership by expanding our executive team. Trisha Coady was promoted to Senior Vice President & General Manager of Clinical Solutions in November 2018 and Scott McQuigg joined HealthStream as Senior Vice President of hStream Solutions in January 2019. Both Ms. Coady and Mr. McQuigg have extensive industry

expertise and experience as entrepreneurs, making them well qualified to lead these important areas of our business.

In May 2018, Chief Operating Officer (COO) J. Edward Pearson was promoted to President & COO, HealthStream. In March 2019, our Chief Financial Officer (CFO), Gerry Hayden, resigned from his position after a decade of service with the Company. Upon his departure, Scott Roberts, HealthStream's Vice President of Accounting & Finance, was named Interim CFO. These updates to our executive team are a testament to the strong bench of leaders within the Company that have consistently contributed to our success.

In January 2019, HealthStream acquired Providigm, LLC, a Denver-based company focused on quality assurance and performance improvement in healthcare, primarily serving skilled nursing facilities. This investment extends our offerings for the continuum of care market, which includes abaqis, Providigm's market-leadingSaaS-based quality improvement program. Abaqis is currently used in over 2,000 skilled nursing facilities and nursing homes.

Looking forward, we intend to continue growing HealthStream organically by increasing our customer base and expanding the number of solutions provided to existing accounts. We may also pursue growth opportunities by utilizing a portion of our cash position and/or common stock to make acquisitions or minority investments arising from our M&A pipeline while we, at the same time, continue to invest in the integration and enhancement of new products and capabilities for our customers.

In closing, I want to thank you, our shareholders, for your continued commitment and support of HealthStream. I, along with the rest of the management team, believe that HealthStream is achieving its vision to improve the quality of healthcare by developing the people who deliver care. We will continue to put forth our best efforts to the task of producing superior results for you.

Sincerely,

Robert A. Frist, Jr.

Chief Executive Officer and Chairman of the Board

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DIRECTORS
Robert A. Frist, Jr.	Frank E. Gordon
Chief Executive Officer and Chairman	Managing Partner
of the Board of Directors	Crofton Capital
HealthStream, Inc.	Michael Shmerling
Jeffrey L. McLaren	Chairman
Chief Executive Officer	Clearbrook Holdings Corporation
Medaxion, Inc.	Dale W. Polley
Thompson S. Dent	Past President and Vice Chairman
Chairman and Chief Executive Officer	First American Corporation
Urgent Team	C. Martin Harris, M.D.
Chairman
Re:Cognition Health	Associate Vice President of the Health Enterprise
William W. Stead, M.D.	Chief Business Officer
Dell Medical School
Chief Strategy Officer	The University of Texas at Austin
Vanderbilt University Medical Center	Deborah Taylor Tate, J.D.
Linda E. Rebrovick	Former Commissioner
President	Federal Communications Commission
Impact Corporate Consulting	Director
	State of Tennessee /Administrative Office of the Courts

EXECUTIVE OFFICERS

Robert A. Frist, Jr.

Chief Executive Officer and Chairman

of the Board of Directors

J. Edward Pearson

Chief Operating Officer and President

Scott A. Roberts

Interim Chief Financial Officer and Vice President,

Accounting & Finance

Jeffrey D. Cunningham

Chief Technology Officer and Senior Vice President

Michael J. Sousa

Senior Vice President and President, Provider Solutions

Trisha L. Coady

Senior Vice President & General Manager, Clinical Solutions

Scott McQuigg

Senior Vice President, hStream Solutions