HealthStream Announces Third Quarter 2005 Results

Highlights:

-- Revenues of $6.8 million in the third quarter of 2005, up 36% over the third quarter of 2004

-- Net income of $554,000 in the third quarter of 2005, compared to a net loss of $177,000 in the third quarter of 2004

-- EBITDA of $1.2 million in the third quarter of 2005, compared to $297,000 in the third quarter of 2004

-- 1,130,000 healthcare professional subscribers fully implemented on our Internet-based learning network at September 30, 2005, up from 987,000 at September 30, 2004, a 14% increase

HealthStream, Inc. (NASDAQ/NM: HSTM), a leading provider oflearning solutions for the healthcare industry, announced todayresults for the third quarter ended September 30, 2005.

Financial Results:

Third Quarter 2005 Compared to Third Quarter 2004

Revenues for the third quarter of 2005 increased by $1.8 million,or 36 percent, to $6.8 million, compared to $5.0 million for the thirdquarter of 2004. Revenue increases of $1.3 million resulted from theMarch 28, 2005 acquisition of Data Management and Research, Inc.("DMR"). Revenues from our HealthStream Learning Center(TM) subscriberbase also grew by $410,000, or 15 percent, while content subscriptionrevenues increased by $250,000, or 42 percent. Revenues from ourpharmaceutical and medical device business declined by $100,000compared to the prior year quarter, however the mix of revenueschanged. Revenues from live events increased by $200,000, but weremore than offset by declines in project-based development revenues of$300,000. The decline in project-based development revenues is aresult of transitioning our sales efforts to subscription basedproducts, such as HospitalDirect, and other online deliverymethodologies.

While the Dollar amount of revenues derived from ourInternet-based subscription products increased by $710,000, thepercentage of total revenues from such products approximated 60percent for the third quarter of 2005, down from 68 percent during thesame quarter in 2004. This percentage decrease resulted from theaddition of DMR's revenues, which are not included within ourInternet-based subscription product offering.

Gross margins (which we define as revenues less cost of revenuesdivided by revenues) were 65 percent for both the third quarter of2005 and 2004. While revenues increased over the prior year quarter,the changes in revenue mix resulted in increased royalties paid by usassociated with content subscription revenues and increased costsassociated with DMR's revenues.

Net income for the third quarter of 2005 was $554,000, or $0.03per share (basic) and $0.02 per share (diluted), compared to a netloss of $177,000, or ($0.01) per share (basic and diluted), for thethird quarter of 2004. The improvement over 2004 primarily resultedfrom increased revenues and related gross margin from both ourexisting business and from the DMR acquisition. This improvement waspartially offset by an increase in personnel, depreciation, andamortization expenses associated with the acquisition of DMR.

EBITDA (which we define as earnings before interest, taxes,depreciation, and amortization) improved to $1.2 million for the thirdquarter of 2005, compared to $297,000 for the third quarter of 2004.This improvement is consistent with the factors mentioned above.

Other Financial Indicators

At September 30, 2005, the Company had cash, investments, andrelated interest receivable of $9.9 million, compared to $8.4 millionat June 30, 2005. This increase resulted from favorable operatingresults, including lower marketing expenses and lower capitalspending. Capital expenditures for the third quarter were $250,000.Days sales outstanding (DSO, which we calculate by dividing theaccounts receivable balance, excluding unbilled and other receivables,by average daily revenues for the quarter) increased to 57 days forthe third quarter of 2005 from approximately 54 days for the secondquarter of 2005. This change is a result of slower collections fromPMD customers, primarily associated with live events.

Hospital-based Customer Channel (HCO) Update

Our learning solutions are helping healthcare organizationsimprove their required regulatory training, while also offering anopportunity to train their employees in multiple clinical areas. Inaddition, our products are designed to improve knowledge of medicaldevices, thereby improving patient safety and reducing organizationalrisks.

At September 30, 2005, approximately 1,130,000 healthcareprofessionals were fully implemented to use our Internet-basedHealthStream Learning Center(TM) for training and education. Revenuerecognition commences when a contract is fully implemented. Thisnumber is up from approximately 987,000 at September 30, 2004, a 14percent increase. The total number of contracted subscribers atSeptember 30, 2005 was approximately 1,229,000, up from 1,057,000 atSeptember 30, 2004, a 16 percent increase. "Contracted subscribers"include both those already implemented (1,130,000) and those in theprocess of implementation (99,000).

The volume of our HealthStream Learning Center customers' accountsup for renewal during the third quarter continued to increase overprior year levels. We measure our renewal rates by the number of fulltime equivalents (FTEs) renewed and by the annual contract valuerenewed. For the quarter ended September 30, 2005, approximately 90percent of FTEs renewed, and the annual contract value renewal ratewas 88 percent.

The increased volume of renewal activity will continue during thefourth quarter of 2005. We are continuing our discussions with HCAregarding a revised longer-term agreement. Our current agreement withHCA has automatically renewed in accordance with its terms for oneyear following the expiration of the initial four-year term. Eitherparty may terminate the agreement upon 45-days notice to the otherparty. HealthStream's agreement with Tenet Healthcare extends throughDecember 2005 with four one-year renewal periods unless either partychooses to terminate. We entered into a renewed four-year agreementwith Sutter Health in the fourth quarter, which includes additionalproduct offerings for their 31,000 employees.

Third quarter revenues from DMR, the survey and data analysisbusiness that we acquired on March 28, 2005, reflected modest growthcompared to the prior year due to renewals of existing businessrelationships and from new accounts.

Pharmaceutical and Medical Device Customer Channel (PMD) Update

HealthStream works with its pharmaceutical and medical devicecompany customers to develop education initiatives that reachhospital-based healthcare professionals. Our innovative learningsolutions are also used by these customers in their product launchplans and in support of their sales training efforts.

HospitalDirect is our innovative software tool set that providesmedical device companies a unique gateway into the nation's singlelargest network of hospitals on a common, online learning platform.During the first three quarters of 2005, we have extended all three ofour initial paid pilot arrangements for HospitalDirect. We have alsoadded new device training with longer term distribution periods. AtSeptember 30, 2005, medical device companies have contracted to trainhospital-based healthcare professionals on, collectively, 40 devices,up from 38 at June 30, 2005. In addition, during the third quarter of2005, we continued to transition delivery of clinical training to ouronline platform, driving more users through our application. Revenuesfor training delivered through our online platform are recognized overthe subscription period.

HealthStream continues to grow its existing pharmaceutical andmedical device company accounts by providing additional services.During the third quarter, Zimmer Dental provided HealthStream with agrant to coordinate their 2006 Global Education Symposium (liveevent), scheduled on May 18-20, 2006. Zimmer Dental will be the grantfund provider for this symposium highlighting scientific advancementsin implant dentistry. HealthStream will be working with the ColoradoDental Association to create this biennial event that will be attendedby over 1,000 dental surgeons.

Financial Expectations

Revenues for the fourth quarter of 2005 are expected toapproximate $7.4 to $7.7 million, an increase of approximately $2.0 to$2.3 million over the same quarter in the prior year, with growthexpected from our DMR survey and data analysis business that weacquired on March 28, 2005 and our hospital-based business. We expectlower revenues from our pharmaceutical and medical device business aswe work to transition one-time project based revenues to recurringsubscription based products.

We anticipate gross margins for the fourth quarter to becomparable to the third quarter. Product development and salesexpenses are expected to increase both in the absolute and as apercentage of revenues. We expect lower net income and EBITDA duringthe fourth quarter compared to the third quarter as a result of theseexpense increases, which are primarily associated with the addition ofproduct development, sales, and account management personnel.

We estimate full-year 2005 revenue of approximately $26.7 to $27million, an increase of 33 to 35 percent over 2004, including theimpact of DMR, and net income of approximately $900,000 to $1.1million.

Commenting on results, Robert A. Frist, Jr., chief executiveofficer, said, "HealthStream's third quarter results increased from anet loss of $177,000 in the third quarter of 2004 to net income of$554,000 in the third quarter of 2005. Our performance to date in 2005gives us confidence to raise our full-year expectations for net incomeby approximately $500,000 to approximately $900,000 to $1.1 millionfor 2005."

A conference call with Robert A. Frist, Jr., chief executiveofficer, Arthur Newman, senior vice president and chief financialofficer, Susan Brownie, senior vice president of finance and humanresources, and Mollie Condra, director of communications and investorrelations will be held on Wednesday, October 26, at 9:00 a.m. (EST).To listen to the conference, please dial 800-262-1292 (passcode#5894320) if you are calling within the domestic U.S. If you are aninternational caller, please dial 719-457-2680 (passcode #5894320).The conference may also be accessed by going tohttp://www.healthstream.com/Investors/index.htm for the simultaneousWebcast of the call, which will subsequently be available for replay.The replay telephone numbers are 888-203-1112 (passcode #5894320) fordomestic callers and 719-457-0820 (passcode #5894320) forinternational callers.

About HealthStream

HealthStream (NASDAQ: HSTM) is a leading provider of learningsolutions for the healthcare industry. Approximately 1.23 millioncontracted healthcare professionals have selected the Internet-basedHealthStream Learning Center(TM), HealthStream's learning platform.The Company's learning products and services are used by healthcareorganizations to meet the full range of their training needs,including training and assessment. Once subscribed to the HealthStreamLearning Center(TM), customers benefit from increased compliance,reduced risks, and improved learning effectiveness. In addition,HealthStream has pioneered a new collaboration with pharmaceutical andmedical device companies to assist them in product launch and marketeducation initiatives within the Company's nationwide network ofhospital customers. (www.healthstream.com)
HEALTHSTREAM, INC.
Summary Financial Data
(In thousands, except per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
2005 2004 2005 2004
-------- -------- -------- --------

Revenues $ 6,831 $ 5,032 $ 19,319 $ 14,631

Operating expenses:
Cost of revenues 2,392 1,776 6,887 5,417
Product development 720 659 2,100 1,940
Sales and marketing 1,340 1,101 4,131 3,462
Depreciation and
amortization 652 536 2,030 1,529
Other general and
administrative 1,245 1,202 3,688 3,568
-------- -------- -------- --------
Total operating expenses 6,349 5,274 18,836 15,916
-------- -------- -------- --------

Operating income (loss) 482 (242) 483 (1,285)
Other income, net 72 65 238 160
-------- -------- -------- --------
Net income (loss) $ 554 $ (177) $ 721 $ (1,125)
======== ======== ======== ========

Net income (loss) per share:
Net income (loss) per share,
basic $ 0.03 $ (0.01) $ 0.03 $ (0.05)
======== ======== ======== ========
Net income (loss) per share,
diluted $ 0.02 $ (0.01) $ 0.03 $ (0.05)
======== ======== ======== ========

Weighted average shares
outstanding:
Basic 21,212 20,656 20,984 20,561
======== ======== ======== ========
Diluted 22,357 20,656 21,963 20,561
======== ======== ======== ========


Summary Financial Data - Continued
(In thousands)

Income before interest, taxes, depreciation and amortization or
EBITDA(1):

Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
2005 2004 2005 2004
-------- --------- -------- --------

Net income (loss) $ 554 $ (177) $ 721 $ (1,125)
Interest income (79) (69) (257) (172)
Interest expense 7 3 16 9
Income taxes 26 4 55 4
Depreciation and amortization 652 536 2,030 1,529
-------- --------- -------- --------
Income before interest,
taxes, depreciation and
amortization $ 1,160 $ 297 $ 2,565 $ 245
======== ========= ======== ========

(1) In order to better assess the Company's financial results,
management believes that income before interest, taxes,
depreciation and amortization ("EBITDA") is an appropriate measure
for evaluating the operating performance of the Company at this
stage in its life cycle because EBITDA reflects net income (loss)
adjusted for non-cash and non-operating items. EBITDA is also used
by many investors to assess the Company's results from current
operations. EBITDA is a non-GAAP financial measure and should not
be considered as a measure of financial performance under
generally accepted accounting principles. Because EBITDA is not a
measurement determined in accordance with generally accepted
accounting principles, it is susceptible to varying calculations.
Accordingly, EBITDA, as presented, may not be comparable to other
similarly titled measures of other companies.


HealthStream, Inc.
Condensed Consolidated Balance Sheets
(In thousands)

September 30, December 31,
2005 2004(1)
------------ ------------
ASSETS
Current assets:
Cash, short term investments and related
interest receivable $ 9,870 $ 16,492
Accounts and unbilled receivables,
net (2) 5,386 4,588
Prepaid and other current assets 1,507 1,393
------------ ------------
Total current assets 16,763 22,473

Property and equipment, net 2,268 2,319
Goodwill and intangible assets, net 13,684 3,473
Other assets 320 292
------------ ------------
Total assets $ 33,035 $ 28,557
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued and other
liabilities $ 3,746 $ 2,786
Deferred revenue 4,368 3,988
Current portion of long-term liabilities 131 24
------------ ------------
Total current liabilities 8,245 6,798

Long-term liabilities, net of current
portion 191 30
------------ ------------
Total liabilities 8,436 6,828

Shareholders' equity:
Common stock 93,791 91,642
Accumulated deficit (69,192) (69,913)
------------ ------------
Total shareholders' equity 24,599 21,729
------------ ------------

Total liabilities and shareholders'
equity $ 33,035 $ 28,557
============ ============

(1) Derived from audited financial statements contained in the
Company's filing on Form 10-K for the year ended December 31,
2004.

(2) Includes unbilled receivables of $1,109 and $597 and other
receivables of $12 and $20 at September 30, 2005 and December 31,
2004, respectively.

This press release includes certain forward-looking statements(statements other than solely with respect to historical fact),including statements regarding expectations for the financialperformance for 2005 that involve risks and uncertainties regardingHealthStream. These statements are based upon management's beliefs, aswell as assumptions made by and data currently available tomanagement. This information has been, or in the future may be,included in reliance on the "safe harbor" provisions of the PrivateSecurities Litigation Reform Act of 1995. Investors are cautioned thatsuch results or events predicted in these statements may differmaterially from actual future events or results. The forward-lookingstatements are subject to significant uncertainties and other risks,including our ability to reach agreement on the terms of a revisedagreement with HCA and other risks referenced in the Company's AnnualReport on Form 10-K and in the Company's other filings with theSecurities and Exchange Commission. Consequently, such forward-lookinginformation should not be regarded as a representation or warranty bythe Company that such projections will be realized. Many of thefactors that will determine the Company's future results are beyondthe ability of the Company to control or predict. Readers should notplace undue reliance on forward-looking statements, which reflectmanagement's views only as of the date hereof. The Company undertakesno obligation to update or revise any such forward-looking statements.