HealthStream : 2019 Annual Report

2019 Letter to Shareholders

FINANCIAL HIGHLIGHTS

Year Ended December 31,			2019		2018
(In thousands, except per share amounts)
Statement of Income Data:
Revenues, net		$	254,112	$	231,616
Operating costs and expenses			239,392		216,125
Operating income			14,720		15,491
Other income, net			3,209		1,084
Income from continuing operations before income taxes			17,929		16,575
Income tax provision			3,733		3,324
Income from continuing operations			14,196		13,251
Discontinued operations			1,574		18,966
Net income		$	15,770	$	32,217
Net income per share - diluted:
Continuing operations		$	0.44	$	0.41
Discontinued operations			0.05		0.59
Net income per share - diluted		$	0.49	$	1.00
Weighted average shares of common stock outstanding:			32,428		32,335
Balance Sheet Data:
Cash and cash equivalents		$	131,538	$	134,321
Investments in marketable securities			41,328		34,497
Accounts receivable, net			27,650		38,124
Goodwill and intangible assets, net			162,227		145,522
Working capital			119,387		134,580
Total assets			489,544		441,948
Deferred revenue - current and noncurrent			67,429		68,929
Shareholders' equity			338,168		318,947
Reconciliation of GAAP income from continuing operations to
Adjusted EBITDA from continuing operations:
GAAP income from continuing operations		$	14,196	$	13,251
Interest income			(3,272)		(2,444)
Interest expense			102		130
Income tax provision			3,733		3,324
Stock based compensation expense			4,244		1,777
Depreciation and amortization			27,869		24,231
Change in fair value of non-marketable equity investments			--		1,271
Adjusted EBITDA		$	46,872	$	41,540

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)

2015									174.8
2016										192.1
2017											214.9
2018												231.6
2019													254.1
0	20	40	60	80	100	120	140	160	180	200	220	240	260

*Full-year revenues reflect revenues associated with continuing operations consistent with GAAP.

DEAR SHAREHOLDERS

It is customary in my annual letter to you, our shareholders, to review and highlight HealthStream's performance for the prior year (2019)-and I intend to do that as we had a strong year with exciting developments. The global coronavirus COVID-19 pandemic, however, has taken center stage in 2020 with the death toll and number of new cases in patients surging, both in the U.S. and worldwide. This deadly virus has disrupted daily life for most everyone in dramatic ways. Nearly a third of the world's population, 2.5 billion people, are under coronavirus-related movement restrictions at the time of this writing in late March of 2020.

During the current COVID-19 pandemic, the U.S. healthcare workforce has provided-and continues to provide-care to all patients in an extraordinary manner, risking their own health and well-being for others. They continue to do this in the midst of dire shortages of personal protective equipment (PPE), including protective masks, gloves, and clothing, which increases their personal risk of contracting the infectious coronavirus. They are tirelessly working around the clock, quickly mobilizing as required to provide care where it is most urgently needed in their organizations and communities. We are clearly at war against the coronavirus pandemic and healthcare professionals are our heroes on the frontlines battling it for all of us. At HealthStream, our nearly 900 employees have never been more honored to support the healthcare workforce.

HealthStream is marshalling its resources and network connections to support the healthcare workforce during the current crisis. We are providing a curated bundle of COVID- 19-related courses, free of charge, to our customers and non- customers alike. A special COVID-19 online site has been created where a multitude of resources are available, including FAQs, important links to CDC and WHO information and materials, relevant podcasts and blog posts, a series of webinars, and a toolkit of posters for healthcare organizations to remind staff of protocols. In addition, we have created a new, virtual training center to accommodate critical training to customers. We are actively engaging our network of partners, who are also stepping up to contribute content and resources to the healthcare workforce. I assure you that as current developments related to COVID-19 continue to unfold, HealthStream will remain steadfast in our ongoing support of healthcare professionals. We believe HealthStream has the most widely adopted technology platform and the most robust ecosystem of solutions in healthcare, and we intend to bring both to bear to help defeat COVID-19.

As we reflect back on 2019, our financial performance was solid. Year-end results for 2019 included annual revenues of $254.1 million, up 10 percent over 2018 revenues. Adjusted

EBITDA (earnings before interest, income taxes, share- based compensation, depreciation, and amortization and change in fair value of non-marketable equity investments) from continued operations improved to $46.9 million, which is 13 percent higher than 2018. We ended 2019 well capitalized with a cash and marketable securities balance of $172.9 million and full availability of our $50 million line of credit-which remains untapped.

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 expanded in 2018. 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 has made significant progress with recent acquisitions in a manner which I believe sets up the Company for expanded growth opportunities in the future. In January of 2019, HealthStream acquired Providigm LLC, a Denver- based company focused on quality assurance and performance improvement in healthcare, primarily serving skilled nursing facilities. In December of 2019, HealthStream, through our VerityStream business, acquired CredentialMyDoc, a Savannah, Georgia-based company focused on SaaS-based solutions used to credential providers, enroll providers with payers for reimbursement, and apply and maintain privileges in the outpatient facilities market. Finally, in the first quarter of 2020, HealthStream acquired NurseGrid, a Portland, Oregon-based company, which resulted in HealthStream gaining the #1 rated and top downloaded app for nurses. These investments extend our offerings, add market share, and expand our customer channels and network.

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, HealthStream continues its transition to the hStream™ platform, which is the essential technology working behind

the scenes that powers all activity in our ecosystem. At year- end 2019, the cumulative total of hStream subscriptions was up to 3.15 million, which is up from 1.51 million at year-end 2018.

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 2019, some of our new industry partners included: Aspenti Health, American College of Emergency Physicians (ACEP), AMPT, National Quality Forum, and Advance Medical Technology Association (AdvaMed), among others.

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, we now aim to offer multiple, competing product/solution options for customers, creating a marketplace of workforce solutions.

Our movement toward a marketplace approach is demonstrated clearly in our resuscitation solutions business. 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.

Sales momentum for our new resuscitation offering has been strong. For full-year 2019, we contracted for 108 accounts totaling over $38.8 million in order value, representing a mix of over 3,000 hospitals and healthcare facilities from across the continuumofcare,includingnewandtransitioningcustomers. We believe these results affirm that the market not only views our new resuscitation solutions as a viable alternative, but also has embraced them. Our collaboration with the American 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.

HealthStream's Provider Solutions business now serves over 2,500 hospitals and over 1,300 outpatient facilities, making us a market-leading credentialing, privileging, and enrollment company in the United States. In the fourth quarter of 2019, we updated our name of this business to "VerityStream," which we believe better conveys our unique vision of providing customers a subscription to a continual stream of platform enhancements, evidence-based content, and curated data. We continue to add customers to our new VerityStream offering, which combines the best platform, content, data, services, and community to deliver a foundational source of truth for healthcare organizations.

In 2019, we invested in leadership by expanding our executive team. Scott McQuigg joined HealthStream as Senior Vice President of hStream Solutions in January 2019. Scott Roberts, who was previously serving as HealthStream's Vice President of Accounting & Finance and Interim Chief Financial Officer (CFO), was named CFO in September 2019. Both Mr. McQuigg and Mr. Roberts have extensive industry expertise and experience, making them well qualified to lead these important areas of our business.

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 inorganic 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

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 (through May, 2019)
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

Chief Financial Officer and Senior Vice President

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