Health Grades, Inc. (NASDAQ: HGRD), the leading independent healthcare ratings company, today reported financial results for the second quarter ended June 30, 2010.
“We are pleased with our second quarter results. We are seeing significant contributions from both our Professional Services and Internet Business Groups.”
Ratings and advisory revenue for the three months ended June 30, 2010 increased $3.2 million, or 25%, to $15.6 million from $12.5 million for the three months ended June 30, 2009. The revenue growth was principally driven by an increase of $2.4 million, or 50%, from the Company's Internet Business Group compared to the three months ended June 30, 2009, and $0.8 million, or 10%, from the Company's Professional Services business compared to the three months ended June 30, 2009.
Gross margins for the three months ended June 30, 2010 and 2009 were approximately 82% and 83%, respectively. Operating margins for the three months ended June 30, 2010 and 2009 were approximately 23% and 21%, respectively. Operating income for the three months ended June 30, 2010 was $3.6 million, a $0.9 million increase, or 34%, over the three months ended June 30, 2009.
Net income attributable to HealthGrades for the three months and six months ended June 30, 2010 was $3.2 million and $5.1 million, respectively. For the three and six months ended June 30, 2010, adjusted, non-GAAP net income attributable to HealthGrades, excluding the recovery of legal fees, was $2.2 million and $4.1 million, respectively.
For the three and six months ended June 30, 2010, diluted earnings per share was $0.10 and $0.16, respectively. For the three and six months ended June 30, 2010, adjusted, non-GAAP diluted earnings per share, excluding the recovery of legal fees, was $0.07 and $0.13, respectively.
Professional Services
For the three months ended June 30, 2010, Professional Services, formerly known as Provider Services, revenue, which principally includes sales of hospital marketing products and quality-improvement products, was $8.6 million, an increase of $0.8 million, or 10%, over the same period of 2009. This increase reflects increased revenue from both the Company's marketing and quality-improvement products. For the six months ended June 30, 2010 and 2009, the Company retained or signed new contracts representing approximately 77% and 76%, respectively, of the annual contract value of hospitals whose contracts had first or second year anniversary dates.
Internet Business Group
For the three months ended June 30, 2010, Internet Business Group revenue, which includes internet advertising and sponsorship, our Connecting PointTM and Patient Direct ConnectTM offerings, quality reports and subscriptions to consumers, and our quality information to employers, health plans and others, was $7.0 million, an increase of $2.4 million, or 50% over the same period of 2009. For the three months ended June 30, 2010, the Company's internet advertising and sponsorship revenue increased to $2.8 million compared to $1.4 million for the three months ended June 30, 2009 due to the increase in unique visitors to the Company's websites. Revenue from the Company's Patient Direct Connect programs (formerly known as Connecting Point) increased $1.2 million to $2.7 million compared to $1.5 million for the three months ended June 30, 2009, due principally to sales from the Patient Direct Connect product which launched in late 2009.
Operating Expenses
Operating expenses increased $1.5 million to $9.2 million for the three months ended June 30, 2010 from $7.7 million for the three months ended June 30, 2009. Sales and marketing expenses increased $0.4 million, product development expenses increased $0.7 million, and general and administrative expenses increased $0.4 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009.
Sales and marketing expenses for the three months ended June 30, 2010 were $3.2 million compared to $2.8 million for the three months ended June 30, 2009. This increase is mainly due to increased sales personnel, and investments the Company has made in its advertising and sponsorship business.
Product development expenses for the three months ended June 30, 2010 were $3.0 million compared to $2.2 million for the three months ended June 30, 2009. This increase is primarily due to additional personnel and consulting costs to support product development efforts, including both the improvement of existing products and the development of new product offerings. In particular, the Company added personnel to develop technology for website products and to support new product initiatives as a result of increase in internet business demand.
General and administrative expenses for the three months ended June 30, 2010 were $3.1 million compared to $2.7 million for the three months ended June 30, 2009. This increase is principally due to additional personnel costs and software expenses.
Other Income
For the three months ended June 30, 2010, other income of $1.5 million includes a recovery of legal fees incurred for the Company's indemnification of its Chief Executive Officer, Mr. Kerry Hicks, for phases I and II of the arbitration proceedings between Mr. Hicks and certain collection agency parties. The total amount received by the Company in May 2010 was $1.6 million; of which, $0.1 million was recorded as a reduction to general and administrative expenses, with the remainder recorded to other income.
Income Taxes
Income tax expense for the three months ended June 30, 2010 and 2009 was $1.9 million and $1.0 million, respectively. For the three months ended June 30, 2010 and 2009, the Company's effective income tax rates were approximately 37% and 39%, respectively.
Cash Position
For the six months ended June 30, 2010, the Company generated $7.8 million in cash flow from operations. As of June 30, 2010, the Company had $24.6 million in cash and cash equivalents, a 29% increase over the balance at December 31, 2009.
Agreement of HealthGrades to be Acquired by Vestar Capital Partners
Vestar Capital Partners V, L.P. ("Vestar") and HealthGrades today announced a definitive agreement for an affiliate of Vestar to acquire all of the outstanding shares of HealthGrades for $8.20 per share, which represents a premium of approximately 32% over HealthGrades' 30-day average closing stock price, and a premium of approximately 29% over the closing price of HealthGrades' common stock on July 27, 2010, the last trading day prior to today's announcement. The aggregate purchase price for the equity of HealthGrades is approximately $294 million (which consists of approximately 35.9 million shares, inclusive of all shares of common stock outstanding, securities convertible into common stock and shares of common stock issuable pursuant to a noncompete agreement with an executive officer).
Under the terms of an agreement unanimously approved by the Board of Directors of HealthGrades, an affiliate of Vestar will commence an all-cash tender offer no later than August 10, 2010. The offer will be conditioned upon the acquisition by Vestar's affiliate of at least a majority of HealthGrades' shares on a fully-diluted basis pursuant to the tender offer and purchases pursuant to tender and support agreements, and other customary closing conditions including regulatory approval. Executive officers of HealthGrades beneficially owning approximately 21% of HealthGrades' fully diluted shares have entered into agreements to support the transaction and to tender or otherwise sell shares to Vestar's affiliate. Following completion of the tender offer, the affiliate of Vestar will acquire all of the remaining publicly-held shares of HealthGrades at $8.20 per share through a second-step merger.
Asset Purchase of HealthWorldWeb
Effective Monday, July 12, 2010, the Company completed the acquisition of certain assets of HealthWorldWeb, an internet-based social decision platform related to the medical and healthcare industry. The purchase consisted principally of a technology platform including community tools, content syndication, semantic search and a proprietary recommendation engine. The consideration paid for the assets consists of an upfront cash payment of $750,000 and contingent consideration with an aggregate potential payout of $1.5 million. Contingent consideration is payable up to $50,000 for 2010, $650,000 for 2011 and $800,000 for 2012 based upon certain levels of page views targets.
2010 Results and Outlook
Kerry Hicks, Chairman and Chief Executive Officer of Health Grades, Inc., stated, "We are pleased with our second quarter results. We are seeing significant contributions from both our Professional Services and Internet Business Groups."
Mr. Hicks continued, "We are pleased to announce an agreement of HealthGrades to be acquired by Vestar Capital Partners. We believe the acquisition price of $8.20 per share, which represents a premium of approximately 32% over our 30-day average closing stock price, represents a strong return for our stockholders and is a great confirmation of all of the efforts of our management team and all of our employees."
The Company is affirming its full year guidance for ratings and advisory revenue growth of 20% over 2009 with an operating margin of between 19% to 22%.
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