Health Grades Reports 3Q 2009 Results.(Financial report)

Health Grades, Inc., an independent healthcare ratings company, has reported financial results for the third quarter ended September 30.

In a release on October 28, the Company noted that ratings and advisory revenue for the three months ended September 30, increased $3.3 million, or 33 percent, to $13.3 million from $10.0 million for the three months ended September 30, 2008. The revenue growth was principally driven by an increase of $2.9 million or 134 percent from the Company's Internet Business Group compared to the three months ended September 30, 2008 and $0.4 million, or 6 percent, from the Company's Provider Services business compared to the three months ended September 30, 2008.

Gross margins for the three months ended September 30, and 2008 were approximately 87 percent and 84 percent, respectively. Operating margins for the three months ended September 30, and 2008 were approximately 22 percent and 20 percent, respectively.

Operating income for the three months ended September 30, was $2.9 million, a $0.9 million increase, or 46 percent, over the three months ended September 30, 2008. Net income attributable to HealthGrades for the three months ended September 30, was $1.8 million or $0.06 per diluted share, compared to approximately $1.3 million, or $0.04 per diluted share, for the same period of 2008.

Operating Expenses

Operating expenses increased $2.2 million to $8.7 million for the three months ended September 30, from approximately $6.5 million for the three months ended September 30, 2008.

Operating expenses for the three months ended September 30, include stock-based compensation expense of $0.6 million related to restricted shares previously granted to members of the Company's executive management team. The shares vest upon the achievement of performance metrics based upon annual revenue and operating income. During the third quarter of 2009, management concluded that a performance target related to annual revenue was probable of achievement, and the Company recorded the $0.6 million of stock-based compensation expense for the implied vesting period of these shares.

Sales and marketing expenses for the three months ended September 30 were $3.2 million compared to $2.7 million for the three months ended September 30, 2008. This increase is mainly due to increased expenses in stock-based compensation, sales personnel, travel, search engine optimization and investments we have made in our sponsorship and advertising business. In addition, sales and marketing expenses increased due to costs incurred related to the websites at WrongDiagnosis.com and CureResearch.com, which the Company acquired in October 2008.

Product development expenses for the three months ended September 30 were $2.2 million compared to $1.9 million for the three months ended September 30, 2008. This increase is primarily due to additional personnel hired 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 focus on advertising development initiatives, as well as several projects that are in process with its search engine partners. The Company also continues to invest in initiatives to both improve its existing data and bring new and actionable data to consumers. The Company maintains physician data relating to nearly 800,000 physicians. HealthGrades continues to acquire new physician data and refine the Company's data-matching process to improve both the impact and the accuracy of its information.

General and administrative expenses for the three months ended September 30, were $3.2 million compared to $1.9 million for the three months ended September 30, 2008. This increase is mainly due to stock-based compensation expense, personnel hired and additional leased office space.

Income Taxes

Income tax expense for the three months ended September 30, and 2008 was $1.1 million and $0.8 million, respectively. For the three months ended September 30, and 2008, the Company's effective income tax rates were approximately 39 percent and 38 percent, respectively.

Cash Position; Stock Repurchases

For the nine months ended September 30, the Company generated $4.0 million in cash flow from operations. As of September 30, the Company had $14.2 million in cash and cash equivalents, a 25 percent increase over the balance at December 31, 2008. As of September 30, the Company has accrued, as an increase to goodwill, $0.6 million of contingent consideration related to the acquisition of Adviware. This amount is expected to be paid in early 2010. For the nine months ended September 30, the Company did not repurchase any shares of its common stock.

2009 Results and Outlook

Kerry Hicks, Chairman and Chief Executive Officer of Health Grades, Inc. stated, "This has been a very strong year for HealthGrades. The performance of our Internet Business Group has exceeded the Company's expectations. We have invested and continue to invest substantial resources in this business unit; and, all products in this unit are performing very well."

"We continue to see strong retention rates of our Provider Services contracts, which has resulted in growth in this business area in the first nine months of the year. However, we have experienced weakness in our new sales related to our Provider Services business this year. As we have discussed throughout the year, this is not surprising given the economic environment. We have begun to see increases in new sales in September and October, which are historically some of our strongest months. Although we had originally expected our Provider Services revenue to increase approximately 15 percent over 2008, for the first nine months of the year we are at a 10 percent increase with an expectation that we will finish the year with slightly less than 10 percent annual revenue growth over 2008."

Hicks continued, "I'm very pleased with the Company's results to date. As we have stated previously, we expect to see our overall revenue mix begin to shift closer to 50 percent from Provider Services and 50 percent from our Internet Business Group and Strategic Health Solutions businesses. With a year-to-date increase over the prior year of over 134 percent from our Internet Business Group, the Company's revenue is certainly trending in that general direction."

Guidance

The Company is raising its full year guidance for ratings and advisory revenue to growth of approximately 30 percent over 2008. This is an increase from prior guidance of approximately 25 percent growth over 2008. The Company expects to complete 2009 with an operating margin on the high end of its previously issued guidance range of 17 percent to 21 percent. The Company expects to release guidance for 2010 in December 2009.

((Comments on this story may be sent to newsdesk@closeupmedia.com))