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Health Grades, Inc. Announces Second Quarter Results

July 31, 2006

Health Grades, Inc. (NASDAQ:HGRD)

             - Quarterly Revenues Grow 37% from Prior Year-   - Quarterly Income from Operations Increases 85% from Prior Year -   - Conference Call to be Held Today at 9:00 a.m. MT/11:00 a.m. ET - 

Health Grades, Inc. (NASDAQ:HGRD), the leading independent healthcare quality ratings company, today reported financial results for the second quarter ended June 30, 2006.

Total revenues for the quarter increased 37% to approximately $6.7 million from $4.9 million in the second quarter of 2005 as a result of strong growth across all product areas. Sales of HealthGrades’ suite of marketing and quality assessment and improvement products to hospitals accounted for approximately $1.2 million or 66% of the increase in revenue, and sales of its quality information to employers, benefits consulting firms, consumers and others accounted for approximately $.6 million or 34% of the increase. Total revenues for the six months ended June 30, 2006, increased 33% to approximately $12.8 million from $9.6 million for the first six months of 2005.

Provider Services

For the quarter ended June 30, 2006, Provider Services revenue, which principally includes sales of hospital marketing products and quality improvement products, was approximately $4.8 million, an increase of $1.2 million, or 32% over the same period of 2005. For the six months ended June 30, 2006, Provider Services revenue was approximately $9.5 million, an increase of $2.4 million, or 35% over the same period of 2005. The increase reflects increased sales of the Company’s marketing products as well as an increase in contract retention rates over the same period of 2005.

Internet Business Group

For the quarter ended June 30, 2006, Internet Business Group revenue, which includes the sale of HealthGrades’ quality reports to consumers, revenue from the Company’s Patient-Provider Gateway product and any website advertising and sponsorship revenue, was approximately $1.2 million, an increase of $.5 million, or 83% over the same period of 2005. For the six months ended June 30, 2006, Internet Business Group revenue was $2.1 million, an increase of $.7 million, or 47% over the same period of 2005. This increase is principally due to an increase in revenue from the Company’s Patient-Provider Gateway(TM) product, resulting from the Tenet Healthcare agreement signed in the second quarter of 2006 and increased sales of the Company’s quality reports to consumers.

Strategic Health Solutions

For the quarter ended June 30, 2006, Strategic Health Solutions revenue, which includes sales of its quality information to employers, benefit consultants, health plans and others as well as any sales of the Company’s data, was approximately $.6 million, an increase of approximately $70,000, or 12% over the same period of 2005. For the six months ended June 30, 2006, Strategic Health Solutions revenue was $1.2 million, an increase of approximately $81,000, or 7% over the same period of 2005.

Income from operations was approximately $1.5 million for the second quarter of 2006, an increase of approximately $696,000, or 85% from approximately $821,000 in the same period of 2005. Operating expenses grew from approximately $3.3 million during the three months ended June 30, 2005, to approximately $4.1 million for the three months ended June 30, 2006. The increase in operating expenses occurred principally due to the hiring of additional personnel during the latter part of 2005, increased legal fees and the Company’s adoption effective January 1, 2006, of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, which resulted in additional stock-based compensation costs. Operating income for the six months ended June 30, 2006, was $2.1 million, an increase of $.8 million or 57% from the six months ended June 30, 2005.

Net income for the second quarter of 2006 was approximately $979,000 or $0.03 per diluted share, compared to approximately $1.9 million or $0.05 per diluted share, for the same period of 2005. Net income for the six months ended June 30, 2006, was $1.4 million or $0.04 per diluted share, compared to $2.5 million or $0.07 per diluted share for the same period of 2005. Net income for the second quarter of 2006 reflects a tax expense of approximately $705,000. Net income for the second quarter of 2005 included an income tax benefit of $1.1 million resulting from the elimination of a valuation allowance for deferred tax assets. For the second quarter of 2006, the Company’s effective income tax rate was approximately 42%.

HealthGrades completed the quarter ended June 30, 2006, with approximately $15.3 million in cash, cash equivalents and short-term investments, a 31% increase over the balance at December 31, 2005.

Kerry Hicks, President and Chief Executive Officer of Health Grades, Inc., stated, “This quarter has included achievements that helped keep us in line with our expectations for the year. We signed a major agreement with Tenet Healthcare, making Tenet the first hospital system to make reports on their doctors available to patients free of charge. Additionally, earlier this month we strengthened our management team with the appointment of Steve Wood as Executive Vice President. During his tenure as the former head of J.D. Power and Associates’ healthcare division, Steve was a thought leader in quantifying and analyzing the ways in which consumers interact with the healthcare system. With this expertise, we believe Steve will provide valuable insight in developing and bringing to market new products for all of our product areas. Finally, we announced our stock repurchase program which we believe demonstrates our firm belief in our company and the successful future we intend to build for it.”

The Company confirmed its annual revenue forecast of an increase of at least 40% over 2005 and an operating margin of approximately 25% in 2006.

As previously announced, HealthGrades will hold a conference call to discuss second quarter financial results today, at 9:00 a.m. Mountain Time/11:00 a.m. Eastern Time. If you would like to participate, please call 800-446-1671 at least ten minutes prior to the start time of 11:00 am ET/9:00 am MT on July 31, 2006, and reference the following – Confirmation number: 15244330, Host Name: Allen Dodge, Company: HealthGrades. The telephone replay will be available one hour after the conclusion of the teleconference at 888-843-8996, passcode 15244330, until August 31, 2006.

About Health Grades, Inc.

HealthGrades (Nasdaq:HGRD) is the leading healthcare ratings company, providing ratings and profiles of hospitals, nursing homes and physicians to consumers, corporations, health plans and hospitals. Consumers and some of the nation’s largest employers, health plans and hospitals rely on HealthGrades’ independent ratings to make healthcare decisions based on the quality of care. More information on the Company can be found at http://www.healthgrades.com.

This press release contains forward-looking statements, including, without limitation, statements relating to the Company’s expected income tax rate, revenue growth and operating margin in 2006 and management’s expectations. Actual results may differ materially from those described in such forward-looking statements due to several factors, including, without limitation, unanticipated non-deductible compensation expense related to incentive stock options, the Company’s inability to continue accelerating sales of its licensing agreements, a decline in anticipated contract retention rates, the Company’s inability to enter into meaningful contractual arrangements and to successfully expand certain lines of business and other factors described in the Company’s filings with the Securities and Exchange Commission, especially the section titled “Risk Factors” in its 2005 Annual Report on form 10-K. The Company does not undertake to update its forward-looking statements.

                           HEALTH GRADES, INC.                     Condensed Statements of Income                               (Unaudited)                            Three Months Ended       Six Months Ended                               June 30,                June 30,                         --------------------    --------------------                           2006        2005        2006        2005                         --------    --------    --------    --------  Revenue:   Ratings and     advisory revenue    $6,662,090  $4,868,748 $12,764,347  $9,568,675   Other                     5,000         387       5,120       6,939                        -----------------------------------------------   Total revenue         6,667,090   4,869,135  12,769,467   9,575,614  Expenses:   Cost of ratings and    advisory revenue     1,078,381     795,997   2,228,527   1,522,757                        -----------------------------------------------   Gross margin          5,588,709   4,073,138  10,540,940   8,052,857  Operating expenses:   Sales and marketing   1,788,568   1,270,813   3,583,074   2,615,756   Product development     834,518     734,664   1,664,404   1,517,958   General and    administrative       1,449,246   1,246,867   3,167,819   2,563,872                        -----------------------------------------------   Income from    operations           1,516,377     820,794   2,125,643   1,355,271  Other:   Gain on sale of    assets and other            --       1,405         450       1,405   Interest income         167,735      34,316     305,162      54,748   Interest expense            (92)        (73)       (205)        (73)                        -----------------------------------------------   Income before income    taxes                1,684,020     856,442   2,431,050   1,411,351   Income taxes           (704,734)  1,051,017  (1,053,640)  1,051,017                        -----------------------------------------------    Net income             $979,286  $1,907,459  $1,377,410  $2,462,368                        ===============================================    Net income per    common share    (basic)                  $0.03       $0.07       $0.05       $0.09                        ===============================================    Weighted average    number of common    shares used in    computation (basic) 28,408,361  26,889,435  28,320,387  26,437,470                        ===============================================    Net income per    common share    (diluted)                $0.03       $0.05       $0.04       $0.07                        ===============================================    Weighted average    number of common    shares used in    computation    (diluted)           33,987,459  34,955,601  34,127,046  34,703,918                        =============================================== 

                           HEALTH GRADES, INC.                        Condensed Balance Sheets                               (Unaudited)                                             JUNE 30,      DECEMBER 31,                                             2006            2005                                       -------------------------------- ASSETS Cash and cash equivalents                $6,274,911      $9,682,106 Short-term investments                    9,034,552       1,988,154 Accounts receivable, net                  2,983,474       5,620,736 Prepaid expenses and other                  725,678         562,540 Deferred income taxes                       347,989       1,080,562                                       -------------------------------- Total current assets                     19,366,604      18,934,098  Property and equipment, net               2,026,186       1,595,065 Intangible assets, net                      146,365         177,729 Goodwill                                  3,106,181       3,106,181 Deferred income taxes                       338,604          31,400                                       -------------------------------- Total assets                            $24,983,940     $23,844,473                                       ================================  LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable                            $80,060        $278,912 Accrued payroll, incentive  compensation and related expenses        1,061,377       1,525,844 Accrued expenses                            447,707         275,865 Current portion of capital lease  obligations                                  1,350           1,310 Current portion of deferred rent             78,914          70,263 Deferred income                          11,008,446      11,742,827 Income taxes payable                         28,811          15,020                                       -------------------------------- Total current liabilities                12,706,665      13,910,041  Long-term portion of capital lease  obligations                                  4,569           5,254 Long-term portion of deferred rent          270,852         311,599                                       -------------------------------- Total liabilities                        12,982,086      14,226,894  Commitments and contingencies  Stockholders' equity: Preferred stock, $0.001 par value,  2,000,000 shares authorized, no  shares issued or outstanding                    --              -- Common stock, $0.001 par value,  100,000,000 shares authorized, and  48,143,570 and 47,879,583 shares  issued in 2006 and 2005,   respectively                                48,143          47,674 Additional paid-in capital               93,069,836      91,984,099 Accumulated deficit                     (67,269,204)    (68,646,614) Treasury stock, 19,583,090 shares       (13,846,921)    (13,767,580)                                       --------------------------------     Total stockholders' equity           12,001,854       9,617,579                                       -------------------------------- Total liabilities and stockholders'  equity                                 $24,983,940     $23,844,473                                       ================================ 



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