Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Allen Dodge – CFO

Kerry Hicks – Chairman and CEO

Analysts

Jackson Spears – The Robins Group

Mitra Ramgopal – Sidoti & Company

Debra Fiakas – Crystal Equity Research

Health Grades, Inc. (HGRD) Q1 2009 Earnings Call Transcript April 23, 2009 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Health Grades Incorporated earnings conference call. My name is Ann and I will be your coordinator for today’s call. (Operator instructions) As a reminder this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Allen Dodge, Health Grades’ Chief Financial Officer. Please proceed, sir.

Allen Dodge

Good morning. Thank you for participating in today's call with us. Before we begin prepared remarks, I would like to remind you that this conference call will include forward-looking comments. All statements other than statements of historical fact may constitute forward-looking statements.

Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from our expectations are disclosed in the risk factors contained in our filings with the Securities and Exchange Commission, which are available at www.sec.gov. All forward-looking statements are qualified in their entirety by these factors.

Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, April 23rd, 2009. This call is being recorded on behalf of Health Grades and is copywrited material. It cannot be recorded or rebroadcast without the Company's permission. Your participation in this call implies consent to our taping.

On today's call, Health Grades Chairman and CEO Kerry Hicks will provide a Company update and discuss business highlights and I will review the financial results. Following our prepared remarks, we will open the call for questions.

With that said, I'd like to turn the call over to Kerry Hicks. Kerry?

Kerry Hicks

Thank you, Allen. I’d also like to extend my welcome to everyone on the call today. I am pleased to have the opportunity to discuss a very successful quarter for Health Grades and also talk about why and how we see continued growth and success going forward. Allen will provide details on the first quarter results. I’d like to begin by highlighting our top four accomplishments in the first quarter. Allen again will give more color on each of these points during his remarks.

We saw a top line revenue growth of 36% over Q1 2008. We achieved a 20% operating margin for the quarter. Allen and his team deserve a lot of credit with respect to managing our expenses. We achieved an 83% retention rate with respect to our Provider Services contracts and we’ve had a successful implementation and integration of the WrongDiagnosis.com website, which has translated into strong strategic and operational performance.

I’d like to begin with an overview of our key areas of focus. Building the Health Grades brand with consumers and the industry is one of the most important initiatives we have. In March 2009, our combined web properties of HealthGrades.com and WrongDiagnosis.com attracted more than 15.5 million unique users each month, making us one of the top ten most attractive healthcare properties as reported by ComScore.

By way of contracts, traffic to our HealthGrades.com website was 5.1 million unique users in March 2008. Our traffic growth has come both organically from our search engine optimization efforts and additional content among other initiatives as well as our acquisition of WrongDiagnosis.com website in October of 2008.

Growth in our HealthGrades.com website over this period was 2.4 million unique users or nearly 50% while WrongDiagnosis.com added approximately 8.2 million unique users in March 2009. The number of targeted consumers we now attract to our properties position us very well not only from a brand perspective but also goes directly to another of our strategic priorities.

Developing and optimizing and advertising sponsorship revenue model is one of our critical initiatives. Allen will talk to the specifics of our first quarter results in a bit but clearly a substantial portion of our first quarter revenue growth came from our Internet Business Group. As we noted throughout 2008, we made significant investments in terms of laying the groundwork for advertising and sponsorship build-out.

We have worked diligently to bring in the proper talent, management, and structure to this initiative to take advantage of the substantial opportunities we see in front of us. With our first quarter results I am pleased to report to you that the investments we have made over the past year are now beginning to show very tangible results.

I am also pleased to report that performance with respect to the acquisition of the WrongDiagnosis.com website is currently exceeding our operational and strategic goals. As a tangible example, when we acquired this asset, revenues from WrongDiagnosis.com website were on a run rate of approximately $500,000 per quarter. In the first quarter of 2009, which is our first full quarter of reporting after the acquisition, the WrongDiagnosis.com website generated over $800,000, which represents an increase of over 50%. We attribute this growth to our ability to attract better advertising through our growing network relationships and more direct campaign sales through both agency and ad networks due to our increased relevance to these entities now that we are a top ten healthcare property.

Another strategic priority for us is to expand our core Provider Services business. A major factor in our ability to continue to expand this business is to maintain high rates of retention with our – within our existing client base. In the first quarter of 2009, and I am pleased to note that we’ve retained contracts or signed new contracts representing approximately 83% of the annual contract value of hospitals whose contracts at first or second year anniversary date. In the current challenging economic environment we believe that our strong rate of retention is a good indicator of the value we bring to our clients.

The other side of that same coin is that we need to do an even better job in this environment of communicating the value of our programs with our new clients from an opportunity standpoint. This is an area where we have seen a lengthening of the sales cycle and some fall off at the end of the sales cycle in terms of clients that once would typically close. There are now a few that are falling off at the end of the sales cycle. Our focus continues to be on demonstrating to our clients the substantial return on investment from the engagement of our services.

To be clear, we believe we are in a very good position even in this difficult economic environment. Although hospitals have certainly felt the pinch of this difficult economy and seeing reduced elective surgery and increase in bad debt, they are cutting on major capital expenditures and engaging broad cost-cutting efforts, at the same time all of our product offerings from our marketing programs to our Connecting Point sponsorships offer an opportunity to provide exactly what hospitals believe they need to do to more effectively compete. And that is to bring in more patients and indeed better paying patients.

Once again, I am very pleased with our first quarter results across all of our areas of business. As always, the entire Health Grades team is focusing on enhancing our ability to perform and build shareholder value over the long term.

With that, I’d like to turn the call over to our Chief Financial Officer Allen Dodge who will discuss our financial results as well as our guidance. Allen.

Allen Dodge

Thank you, Kerry. Instead of reiterating all the details that was provided in our expense release from this morning, I’d like to give a bit more color to each area in terms of our results in addition to reaffirming some important points from the release.

The principal growth drivers for our 36% revenue growth in the first quarter 2009 over the same period of 2008 were our Internet Business Group and Provider Services businesses. Although we also saw a 24% growth in our Strategic Health Solutions business, given this represented only roughly $100,000 of our growth for the quarter, my comments will be focused on the other two business areas.

Our Provider Services revenue was $8 million, and increase of 15% over the same period of 2008. For the three months ended March 31st, 2009 and 2008, we’ve retained contracts or signed new contracts representing approximately 83% and 73%, respectively, of the annual contract value of hospitals whose contracts have first or second year anniversary dates. We are very pleased with our current retention rates. We’ve worked diligently to have our client see us as strategic partners and believe we have made substantial progress toward that goal.

In addition of the total dollar value of the agreement that had first or second year anniversary dates in the first quarter of 2009 approximately 27% of these contracts were two-year fixed agreements with a third-year renewal option that had their first year anniversary date during this quarter.

As Kerry noted during his opening remarks we have seen a lengthening of our sales cycle to a degree. Some of this stems from additional levels of approval that are required at a hospital that seems to have changed a bit over the past six months. However, we have continued to see strong sales from our more tenured sales representatives. We do have a number of sales representatives that have started with us over the last three to four months. These representatives have not contributed to sales that we’d like or expect to see. Our focus in this area is substantially on training these new reps and bringing them up to speed much quicker. We believe we have – we are addressing this and will see improved sales from these newer individuals throughout the remainder of the year.

In the Internet Business Group, we saw strong growth from all of our product areas. For the three months ended March 31st, 2009, Internet Business Group revenue was $3.8 million, an increase of $2.1 million or 124% over the same period of 2008. The most significant growth drivers for the first quarter revenue was a sponsorship agreement with Fresenius Medical Care, which we signed in the second quarter of 2008 and the results from the acquisition of WrongDiagnosis.com. The Fresenius agreement represents approximately $500,000 in revenue for the quarter. The WrongDiagnosis.com website contributed approximately $800,000 for the quarter.

In the first quarter of 2008 there was no associated revenue recorded in our financial statements for either of these items. In addition to these two items, we also saw a strong growth from advertising on the HealthGrades.com website as well as some sales from our new subscription service we launched in late 2008 around our consumer reports product. As Kerry noted, we have begun to see additional sales directly through our advertising network channels and directly to advertising agencies for both the Health Grades and WrongDiagnosis websites, which has contributed substantially to our growth.

Our operating margin for the first quarter of 2009 was 20% compared with an operating margin of 16% in the first quarter of 2008. This significant operating margin improvement is principally the result of our strong revenue growth. In addition, we continue to work diligently to manage our expenses. We are continuing to hire in a number of areas such as technology and product development as well as sales. However, we are working and are focused on ensuring that our hiring does not outpace our revenue growth.

Our net income for the quarter was $1.6 million, or $0.05 per fully diluted share compared with net income of $1.1 million, or $0.03 per fully diluted share in the first quarter of 2008.

Turning to the balance sheet, as of March 31st, 2008, our cash and cash equivalents were $14.8 million compared with cash and cash equivalents of $11.3 million at the close of 2008. During the first quarter we generated $3.2 million in cash flow from operations.

Today, we are affirming the financial guidance for 2009. Specifically, we are forecasting revenue growth of over 20% over 2008. We are also maintaining our forecast of operating margin in 2009 of between 17% and 21%.

With that, I would like to turn the call over Kerry for some closing remarks.

Kerry Hicks

Thanks, Allen. As I am sure many of you saw, we recently hired Wes Crews as our Chief Operating Officer and we are thrilled to welcome him to the expenditure management team. Wes will be responsible for the strategic and operational leadership of Health Grades sales, marketing, and service professionals. Specifically, most of the executive team will report to Wes with the exception of David Hicks who oversees our entire information technology operation and Allen Dodge who oversees our finance, accounting, and human resource functions.

Wes brings over 20 years of highly relevant online services and publishing experience to Health Grades. His most recent position was as an executive vice president and general manager at onTargetjobs, a leading provider of online recruitment advertising websites with nearly 500 niche job boards including pharmaceutical, medical device, hospitality, nursing, physician, allied health, financial, and local markets.

We are very pleased to have Wes on our executive team and look forward to his assistance in helping us achieve the substantial goals we have set over the next few years from a financial, brand-building, and industry leadership perspective.

Additionally, we have elevated Dr. Sam Collier, our Chief Medical Officer to Executive Vice President overseeing the Provider Services group. Dr. Collier is one of the architects of our hospital ratings and oversaw one of our business units within Provider Services. We are extremely pleased to have such a talented leader heading up our largest business unit.

That concludes our prepared remarks and we are now ready to open the call for questions.

Question-and-Answer Session

Operator

Okay. (Operator instructions) And the first question comes from the line of Jackson Spears with Robins Group. Please proceed.

Jackson Spears – The Robins Group

Kerry and Allen, congratulations. Your numbers beat anyone’s expectations, I believe, particularly on the revenue line.

Allen Dodge

Thanks, Jack.

Jackson Spears – The Robins Group

Could you give us some color what’s happening on your traffic growth? Is that starting to have an impact on you advertising numbers and are you seeing clients wanting to advertise or begin campaigns with you?

Allen Dodge

Yes. We are seeing positive trends I think from a financial standpoint really in every area. So, certainly the gross traffic trends certainly garners enormous attention strategically from the advertisers that frankly we want – and those relationships, frankly, that we want to cultivate. That’s I guess number one. Number two is I think we are doing a much better job through leadership of Andrew Pearson that we talked about last time in terms of our overall inventory management from an advertising standpoint. So, that area has substantially improved and indeed we continue to see month-over-month improvement from a financial standpoint. So, every element and all the aspects within that advertising area from a performance standpoint have indeed improved.

Jackson Spears – The Robins Group

You and I have talked about how difficult it is to get the drug industry to move and is it or is it now getting easier where – as the year progresses we can see similar evidence of drugs using your promotion sites?

Allen Dodge

It’s a good question, Jack. There is a lot of uncertainty right now I think in the pharmaceutical sales area and I think you are seeing that in a lot – with a lot of companies as it relates to get to establishing relationships directly with pharmaceutical companies. We do believe, again, that we have a great platform for pharmaceutical companies and indeed brand managers. We have not converted any of those directly to sponsorship, but having said that if anyone track our websites you’ll see that substantially more of our inventory is directly healthcare related and we see that quarter-over-quarter improvement, which obviously does translate to our operating results.

Jackson Spears – The Robins Group

Okay. And what kind of pipeline do you have in here? Is it like several clients, now like five to 10 and so as the year progresses or in 2010 then we can see real evidence of progress here?

Allen Dodge

You know, we are in discussions with again I would say nearly a dozen large or mid-tier pharmaceutical companies and literally dozens of brand managers. So, we are active in this area. We continue to invest in this area. You’ve heard me comment before with respect to our commitment from a sponsorship standpoint. So, we think all it does – that does translate into results if not later on this year, certainly next year.

Jackson Spears – The Robins Group

What kind of color can you gives us on the Yahoo and Google healthcare portals, where do they stand, and what kind of progress are they making? And when will that begin to impact you – your numbers or your top line?

Allen Dodge

Well, those – our relationships with those are predominantly traffic numbers, right. So, we think in all that that converts obviously to from a monitory standpoint to the Company (inaudible) and all that we have – so we see an improvement in our gross traffic numbers. So, that’s how we’ve created those relationships with both Google and again that’s – from a physician standpoint it’s not only Google Health but Google Local and then just general kind of Google. So, it’s all facets of their business. And again we are – you see results from the traffic growth standpoint again quarter-over-quarter, right, which is representative of that – of the success of that relationship.

With respect to Yahoo, there have been some developmental delays right now. We don’t have a lot of visibility into what they may launch their next healthcare or rather relaunch their Yahoo Health portal, but we are engaged with Yahoo in terms of formulating when that might be, but as you no doubt know that they are under new leadership, they have new priorities and we don’t right now have a lot of visibility into the timing of a relaunch of Yahoo Health.

Jackson Spears – The Robins Group

Allen, you hired a number of people in the first quarter. Could you give us some detail in terms of additions to sales force and the product development and technology? How many employees you had end of the first quarter versus where you stood at the beginning in those major categories?

Allen Dodge

Yes, Jack, and let me answer. In terms of the hiring, I would say it started towards the end of last year, in the November and December timeframe, so affected numbers just a little bit in 2008, but really started rolling into 2009. And we have roughly 200, a little over 200 employees today over the last about four months I would say we’ve – we added about 15 employees. The majority are in some of the technology side of the business, the web developers. We’ve moved from what’s typically known as the waterfall methodology to an agile methodology which is much more team based. So, as we broke out that teams, those teams, we’ve added a number of positions, probably many names of which wouldn’t make sense to a number of you on the call, things like ScrumMaster, et cetera. But, they are really kind of managers over each of these teams. So, long story short, it’s really been to help continue our development efforts. I think you are seeing those efforts come to a fruition in our revenue numbers and as I have mentioned on the call we are certainly going to be cognizant of not hiring too much ahead of the revenue growth, but definitely want to grow the business. So, hopefully that answers your question.

Jackson Spears – The Robins Group

What kind of CapEx did you have in the first quarter and what are your expectations for the year?

Allen Dodge

We really had about $200,000 in CapEx in Q1. My expectation is for the year that we’ll still see in excess of $2 million, I would say between $2 million and $2.4 million depending on some things we do on some of our equipment and a lot of that is again technology, it’s servers, it’s hard equipment, to make sure that we are ahead of growth in terms of – obviously, we generated substantial traffic growth over the last year. So – and we want to make sure that we have the best user experience. So that’s where we are investing from a technology standpoint.

Jackson Spears – The Robins Group

Congratulations on your numbers. Thanks, Allen.

Allen Dodge

Thanks, Jack.

Operator

(Operator instructions) And the next question comes from the line of Mitra Ramgopal with Sidoti. Please proceed.

Mitra Ramgopal – Sidoti & Company

Yes, hi, good morning, guys. Given the really strong quarter and especially on the Internet Business segment I notice you’ve maintain guidance, is this just a function of the environment and you want to be a little conservative here?

Kerry Hicks

Yes, predominantly that’s the answer. To give of course a little more color in 30 seconds, again with – what is not in the Q1, Q2 numbers will be any of the Adviware acquisition from a revenue standpoint. Obviously, that occurred in the fourth quarter of last year. And we only had one month of revenue in this – in Q2 from Fresenius. So, again, I mean we are still very optimistic about our outlook and about the prospects but you hit the nail on the head that we want to be conservative.

Mitra Ramgopal – Sidoti & Company

Okay. And also I noticed with regards to the contracts you retained or signed new ones with I mean I guess 83% versus the 73% a year ago definitely marked improvement. Anything in particular that led to that?

Allen Dodge

Yes, Mitra, I mean there are a number of things we’ve touched on at least on the call, but one of our main focus is and it has been for some time, but I think we did an even better job in 2008, is ensuring that our clients see us as strategic partners versus simply account managers. So, I think we’ve done a lot more to work directly with the client, get more relationships within the (inaudible) and our clients and really show them that Health Grades not only offers “message,” meaning a five star message, but also substantial advisory services. And we really are business professionals and business advisors to these hospitals. So, I think we can continue to improve on that message, but I definitely think that went a long way to help us see improved retention rates, and you saw this through 2008 as well. You saw even though we had 73% in Q108, we also saw that expand throughout the end of last year. So, this is kind of a continuation of that improvement.

Mitra Ramgopal – Sidoti & Company

Right. And given a lot of hospitals are feeling budget pressures, et cetera, are you seeing any push back or resistance with regard to them signing up for your offering?

Allen Dodge

Yes, from a new sales, and we did mention that on the call, we are seeing some lengthening in that sales cycle, and some of that comes from whereas perhaps last year a – say a vice president of marketing may be able to sign an agreement of the size of our contracts, whereas this year that may be a CEO now that needs to be involved. So, we are seeing the same kind of level of pipeline, the activity, all of those things are there. And in terms of our tenures sales reps, we are seeing consistent production out of those reps compared to last year. So, I think a little bit right now is a combination of one, some lengthening in that sales cycle as well as we need to do a better job and we will of getting our newer reps up to speed, doing a better job of training and really allowing them, giving them the tools to really hit the ground running and be productive quicker.

Mitra Ramgopal – Sidoti & Company

Okay. Finally, again I mean you have really a strong balance sheet and you are building cash again. I take it WrongDiagnosis.com is pretty much integrated now. Would you be sort of again active in terms of looking for acquisitions or share buybacks in terms of uses of cash?

Kerry Hicks

I am sure that we are interested in anything obviously that improves shareholder value, both of the ones that you have named there would be certainly central to that. If we see this softness in the stock, we will be opportunistic and we think it represents a great value today. I think secondarily, we are seeing again better kind of – a better valuation landscape, I should say, as it relates to private companies. And you’ve heard me say before at the end of really last year that we are seeing some delay from evaluation standpoint in the private companies, but we are seeing that again correct – closer I guess to the public companies, namely ours. So, we are active in that area. We have nothing to report today, but we do have a robust identified group of companies where we have an interest in.

Mitra Ramgopal – Sidoti & Company

Okay. Thanks again.

Kerry Hicks

Thanks.

Allen Dodge

Thanks, Mitra.

Operator

And the next question comes from the line of Debra Fiakas with Crystal Equity Research. Please proceed.

Debra Fiakas – Crystal Equity Research

Good morning.

Allen Dodge

Good morning, Debra.

Kerry Hicks

Good morning, Debra.

Debra Fiakas – Crystal Equity Research

You mentioned that your retention rate in Provider Services is about 83%. Can you give us maybe also in percentage terms how many of your existing customers expanded their relationship with you?

Allen Dodge

Yes, that’s a question, Debra. If you look at our new sales efforts, each and every year, we’ve said the trend has been roughly between 25% and 30%. In Q1 we had about 27% of all of our new sales that were represented or came from up sales, so again sales with existing clients or sales of additional product into our existing client base.

Debra Fiakas – Crystal Equity Research

Okay, so you are saying 27% of the revenue or the relationship–?

Allen Dodge

Of the new sales. So, of all the new sales we booked in the quarter 27% of those were to existing clients’ new product and so reciprocally 73% would be to just new clients.

Debra Fiakas – Crystal Equity Research

Okay. And then also again on the Provider Services segment can you give us an idea of how many brand new customers you might have signed in the quarter?

Allen Dodge

You know, Debra, we don’t typically give that out quarter-over-quarter. I mean obviously since 73% of all our new sales were in new clients and we did sign a significant number of new clients, but that’s not a metric we’ve given out each year. We really focus more on the overall book of business and really focus on the retention rates because frankly that’s what drives the majority of our revenue today is keeping those retention rates high.

Debra Fiakas – Crystal Equity Research

Okay, very good. And then one other question in regard to the consumer card – the healthcare loyalty card, if you will, could you give us an update on the progress that you have made in the last two or three months on that?

Allen Dodge

Sure, Debra. In the last call, if you heard us on our February call, we signed a bank, so we do have the bank signed on board. We are making progress in a number of the targets that we have in that area. Obviously there has not been an event significant enough from a reporting standpoint for us to announce publicly. But as we said in February, I would expect us to give more of an update on the second quarter call, so in the say the July timeframe. We expect to be able to announce more progress and more tangible results in that area, but suffice it to say that we do feel that things are moving well in that area in terms of the activity and we do believe that there will some things that we can look forward to more tangibly on the second quarter call.

Debra Fiakas – Crystal Equity Research

Thank you.

Allen Dodge

Thanks, Debra.

Operator

And this concludes the question-and-answer session. I would now like to turn the meeting back to Mr. Kerry Hicks for closing remarks.

Kerry Hicks

Well, I would like to thank everyone. I look forward to sharing with everyone in our second quarter call and appreciate everyone’s support. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Health Grades, Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts