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Epocrates Reports 2010 Fourth Quarter And Full-Year Financial Results And Provides 2011 Outlook

Stocks in this article: EPOC

Adjusted EBITDA is not a measure of liquidity calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should be viewed as a supplement to—not a substitute for—results of operations presented on the basis of GAAP. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by GAAP. Epocrates' statement of cash flows presents its cash flow activity in accordance with GAAP. Furthermore, adjusted EBITDA is not necessarily comparable to similarly‑titled measures reported by other companies.

Epocrates believes adjusted EBITDA is used by and is useful to investors and other users of its financial statements in evaluating its operating performance because it provides them with an additional tool to compare business performance across companies and across periods. Epocrates believes that:

  • EBITDA is widely used by investors to measure a company's operating performance without regard to such items as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and
  • investors commonly adjust EBITDA information to eliminate the effect of stock‑based compensation expenses and other charges, which can vary widely from company to company and impair comparability.

Epocrates management uses adjusted EBITDA:

  • as a measure of operating performance to assist in comparing performance from period to period on a consistent basis;
  • as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations;
  • in communications with the board of directors, stockholders, analysts and investors concerning our financial performance; and
  • as a significant performance measurement included in its bonus plan.

The table below sets forth a reconciliation of net income (loss) to adjusted EBITDA (in thousands):

  Three Months Ended December 31, Twelve Months Ended December 31,
  2010 2009 2010 2009
  (unaudited) (unaudited) (unaudited) (unaudited)
         
Net income $ 2,679 $ 3,503 $ 3,803 $ 7,659
         
Interest income  (20)  (18)  (93)  (127)
Interest expense  --   214  214  855
Building rent recorded as interest expense  --   (214)  (214)  (855)
Other income (expense), net  2  (1)  --   73
Provision for income taxes  3,045  2,738  5,187  6,788
Depreciation and amortization  843  735  3,083  2,889
Amortization of purchased intangibles  771  --   1,319  -- 
Stock-based compensation  1,652  1,211  6,356  4,534
Change in fair value of contingent consideration  (1,919)  --   (1,034)  -- 
Gain on sale-leaseback of building  --   --   (1,689)  -- 
         
Adjusted EBITDA  7,053  8,168  16,932  21,816

The following tables set forth a reconciliation of gross margin, gross margin percentage, operating income, operating income percentage, net income and net income per share on a GAAP basis to a non-GAAP basis (in thousands):

           
  Three Months Ended December 31, 2010
  Gross Margin Gross Margin % Operating Income Operating Income % Net Income
  (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
           
GAAP $ 21,885 72%  5,706 19%  2,679
           
Amortization of purchased intangibles  771    771    771
Stock-based compensation  54    1,652    1,652
Change in fair value of contingent consideration  --     (1,919)    (1,919)
Tax adjustment (1)  --     --     492
           
Non-GAAP $ 22,710 75% $ 6,210 21% $ 3,675
           
           
Non-GAAP - Diluted net income per share           $ 0.18
           
Shares used to compute diluted net income per share- GAAP basis  9,309
Add: Dilutive effect of conversion of outstanding shares of our preferred stock into common stock and conversion of preferred stock warrant into common stock warrant  11,098
Shares used to compute diluted net income per share- Non GAAP basis  20,407
           
           
  Twelve Months Ended December 31, 2010
  Gross Margin Gross Margin % Operating Income Operating Income % Net Income
  (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
           
GAAP $ 72,258 69%  7,422 7%  3,803
           
Amortization of purchased intangibles  1,319    1,319    1,319
Stock-based compensation  272    6,356    6,356
Change in fair value of contingent consideration  --     (1,034)    (1,034)
Tax adjustment (1)  --     --     (1,222)
           
Non-GAAP $ 73,849 71% $ 14,063 14% $ 9,222
           
           
Non-GAAP - Diluted net income per share           $ 0.46
           
Shares used to compute diluted net income per share- GAAP basis  9,145
Add: Dilutive effect of conversion of outstanding shares of our preferred stock into common stock and conversion of preferred stock warrant into common stock warrant  11,097
Shares used to compute diluted net income per share- Non GAAP basis  20,242
           
           
           
           
  Three Months Ended December 31, 2009
  Gross Margin Gross Margin % Operating Income Operating Income % Net Income
  (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
           
GAAP $ 19,899 73%  6,436 23%  3,503
           
Amortization of purchased intangibles  --     --     -- 
Stock-based compensation  58    1,211    1,211
Change in fair value of contingent consideration  --     --     -- 
Tax adjustment (1)  --     --     (317)
           
Non-GAAP $ 19,957 73% $ 7,647 28% $ 4,397
           
           
Non-GAAP - Diluted net income per share           $ 0.22
           
Shares used to compute diluted net income per share- GAAP basis  9,233
Add: Dilutive effect of conversion of outstanding shares of our preferred stock into common stock and conversion of preferred stock warrant into common stock warrant  11,095
Shares used to compute diluted net income per share- Non GAAP basis  20,328
           
  Twelve Months Ended December 31, 2009
  Gross Margin Gross Margin % Operating Income Operating Income % Net Income
  (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
           
GAAP $ 64,202 69%  15,248 16%  7,659
           
Amortization of purchased intangibles  --     --     -- 
Stock-based compensation  213    4,534    4,534
Change in fair value of contingent consideration  --     --     -- 
Tax adjustment (1)  --     --     (994)
           
Non-GAAP $ 64,415 69% $ 19,782 21% $ 11,199
           
           
Non-GAAP - Diluted net income per share           $ 0.54
           
Shares used to compute diluted net income per share- GAAP basis  9,491
Add: Dilutive effect of conversion of outstanding shares of our preferred stock into common stock and  conversion of preferred stock warrant into common stock warrant  11,096
Shares used to compute diluted net income per share- Non GAAP basis  20,587
           
(1)The Non-GAAP net income reflects a provision for income tax of 41%, which is our projected long-term tax rate.
 
EPOCRATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
         
         
  Three Months Ended December 31, Twelve Months Ended December 31,
  2010 2009 2010 2009
  (unaudited) (unaudited) (unaudited) *
         
 Subscription revenues   $ 7,368  $ 5,235  $ 24,683  $ 19,001
 Interactive services revenues   22,917  22,171  79,305  74,653
 Total revenues, net   30,285  27,406  103,988  93,654
         
 Cost of subscription revenues   1,697  1,468  6,516  6,558
 Cost of interactive services revenues   6,703  6,039  25,214  22,894
 Total cost of revenues (1)   8,400  7,507  31,730  29,452
         
 Gross margin   21,885  19,899  72,258  64,202
         
 Operating expenses (1):         
 Sales and marketing   8,413  6,398  30,424  22,704
 Research and development   5,205  4,108  19,717  14,663
 General and administrative   4,480  2,957  15,729  11,587
 Change in fair value of contingent consideration   (1,919)  --   (1,034)  -- 
 Total operating expenses   16,179  13,463  64,836  48,954
         
 Income from operations   5,706  6,436  7,422  15,248
         
 Interest income   20  18  93  127
 Interest expense   --   (214)  (214)  (855)
 Other income (expense), net   (2)  1  --   (73)
 Gain on sale-leaseback of building   --   --   1,689  -- 
         
 Income before income taxes   5,724  6,241  8,990  14,447
         
 Provision for income taxes   (3,045)  (2,738)  (5,187)  (6,788)
         
 Net income   2,679  3,503  3,803  7,659
         
 Less: Accretion of Series B mandatorily redeemable  preferred stock dividends   881  881  3,523  3,523
         
 Less: Allocation of net income to participating   preferred stockholders   1,062  1,557  167  2,433
         
 Net income available to common stockholders - basic   736  1,065  113  1,703
         
 Undistributed earnings re-allocated to common stockholders   $ 85  $ 126  $ 13  $ 205
         
 Net income available to common stockholders - diluted   $ 821  $ 1,191  $ 126  $ 1,908
         
 Net income per common share - basic   $ 0.10  $ 0.14  $ 0.01  $ 0.22
         
 Net income per common share - diluted   $ 0.09  $ 0.13  $ 0.01  $ 0.20
         
 Weighted average common shares outstanding - basic   7,678  7,586  7,558  7,758
         
 Weighted average common shares outstanding - diluted   9,309  9,233  9,145  9,491
         
         
 (1) Includes stock-based compensation in the following amounts:       
         
 Cost of revenues   54  58  272  213
 Sales and marketing   421  268  1,741  1,221
 Research and development   275  304  1,512  899
 General and administrative   902  581  2,831  2,201
         
* The statement of operations for the twelve months ended December 31, 2009 has been derived from the audited financial  statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
 
 
EPOCRATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
     
     
  December 31, 2010 December 31, 2009
  (unaudited) *
Assets    
     
Current assets:    
Cash and cash equivalents  $ 35,987  $ 60,895
Short-term investments  18,697  4,424
Accounts receivable, net  21,101 17,309
Deferred tax asset 4,971 9,345
Prepaid expenses and other current assets 3,548 3,984
Total current assets 84,304 95,957
     
Property and equipment, net 8,757 25,237
Deferred tax asset, long-term 779 899
Goodwill 19,079 1,120
Other intangible assets, net 11,438 577
Other assets 2,859 1,675
     
Total assets  $ 127,216  $ 125,465
     
     
Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Stockholders' Deficit
     
Current liabilities:    
Accounts payable  $ 3,635  $ 1,582
Deferred revenue 46,164 54,587
Other accrued liabilities 9,251 5,781
Total current liabilities 59,050 61,950
     
Financing liability  --   20,314
Deferred revenue, less current portion  8,732  7,721
Contingent consideration  15,016  1,300
Other liabilities  1,913  1,342
Total liabilities 84,711 92,627
     
Mandatorily redeemable convertible preferred stockholders 73,342 70,502
     
Stockholders' deficit:    
Common stock at par  8  8
Additional paid-in capital 11,911 6,291
Accumulated other comprehensive income (1) (1)
Accumulated deficit (42,755) (43,962)
Total stockholders' deficit (30,837) (37,664)
     
Total liabilities, mandatorily redeemable convertible preferred stock, and stockholders' deficit  $ 127,216  $ 125,465
     
* The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
 
 EPOCRATES, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
 (in thousands) 
     
     
   Twelve Months Ended December 31, 
  2010 2009
  (unaudited) *
     
Cash flows from operating activities:    
Net income $ 3,803 $ 7,659
Adjustments to reconcile net income to net cash provided by operating activities:    
Stock-based compensation  6,356  4,534
Depreciation and amortization  3,083  2,889
Amortization of intangible assets  1,319  -- 
Allowance for doubtful accounts and sales returns reserve  119  (5)
Change in carrying value of preferred stock liability  33  (16)
Excess tax benefit from stock-based compensation awards  (319)  (38)
Contingent consideration expense  (1,034)  -- 
Gain on sale-leaseback of building  (1,689)  -- 
Changes in assets and liabilities, net of effect of acquisitions:    
Accounts receivable  (3,911)  (4,978)
Deferred tax asset, current and noncurrent  4,495  5,841
Prepaid expenses and other assets  (1,165)  (1,447)
Accounts payable  1,210  (523)
Deferred revenue  (7,464)  3,869
Other accrued liabilities and other payables  4,276  (767)
Net cash provided by operating activities 9,112 17,018
     
Cash flows from investing activities:    
Purchase of property and equipment (4,657) (2,613)
Business acquisitions (14,600) (400)
Purchase of short-term investments  (27,793)  (4,426)
Sale of short-term investments  1,797  -- 
Maturity of short-term investments  11,725  -- 
Net cash used in investing activities (33,528) (7,439)
     
Cash flows from financing activities:    
Acquisition of common stock (3,491) (7,928)
Excess tax benefit from stock-based compensation awards 319 38
Proceeds from exercise of common stock options 2,680 941
Net cash used in financing activities (492) (6,949)
     
Net increase (decrease) in cash and cash equivalents  (24,908)  2,630
Cash and cash equivalents at beginning of period 60,895 58,265
Cash and cash equivalents at end of period $ 35,987 $ 60,895
     
* The statement of operations for the twelve months ended December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
CONTACT: INVESTORS & MEDIA:
         Julie Tracy
         Sr. Vice President, Chief Communications Officer
         Epocrates, Inc.
         (609) 583-1464
         jtracy@epocrates.com

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