Health Grades, Inc. (HGRD)

Q1 2010 Earnings Call Transcript

April 21, 2010 11:00 am ET


Allen Dodge – EVP and CFO

Kerry Hicks – Chairman and CEO


Mitra Ramgopal – Sidoti

Debra Fiakas – Crystal Equity Research



Good day, ladies and gentlemen and welcome to the first quarter 2010 Health Grades, Inc. conference call. My name is Tamina, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, 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 facts, 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 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 21, 2010. This call is being recorded on behalf of Health Grades and is copyrighted 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 also like to extend my welcome to everyone on the call today. I am pleased to have the opportunity to discuss a strong quarter for Health Grades and also talk about why and how we see continued growth and success going forward. Allen will be providing details on the first quarter results. I would like to begin by highlighting some of key metrics for the quarter. Allen and I will give more color on each of these points during our prepared remarks.

One, our topline revenue growth was 20% over the first quarter of 2009. Two, we achieved a 20% operating margin for the quarter. Three, we had an 80% rate with respect to our Professional Services contract with first or second year anniversary date that lasted during the quarter. Four, the unique visitors to our web properties increased 15.9 million to 57.4 million for the first quarter, which represents a 38% growth over the first quarter of 2009.

I will focus my comments on progress we made during the first quarter on two strategic initiatives. Although we have a number of strategic initiatives that we continue to make meaningful progress against many of them, I wanted to give you more color on two I consider to be the most significant. Those initiatives are developing and optimizing the advertising and sponsorship revenue model, and evolution in our provider services sales and delivery model for being product focused to market focused.

There are a number of factors to the development and optimization of our advertising and sponsorship model. The most tangible measure of success against this initiative is revenue growth in our Internet Business Group. With 40% revenue growth in this business in the first quarter of 2010 over the same period of 2009, clearly we are executing well against the strategic initiative. In terms of our development and optimization efforts, our focus is on increasing free or organic traffic, and improving our revenue mix for both Health Grades and the Wrong Diagnosis web properties.

As I mentioned earlier, the unique visitors to our web properties increased roughly 16 million or 38% in the first quarter compared to the same period of 2009. As many of you know, we are committed to grow our traffic not by paying for key words on Google and other search engines, but rather through organic search. Today, approximately 98% of our web traffic from our combined properties comes through organic search that means to put fundamentally that we do not pay a fee for 98% of our traffic.

The intrinsic value of the user who comes to us through organic search is factor [ph] times more valuable than a user that is generated through paid search as you can well imagine. We think this is a significant differentiator to Health Grades against many other competitors and others looking to build an online presence in healthcare. Many companies have attempted to build healthcare web properties and drive traffic through paid search. That certainly works to drive traffic however, it is not the right traffic and the model in our opinion is just simply not sustainable.

The easiest way to explain this is give an industry example. For companies that are in the auto industry, for example, it makes sense for them to pay for direct consumers who may be looking at other consumer goods through a car buying website. Arguably consumers who are looking for consumer goods may have an interest in purchasing a car. However, in healthcare, the opposite is true. Consumers actively avoid healthcare ad until such time that they have a direct and immediate need. And while it may be important for many of our clients from a branding perspective in the hospital industry to be known as a quality provider in general image ads, there need to be a tangible benefit in securing consumers that have an immediate need to a healthcare website such as Health Grades.

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