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

San Mateo, Calif. (GLOBE NEWSWIRE), March 29, 2011

Epocrates, Inc. (Nasdaq:EPOC), a leading provider of mobile drug reference tools to healthcare professionals and interactive services to the healthcare industry, today reported financial results for its fiscal fourth quarter and full-year of 2010 and its financial outlook for 2011. Epocrates' net sales totaled $30.3 million in the fourth quarter of 2010 compared to $27.4 million in the same quarter of the prior year, an increase of 11%. For the year ended December 31, 2010, Epocrates' net sales increased 11% to $104.0 million compared to $93.7 million for the year ended December 31, 2009.

Rose Crane, president and chief executive officer of Epocrates, Inc., commented, "The fourth quarter of 2010 was another successful quarter for our company, demonstrating consistent double-digit revenue growth and further solidifying our position as a leading provider of point-of-care reference solutions. We are beginning to see positive momentum from the incremental investments we have made throughout 2010 to expand our portfolio of products targeted to the pharmaceutical industry, including line extensions for our flagship DocAlert® product offering and the launch of a suite of virtual representative services. We also remain encouraged by the favorable customer response to our recent acquisition of Modality, Inc., which has allowed us to diversify and expand the breadth of clinical information available to our large, established clinician network."

For the fourth quarter ended December 31, 2010, net income was $2.7 million, or $0.09 per diluted share, compared to $3.5 million, or $0.13 per diluted share, in the same quarter of the prior year. The decline in net income for the quarter was primarily attributable to an increase in research and development investment and sales and marketing expenses related to the development of a new Epocrates EHR™ electronic health records platform and the development and launch of new interactive services offerings.

Epocrates' adjusted EBITDA, as defined in Epocrates' final prospectus filed with the Securities and Exchange Commission in connection with its recent initial public offering, and in the GAAP to non-GAAP reconciliation provided later in this release, was $7.1 million, or 23% of revenue for the fourth quarter of 2010, compared to $8.2 million, or 30% of revenue, in the same period last year. The decline in adjusted EBITDA for the quarter was primarily attributable to the ongoing investment in the development of an EHR platform.

For the year ended December 31, 2010, GAAP net income was $3.8 million, or $0.01 per diluted share, compared to $7.7 million, or $0.20 per diluted share, in 2009. The decline in net income for the year was primarily attributable to an increase in research and development investment and sales and marketing expenses related to the development of a new EHR platform and the development and launch of new products for the pharmaceutical industry.

For 2010, Epocrates' adjusted EBITDA was $16.9 million or 16% of revenue, from $21.8 million, or 23% of revenue in 2009. The decline in adjusted EBITDA for the year was primarily attributable to the ongoing investment in the development of the EHR platform.

Cash, cash equivalents and short-term investments totaled $54.7 million as of the end of the fourth quarter of 2010 and does not reflect the proceeds from the initial public offering that closed on February 7, 2011.

As of December 31, 2010, Epocrates had total backlog of $86.5 million, consisting of deferred revenue of $55.0 million, along with $31.5 million of contractual backlog. Bookings were $37.0 million in the fourth quarter of 2010, a 22% increase compared to the fourth quarter of 2009, led by a 43% increase in bookings from pharmaceutical company clients.

Crane concluded, "With our 2010 investments and recently completed initial public offering providing a strong foundation for growth, an expanded product portfolio and strong cash flow profile, we are poised to deliver on our growth targets and strengthen our leadership position. We see opportunities to build shareholder value by further leveraging our broad physician network, expanding our interactive services opportunities and developing an innovative EHR platform specifically targeted for solo and small physician practices. We are confident that we have the right strategic programs in place to position Epocrates for future success."

An investor presentation summarizing the company's fourth quarter of 2010 results is available in the Investor Relations section of the Epocrates website at http://www.epocrates.com.

Outlook for Full-Year 2011

Epocrates expects full-year 2011 net sales to be in the range of $122 million to $125 million, representing growth of 17% to 20% over full-year 2010. Epocrates expects 2011 adjusted EBITDA of 16% to 17% of sales, or $19.5 million to $21.5 million. This would represent an increase in adjusted EBITDA of 15% to 27% over the adjusted EBITDA reported in 2010. In addition, full-year 2011 net income is expected to be in the range of $3.0 million to $4.0 million, and net income per diluted share is expected to be between $0.12 and $0.15, based on approximately 26.0 million shares outstanding.

Post Year End Events

On February 7, 2011, Epocrates closed its initial public offering by issuing 3,574,285 shares of its common stock at $16.00 per share, raising approximately $53.2 million net of underwriters' discounts and commissions. In addition, the underwriters exercised their over-allotment option on an additional 804,000 shares, raising approximately $11.9 million more for the company, net of underwriters' discounts and commissions. From these proceeds, aggregate cumulative dividends to the holders of Epocrates' Series B preferred stock were paid in full, in the amount of approximately $29.6 million.

As a result of its initial public offering, Epocrates has strengthened its balance sheet. At February 2011 month end, Epocrates held approximately $89.9 million in cash, cash equivalents and short-term investments and no debt. At the end of February 2011, Epocrates had approximately 23.4 million shares issued and outstanding.

Earnings Call Information

Epocrates will host a conference call today beginning at 8:30 a.m. Eastern Time to review its 2010 fourth quarter results and full-year operating results and future outlook, followed by a question and answer session.

To participate in the live conference call and webcast, please dial 877-398-9481 (if dialing from within the U.S.) or 760-298-5095 (if dialing from outside the U.S.) using conference code 47269531 or visit the Investor Relations section of the company's web site at http://www.epocrates.com.

A replay of the conference call will be available approximately two hours after the completion of the conference call by dialing 800-642-1687 (if dialing from within the U.S.) or 706-645-9291 (if dialing from outside the U.S.) using conference code 47269531. The replay will be available for one week on the above number. A webcast replay will also be archived on the company's website for approximately 12 months.

About Epocrates, Inc.

Epocrates is a leading provider of mobile drug reference tools to healthcare professionals and interactive services to the healthcare industry. Epocrates' active user network currently has more than one million healthcare professionals, including more than 45 percent of U.S. physicians. Most commonly used on mobile devices at the point of care, the company's clinical products and services help healthcare professionals make more informed prescribing decisions, enhance patient safety and improve practice productivity. For more information about Epocrates, please visit www.epocrates.com.

Epocrates, Epocrates EHR and DocAlert are trademarks of Epocrates, Inc., in the U.S. and other countries.

Forward-Looking Statements

Statements contained in this press release under the heading "Outlook for Full-Year 2011" and in Ms. Crane's quote regarding Epocrates being poised to deliver on its growth targets and strengthen its leadership, and opportunities for the future, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Uncertainties and risks may cause Epocrates' actual results to be materially different than those expressed in or implied by Epocrates' forward-looking statements. For Epocrates, particular uncertainties and risks include, among others: unexpected delays in Epocrates delivering new products may occur, which would cause revenues not to be as Epocrates expects; market acceptance of new products may not be as Epocrates expects, which would cause revenues not to be as Epocrates expects; and the impact of competitive products and pricing may force Epocrates to decrease the price of its products. More detailed information on these and additional factors that could affect Epocrates' actual results are described in Epocrates' filings with the Securities and Exchange Commission, including its final prospectus filed with the Securities and Exchange Commission on February 2, 2011. Except as required by law, Epocrates undertakes no obligation to publicly update its forward-looking statements.

Use of Non-GAAP Financial Measures

To supplement Epocrates' condensed consolidated financial statements presented on a GAAP basis, Epocrates uses non-GAAP measures of gross margin, gross margin percentage, operating income, operating income percentage, net income and net income per share, which are adjusted to exclude certain costs, expenses, gains and losses Epocrates believes appropriate to enhance an overall understanding of its past financial performance and also its prospects for the future. These adjustments to current period GAAP results are made with the intent of providing both management and investors a more complete understanding of Epocrates' underlying operational results and trends and its marketplace performance. In addition, these adjusted non-GAAP results are among the information management uses as a basis for planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles in the United States of America.

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.

Media Contact

Holly Spring
athenahealth, Inc. (Media)
media@athenahealth.com
617-402-1631

Dana Quattrochi
athenahealth, Inc. (Investors)
investorrelations@athenahealth.com
617-402-1329

April Marks
Epocrates, Inc. (Media)
pr@epocrates.com
650-520-2413