We're maintaining our fair value estimate for NightHawk Radiology NHWK after reviewing the firm's solid third quarter. Although operating expenses came in slightly higher than we expected, strong volume growth, increased final read penetration, and a heightened customer retention rate reinforced our optimistic view of the firm's long-run prospects. Third-quarter revenue grew to $43.5 million from $43.4 million in the year-ago period, which was driven by a 9.3% increase in total read volume to a record level of 865,000 scans. While minor, this growth was symbolically important for the company as it represented the first period of year-over-year top-line growth since the second quarter of 2008. We think the firm's stabilizing revenue, paired with its stellar 98% customer retention rate for the quarter, signals that NightHawk's customer-service woes are largely behind it. Furthermore, final read revenue increased 40.0% from the year-ago quarter as scan volume increased 56.0%; final reads now constitute 16.0% of total revenue, up from 11.3% in the same period last year. We find NightHawk's increased penetration into the finals realm encouraging, as final reads represent a $15 billion market opportunity.However, our enthusiasm for NightHawk's third quarter was tempered by higher-than-expected expenses as operating margins still remain below historical levels. The gross margin took a hit this quarter as strong volume growth, coupled with a 9.0% price decline, led to high professional services expense. Although we believe pricing declines of this magnitude are unsustainable over the long run, we'll be keeping a close eye on management's ability to translate top-line gains to the bottom line.
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NightHawk Radiology Holdings, Inc. Full Analyst Report
Analyst Notes
08-06-09 | 9:37AM NightHawk Turns Out Great 2Q
06-19-09 | 12:38PM Founder Leaves NightHawk's Board
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