Athena Reports Mixed 3Q; Profit Up

Zacks

Leading vendor of cloud-based services for physician practices Athenahealth (ATHN) reported third quarter 2012 adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 18 cents. It beat the Zacks Consensus Estimate of 17 cents per share as well as the year-ago earnings of 15 cents.

Reported net income in the third quarter increased 17.6% year over year to $6.2 million (or 17 cents per share).

Revenues

Revenues climbed 26% year over year to $105.9 million in the quarter. Revenues missed the Zacks Consensus Estimate of $109 million and were below the company’s expectation.

On a segment-wise basis, revenues from Business Services surged 26.8% year over year to $102.3 million while Implementation and Other revenues improved 17.1% to $3.6 million.

Utilization of athenaCollector by medical providers and physicians grew 20.4% and 20.2% respectively, year over year in the third quarter. Furthermore, the use of athenaClinicals by medical providers and physicians jumped 72% and 74.7% respectively, year over year. The utilization of athenaCommunicator increased almost three fold to 12,149 medical providers (of whom 8,739 were physicians) from 4,117 medical providers (of whom 2,931 were physicians) in the year-ago period.   

Margins

Adjusted gross margin decreased 110 basis points year over year to 62.7% whereas adjusted operating margin increased 140 basis points to 18.3% in the quarter. Adjusted EBITDA improved 38% year over year to $26 million (24.6% of total revenues).

Balance Sheet

Athenahealth ended the third quarter with cash and cash equivalents and short-term investments of $180.2 million, up 52.1% year over year. Its balance sheet had zero debt.

Our Take

Athenahealth’s web-based deployment provides a low-cost scalable service while its flexible rules engine leads to higher efficiency in claims settlement. The Software-as-a-Service (SaaS)-based approach allows for a more flexible delivery mechanism that is expected to help Athenahealth win deals. The company has traditionally enjoyed high customer satisfaction rates, which facilitates a larger number of referrals.

Athenahealth’s unique business model makes it a strong provider of RCM services (athenaCollector) designed for small physician practices. Its EHR product (athenaClinical) is a key player in ambulatory settings.

We believe that sales of athenaClinical are likely to remain robust. In addition, the company will harness its newer products, namely athenaCommunicator and athenaCoordinator.

The company should benefit from its extensive athenaCollector client base, as only a minority of its subscriber base also utilizes athenaClinical. Cross selling represents a real growth opportunity in the near term. In this regard, Athenahealth has made rapid strides in capturing the EHR business of physician practices. However, this segment is shrinking, as hospitals increasingly absorb physician’s medical practices.

Athenahealth is geared to enter the enterprise segment through its strategic alliance with Microsoft (MSFT) and the acquisition of Proxsys, both completed in 2011. The company has recently signed on, and executed several enterprise-sized deals, which provide it with a credible and referenceable client base.

Though the federal stimulus will gradually wind down, the replacement market has been growing. Competition is fierce and larger competitors may benefit from the incumbency factor. Industry stalwarts such as Cerner (CERN) offer long-standing seamless products integrating inpatient and ambulatory-care systems. Quality Systems (QSII) and Allscripts Healthcare Solutions (MDRX) are two other well-known competitors in a crowded field.

We have a long-term Neutral recommendation on Athenahealth. The stock carries a Zacks #3 Rank, which translates into a short-term Hold rating.

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