athenahealth Beats, Earnings Rise

Zacks

athenahealth Inc. (ATHN) reported adjusted earnings of $8.0 million or 21 cents per share (excluding amortization and integration and transaction costs) in the third quarter of the year, exceeding the Zacks Consensus Estimate of 15 cents per share. This translated into a 15.5% rise in net earnings from $7.0 million and 10.5% rise in earnings per share from 19 cents in the comparable quarter a year ago.

Revenues in the quarter surged 43.1% to $151.5 million but missed the Zacks Consensus Estimate of $155 million. Excluding the Epocrates and other revenues (consisting of third-party tenant revenues) totaling $17.2 million, core athenahealth revenues rose 27% to $134.3 million. Growth was led by expanded clientele for the company’s offerings since the acquisition of Healthcare Data Services and strong athenaCoordinator business.

On a segment-wise basis, revenues from Business Services rose 38.2% year over year to $141.3 million (including $13.4 million from Epocrates) while Implementation and Other revenues nearly tripled to $10.2 million in the quarter under study.

Adjusted gross earnings rose nearly 42% to $92.0 million but adjusted gross margin fell 50 basis points (bps) to 60.7% due to higher operating expenses. Adjusted operating earnings dipped 19.6% to $9.5 million while adjusted operating margin decreased 490 bps to 6.3% in the quarter.

Financial Position

ATHN had cash and cash equivalents of $62.3 million as of Sep 30, 2013, down from $155.0 million as of Dec 31, 2012. Total debt rose to $192.5 million as of Jun 30, 2013 compared with no debt at the end of 2012.

In the first nine months of 2013, cash flow from operating activities rose 21.7% to $56.2 million from $46.2 million in the same period of 2012. Capital expenditure grew 11.9% to $21.4 million compared with $19.1 million in the first three quarters of 2012.

Guidance Reiterated

athenahealth stuck to its 2013 guidance provided in May this year. Total sales are expected to be in the midpoint of the range of $580 million to $615 million. The current Zacks Consensus Estimate of $594 million lies within the company’s expected range.

Our Take

We are encouraged by athenahealth’s third quarter results as the company’s top-line beat both the Zacks Consensus Estimate and the year-ago earnings. We believe that the company will benefit from cross-selling opportunities, Epocrates buyout and the successful implementation of the Meaningful Use Stage 2 (MU2) criteria across its nationwide, cloud-based network.

Despite Athenahealth’s strong presence and unique business model in the health care information technology (:HCIT) industry, we remain cautious owing to the crowded field with larger players like Cerner Corp. (CERN), which has a Zacks Rank #2 (Buy).  

Currently, ATHN carries a Zacks Rank #3 (Hold). While we prefer no other stocks from the medical information systems industry at this moment other than Cerner, we view Bio-Rad Laboratories, Inc. (BIO) and INSYS Therapeutics, Inc. (INSY) from the medical products industry as worth considering. Both of them carry a Zacks Rank #1 (Strong Buy).

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