Athena's Mixed 4Q; Profit Up

Zacks

Leading vendor of cloud-based services for physician practices Athenahealth (ATHN) reported fourth quarter 2012 adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 18 cents beating the Zacks Consensus Estimate of 16 cents per share.

Reported net income in the fourth quarter increased 11.5% year over year to $5.9 million (or 16 cents per share).

For 2012, adjusted earnings per share of 56 cents missed the Zacks Consensus Estimate of 57 cents.

Revenues

Revenues climbed 26% year over year to $116.3 million in the quarter missing the Zacks Consensus Estimate of $117 million. The company posted collections of $2.5 billion in the fourth quarter, up 25%.

For 2012, sales were $422.3 million, up 30%, missing the Zacks Consensus Estimate of $423 million. The company recorded collections of $9.2 billion in 2012, up 26%.

On a segment-wise basis, revenues from Business Services surged 26.1% year over year to $112.6 million while Implementation and Other revenues improved 15.7% to $3.7 million.

Utilization of athenaCollector by medical providers and physicians grew 21.4% and 20.7% respectively, year over year in the fourth quarter. Furthermore, the use of athenaClinicals by medical providers and physicians jumped 67.4% and 70.5% respectively, year over year. The utilization of athenaCommunicator increased almost two and a half times to 14,065 medical providers (of whom 10,153 were physicians) from 5,830 medical providers (of whom 4,098 were physicians) in the year-ago period.  

Margins

Adjusted gross margin decreased 80 basis points year over year to 63.4% whereas adjusted operating margin dropped 30 basis points to 16.9% in the quarter. Adjusted EBITDA margin improved to 23.3% from 22.4% a year ago.

Balance Sheet

Athenahealth ended the fourth quarter with cash and cash equivalents and short-term investments of $193.1 million, up 61.1% year over year.

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 helps 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.

Athenahealth should benefit from its extensive athenaCollector client base, as only a minority of its subscriber base also utilizes athenaClinicals. 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. In early Jan 2013, Athenahealth signed a definitive agreement to take over Epocrates (EPOC), a provider of point-of-care digital solutions in the healthcare industry. The acquisition will enable Athenahealth to increase its user network and improve its brand awareness.

Though the federal stimulus is winding down, the replacement market has been growing. Competition is fierce and larger competitors may benefit from the incumbency factor. Industry stalwarts such as Cerner Corporation (CERN) offer long-standing seamless products which integrate inpatient and ambulatory-care systems. Allscripts Healthcare Solutions, Inc. (MDRX) is another competitor in a crowded field.

Athenahealth carries a Zacks Rank #3 (Hold).

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