ATHN Earnings Beat on Higher Revs

Zacks

Leading vendor of cloud-based services for physician practices and inpatient settings, Athenahealth (ATHN) reported first quarter 2013 adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 16 cents beating the Zacks Consensus Estimate of 12 cents per share.

Reported net income in the first quarter dropped 71.2% year over year to $0.7 million (or 2 cents per share).

Revenues

Revenues climbed 30% year over year to $125.6 million in the quarter beating the Zacks Consensus Estimate of $122 million. Excluding revenues of $5.5 million from the acquisition of Epocrates, sales were $120.1 million, up 24% year over year. The company posted collections of $2.6 billion in the first quarter, up 23.8%.

On a segment-wise basis, revenues from Business Services surged 29.8% year over year to $121.5 million (including $5.5 million from Epocrates) while Implementation and Other revenues improved 37% to $4.1 million.

Utilization of athenaCollector by medical providers and physicians grew 20.7% and 19.7% respectively, year over year in the first quarter. Furthermore, the use of athenaClinicals by medical providers and physicians jumped 64% and 64.6%, respectively, year over year. The utilization of athenaCommunicator increased almost two and a half times to 16,296 medical providers (of whom 11,840 were physicians) from 6,800 medical providers (of whom 4,820 were physicians) in the year-ago period.  

Margins

Adjusted gross margin decreased 110 basis points year over year to 60.4% whereas adjusted operating margin dropped 450 basis points to 7.5% in the quarter. Adjusted EBITDA margin declined to 14% from 17.7% a year ago.

Balance Sheet

Athenahealth ended the first quarter with cash and cash equivalents and short-term investments of $47.8 million, down 69.2% on a sequential basis.

Guidance

Athenahealth updated its guidance for 2013. Total sales are expected in the range of $580 million to $615 million (earlier $525 million to $550 million). The band for Epocrates sales is $46 million to $55 million, while Arsenal is expected to contribute $10 million of revenues by way of tenancy. The company forecasts adjusted gross margin of 63% to 64% (earlier 62% to 63%) and adjusted operating income of $68 million to $80 million (earlier $75 million to $82 million). Athenahealth guided to adjusted earnings per share of $1.05 to $1.15 (earlier $1.15 to $1.25).   

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 (athenaClinicals) is a key player in ambulatory settings. We believe that sales of athenaClinicals 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. The company has recently signed on, and executed several enterprise-sized deals, which provide it with a credible and referenceable client base. In Mar 2013, Athenahealth completed the takeover of Epocrates, 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.

We currently have a Zacks Rank #3 (Hold) on the company. However, we are more positive about other stocks such as Merge Healthcare Incorporated (MRGE) which carries a Zacks Rank #2 (Buy) and is expected to do well.  

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