CERN Cerner Corporation

Leading vendor of cloud-based services for physician practices Athenahealth (ATHN) reported fourth-quarter adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 16 cents, matching the Zacks Consensus Estimate and trailing the year-ago earnings per share of 21 cents.  

For fiscal 2011, adjusted earnings per share of 55 cents missed the Zacks Consensus Estimate of 57 cents and exceeded the year-ago earnings of 37 cents a share.

Net income (as reported) for the quarter dropped to $5.3 million (or 15 cents per share) from $7.3 million (or 21 cents per share) a year ago, due to higher expenses, including a 58.2% rise in selling and marketing expense.

Revenues

Revenues for the reported quarter were up sharply 33% year over year to $92.5 million, beating the Zacks Consensus Estimate of $92 million. For fiscal 2011, sales were $324.1 million, up 32%, squeaking past the Zacks Consensus Estimate of $324 million. The company posted collections of $2 billion in the fourth quarter, up 25%.

As for the two reporting segments, sales from Business Services were up 33% to $89.3 million while Implementation and Other revenues rose 41.7% to $3.2 million.

Revenues were mainly bolstered by continued adoption of the company’s revenue cycle management (“RCM”) offering athenaCollector and its electronic health record (“EHR”) service athenaClinicals by physicians. In addition, usage of the newer products athenaCommunicator and athenaCoordinator gathered momentum.

Utilization of athenaCollector by medical providers and physicians grew 20.7% and 20.9%, respectively, year over year, in the fourth quarter. Furthermore, the use of athenaClinicals by medical providers (as well as physicians) almost doubled year over year. The usage of athenaCommunicator shot up exponentially to 5,830 medical providers (of whom 4,098 were physicians).   

Margins

Adjusted gross margin dropped to 64.2% in the quarter from 66.3% a year ago while adjusted EBITDA was down to 22.4% from 29.1%. Adjusted operating margin dipped to 17.2% from 24.5% a year ago.  

Balance Sheet

Athenahealth exited the quarter with cash, cash equivalents and available-for-sale investments of $138.5 million, up 13.7% year over year.

Other

Athenahealth continued, in 2011, with its effort to create a national health information system. Its efforts have been successful thus far with the launch of athenaCoordinator and permission from the regulatory authorities to build a bilateral system for health information exchange.

Outlook

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 facilitate a larger number of referrals.

Athenahealth’s unique business model makes it a strong provider of RCM services (athenaCollector) to 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, given the opportunity for physicians to earn incentive payments under the federal stimulus. 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 practices.

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

Though the federal stimulus will gradually wind down, the replacement market is 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 currently have a Neutral recommendation on Athenahealth. The stock currently retains a Zacks #2 Rank, which translates into a short-term “Buy” recommendation.

 
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