Second Quarter Miss for Athena

Leading vendor of cloud-based services for physician practices Athenahealth ( ATHN - Analyst Report ) reported second quarter 2012 adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 12 cents. It missed the Zacks Consensus Estimate of 16 cents per share as well as the year-ago earnings of 14 cents.

Reported net income in the quarter declined 19.9% year over year to $4.2 million (or 11 cents per share).

Revenues

Revenues in the quarter jumped 32.9% year over year to $103.5 million, falling short of the Zacks Consensus Estimate of $104 million.

As for the two reporting segments, revenues from Business Services increased 32.9% year over year to $100.1 million, while Implementation and Other revenues improved 34.3% to $3.4 million.

Utilization of athenaCollector by both medical providers and physicians grew 20.1% year over year in the second quarter. Furthermore, the use of athenaClinicals by medical providers and physicians jumped 76.5% and 78.6% respectively, year over year. The utilization of athenaCommunicator increased exponentially to 8,642 medical providers (of whom 6,306 were physicians) from 1,936 medical providers (of whom 1,198 were physicians) in the year ago period.

Margins

Adjusted gross margin declined to 62.6% in the quarter from 64.4% a year ago whereas adjusted EBITDA improved 18% to $20.6 million (19.9% of total revenues). Operating margin slipped to 6.5% from 12.1% in the prior year quarter.

Balance Sheet

Athenahealth ended the second quarter with cash and cash equivalents and short-term investments of $155.4 million, up 48.8% year over year.

Outlook

For 2012, Athenahealth expects revenues to grow in the range of 31% to 33% to a band of $425 million and $430 million. The company forecasts adjusted earnings in the range of 90 cents to $1.00.

Adjusted gross margin for 2012 is expected to be in the range of 62% to 63% while adjusted operating income is estimated in the range of $59 million to $65 million.

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, 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’s medical practices.

Athenahealth is geared to enter the enterprise segment through its strategic alliance with Microsoft ( MSFT - Analyst Report ) 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 - Analyst Report ) offer long-standing seamless products integrating inpatient and ambulatory-care systems. Quality Systems ( QSII - Analyst Report ) and Allscripts Healthcare Solutions ( MDRX - Analyst Report ) are two other well-known competitors in a crowded field.

We have a long-term Neutral recommendation on Athenahealth. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.