EM Emdeon Inc. Class A Common Stock

Leading vendor of cloud-based services for physician practices Athenahealth (ATHN) reported third-quarter fiscal 2011 adjusted (excluding one-time items other than stock-based compensation expense) earnings of 15 cents per share squeaking past the Zacks Consensus Estimate of 14 cents.

Net income (as reported) for the quarter increased to $5.3 million (or 15 cents per share) from $3.8 million (or 11 cents per share) a year ago, partly riding on higher revenues. The stock was virtually stagnant during after-hours trading.

Revenues

Revenues for the reported quarter were up sharply 33% year over year to $83.7 million, beating the Zacks Consensus Estimate of $83 million. The company recorded collections of $1.9 billion, up 26.7%.

As for the two reporting segments, sales from Business Services were up 32% to $80.6 million while Implementation and Other revenue rose 50.7% to $3.1 million.

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

Utilization of athenaCollector by medical providers and physicians increased a respective 20.4% and 21% year over year, in the third quarter. Furthermore, the use of athenaClinicals by medical providers (as well as physicians) more than doubled year over year. The usage of athenaCommunicator shot up exponentially to 4,117 medical providers (of whom 2,931 were physicians).   

Margins

Adjusted gross margin rose to 63.8% in the quarter from 62.8% a year ago while adjusted EBITDA margin dropped slightly to 22.6% from 23%. Adjusted operating margin dipped to 16.9% from 18.5% a year ago.  

Balance Sheet

Athenahealth exited the quarter with cash, cash equivalents and short-term investments of $118.5 million, up 21.4% year over year. The company extinguished outstanding debt obligations since the prior-year period.

Other

The company set up an online dashboard reporting on client performance related to meaningful use requirements. During the quarter, Athenahealth accomplished its takeover of Proxsys and released the athenaCoordinator offering to enable hospitals (and other recipients of patient referrals) to improve coordination of care.  

Outlook

Athenahealth raised the low end of its revenue forecast for fiscal 2011 to $320 million to $325 million (earlier $315 million to $325 million). The company also hiked adjusted gross margin to a band of 63% to 63.5% (earlier 62.5% to 63.5%) and adjusted EBITDA to a range of $64 million to $68 million (earlier $59 million to $67 million). The guidance for adjusted earnings was raised to a band of 78 cents to 85 cents a share from the earlier projection of 70 cents and 83 cents. 

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 revenue cycle management (“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.

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, which also includes low-end players such as Emdeon (EM).

 
ATHENAHEALTH IN (ATHN): Free Stock Analysis Report
 
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MICROSOFT CORP (MSFT): Free Stock Analysis Report
 
QUALITY SYS (QSII): Free Stock Analysis Report
 
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