(ATHN) Athenahealth Remains Neutral

We maintain our Neutral rating on Athenahealth (ATHN). Its second-quarter 2012 adjusted earnings per share of 12 cents missed the Zacks Consensus Estimate of 16 cents. Reported net income in the quarter declined 19.9% year over year to $4.2 million (or 11 cents per share).

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.

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 to 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) to 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, 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 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 those physician practices.

Athenahealth has geared itself for the enterprise segment through its strategic alliance with Microsoft (MSFT) and the acquisition of Proxsys, both in 2011. The company has recently signed on, and executed several enterprise-sized deals, which provide it with a credible and referable 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 #3 Rank, which translates into a short-term Hold recommendation.

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