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Athenahealth Swoons on Earnings Shortfall

Shares of Athenahealth take a huge hit after the health care IT company fails to deliver on earnings.

(Athenahealth story updated for Friday morning pre-market action, analyst comment)



) -- The market argument over health care information technology stocks has been whether the stocks merit their pricey valuations since the sector ran up in 2009.


(ATHN) - Get Athena Technology Acquisition Corp. Class A Report

lost that argument in the aftermarket session on Thursday, after missing on both the top line and the bottom line in its first quarter earnings.

Athenahealth shares plummeted by more than 15% in afterhours trading on Thursday, and were headed down towards a share price that the health care IT company had not seen since June 2009.

The afterhours loss in Athenahealth shares was $5.35, to a share price of $30. Athenahealth's 52-week low is $28.31, and shares had been trading above $40 just a month ago.

On Friday morning in the pre-market, Athenahealth shares were down nearly 18%, and under the $30 mark.

The biggest trigger for the selloff in Athenahealth shares was a 72% rise in spending in the first quarter, a strategy that did not translate into immediate growth of business.

Athenahealth reported earnings of 1 cent per share, compared with 4 cents a share in the first quarter 2009. Excluding special items, Athenahealth earned 6 cents a share, but that was still less than half the Street consensus of 13 cents per share earnings.

Athenahealth revenue rose 33% to $54.5 million, but that was short of the Street consensus of $55.8 million.

Investors don't have enough information to necessarily question the long-term strategy of Athenahealth to spend more on sales and marketing to drive its growth related to the migration to electronic records by physicians. However, investors are questioning just when that growth will occur, and analysts will likely have to reassess financial models for Athenahealth.

The most notable comment in the earnings release from Athenahealth was related to the timing of growth, and the potential short-term drag on earnings exacted by the sales and marketing increase.

Athenahealth CFO Tim Adams stated, "We continue to believe that year-over-year expansion in Non-GAAP Adjusted Gross Margins as well as general and administrative expense leverage will drive year-over-year expansion in bottom line profitability during the back half of the year."

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The key words are "back half of the year." This leaves open the question as to whether the second quarter will also be a disappointment for Athenahealth.

Maxim Group analyst Anthony Vendetti said his No. 1 question for Friday morning's conference call with Athenahealth will be related to the potential drag on earnings in the second quarter.

"I hope it's money well spent, but does Athenahealth have any evidence to prove that it's working and not money going down the drain?" Vendetti asked.

The Maxim Group analyst said that Athenahealth should be given a chance to prove its long-term strategy, but the company will be pressed on the conference call to provide more visibility. "Have they done any type of correlation studies to show how the increase in sales and marketing will reap benefits?" Vendetti asked.

Ultimately, the disconnect between the long-term strategy driving the increased in spending and the short-term earnings shortfall has to lead to questioning of Athenahealth's valuation.

Stifel Nicolaus analyst Todd Weller concurred, writing after the Athenahealth earnings miss: "As expected, Athena is stepping up investments in marketing and implementation and sales headcount, though the level of investment was clearly a lot more than we expected, noting the significant margin pressure/earnings miss.... We plan to revisit our estimates following the conference call though the bias is clearly down."

There were indications in the fourth quarter analyst day held by Athenahealth that more spending was on the way.

"Athenahealth more or less indicated that they may spend money in the short-term to capitalize on the long-term opportunity available due to the federal stimulus package," Vendetti noted, adding that the comment raised the issue of a earnings shortfall, even though it was never explicitly stated. "That's what happened here and could happen in the second quarter, and if you connected the dots, you could have seen it," the analyst said.

Maxim Group has been at a hold on Athenahealth shares -- even after

Athenahealth resolved an accounting overhang on the stock earlier this year -- because of the issue of valuation.

The fourth quarter and first quarter 2010 have been "put up or shut up" quarters for the health care IT earnings. Most of the stocks, led by


(CERN) - Get Cerner Corporation Report



(MDRX) - Get Allscripts Healthcare Solutions, Inc. Report

were hit hard in January earnings reports for even minor shortfalls, because the stocks had become relatively expensive. Both

Allscripts-Misys and Cerner have delivered solid results in the April earnings reports, and the investor outlook has improved alongside the better results.

With the big after-market drop on Thursday, some investors may think it's an opportune time to buy into Athenahealth shares. However, with the second-quarter earnings still an open question, and the near-term benefits of the big spending push from Athenahealth still demanding more proof, it could be a little premature, even after the 15% drop, to think that Athenahealth shares are again a buy.

"One should not rush to judgment. Just because a stock is down does not mean it is cheap," Maxim Group's Vendetti said.

-- Reported by Eric Rosenbaum in New York.


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