Sickly Athenahealth Pops on Earnings Beat

Athenahealth, the information technology provider to the health care sector, is spiking on an earning beat after hitting a 52-week low this week.
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(Athenehealth story updated for trading gains, analyst commentary on Athenahealth)



) -- Athenahealth, the health care information technology provider, is up 20% in early trading on Friday and quickly surpassed one million shares traded, versus an average daily trading volume of 700,000 shares.

Athenahealth has been a controversial stock in recent trading, diving after its last earnings report when sales and marketing expenses skyrocketed and did not translate into any earnings pop. Athenahealth shares closed at $22.06 on Thursday and its early gain of more than 20% on Friday had shares up more than $5. Athenahealth's 52-week low of $21.51 was reached just this Monday.

Athenahealth earned 12 cents on revenue of $58.6 million in the second quarter, versus a Street consensus of 10 cents. It was behind the Street by two cents on a GAAP basis. The Street had revenue just a bit higher, at $59 million, however, Athenahealth had $1 million in revenue that is being pushed over to the third quarter.

Athenahealth also provided a bullish outlook -- though that's nothing new for the health care information company, which had been projecting as high as 40% growth in EPS and revenue earlier in the year. Athenahealth expects third quarter revenue of at least $63.3 million and 2010 revenue of $247.6 million to $249.5 million. The current Street consensus estimate is revenue of $61.9 million for the third quarter and $244.6 million for the year.

Athenahealth shares have been heavily shorted as health care bears doubted that the company would be able to make a successful transition to the electronic records business that is receiving huge support from federal reimbursements to hospitals and doctors that make the switch to electronic records management.

"I'm surprised by the magnitude of the upside. I think there is a short squeeze going on, more so than investors suddenly having conviction on the stock," said Anthony Vendetti, analyst at Maxim Group, though he said Athenahealth did deserve some credit for improvements made in the quarter, particularly with cross-selling in its three main products.

After the last Athenahealth earnings, analysts turned to a reevaluation of the stock and its growth targets, as it seemed that all of the money being poured into the electronic records business by Athenahealth was getting ahead of the company's ability to execute on those sales.

>>Athenahealth Swoons on Earnings Shortfall

Athenahealth spending was up 33% in the second quarter, to $55.7 million, but more importantly, its spending on sales and marketing specifically was up 43%. Last quarter that figure was up hugely.

The sales and marketing spending hike comes into perspective when placed against the new revenue target issued by Athenahealth, of 30% growth.

The 30% revenue growth projection from Athenahealth, coupled with gains in the cross-selling of its products, were probably the biggest positive data points in the earnings. However, the Street isn't convinced that the 30% revenue growth is a slam dunk, given the history of Athenahealth and its still-unproven ramp up in cross-selling existing products with its newer electronic records product.

Additionally, Athenahealth said on the earnings conference call that it will add fewer doctors this year than it had in the previous year. The silver lining is that Athenahealth has increased cross-selling of its products, so it can reach revenue targets off a smaller base of physician clients. Approximately 14% of clients were buying all three of Athenahealth's products -- Collector, Clinicals and Communicator -- in the most recent quarter. Still, this silver lining can be flipped on its head, and a skeptical investor say that Athenahealth has to focus on cross-selling opportunities if it is losing ground in the total number of doctors added to its client list.

Another potential negative was that Athenahealth did not add any enterprise deals -- of 150 physicians or more -- in the quarter, and it looks as if the company doesn't have any enterprise deals coming up any time soon, so it has to depend on the incremental gains of small physician adds. While booking of enterprise deals can be lumpy, lack of enterprise deals makes it that much harder for Athenahealth to push the rock up the hill of meeting its 30% revenue growth target.

"I think 2Q10 results should quell some investor concerns for the time being. Selling and marketing expense remains high, but if they add more physicians, they will get significant return on that expense. Doc growth will slow as the base gets bigger, but there is so much opportunity to sell Collector, Clinicals and Communicator," said Steve Halper, analyst at Stifel Nicolaus.

Maxim Group's Vendetti said it was concerning that Athenahealth had no enterprise deals in the quarter, and that Athenahealth is still "sticking its neck out there" with the 30% revenue growth forecast.

The largest sticking point for investors may be the continued increase in sales and marketing expenses and the unproven "bang for the buck." Athenahealth CEO Jonathan Bush had said last quarter that 30 new sales people would be added by the end of the year, but Athenahealth has only added 12 so far. This means 18 more sales people will be added in the second half of the year -- 50% more than added in the first half of the year -- keeping sales and marketing expenses high.

Revenue growth was up 28% in the second quarter, but sales and marketing expenses were up 43%. "They are still spending more to get less, and while I understand that's part of the ramp in sales and marketing, they are now saying they are behind schedule, and that puts pressure on the bottom line," said Maxim Group's Vendetti.

Athenahealth is certainly bouncing off a low on Friday, and short covers are a part of the big stock rally, but the more than 20% gains could quickly be followed by some profit-taking from investors who still desire more proof of the Athenahealth story and the big sales and marketing expenditures translating into long-term success.

-- Written by Eric Rosenbaum from New York.


>>Athenahealth Swoons on Earnings Shortfall

>>Athenahealth Dives on Accounting Issues

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