CAMBRIDGE, Mass. ( TheStreet) -- Twelve years was the key numerical figure when Athenahealth ( ATHN) reported its delayed fourth quarter earnings after the market close on Monday.

However, 12 years is not a number related to the Athenahealth fourth quarter earnings report specifically.

Last month, Athenahealth said it was investigating its amortization of revenues . Without getting into the nitty-gritty, sleep-inducing details of the accounting issue, the key question was how long of a time period Athenahealth would consider prudent over which to amortize revenues derived from the implementation phase of its client use of medical software services.

Athenahealth had been amortizing the implementation revenues over a one-year period. Some analysts contended at the time of the accounting investigation that a one-year period was justifiable. Nonetheless, analysts expected that Athenahealth might change the amortization period to as long as three years, which has an immediate impact on earnings-per-share estimates.

On Monday, Athenahealth went well beyond any of the Street's most conservative calls for a change in the amortization period, saying it would amortize the revenues over 12 years -- more or less the lifetime of the product.

Analysts were happy that Athena resolved the accounting issue quickly, but were, however, less enthused about the extreme conservative nature of the 12-year amortization, with one health care analyst describing it as "draconian."

"It was pleasing to see that the issue was resolved quickly, but the revenue outlook is a bit puzzling as a result of the fact that Athenahealth opted to recognize revenues over 12 years," said Leo Carpis, analyst at Caris & Company.

George Hill, a health care analyst with Leerink Swann concurred, saying, "I do find it overly conservative. When the news first broke I started looking at other companies with similar issues and no company has gone as far out as a 12-year amortization period."

Athenahealth spokesman John Hallock said that while the amortization period may be much longer than is traditional with health care IT companies, Athenahealth has a close relationship with clients that speaks to the longevity of its product use, and that was an issue that had to be taken into consideration. He also argued that as the implementation of software becomes less costly for both physicians and Athenahealth, it should represent a lower percentage of revenue, when compared with more traditional health care IT companies.

The amortization period is critical to earning estimates from the Street. "We're pleased the accounting situation is resolved, but it resets the bar for earnings per share," the Caris analyst said.

For example, with restated earnings estimates for 2009 being lowered from 51 cents to 43 cents, the Street has a lower starting point from which to guide investors in 2010 and 2011, the Caris analyst said.

Take the case of gross margins for 2011, which need to be adjusted down by 200 basis points and operating margins by 400 basis points. On a quarterly basis, analysts will need to shave off as much as 3 cents from Athenahealth's earnings per share, and on an annual basis the Street will need to shave off as much as 10 to 12 cents.

Earning-per-share bottom-line growth is still 40%; however, it's starting from a much lower earnings per share estimate, the Caris & Company analyst said.

Leerink's Hill agreed, saying the 2010 and 2011 numbers will come down across the Street. However, the Leerink analyst said the flip side is that Athenahealth made clear that the accounting revision is not affecting its cash collection level. Both health care analysts indicated that it would have been a much more serious issue if the restated earnings showed an impact to historical cash flow levels.

Leerink's Hill also said the conservative tone being taken by Athenahealth's management could benefit it with some investors. "It could be viewed as a breath of fresh air and welcomed by investors, though the question is: Is the extent of the negative revision offset by a willingness on the part of investors to pay more for a company taking a more conservative approach?" the Leerink analyst asked.

Investors were clearly relieved on Tuesday morning with the resolution to the Athenahealth accounting issues. Shares were up close to 6% and twice its average daily volume of shares had been traded before midday.

Nonetheless, the rally in Athenahealth shares was short of a ringing endorsement of a health care stock which many investors had been holding while the accounting situation played out.

Athenahealth's 52-week high is close to $48 -- in fact, the entire health care information sector has been considered by many analysts tilted to the expensive side after a big run-up in 2009, providing less margin of error for these stocks. After the accounting issues surfaced and earnings were delayed, Athenahealth shares dropped nearly 15% in one day, from $43.50 to $36.80.

Athenahealth shares climbed back near the $40 mark on Tuesday morning, but didn't climb near the level at which its shares were trading on the day the accounting news first broke. Therefore, Tuesday's Athenahealth rally could indicate that $40 is the new fair valuation point being pegged by the market for shares given the 12-year amortization drag on revenue recognition.

The fourth-quarter earnings, it's easy to lose sight of amid the accounting issue, were in line with Street estimates. What's more, analysts noted that Athenahealth's cross-selling effort into clinical products was even exceeding expectations.

Caris & Company analyst Caris said that considering the accounting noise, the fourth quarter offered nice performance and the gross margin level of 62.7% was a positive surprise, though Athenahealth indicated that it could not be sustained as a target gross margin level. Cross-selling to physicians of Athenahealth's clinical product was up 6%, or about 60 basis points from the prior quarter, and up 200 basis points for the year.

"The cross-selling was better than we expected, and given the small penetration level in that market by Athenahealth, we expect the growth to be aggressive from an absolute numbers perspective," Leerink's Hill said.

Even so, analysts remain divided on whether Athenahealth has room left to grow in terms of its current valuation. Caris & Company's Caris believes that the $40 ceiling the market is showing today for Athenahealth shares provides an accurate reflection of the stock's potential.

There was another account wrinkle that surfaced in the delayed fourth quarter earnings that also influences the short-term earnings per share outlook. Athenahealth said it would also defer revenues from clients that are adopting its clinical software under the federal government's "meaningful use" rule. The rule makes health care clients eligible for federal stimulus reimbursement. The software has not been authorized yet -- though Athenahealth has all but guaranteed that it will be. Nevertheless, until the software is authorized, those revenues will be deferred.

While this deferral may result in better-than-expected revenue quarters further down the line, it could be another short-term drag on revenues for Athenahealth, added to the downward revision from the 12-year amortization period on implementation revenues.

Athenahealth is trading at above 40 times 2010 estimates and 32 times 2011 estimates. The Caris analyst said it is harder now to push the Athenahealth multiple higher than 40 times earnings.

The Leerink analyst remains more bullish, arguing that the 32 times 2011 earning estimate is conservative, and that even given the downward revision, he believes Athenahealth shares will approach a 40x multiple on 2011 number by the end of this year. "With the uncertainty being removed, there is still room for more share appreciation."

However, at least on the first day after the uncertainty being removed -- and before a new set of lower numbers from the Street -- investors weren't willing to bet on the hypothetical room for more appreciation in Athenahealth shares.

There was a high level of trading on Tuesday morning, but the most revealing trading dynamic may have been that Athenahealth shares seemed unable to break through the $40 mark.

-- Reported by Eric Rosenbaum in New York.


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