Zacks_Analysts' Blog : Athenahealth Initiated at Outperform - Analyst Blog

We initiate our coverage on Athenahealth (ATHN), a leading provider of electronic health record (“EHR”) for medical establishments, with an Outperform rating. Second-quarter fiscal 2011 earnings per share of 14 cents beat the Zacks Consensus Estimate of 11 cents. Revenues of $78 million came in ahead of the Zacks Consensus Estimate of $75 million.

The company’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 (HITECH provisions).

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 solid 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 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.

Expansion of operating margin, a rising proportion of recurring revenues and better-than-expected quarterly results are pillars of strength. We believe that the company’s guidance for 2011 may leave further potential for upside thereby providing room for earnings revision or surprise.

However, the federal stimulus will gradually wind down but 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).