What's Behind Athenahealth's So-So Earnings

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Investors looking for a return of high-flying momementum of the past from athenahealth might still be looking. The cloud-based health services company announced third quarter results Thursday that didn't cause much jubilation but weren't too terribly disappointing either. Here are the highlights from those results.

Source: athenahealth

By the numbers
Athenahealth reported third quarter revenue of $190.4 million. This reflects a solid 26% jump over total revenue from the same quarter in 2013. The figure also met the consensus estimate from analysts polled by Thomson Reuters.

The company also managed to meet analyst estimates with non-GAAP earnings of $10.4 million, or $0.27 per share, compared to $11.15 million, or $0.29 per share, in the same quarter last year. However, athenahealth's bottom line slipped into the red on a GAAP basis with a loss during the quarter of $1.63 million, or $0.04 per share. That represented a marked deterioration from the third quarter of 2013, when the company reported GAAP earnings of $1.17 million or $0.03 per share.

Athenahealth reaffirmed its previous guidance for both revenue and earnings for full-year 2014. The company still expects to generate revenue between $725 and $755 million. It also anticipates non-GAAP net income of $0.98 to $1.10 per diluted share.

Behind the numbers
Two factors contributed to these somewhat lackluster results from athenahealth. The key culprit is increased costs. Athenahealth reported total expense of $191.7 million in the third quarter, a big jump from the $148.9 million in the same quarter last year.

Increased staffing makes up a significant portion of this added expense. The company is on a hiring spree as it anticipates increased customer growth. Athenahealth recently announced major expansions in Atlanta and San Francisco.

A lesser issue is that Epocrates revenue continues to slide, with revenue from Epocrates-branded services falling in third quarter by 27% to $9.8 million.

The good news is that athenahealth's core business is chugging along quite nicely. Revenue from athenahealth-branded services increased in the third quarter to $175.6 million from $134.3 million in the same quarter of the prior year. Core revenue growth of 31% isn't bad at all. This bright spot reflects athenahealth's sustained success in lining up new customers for athenaCollector, athenaClinicals, and athenaCommunicator. 

Looking ahead
Shares of athenahealth tripled over the last five years, but the stock is down in 2014. When can investors expect the stock to regain momentum? 

The answer to that question rests largely on how quickly athenahealth will see a payoff from its big investment in new staff. Athenahealth's optimism about its future should be encouraging to shareholders. However, that optimism will need to translate to even higher revenue growth in the days ahead to outweigh the added expense the company has taken on.

Continued disappointment from Epocrates isn't as worrisome of an issue. The revenue from Epocrates-branded services represents only a small fraction of total revenue. Athenahealth is also reaping some benefits from more lead generation from Epocrates customers for its other products. However, athenahealth paid $293 million for Epocrates and a positive return on investment is needed to prove the wisdom of the acquisition.

For now, investors will have to keep on waiting.

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The article What's Behind Athenahealth's So-So Earnings originally appeared on Fool.com.

Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Athenahealth. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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