Most companies that miss Wall Street earnings estimates see their stocks get punished. Not athenahealth (ATHN). The cloud-based physician software company missed analysts' estimates for the third quarter by $0.02, but shares actually rose as much as 23%.
Investors shrugged off the miss, which came as a result of athenahealth's recent acquisition of mobile application developer Epocrates. Instead, they focused more on the company's solid prospects in the days ahead. There are plenty of things to like about this high-flying health-care technology stock. Here are five of them -- based on direct quotes from CEO Jonathan Bush during athenahealth's conference call last week.
athenahealth CEO Jonathan Bush. Source: athenahealth.
1. "An end to 80% of what I'm humiliated about health care."
Jonathan Bush uttered these words in reference to a new capability in the athenaCoordinator product to electronically send patients' electronic charts from one physician to another. It's not that this one feature makes athenahealth worth considering, of course. However, the new capability exemplifies the company's innovation.
The products are continually improving. Another good example of this is that athenahealth allows physicians to see which prescriptions have actually been filled by patients. Companies that lead in innovation are often great ones to follow.
2. "Watch out, you Nordies."
Bush's comment here related to athenahealth's push to capture its Net Promoter Score. This score is calculated by adding the number of customers that give a rating of 9 or 10 to the question "I would refer athenahealth to my most trusted friend and colleague" and subtracting the number of customers that give a rating of 1 through 6.
Athenahealth's Net Promoter score is 52% -- higher than Netflix (with a score of 50%) but lower than Nordstrom's 78%. Nordstrom is considered to be one of the best customer service organizations around. Companies that build high levels of customer loyalty tend to do well. Athenahealth is definitely on the right track.
3. "Little by little, we find business models that attach to the end of the slinky that we've got so far."
Athenahealth's "slinky" is an expanding health-care Internet network. The company isn't content to focus only on the physician software market. He talked about a strategy to go after hospitals, in particular.
Physicians are still important, though. The company recently renewed its partnership with PSS World, which is now part of McKesson (MCK -1.35%). This deal almost doubled the sales force promoting athenahealth's products. Bush said that the expanded agreement with McKesson presents a great opportunity for athenahealth to grow, particularly on the West Coast and in the ambulatory surgical center market.
4. "There is sadness, obviously, when they realize they plunked down on a pre-Internet system in an Internet world."
This remark was made in the context of speaking about getting customers of other vendors to switch to athenahealth's clinical product. Bush said that the last time he checked, around 40% of the company's clinical sales resulted from customers moving from another product -- in many cases where the customer had been on the other product for less than three years.
Earlier this year, Black Book Ranking published its annual survey of nearly 17,000 electronic health record users. A surprisingly large amount indicated that they planned to switch vendors in the near future, with more than two-thirds of those respondents saying they would either move to or stay with a web-based system.
Judging from the most recent quarterly revenue numbers for some of the major competitors in the physician software market, there could be validity to both Bush's comments and the Black Book Ranking survey. Allscripts' (MDRX) revenue dropped almost 7% year-over-year. Revenue for Quality Systems (NXGN) was down a little over 7%.
While Allscripts and Quality Systems have seen their top lines languish, Cerner (CERN) saw its revenue grow at a healthy 10.6% compared to the same quarter in 2012. All of these competitors pale in comparison to athenahealth, though. The company's third-quarter revenue jumped 43% year-over-year.
5. "I don't know when people will say, 'Uh-oh, I'm in trouble.'"
The "uh-oh moment" Bush referred to relates to implementation of the major new billing code system called ICD-10. He expects that sales will get a nice bump at some point from this implementation, although he isn't sure exactly when it will happen.
ICD-10 is just the latest of several big changes over the past few years that have helped health-care technology companies. The good news for these vendors is that change is a constant in the industry. These major disruptions can cause customers to think seriously about moving to a new system. Athenahealth seems poised to be ready to take advantage if they do.
A winning assumption
Product innovation. Attention to customers. Aggressive business model. Rivals like Allscripts and Quality Systems facing challenges. Significant industry changes. All of these add up to a great opportunity for athenahealth in the days ahead.
Perhaps the biggest risk for athenahealth's stock could be a sell-off on fears that the price has simply gone up too much. The company's forward price-to-earnings multiple stands at 100. This definitely is no value play. However, premium valuations haven't hurt athenahealth's shares from rising in the past.
I think that an exchange between Bush and one of the analysts on the company's earnings call last week is indicative of the outlook for athenahealth. When asked by the analyst whether his company would be a winner or loser as a result of hospital consolidation, Bush replied: "I don't know, dude. I assume we'll win." Winning is an assumption that athenahealth makes regularly.
