Source: athenahealth.

If there's one certainty in health care it's that someday everyone's patient record will be filed and shared electronically rather than stored in metal cabinets. Thanks to carrots offered by the government to providers that hit meaningful use targets for electronic health records (the Centers for Medicare & Medical Services had paid out some $14.6 billion by May) millions of patient records have already made the migration.

The electrification of medical records has proven a boon to information technology companies like athenahealth (NASDAQ:ATHN) that focus solely on health-care hardware and software solutions. However, investors have shrugged at athena's earnings results that showed rising demand and revenue in the second quarter. Let's look at why.

Tipping our cap
There's little to dislike about athena's top-line performance. Revenue jumped more than 27% year over year to $186 million, as 2,500 more health-care providers adopted athena's cloud-based EHR products and services. That brought athena's client base to more than 55,000.

A larger installed base is kicking off more referrals, and a recently announced relationship with Henry Schein (a health-care products distributor with 800,000 customers) to co-market athena's EHR suite has the IT company targeting bookings growth of 30% this year.

ATHN Revenue (Quarterly) data by YCharts.

Ongoing investment
Athena's gross margin is solid at 63%, but the ongoing land grab for market share continues to push operating margin lower.

The company's year-over-year research and development expense increased by 15% in the quarter, while its selling and marketing expense grew 24%. Those second-quarter investments translated into a loss of $3.1 million.

ATHN EPS Diluted (Quarterly) data by YCharts.

Future opportunity
Health-care providers continue to struggle to find the perfect fit , given that 17% of providers polled earlier this year said they're likely to switch EHR systems by year-end. That creates plenty of opportunity to improve retention and win away accounts from competitors like the privately held Epic (the largest player in the EHR market), Allscripts (NASDAQ:MDRX), and Quality Systems (NASDAQ:NXGN).

Source: Quality Systems.

Allscripts has 180,000 physician customers and booked $340 million in first-quarter sales; however, those sales were down from $347 million in the first quarter of 2013. Quality Systems has 85,000 physician customers and posted sales of $115 million in the first quarter, up just 4% from a year ago. Since both companies are growing more slowly than athena, it appears athena is winning physician business away from these larger players.

Athena also thinks it can elbow some share away from Epic and competitor Cerner in hospitals.

Epic and Cerner are long-standing market share leaders among hospital systems, but athena could significantly boost its sales by forcing its way into that market. So far, athena has rolled out its enterprise suite at Steward, Griffin, and Arise Austin Medical Center; if those launches go well, more systems may sign up over the coming year.

Finally, athena says just 49% of financial, clinical, and patient-facing records have made their way to the cloud. That suggests plenty of room remains for the company to grow.

Fool-worthy final thoughts
During the second-quarter conference call, athena affirmed its expectations for full-year sales of between $725 million and $755 million, but that did little to spark investor enthusiasm given hopes for a guidance increase. In the second quarter of 2013, athena guided for full-year 2013 sales of between $580 million and $615 million; the company ended up delivering $595 million for the year, so it's unlikely there will be much of an upward surprise this year, either.

Athena also left its full-year earnings-per-share target unchanged at between $0.98 and $1.10, which means company shares are trading at more than 100 times expected earnings, which is far from compelling.

There's clearly a big and growing market for EHR providers like athena, but given that its year-over-year sales growth of 27% was down from 41% in the second quarter of last year and its earnings aren't budging due to investment, I'll wait on the sidelines until those market share-grabbing expenses drop or shares get a bit cheaper.