athenahealth, Inc. Reports Third Quarter Fiscal Year 2014 Results

Company Announces Record Physician Additions

Q3 2014 Financial Results

• 26% Revenue Growth Over Third Quarter of 2013
• Non-GAAP Adjusted Operating Income of $18.5 million
• GAAP Net Loss of $1.6 million, or $0.04 Per Diluted Share
• Non-GAAP Adjusted Net Income of $10.4 million, or $0.27 Per Diluted Share

WATERTOWN, Mass., Oct. 16, 2014 (GLOBE NEWSWIRE) -- athenahealth, Inc. (Nasdaq:ATHN) ("athenahealth" or "we"), a leading provider of cloud-based services and mobile tools for medical groups and health systems, today announced financial and operational results for the third quarter of fiscal year 2014. We will conduct a conference call tomorrow, Friday, October 17, 2014, at 8:00 a.m. Eastern Time to discuss these results and management's outlook for future financial and operational performance.

• Grew net new active physicians on athenaCollector® (3,420 physicians added), athenaClinicals® (2,786 physicians added), and athenaCommunicator® (3,846 physicians added) for the three months ended September 30, 2014, compared to athenaCollector (2,715 physicians added), athenaClinicals (1,343 physicians added), and athenaCommunicator (3,499 physicians added) in the same period last year.
• Total revenue for the three months ended September 30, 2014, was $190.4 million, compared to $151.5 million in the same period last year, an increase of 26%.
  • Revenue from athenahealth-branded services was $175.6 million, an increase of 31% over $134.3 million for the three months ended September 30, 2013.
  • Revenue from Epocrates-branded services was $9.8 million, a decrease of 27% from $13.4 million for the three months ended September 30, 2013.
  • Third-party tenant and other non-core revenue was $5.0 million, an increase of 32% over $3.8 million for the three months ended September 30, 2013.

"We continued to see strong momentum across the business in the third quarter, with record physician additions, the opening of two extraordinary offices in Atlanta and San Francisco, the launch of a brand new user experience across our client base, and industry-leading Meaningful Use Stage 2 attestation results," said Jonathan Bush, chairman and chief executive officer of athenahealth. "As we prepare for the next wave of growth, we are intently focused on achieving the ambitious goals we laid out for 2014, as well as refining our 2015 roadmap and priorities."

• For the three months ended September 30, 2014, Non-GAAP Adjusted Gross Margin was 61.2%, down slightly from 61.9% in the same period last year.
• For the three months ended September 30, 2014, Non-GAAP Adjusted Operating Income was $18.5 million, or 9.7% of total revenue, compared to $19.3 million, or 12.7% of total revenue, in the same period last year.
• For the three months ended September 30, 2014, GAAP Net Loss was $1.6 million, or $0.04 per diluted share, compared to GAAP Net Income of $1.2 million, or $0.03 per diluted share, in the same period last year.
• For the three months ended September 30, 2014, Non-GAAP Adjusted Net Income was $10.4 million, or $0.27 per diluted share, compared to $11.2 million, or $0.29 per diluted share, in the same period last year.
  • For 2014, we are using a non-GAAP tax rate of 40% to normalize the tax impact to our Non-GAAP Adjusted Net Income per Diluted Share based on the fact that a relatively small change in pre-tax GAAP income (loss) could result in a volatile GAAP effective tax rate. If this approach had been used for the three months ended September 30, 2013, Non-GAAP Adjusted Net Income per Diluted Share would have been $0.28 instead of $0.29.

"The athenahealth team continued to make marked progress against our financial and operational goals in the third quarter and we are strongly positioned to continue to drive meaningful change in health care," said Kristi Matus, chief financial and administrative officer of athenahealth. "Our results demonstrate an ongoing commitment to delivering on our promise to clients–when they succeed, we succeed. We are proud of the progress we have made to date, but remain focused on innovating and connecting care across the continuum. We look forward to closing out 2014 with the same passion and diligence that has brought athenahealth to where it is today."

Our fiscal year 2014 guidance communicated at our 6^th Annual Investor Summit on December 12, 2013, is summarized in the following table:

We are not making any changes to the fiscal year 2014 guidance we presented at our 6th Annual Investor Summit on December 12, 2013. However, based on our year-to-date performance and current expectations for Q4 2014, we are providing additional insight into our fiscal year 2014 guidance as follows:

• We expect GAAP Total Revenue to be at or above the mid-point of the $725 million to $755 million guidance range.
• We expect Non-GAAP Adjusted Gross Margin to be close to the mid-point of the 62.5% to 63.5% guidance range.
• We expect Non-GAAP Adjusted Operating Income to be at or above the mid-point of the $70 million to $80 million guidance range.
• Finally, we expect Non-GAAP Adjusted Net Income per Diluted share to be close to the high end of the $0.98 to $1.10 guidance range.

Our 7th Annual Investor Summit will be held at our Watertown, Massachusetts headquarters on December 11, 2014.

Use of Non-GAAP Financial Measures

In our earnings releases, prepared remarks, conference calls, slide presentations, and webcasts, we may use or discuss non-GAAP financial measures, as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure, are included in this press release after the condensed consolidated financial statements. Our earnings press releases containing such non-GAAP reconciliations can be found in the Investors section of our web site at www.athenahealth.com.

Conference Call Information

To participate in our live conference call and webcast, please dial 877-853-5645 (or 408-940-3868 for international calls) using conference code No. 5761982, or visit the Investors section of our website at www.athenahealth.com. A replay will be available for one week following the conference call at 855-859-2056 (and 404-537-3406 for international calls) using conference code No. 5761982. A webcast replay will also be archived on our website.

About athenahealth, Inc.

athenahealth is a leading provider of cloud-based services for electronic health records (EHR), revenue cycle management and medical billing, patient engagement, care coordination, and population health management, as well as Epocrates and other point-of-care mobile apps . We connect care and drive meaningful, measurable results for more than 59,000 health care providers in medical practices and health systems nationwide. For more information, please visit www.athenahealth.com.

Forward-Looking Statements

This press release contains forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements reflecting management's expectations for future financial and operational performance and operating expenditures, expected growth, and business outlook; statements regarding the benefits of our service offerings and demand for our service offerings; statements regarding the expansion of our network, including physician additions to our network; statements regarding our market opportunity; statements regarding changes in the health care industry, and our positioning to lead such changes; Meaningful Use attestation rates; statements regarding the expected value creation from our investments; statements regarding our clients' financial and operational performance; and statements found under our "Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures" section of this release. The forward-looking statements in this release do not constitute guarantees of future performance. These statements are neither promises nor guarantees, and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. In particular, the risks and uncertainties include, among other things: our fluctuating operating results; our variable sales and implementation cycles, which may result in fluctuations in our quarterly results; risks associated with the acquisition and integration of companies and new technologies to achieve expected synergies, including those related to our ability to successfully integrate the services and offerings of Epocrates and realize the expected benefits; risks associated with our ability to realize the expected benefits from the purchase of the Arsenal on the Charles campus in Watertown, Massachusetts; risks associated with our expectations regarding our ability to maintain profitability; the impact of increased sales and marketing expenditures, including whether increased expansion in revenues is attained and impacts on margins and profitability; changes in tax rates or exposure to additional tax liabilities; the highly competitive industry in which we operate and the relative immaturity of the market for our service offerings; and the evolving and complex governmental and regulatory compliance environment in which we and our clients operate. Forward-looking statements may often be identified with words such as "we expect," "we anticipate," "upcoming," "aim," or similar indications of future expectations. These statements are neither promises nor guarantees, and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise the information contained in this press release, whether as a result of new information, future events or circumstances, or otherwise. For additional disclosure regarding these and other risks faced by us, please see the disclosures contained in our public filings with the Securities and Exchange Commission, available on the Investors section of our website at www.athenahealth.com and on the SEC's website at www.sec.gov.

Explanation of Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States of America, or GAAP. However, management believes that, in order to properly understand our short-term and long-term financial and operational trends, investors may wish to consider the impact of certain non-cash or non-recurring items, when used as a supplement to financial performance measures in accordance with GAAP. These items result from facts and circumstances that vary in frequency and impact on continuing operations. Management also uses results of operations before such items to evaluate the operating performance of athenahealth and compare it against past periods, make operating decisions, and serve as a basis for strategic planning. These non-GAAP financial measures provide management with additional means to understand and evaluate the operating results and trends in our ongoing business by eliminating certain non-cash expenses and other items that management believes might otherwise make comparisons of our ongoing business with prior periods more difficult, obscure trends in ongoing operations, or reduce management's ability to make useful forecasts. Management believes that these non-GAAP financial measures provide additional means of evaluating period-over-period operating performance. In addition, management understands that some investors and financial analysts find this information helpful in analyzing our financial and operational performance and comparing this performance to our peers and competitors.

Management defines "Non-GAAP Adjusted Gross Profit" as total revenue, less direct operating expense, plus (1) stock-based compensation expense allocated to direct operating expense and (2) amortization of purchased intangible assets allocated to direct operating expense, and "Non-GAAP Adjusted Gross Margin" as Non-GAAP Adjusted Gross Profit as a percentage of total revenue. Management considers these non-GAAP financial measures to be important indicators of our operational strength and performance of our business and a good measure of our historical operating trends. Moreover, management believes that these measures enable investors and financial analysts to closely monitor and understand changes in our ability to generate income from ongoing business operations.

Management defines "Non-GAAP Adjusted EBITDA" as the sum of GAAP net income (loss) before provision for (benefit from) income taxes, total other (income) expense, stock-based compensation expense, depreciation and amortization, amortization of purchased intangible assets, integration costs, transaction costs, and gain on early termination of lease and "Non-GAAP Adjusted EBITDA Margin" as Non-GAAP Adjusted EBITDA as a percentage of total revenue. Management defines "Non-GAAP Adjusted Operating Income" as the sum of GAAP net income (loss) before provision for (benefit from) income taxes, total other (income) expense, stock-based compensation expense, amortization of capitalized stock-based compensation related to software development, amortization of purchased intangible assets, integration costs, transaction costs, and gain on early termination of lease and "Non-GAAP Adjusted Operating Income Margin" as Non-GAAP Adjusted Operating Income as a percentage of total revenue. Management defines "Non-GAAP Adjusted Net Income" as the sum of GAAP net income (loss) before stock-based compensation expense, amortization of capitalized stock-based compensation related to software development, amortization of purchased intangible assets, integration costs, transaction costs, and gain on early termination of lease and any tax impact related to these preceding items, and an adjustment to the tax provision for the non-GAAP tax rate and "Non-GAAP Adjusted Net Income per Diluted Share" as Non-GAAP Adjusted Net Income divided by weighted average diluted shares outstanding. Management considers all of these non-GAAP financial measures to be important indicators of our operational strength and performance of our business and a good measure of our historical operating trends, in particular the extent to which ongoing operations impact our overall financial performance.

Management excludes or adjusts each of the items identified below from the applicable non-GAAP financial measure referenced above for the reasons set forth with respect to that excluded item:

• Stock-based compensation expense and amortization of capitalized stock-based compensation related to software development — excluded because these are non-cash expenditures that management does not consider part of ongoing operating results when assessing the performance of our business, and also because the total amount of the expenditure is partially outside of our control because it is based on factors such as stock price, volatility, and interest rates, which may be unrelated to our performance during the period in which the expenses are incurred.
• Amortization of purchased intangible assets — purchased intangible assets are amortized over their estimated useful lives and generally cannot be changed or influenced by management after the acquisition. Accordingly, this item is not considered by management in making operating decisions. Management does not believe such charges accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.
• Integration costs —integration costs are the severance payments and retention bonuses for certain employees relating to the Epocrates acquisition. Accordingly, management believes that such expenses do not have a direct correlation to future business operations, and therefore, these costs are not considered by management in making operating decisions. Management does not believe such charges accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.
• Transaction costs — transaction costs are non-recurring costs related to specific transactions. Accordingly, management believes that such expenses do not have a direct correlation to future business operations, and therefore, these costs are not considered by management in making operating decisions. Management does not believe such charges accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.
• Gain on early termination of lease — Gain on early termination of lease was a non-recurring gain related to the early termination of the Arsenal on the Charles lease. Accordingly, this gain was not considered by management in making operating decisions, and management believes that this gain does not have a direct correlation to future business operations. Management does not believe such gain accurately reflects the performance of our ongoing operations for the period in which such gain was recorded.
• Non-GAAP tax rate — For 2014, we are using a non-GAAP tax rate of 40% to normalize the tax impact to our Non-GAAP Adjusted Net Income per Diluted Share based on the fact that a relatively small change in pre-tax GAAP income (loss) could result in a volatile GAAP effective tax rate.