×

athenahealth, Inc. Reports Second Quarter Fiscal Year 2017 Results

Company Achieves 15% Revenue Growth and Expands Operating Margin;
Reaffirms Fiscal Year 2017 Financial Outlook

Q2 2017 Financial Results

  • 15% Revenue Growth Over Second Quarter of 2016
  • GAAP Operating Income of $12.2 million
  • Non-GAAP Adjusted Operating Income of $35.9 million
  • GAAP Net Income of $9.9 million, or $0.24 Per Diluted Share
  • Non-GAAP Adjusted Net Income of $20.5 million, or $0.51 Per Diluted Share

WATERTOWN, Mass., July 20, 2017 (GLOBE NEWSWIRE) -- athenahealth, Inc. (NASDAQ:ATHN) (“athenahealth” or “we”), a leading provider of network-enabled services and point-of-care mobile applications for hospital and ambulatory clients nationwide, today announced financial and operational results for the second quarter of fiscal year 2017. We will hold a conference call tomorrow, Friday, July 21, 2017, at 8:00 a.m. Eastern Time to discuss these results and management’s outlook for future financial and operational performance.

“Over the past 20 years, we’ve made great progress on our vision to build the healthcare internet. Today, our network has grown to over 100,000 providers, 98 million unique patient records, and 2.8 million covered lives,” said Jonathan Bush, chief executive officer, athenahealth. “Our second quarter results were in line with our expectations, and we remain focused on delivering against our 2017 objectives to deepen our services, execute in the small hospital market, invest in our platform, and build out nationwide connectivity for the network.”

athenahealth also noted today that it has received significant shareholder feedback over the past several months. The athenahealth Board of Directors, in consultation with its advisors, is fully evaluating this feedback and will provide an update in due course.

Q2 2017 Financial Results

  • Total revenue for the three months ended June 30, 2017, was $301.1 million, compared to $261.9 million in the same period last year, an increase of 15%.
  • For the three months ended June 30, 2017, GAAP Gross Margin was 52.2%, compared to 49.3% in the same period last year.
  • For the three months ended June 30, 2017, Service Automation Rate, formerly referred to as Non-GAAP Adjusted Gross Margin, was 64.2%, compared to 62.8% in the same period last year.
  • For the three months ended June 30, 2017, GAAP Operating Income was $12.2 million, or 4.1% of total revenue, compared to GAAP Operating Loss of $1.3 million, or 0.5% of total revenue, in the same period last year.
  • For the three months ended June 30, 2017, Non-GAAP Adjusted Operating Income was $35.9 million, or 11.9% of total revenue, compared to $23.9 million, or 9.1% of total revenue, in the same period last year.
  • For the three months ended June 30, 2017, GAAP Net Income was $9.9 million, or $0.24 per diluted share, compared to GAAP Net Loss of $1.9 million, or loss of $0.05 per diluted share, in the same period last year.
  • For the three months ended June 30, 2017, Non-GAAP Adjusted Net Income was $20.5 million, or $0.51 per diluted share, compared to $13.4 million, or $0.34 per diluted share, in the same period last year.

Network Growth

We continued to expand our network across ambulatory (athenaOne), hospital (athenaOne for Hospitals & Health Systems) and population health (athenahealth Population Health). Our network growth metrics for Q1 2017 to Q2 2017 are summarized in the following table:

athenaOne (Ambulatory) athenaOne
(Hospital)
Population
Health
Collector
Providers
Clinicals
Providers
Communicator
Providers
Discharge Bed
Days
Covered Lives
Ending Balance as of 3/31/1798,948 52,273 60,070 11,350 2,777,960
Sequential Growth1,358 2,636 2,858 2,757 3,675
Ending Balance as of 6/30/17100,306 54,909 62,928 14,107 2,781,635
Sequential Growth %1%5%5% 24% %

Fiscal Year 2017 Outlook

We are reaffirming our fiscal year 2017 financial guidance we communicated on April 27, 2017 with the release of our first quarter fiscal year results. Our fiscal year 2017 financial guidance is summarized in the following table:

For the Fiscal Year Ending December 31, 2017
Forward-Looking Guidance
Financial Measures
GAAP Total Revenue$1,210 million - $1,250 million
GAAP Operating Income$36 million - $46 million
Non-GAAP Adjusted Operating Income$120 million - $140 million
Financial Metric
Annual Bookings$350 million - $400 million

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 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 website at www.athenahealth.com.

Conference Call Information

To participate in our live conference call and webcast on Friday, July 21, 2017, at 8:00 a.m. Eastern Time, please dial 877-853-5645 (or 408-940-3868 for international calls) using conference code no. 43730773, 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. 43730773. A webcast replay will also be archived on our website.

About athenahealth, Inc.

athenahealth partners with hospital and ambulatory clients to drive clinical and financial results. We offer medical record, revenue cycle, patient engagement, care coordination, and population health services. We combine insights from our network of 100,000 providers and 98 million patients with deep industry knowledge and perform administrative work at scale. For more information, please visit www.athenahealth.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding management’s expectations for future financial and operational performance and operating expenditures, expected growth, and business outlook, including our revised fiscal 2017 guidance; statements regarding our positioning in the market and our progress on building the healthcare internet; and statements found under our “Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures” and “Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures for Fiscal Year 2017 Guidance” sections of this release. Forward-looking statements may be identified with words such as “will,” “may,” “expect,” “plan,” “anticipate,” “upcoming,” “believe,” “estimate,” or similar terminology, and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance, 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. These risks and uncertainties include: our highly competitive industry and our ability to compete effectively and remain innovative; the development of the market for cloud-based healthcare information technology services; changes in the healthcare industry and their impact on the demand for our services; our ability to manage changes in our management team; our ability to maintain consistently high growth rates due to lengthening customer sales cycles; the impact of changes in our business model and structure; our ability to effectively manage our growth; our ability to protect our intellectual property; current and future litigation, including for intellectual property infringement; our dependence on third-party providers; risks and costs associated with our worldwide operations; our ability to attract and retain highly-skilled employees; our fluctuating operating results; our ability to retain our clients and maintain client revenue; our tax liability; our variable sales and implementation cycles; the timing at which we recognize certain revenue and our ability to evaluate our prospects; defects and errors in our software or services, or interruptions or damages to our systems or those of third parties on which we rely; a data security breach; limitations on our use of data; the effect of payer and provider conduct; the failure of our services to provide accurate and timely information; changing government regulation and the costs and challenges of compliance; the potential for illegal behavior by employees or subcontractors; and the price volatility of our common stock. Forward-looking statements speak only as of the date hereof and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. For additional information regarding these and other risks faced by us, refer to our public filings with the Securities and Exchange Commission (“SEC”), available on the Investors section of our website at www.athenahealth.com and on the SEC’s website at www.sec.gov.

athenahealth, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except per share amounts)
June 30,
2017
December 31,
2016
Assets
Current assets:
Cash and cash equivalents $71.2 $147.4
Accounts receivable, net 170.3 161.6
Prepaid expenses and other current assets 46.4 34.2
Total current assets 287.9 343.2
Property and equipment, net 362.7 347.7
Capitalized software costs, net 126.4 125.8
Purchased intangible assets, net 118.9 112.1
Goodwill 274.1 240.7
Deferred tax assets 47.7 2.2
Investments and other assets 26.4 17.5
Total assets $1,244.1 $1,189.2
Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable $5.7 $9.5
Accrued compensation 63.5 89.7
Accrued expenses 57.2 51.7
Current portion of long-term debt 16.4 18.3
Deferred revenue 34.4 28.7
Total current liabilities 177.2 197.9
Deferred rent, net of current portion 30.3 30.8
Long-term debt, net of current portion 263.6 272.8
Deferred revenue, net of current portion 49.0 48.4
Other long-term liabilities 7.0 6.0
Total liabilities 527.1 555.9
Stockholders’ equity:
Preferred stock, $0.01 par value: 5.0 shares authorized; no shares issued and outstanding at June 30, 2017 and December 31, 2016
Common stock, $0.01 par value: 125.0 shares authorized; 41.2 shares issued and 39.9 shares outstanding at June 30, 2017; 40.8 shares issued and 39.5 shares outstanding at December 31, 2016 0.4 0.4
Additional paid-in capital 618.1 591.5
Treasury stock, at cost, 1.3 shares (1.2) (1.2)
Accumulated other comprehensive loss (0.5) (0.9)
Retained earnings 100.2 43.5
Total stockholders’ equity 717.0 633.3
Total liabilities and stockholders’ equity $1,244.1 $1,189.2


athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in millions, except per share amounts)
Three Months Ended
June 30,
2017 2016
Revenue:
Business services $293.0 $254.1
Implementation and other 8.1 7.8
Total revenue 301.1 261.9
Cost of revenue 143.8 132.9
Gross profit 157.3 129.0
Other operating expenses:
Selling and marketing 65.0 68.2
Research and development 42.4 28.8
General and administrative 37.7 33.3
Total other operating expenses 145.1 130.3
Operating income (loss) 12.2 (1.3)
Other expense (1.7) (1.5)
Income (loss) before income tax (provision) benefit 10.5 (2.8)
Income tax (provision) benefit (0.6) 0.9
Net income (loss) $9.9 $(1.9)
Net income (loss) per share – Basic $0.25 $(0.05)
Net income (loss) per share – Diluted $0.24 $(0.05)
Weighted average shares used in computing net income (loss) per share:
Basic 39.9 39.3
Diluted 40.5 39.3


athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
Six Months Ended
June 30,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $8.5 $(2.7)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 72.8 66.5
Deferred income tax 1.4 (2.0)
Stock-based compensation expense 30.0 33.5
Changes in operating assets and liabilities:
Accounts receivable, net (8.7) 8.3
Prepaid expenses and other current assets (12.2) (2.9)
Other long-term assets (8.8) (1.3)
Accounts payable (1.1) (6.0)
Accrued expenses and other long-term liabilities 6.3 1.2
Accrued compensation (26.5) (9.2)
Deferred revenue 6.3 (4.1)
Deferred rent 0.7
Net cash provided by operating activities 68.0 82.0
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software costs (35.7) (42.8)
Purchases of property and equipment (51.0) (34.0)
Payments on acquisitions, net of cash acquired (40.8) (1.7)
Other investing activities 0.2
Net cash used in investing activities (127.5) (78.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under stock plans and warrants 9.4 9.2
Taxes paid related to net share settlement of stock awards (15.2) (16.5)
Payments on long-term debt (11.2) (3.8)
Other financing activities (0.1)
Net cash used in financing activities (17.0) (11.2)
Effect of exchange rate changes on cash and cash equivalents 0.3 (0.1)
Net decrease in cash and cash equivalents (76.2) (7.6)
Cash and cash equivalents at beginning of period 147.4 141.9
Cash and cash equivalents at end of period $71.2 $134.3

athenahealth, Inc.
STOCK-BASED COMPENSATION
(Unaudited, in millions)

Set forth below is a breakout of stock-based compensation impacting the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2017, and 2016:

(unaudited, in millions)Three Months Ended
June 30,
Six Months Ended
June 30,
2017 2016 2017 2016
Stock-based compensation charged to Condensed Consolidated Statements of Income:
Cost of revenue$4.1 $4.4 $7.8 $9.3
Selling and marketing4.5 5.1 8.9 9.2
Research and development3.7 3.6 7.1 6.1
General and administrative3.5 5.2 6.2 8.9
Total stock-based compensation expense15.8 18.3 30.0 33.5
Amortization of capitalized stock-based compensation related to software development allocated to cost of revenue (1)0.6 1.3 1.6 2.5
Amortization of capitalized stock-based compensation related to software development allocated to research and development (1) 0.1
Total$16.4 $19.6 $31.7 $36.0

(1) In addition, for the three months ended June 30, 2017, and 2016, $0.7 million and $0.9 million, respectively, of stock-based compensation was capitalized in the line item Capitalized software costs, net in the Condensed Consolidated Balance Sheets. For the six months ended June 30, 2017, and 2016, $1.3 million and $1.2 million, respectively, of stock-based compensation was capitalized in the line item Capitalized software costs, net in the Condensed Consolidated Balance Sheets.

athenahealth, Inc.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS
(Unaudited, in millions)

Set forth below is a breakout of amortization of purchased intangible assets impacting the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2017, and 2016:

(unaudited, in millions)Three Months Ended
June 30,
Six Months Ended
June 30,
2017 2016 2017 2016
Amortization of purchased intangible assets allocated to:
Cost of revenue$1.3 $1.8 $2.4 $5.1
Selling and marketing3.2 2.9 6.5 5.8
Total amortization of purchased intangible assets$4.5 $4.7 $8.9 $10.9

athenahealth, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO COMPARABLE GAAP MEASURES
(Unaudited, in millions, except per share amounts)

The following is a reconciliation of the non-GAAP financial measures used by us to describe our financial results determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”). An explanation of these measures is also included below under the heading “Explanation of Non-GAAP Financial Measures.”

While management believes that these non-GAAP financial measures provide useful supplemental information to investors regarding the underlying performance of our business operations, investors are reminded to consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, it should be noted that these non-GAAP financial measures may be different from non-GAAP measures used by other companies, and management may utilize other measures to illustrate performance in the future. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP.

Please note that these figures may not sum exactly due to rounding.

Non-GAAP Adjusted Gross Margin and Service Automation Rate
Set forth below is a presentation of our “Non-GAAP Adjusted Gross Profit” and “Non-GAAP Adjusted Gross Margin,” which represents Non-GAAP Adjusted Gross Profit as a percentage of total revenue and our “Service Automation Profit” and “Service Automation Rate,” which represents Service Automation Profit as a percentage of total revenue.

(unaudited, in millions)Three Months Ended
June 30,
Six Months Ended
June 30,
2017 2016 2017 2016
Total revenue$301.1 $261.9 $586.5 $518.0
Cost of revenue143.8 132.9 288.2 265.3
GAAP Gross Profit157.3 129.0 298.3 252.7
GAAP Gross Margin52.2% 49.3% 50.9% 48.8%
Add: Stock-based compensation
allocated to cost of revenue
4.1 4.4 7.8 9.3
Add: Amortization of capitalized stock-based
compensation related to software
development allocated to cost of revenue
0.6 1.3 1.6 2.5
Add: Amortization of purchased intangible assets
allocated to cost of revenue
1.3 1.8 2.4 5.1
Add: Integration and transaction costs
allocated to cost of revenue
0.1
Add: Exit costs, including restructuring costs
allocated to cost of revenue
0.3 0.3
Non-GAAP Adjusted Gross Profit (as redefined)$163.3 $136.8 $310.2 $269.9
Non-GAAP Adjusted Gross Margin (as redefined)54.2% 52.2% 52.9% 52.1%
Add: Amortization and depreciation expense
allocated to cost of revenue
24.9 23.1 49.7 44.9
Add: Overhead expense
allocated to cost of revenue
5.0 4.6 9.4 8.7
Service Automation Profit (1)$193.2 $164.5 $369.3 $323.5
Service Automation Rate (1)64.2% 62.8% 63.0% 62.5%

(1) Service Automation Profit and Rate, formerly referred to as Non-GAAP Adjusted Gross Profit and Margin, excludes amortization, depreciation, and overhead costs.

Non-GAAP Adjusted Operating Income
Set forth below is a reconciliation of our “Non-GAAP Adjusted Operating Income” and “Non-GAAP Adjusted Operating Income Margin,” which represents Non-GAAP Adjusted Operating Income as a percentage of total revenue.

(unaudited, in millions)Three Months Ended
June 30,
Six Months Ended
June 30,
2017 2016 2017 2016
Total revenue$301.1 $261.9 $586.5 $518.0
GAAP net income (loss)9.9 (1.9) 8.5 (2.7)
Add: Provision for (benefit from) income taxes0.6 (0.9) 1.9 (1.6)
Add: Total other expense1.7 1.5 2.9 3.3
GAAP operating income (loss)$12.2 $(1.3) $13.3 $(1.0)
GAAP operating margin4.1% (0.5)% 2.3% (0.2)%
Add: Stock-based compensation expense15.8 18.3 30.0 33.5
Add: Amortization of capitalized stock-based compensation related to software development0.6 1.3 1.7 2.5
Add: Amortization of purchased intangible assets4.5 4.7 8.9 10.9
Add: Integration and transaction costs2.8 0.1 4.0 0.4
Add: Exit costs, including restructuring costs 0.8 1.9
Non-GAAP Adjusted Operating Income$35.9 $23.9 $57.9 $48.2
Non-GAAP Adjusted Operating Income Margin11.9% 9.1% 9.9% 9.3%

Non-GAAP Adjusted Net Income
Set forth below is a reconciliation of our “Non-GAAP Adjusted Net Income.”

(unaudited, in millions, except per share amounts)Three Months Ended
June 30,
Six Months Ended
June 30,
2017 2016 2017 2016
GAAP net income (loss)$9.9 $(1.9) $8.5 $(2.7)
Add: Stock-based compensation expense15.8 18.3 30.0 33.5
Add: Amortization of capitalized stock-based compensation related to software development0.6 1.3 1.7 2.5
Add: Amortization of purchased intangible assets4.5 4.7 8.9 10.9
Add: Integration and transaction costs2.8 0.1 4.0 0.4
Add: Exit costs, including restructuring costs 0.8 1.9
Sub-total of tax deductible items23.7 25.2 44.6 49.2
Add: Tax impact of tax deductible items (1)(9.5) (10.1) (17.8) (19.7)
Add: Tax impact resulting from applying non-GAAP tax rate (2)(3.6) 0.2 (2.3) 0.1
Non-GAAP Adjusted Net Income$20.5 $13.4 $33.0 $26.9
Weighted average shares - diluted40.5 39.3 40.4 39.2
Non-GAAP Adjusted Net Income per Diluted Share$0.51 $0.34 $0.82 $0.69

(1) Tax impact calculated using a statutory tax rate of 40%.
(2) Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 40%. We used 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) in any one period could result in a volatile GAAP effective tax rate.

Non-GAAP Adjusted Net Income per Diluted Share
Set forth below is a reconciliation of our “Non-GAAP Adjusted Net Income per Diluted Share.”

(unaudited, in millions, except per share amounts)Three Months Ended
June 30,
Six Months Ended
June 30,
2017 2016 2017 2016
GAAP net income (loss) per share - diluted$0.24 $(0.05) $0.21 $(0.07)
Add: Stock-based compensation expense0.39 0.47 0.74 0.86
Add: Amortization of capitalized stock-based compensation related to software development0.01 0.03 0.04 0.06
Add: Amortization of purchased intangible assets0.11 0.12 0.22 0.28
Add: Integration and transaction costs0.07 0.10 0.01
Add: Exit costs, including restructuring costs 0.02 0.05
Sub-total of tax deductible items0.59 0.64 1.10 1.26
Add: Tax impact of tax deductible items (1)(0.23) (0.26) (0.44) (0.50)
Add: Tax impact resulting from applying non-GAAP tax rate (2)(0.09) 0.01 (0.06)
Non-GAAP Adjusted Net Income per Diluted Share$0.51 $0.34 $0.82 $0.69
Weighted average shares - diluted40.5 39.3 40.4 39.2

(1) Tax impact calculated using a statutory tax rate of 40%.
(2) Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 40%. We used 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) in any one period could result in a volatile GAAP effective tax rate.

athenahealth, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO COMPARABLE GAAP MEASURES FOR FISCAL YEAR 2017 GUIDANCE
(Unaudited, in millions, except per share amounts)

Please note that the figures presented below may not sum exactly due to rounding.

Non-GAAP Adjusted Operating Income Guidance
Set forth below is a reconciliation of our “Non-GAAP Adjusted Operating Income” and “Non-GAAP Adjusted Operating Income Margin” guidance for fiscal year 2017, which represents Non-GAAP Adjusted Operating Income as a percentage of total revenue.

LOW HIGH
Fiscal Year Ending December 31, 2017
Total revenue$1,210 $1,250
GAAP operating income$36 $46
GAAP operating income margin3.0% 3.7%
Add: Stock-based compensation expense60 70
Add: Amortization of capitalized stock-based compensation related to software development2 2
Add: Amortization of purchased intangible assets17 17
Add: Integration and transaction costs5 5
Add: Exit costs, including restructuring (1)
Add: Gain or loss on investments (1)
Non-GAAP Adjusted Operating Income$120 $140
Non-GAAP Adjusted Operating Income Margin9.9% 11.2%

(1) We currently do not anticipate exit costs, including restructuring or gain or loss on investments during fiscal year 2017. However, if these items occur in fiscal year 2017, we would exclude these items from our Non-GAAP Adjusted Operating Income and Non-GAAP Adjusted Operating Income Margin.

Explanation of Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles 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.

In Q4 2016, management redefined “Non-GAAP Adjusted Gross Profit” as total revenue, less cost of revenue, plus (1) stock-based compensation expense allocated to cost of revenue, (2) amortization of purchased intangible assets allocated to cost of revenue, (3) integration and transactions costs allocated to cost of revenue, and (4) exit costs, including restructuring costs allocated to cost of revenue, and “Non-GAAP Adjusted Gross Margin” as Non-GAAP Adjusted Gross Profit as a percentage of total revenue. Management defines “Service Automation Profit,” formerly referred to as Non-GAAP Adjusted Gross Profit, as total revenue, less cost of revenue, plus (1) stock-based compensation expense allocated to cost of revenue, (2) amortization of purchased intangible assets allocated to cost of revenue, (3) integration and transaction costs allocated to cost of revenue, (4) exit costs, including restructuring costs allocated to cost of revenue, (5) amortization and depreciation expense allocated to cost of revenue, and (6) overhead expense allocated to cost of revenue, and “Service Automation Rate,” formerly referred to as Non-GAAP Adjusted Gross Margin, as Service Automation Profit as a percentage of total revenue. Management considers these non-GAAP financial measures and metrics 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 and metrics 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 Operating Income” as the sum of GAAP net income (loss) before provision for (benefit from) income taxes; total other expense; stock-based compensation expense; amortization of capitalized stock-based compensation related to software development; amortization of purchased intangible assets; integration and transaction costs; exit costs, including restructuring costs; and gain or loss on investments; 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 and transaction costs; exit costs, including restructuring costs; and gain or loss on investments 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 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 excludes or adjusts each of the items identified below from the applicable non-GAAP financial measure or metric 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 and transaction costs — Integration costs are the severance payments and retention bonuses for certain employees related to specific transactions. Transaction costs are costs related to strategic 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.

  • Exit costs, including restructuring costs — represents costs related to workforce reductions and to terminate certain lease or other agreements for strategic realignment purposes. Management does not believe such costs accurately reflect the performance of our ongoing operations for the period in which such costs are incurred.

  • Gain or loss on investments — represents gains or losses on the sales, conversions, or impairments of our investments, such as marketable securities and More Disruption Please Accelerator investments. Management does not believe such gains or losses accurately reflect the performance of our ongoing operations for the period in which such gains or losses are reported.

  • Non-GAAP tax rate — We use 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) in any one period could result in a volatile GAAP effective tax rate.


Contact Info: Dana Quattrochi athenahealth, Inc. (Investors) investorrelations@athenahealth.com (617) 402-1329 Holly Spring athenahealth, Inc. (Media) media@athenahealth.com (617) 402-1631

Source: athenahealth, Inc.