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athenahealth, Inc. (NASDAQ:ATHN)

Q4 2012 Earnings Conference Call

February 8, 2013, 08:00 AM ET

Executives

Jonathan Bush - Chairman, President and CEO

Timothy M. Adams - SVP and CFO

Dana Quattrochi – Director, Investor Relations

Analysts

Jamie Stockton - Wells Fargo Securities

Michael Cherny - ISI Group LLC

David Larsen - Leerink Swann

Charles Rhyee - Cowen and Company, LLC

Sean Wieland - Piper Jaffray & Co.

Ryan Daniels - William Blair & Co.

Gregory Bolan - Sterne, Agee & Leach

Eric Coldwell - Robert W. Baird & Co.

Richard Close - Avondale Partners

George Hill - Citigroup Inc.

Bret Jones - Oppenheimer & Co. Inc.

David Windley, Jefferies & Co.

Operator

Welcome to the athenahealth Q4 2012 Earnings Conference Call. My name is Sandra and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I’ll now turn the call over to Ms. Dana Quattrochi. Ms. Quattrochi, you may begin.

Dana Quattrochi

Good morning and thank you for joining us. With me on the call today is Jonathan Bush, our Chairman and CEO; and Tim Adams, our Chief Financial Officer.

On today’s call, management will share brief highlights from the prepared remarks we published yesterday, and then take questions from the audience. Because this call will include information relating to our previously announced proposed acquisition of Epocrates, Inc we’re required to provide you with the following reminder. In connection with our proposed acquisition of Epocrates.

Epocrates will file with the U.S. Securities and Exchange Commission, a proxy statement and other relative materials in connection with the proposed transaction. Epocrates will also mail the proxy statement to Epocrates’ shareholders. athenahealth and Epocrates urge investors and security holders to read the proxy statement and the other relevant material when they become available, because these materials will contain important information about athenahealth Epocrates and the proposed transaction.

The proxy statement and other relevant materials when they become available in any and all documents filed with the SEC maybe obtained free of charge at the SEC's website at www.sec.gov. In addition, free copies of the documents filed with the SEC by athenahealth will be available on the Investors portion of athenahealth website at www.athenahealth.com. Free copies of the document filed with the SEC in the website at www.epocrates.com.

Investors and security holders are urged to read the proxy statement and the other relevant materials when they become available before making any voting or investment decision with respect to the proposed transaction.

athenahealth its acquisition subsidiary Epocrates and the respective Executive Officers and Directors maybe deemed to be participants in the solicitation of proxies from the security holders of Epocrates in connection with the merger. Information about those Executive Officers and Directors of athenahealth is set forth in athenahealth’s proxy statement for its 2012 Annual Meeting of stockholders, which was filed with the SEC on April 26, 2012, and is supplemented by other public filings made and to be made with the SEC.

Information about those Executive Officers and Directors of Epocrates and the ownership of Epocrates common stock is set forth in the Epocrates proxy statement for its 2012 Annual Meeting of stockholders, which was filed with the SEC on August 30, 2012, and is supplemented by other public filings made and to be made with the SEC.

Investors and security holders may obtain additional information regarding the direct and indirect interest of athenahealth, its acquisition subsidiary Epocrates and the respective Executive Officers and Directors in the merger by reading the proxy statement and the other filings and documents referred to above. Nothing said in this call constitutes an offer of any securities for sale.

We’d also like to remind everyone that certain statements contained in this conference call may be considered forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements reflecting our expectations for future operational performance, including operating expenditures, growth rates, and profitability; our integrated service strategy; selling and marketing efforts, service offering benefits, and research and development plans and timelines, the client development potential of our coordinate strategy, and our creation of an ecosystem of networked service providers.

Forward-looking statements may often be identified with such words as we expect, we anticipate, upcoming or similar indications of future expectations. These statements are not promises or guarantees and are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed in such forward-looking statements, including the risks and uncertainties under the heading Risk Factors in our most recent Annual Report on Form 10-K and other periodic reports filed with the SEC, which are available on our website at investors.athenahealth.com and on the SEC’s website at sec.gov. These statements speak only as of the date hereof, and we undertake no obligation to update or revise the information contained in this call.

Finally, please note that on today’s call; we will refer to certain non-GAAP financial measures in which we exclude certain non-cash and non-recurring items such as stock-based compensation from our GAAP financial results. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to consider the impact of these items as a supplement to financial performance measures determined in accordance with GAAP.

Please refer to yesterday’s press release announcing our fourth quarter and full-year 2012 results available on our website for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

With that, I’ll now turn the call over to Jonathan Bush.

Jonathan Bush

Thank you, Dana, and good morning, everyone. I’m very happy to share that the athenahealth team delivered another great year. We tackled a record number of new initiatives, our services continued to improve what they deliver to clients. We stayed mindful of our purpose and improved our understanding of why we do, what we do. And one more thing, we grew 30% again.

In terms of new initiatives everyone at athenahealth has a boulder list, which outlines new beachheads to take, new inventions to make and things that don’t bear any financial fruit but make up the backbone of the athenahealth to come. Among these boulders during 2012 were a seamless transition to ANSI 5010 while other HIT companies may have built compliance software they have no idea as to the compliance of their clients. At athenahealth we are sure of both.

The successful launch of athena mobile with over 30% of athenaClinical users already loyal. The launch of a new physician credentialing service. The expansion of our More Disruption Please program to over 800 MDP member companies expanding all aspect’s of healthcare technology. Finally athenahealth is now fully functional on mobile and desktop versions of [Safari]. I’m sorry Bill.

Despite the fertile new ground broken the performance of our core services was not compromised, in fact it improved. Client days and accounts receivable hit our goal of 36 days in AR in Q4 representing a reduction of almost three days from this time last year. Our client satisfaction score hit a record high of 89.8% in Q2 and remained well above our goal of 85% all year long.

Finally we reached our stretch goal of moving physician documentation time below five minutes per encounter during Q4, 2012. This last accomplishment is particularly noteworthy to those who are new to athenahealth for several reasons. First, we are the only company to even know the documentation cycle time of our clients.

Second, it is evidence of our ability to combine our business model with our lean development approach tweaking and enhancing the user experience of our app constantly. Perhaps this is why we are simultaneously nearly unknown to physicians and yet number one in class. Finally this is a testament to our service culture which won't let us let go of technology when we get it to work properly, but only when it feels just right to our clients.

So that’s a little about the outcome of the fight. I want to talk a little bit about the questions that lead us into battle. First, you may remember that I ended the earnings call last year with some big questions. I want to go back over them.

Question one, how easy can we make it to enter and use athenaNet. This answer must start with the fact that physicians can’t enter and use what they don’t know exists. We believe that with the pending acquisition of Epocrates we will gain a powerful new awareness platform and entry point. Our latest national awareness score was 31% among physicians. This means that nearly 7 out of 10 physicians don’t even know who we are or how we can help them do well by doing the right thing.

Epocrates, by contract enjoys an astounding 90% awareness and 68% net promoter score. We have never made such a big leap against our biggest obstacle to growth. Beyond awareness there’s ease of use. Our user experience team and our athena care team have moved us miles from the nascent EMR we started to becoming the leading healthcare app that we are. And with Epocrates we are positioned to completely redefine medical care givers mobile experience.

Kids today don’t even know what a rotary phone is and soon athenaClinical physicians won't remember what a CCHIT certified EMR is. Question two, how quick and cheap can implementation on to athenaNet become for our clients? Our improvements in awareness and user experience must be matched with improvements in getting on to our cloud-based services.

Today our average implementation timeline is five months and costs an average of $1500 per physician on to athenaOne. Our goal is to make this nearly instantaneous and free. We’ve learned some hard lessons during 2012 about implementation in larger enterprise clients and have built astonishing capabilities as a result. In Q4, we established a nerve center to monitor the largest implementations in our history, spread across three time zones, six states, over a 100 locations, we on-boarded over 200 physicians and providers from Health Management Associates on all of our services at the same time.

With this new nerve center we believe, we can move cycle times on enterprise implementations way down and politics way into the background. With independent practices, our progress was almost as exciting. We ran a prototyping exercise and successfully executed a flawless medium group practice implementation in only 1.6 weeks. Our professional service team is now hard at work at scaling this pilot to become our standard approach. Question three, what percentage of our athenaClinicals base can we move to transaction based pricing? The short answer is I think we can get them all.

By the end of 2012 we had almost 20% of our athenaClinicals on order base pricing. But over 82% of our new athenaClinicals client selected orders based pricing during 2012. While this percentage needs to be much larger our clients are beginning to understand the true value of an integrated network. And they will only truly gain the benefits of a two sided market, if they’re on our transaction based pricing approach.

Question four, how broadly can we scale up our new coordination operations? athenaCoordinator had a rough year. But we have learned a lot and our confidence is high that athenaCoordinator has the core DNA to scale like our other service offerings. With that said, due to the strong revenue cycle element of this service, we expect it will scale at a pace more like athenaCollector than athenaClinicals.

Question five, how can we find new ways to help our clients coordinate care and profit from it. Today we connect with over 28,000 clinical care givers, including labs, pharmacies, hospitals, radiology and imaging centers as well as nearly every insurance company. And unlike most of these failing health information exchanges, we were actually exchanging health information and connecting care across the healthcare continuum in an operational and reusable way. We can further help our clients win in a market increasingly driven by global risk and ACL programs with our new health data services offering. We expect to be able to make some new and exciting announcements in this respect around the upcoming HIMSS Convention.

And finally question six, how can we attract more companies and capital to the cloud-based services approach that we’ve started? Through our More Disruption Please program we’ve built community of over a 1,000 innovators, entrepreneurs, healthcare, IT companies and investors. Today we’ve successfully integrated six MDP partner companies into athenaNet and we’re working on adding another 25 during 2013. We were constantly thinking of new ways to attract entrepreneurs and capital to the health information cloud for the benefit of our clients.

I think that these are still the right questions to re-ask in 2013. But I think one is missing. Even though the vast majority of all of our lives here at athenahealth is focused on what we do and how we do it? The thing that truly makes athenahealth different and special is the why? I want every athenista to know everyday why they’re doing whatever it is that they’re doing. If they know that and share it well with their colleagues, their what and how will always make us untouchable in the market. So, why do we have this mission of being the care givers most trusted service? Because without it, we will never convince great care givers to let us offer our health information backbone as a sole source of the information that they use and capture for long. Why do we have this vision of a national health information backbone? Because we believe that healthcare today not only defies our ability to pay for it as a society, but robs us of our individual humanity in the process. It does not feel like us. We can’t trick it out so that it truly expresses who we are as individuals.

If we don’t like how we’re treated, we can’t really leave. If we act frugally, we can’t really save. A national health information backbone is the necessary first step on the path to personnel ownership of healthcare. If we can move our health information wherever we wanted, we can begin to shop. And we Americans we know how to shop. We can shop for price, we can shop for quality or empathy or whatever it is we value most. But as long as healthcare information is trapped in close systems none of this can start and healthcare will never be an expression of our humanity. Everything we do at athenahealth is organized around the hope for these things. And frankly, I feel like we’re starting to make progress.

I will now let Tim take a minute to review our key financial details and then we both look forward to your questions.

Timothy M. Adams

Thank you, Jonathan. Good morning, everyone. We are pleased with our performance for the full-year 2012, which marks our 13th consecutive year of annual revenue growth of 30%. As compared to our Balanced Scorecard goals, we exceeded our goals in the stability, satisfaction and financial results sections generating an overall score card result of 100%.

While bookings performance was 12% shy of our annual goal, Q4 2012 and full-year 2012 bookings were in line with our latest forecast. This puts us on track to achieve our 2013 revenue plan. Financial results for full-year 2012 were also in line with our latest expectations and consistent with our original guidance for 2012.

Q4, 2012 revenue growth was 26% and non-GAAP adjusted net income was $10.8 million or $0.29 per diluted share. For full-year 2012 we grew total revenue by 30% over 2011 to $422.3 million and grew our non-GAAP adjusted gross profit by 28% to $264.4 million or 62.6% of total revenue. We invested in growth and innovation and grew our non-GAAP selling and marketing expense in line with revenue of 30% and grew our non-GAAP research and development expense by 45%. On a cash basis our research and development expense including capitalized software development cost was 10.9% of revenue as we continue to invest in the redesign of athenaNet as part of our beautiful strategy.

Our non-GAAP adjusted EBITDA grew by 29% to $90.9 million or 21.5% of revenue during full-year 2012. In addition, we posted non-GAAP adjusted earnings per diluted share of $1 which is an increase of $0.12 or 14% over the prior-year. Finally our balance sheet remains healthy as cash and cash equivalents increased by almost $55 million or 39% from 2011 to $193.1 million.

Before we take questions, I want to remind everyone that the first quarter of each fiscal year is characterized by higher expense levels related to the reset of FICA payroll taxes, vacation and bonus accruals, merit increases and sales and marketing events such as the HIMSS annual conference. I should also emphasize that discretionary use of physician services declines during the holiday season, which leads to a decline in collections by our physician clients about 38 days later. While we do not provide quarterly guidance, it is important to keep these seasonal factors in mind when formulating expectations for our Q1, 2013 performance.

I also want to update everyone on the status of our 2013 fiscal year guidance as presented at our investor summit on December 6, 2012. We anticipate updating our fiscal year 2013 guidance on the Q1, 2013 earnings call assuming both the Arsenal real estate purchase and the Epocrates acquisition are closed.

In closing we set very ambitious goals for ourselves. We fell a bit short on our revenue and bookings goals for the year. However we believe we have an amazing team focused on the right strategic priorities to achieve our goals and to continue to produce significant shareholder value. We believe our strategic position is stronger than ever exiting 2012 and will be turbo charged with the addition of Epocrates. Stay tuned for an update on our integration plans and the strategic priorities once the Epocrates transaction is closed.

And with that, we’d be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question is from Jamie Stockton from Wells Fargo. Please go ahead.

Jamie Stockton - Wells Fargo Securities

Hey, good morning. Thanks for taking my questions. Maybe just first of all, 2013 because of the visibility you guys have in the enterprise deal, it seems like it's going to be a big year for doc adds; I was just wondering if you could give us some color on what you’ve done to prepare at this point. Do you feel like you have put in place the people that you need to be able to handle that incremental volume or should we expect there to be some ramp of expenses early in 2013 to reflect what should be a pretty heavy second and third quarter?

Timothy M. Adams

Yeah, hey Jamie, good morning, it's Tim. When we lay our plans out we’re always planning way in advance. So, when you sign these enterprise accounts generally you have a nine month implementation cycle. So, the professional services team who’s responsible for implementation, we try to staff higher trained, well in advanced, because we want them to hit the ground running when they get here on day one. So, we have already started some of that ramping. But in Q1, as you point out that will be a factor of additional expenses in addition to the traditional things that we stated on the prepared comments of FICA, benefits, vacation, payroll, resets et cetera that always hit us in the first quarter, but the operational piece if you bring up is also going to be relevant in Q1 as well.

Jonathan Bush

I will throw in that. As I mentioned in the prepared remarks, we’ve done a fair amount of R&D, we turned our kind of efficiency oriented R&D headlights from the core claim operations move or towards the servicing side of the business, there is a project which we will be talking about in future called Click to Call where somebody can click on wherever they’re in the application and say I’m frustrated or confused, and we will call them knowing exactly who they’re, what their client is, and what screen they’re in, rather than calling an 100 number, there is the Enterprise Nerve Center, which is bringing – which is creating kind of a central virtual resource for doing implementations across many geographies and specialties and products at the same time and the Health Management Associates was the first client to use that, it went very well. We expect to expand the use of that. And the last thing is we’ve got Tom Cady, who is our long time black belt, Head of Professional Services, leading a – an initiative to take that pilot of near instant in implementation 1.6 week implementation and make it standard for standard medium and small groups.

So we are doing work to turn the crank in that area, because of course you cant keep doing things the same way when the scale goes up at 30%. So we think we will get some leverage there and not going slower. But you’re good to point out that those enterprise fields can move for all kinds of reasons, political and otherwise.

Jamie Stockton - Wells Fargo Securities

And then maybe just as my follow-up, sales and marketing spend, if it stays the same percent of revenue you guys are going to spend S25 million or $30 million more in 2013 and you did in 2012, aside from commissions. Can you give us any color on what might you focus on incrementally in 2013 versus or you’ve been doing thus far? That will be it. Thanks.

Timothy M. Adams

Yeah, Jamie you’re right. We’re early on in this game with 4% market share. So we will continue to invest heavily both in growth, sales and marketing and innovation R&D. I think the sales and marketing team that we built is doing a great job and there is just so much we can do, hosting more events, there is more page search, really trying to get the name out there more. Now we’re counting on Epocrates to help us, once we get that deal close. But it will be a lot of the same and I’m – Rob is always looking for new opportunities to reach the marketplace. But the spend will stay at an elevated level.

Jonathan Bush

The hope is that one way we’re going to pay for Epocrates is essentially say that, Rob Cosinuke, who is going to rent it for meetings, it is the way of looking at it. And so maybe probably not this year where we will be just getting to know each other, but in future years, hopefully that we will be a little bit of denting in the line to account for the money that we put into – one way of looking at it is the capital we put into Epocrates can be turned into, the rent on that capital is, has got to be covered in the sales and marketing budget. So you may optically see a reduction in the sales and marketing budget. It may not grow the 30% that we want to grow in out years as Epocrates gets online. But I don’t know if it will hit in 2012 much at all. That’s our team.

Timothy M. Adams

Yeah. That’s really more of a 14 plus, that we were thinking about, but that’s right.

Jamie Stockton - Wells Fargo Securities

Thanks.

Operator

Thank you. And the next question is from Michael Cherny from ISI Group. Please go ahead.

Michael Cherny - ISI Group LLC

Good morning, guys. Hoping the snow is not too bad there yet.

Jonathan Bush

Nothing.

Timothy M. Adams

Nothing yet. Its coming now.

Jonathan Bush

It better snow because they killed the lawn with all the salt they put down.

Michael Cherny - ISI Group LLC

Well, good luck up there with that. Just first quickly a housekeeping question for Tim. In terms of the Epocrates deal, obviously there is something that took a few months probably to consummate, any outstanding one-time costs that where baked into any line items for the quarter, maybe expectations for the first quarter as well?

Timothy M. Adams

Michael in Q4 we’ve got about $1.3 million of deal cost related to Epocrates, the Arsenal real estate purchase and HDS, the deal we close back in October. So that hits G&A, so that’s a one-time step up in the quarter in G&A. There will be some additional costs in Q1, we’ve not disclosed those yet. We will break them out for you when we get to the Q1 call. But we had about a $1.3 million that did land in the quarter. The Epocrates component of that drives the tax rate up a pinch, because it’s non-deductible. So, you’ll see the tax rate a little bit higher in the quarter as well that is one reason why.

Michael Cherny – ISI Group

Great. And then just thinking about the enterprise market, you guys had some fairly notable deal wins recently. Obviously there has been some noise in the market from some of the other players, competitors, regarding some product challenges, market challenges they’ve been facing. How do you see the continued competitive environment developing? Jonathan, I know you mentioned that you expect that at some point the cloud-based architecture is going to be the way to go in the future. But in terms of the conversion rate, getting people to the burn unit, do you see any change in leads; and how do you see these people coming down into your pipeline for potential sales?

Jonathan Bush

Well, there’s always this sort of surface ripples of meaningful use rush, meaningful use pause, all scripts explodes, all scripts stabilizes that kind of move the top of the water. But underneath it all it's a fundamental issue of awareness and timing that waiting for each practice to find out about us a, and then find a time when they’ve got the emotional energy to risk a transition. And these noisy things we read about in the news kind of create little adds and flows, but overall it's obvious that all of them eventually go this way. It's just a question of, when each find their time. So, I think there’s no structural change in the opportunity that’s gone in, despite lots and lots of little tactical changes in the opportunity for the better and for the worse as time goes on. One thing I’ll add is, I think the ability to effect reliable clinical integration between groups that you own and groups that you control and between various parts of the clinical supply chain is going to be increasingly important. And so the more your systems are isolated or the more your systems require you to do a lot of manual or consulting work to connect the more stress you’ll be under. And if that continues obviously networks will have that added advantage.

Michael Cherny – ISI Group

Great. Thanks.

Operator

Thank you. And the next question is from David Larsen from Leerink Swann. Please go ahead.

David Larsen - Leerink Swann

Hi, can you talk a little bit about the technology integration that has occurred or is occurring with your recent acquisitions? Two of your competitors have faced some challenges in the market, I think partly due to acquisitions they’ve done. Has Proxsys been fully rewritten, the code fully rewritten onto your platform? And can you talk about HDS, please? Thanks.

Jonathan Bush

Yeah, Proxsys we had to completely rewrite from scratch, and therefore we had no forward movement on margin or functionality. During the year it hurt us on sales. If you look, we missed bookings a little bit almost all of it with Proxsys and Anodyne where we are basically merging technology into the core. So, I think that’s a noteworthy point of concern. We’re ready to go now and it's clean. In terms of HDS this is an app with only five clients on it. It's more of a capability, and we believe that we will be able to us that capability as it is for the next stretch of years, it's a -- that the team, it’s essentially what we bought was an R&D group that happened to have five customers. And just their work is incredibly high quality. Their technology knowledge is incredibly high. Their product knowledge is incredibly high. They just don’t have -- but they are their sales and marketing and client support. And so, in that case the integration work will be more around sales, marketing and client support. So, I’m less worried about the technology integration with HDS.

David Larsen - Leerink Swann

Okay, great. So there is one login for Proxsys, Collector, athenaOne, Anodyne. There is one user login? Is that correct?

Jonathan Bush

Yes. I know that’s true. Remember Anodyne not all, I mean, most of Anodyne clients or half anyway are non athenahealth clients. So, Stanford Medical Group is a client of Anodyne, but they’re not on athenaNet. So, we download there whatever systems they’re on Epic data so that they can report on it. And in that case there isn’t a common login. But many, many athenahealth clients are on Anodyne and yeah they can -- they have a seamless experience.

Timothy M. Adams

Yeah, David one thing to remember about Anodyne. It really is a powerful enterprise reporting solution that fits inside athenaNet, interfaces in with every other system that’s out there today. That was an important reason why we acquired Anodyne in a couple of years ago, but also it gave us this cross-sell opportunity, Jon mentioned Stanford, they had so many enterprise accounts that were up and running on that solution at the time of acquisition back in ’09 and as we talk back in May of this year Health Management was on Anodyne and that was an Anodyne lead, as was children’s of LA. So, it really has panned out from a solution standpoint and its also panned out from a cross-sell opportunity as well.

David Larsen - Leerink Swann

Great, thanks. Congratulations on a great quarter. Thanks.

Jonathan Bush

Thanks.

Timothy M. Adams

Thank you.

Operator

Thank you. And the next question is from Charles Rhyee from Cowen and Company. Please go ahead.

Charles Rhyee - Cowen and Company, LLC

Yeah, thanks for taking the questions. First, Jonathan, maybe to talk about Coordinator a little again here, and you talked about your expectations on how it will scale more in line with Collector versus maybe faster like Communicator or Clinicals. Can you talk about sort of what are the differences here that’s going to make – not that it's going to be a really slow ramp, but what is the sort of limiting factor here to not maybe get it ramping up faster like some of your other newer offerings?

Jonathan Bush

The major difference is that Coordinator is payer specific. So every different payer has a different dance that you have to do to get a pre-cert from them. That we just got a letter from Blue Cross Blue Shield of North Carolina saying that we cant call them anymore to get a pre-cert even though you cant get the pre-cert on the website that we actually have to have the physician him or her self call to do the pre-cert then. Well that’s patently ridiculous. I’m not sure what they’re snorting there, but we will try to get it out of the bloodstream as quickly as possible. But the point is every different payer has a different dance, just like with Collector and we need to learn that dance, then we need to learn to do it at a scale and then we need to do – learn to automate it. And so that’s – and that’s why we depend so heavily on these wonderful folks down in Birmingham, 200 strong or so, that are – have learned the manual cookbook for each of these payers. Now they also ran out of cash, which made us like up to get them so, we have to keep that knowledge going, but figure out a way to deliver it at scale so that it starts to make money. And our vision is stronger than ever, we believe its there. But it is many, many, many, many little automation subroutine for each of the payers that we deal with. Then once we have it, it’s unbelievably hard to replicate, unbelievably valuable cash generating for the client network capability. But its just – the good news is, its going to be an incredible competitive advantage when we get into work at scale. The bad news is, its going to be a lot of work to get it there.

Timothy M. Adams

Charles, just remember we’ve been down this road before. If we go back to the early days, this is what Collector look like, negative gross margin and a lot of automation, a lot of work, the operations team, the R&D team here is very good, they’re very committed and we have a lot of confidence in their ability to deliver and they’ve done it before.

Charles Rhyee - Cowen and Company, LLC

Okay, thanks. And then maybe a follow-up to that though, you have other companies out there, let’s say like an Emdeon, other large companies that already have these huge EDI networks that maybe has already managed a lot of these payer rules. So what’s – is there something different here? What is the limiting factor maybe for those kind of platforms to also do care coordination the way you’re envisioning it?

Jonathan Bush

Well, I think there is two problems with a middle man. One is that they – there is Lean development is very hard, if you don’t know what’s wrong. In other words, the way Lean works is you set a goal, you scrum against that goal, then you try it and then you iterate and you scrum again, right. But if you’re sitting in the middle, you don’t know what happened and so you don’t know how to change it. The other problem is you don’t have control of where the mistakes are made. So, 90% of what causes this mess is because somebody who is -- works by the hour for about a half a standard deviation more than they pay at McDonald’s is in a patient exam type experience and does their best to make a decision and they – they’re missing some idiosyncratic tidbit of information required for that payer or that lab or that doctor or that specialist and so they push garbage out into the system, unintentionally. Unless you can get into that moment, in sixth grade English, what we call situational awareness, in the point of care, you can’t fix all the knowledge in the world, can’t result in a change. Eddie likes to say, our Chief Operating Officer, Eddie Park likes to say a 100% insight times 0% action equals zero. So, even if these middleware of people were to somehow miraculously find the insight without trial and error, if they can’t push that insight into the hands or the minds of the people that are hurriedly making those mistakes, it don’t matter.

Charles Rhyee - Cowen and Company, LLC

Right, okay. That’s really helpful. Thanks.

Operator

Thank you. And the next question is from Sean Wieland from Piper Jaffray. Please go ahead.

Sean Wieland - Piper Jaffray & Co.

Thank you very much. Good morning. A lot of chatter out of these companies around analytics and population health management. And I just wanted to see if you wanted to throw your hat in the ring and talk about, what your capabilities are there? What's your strategy there going forward?

Jonathan Bush

Oh, absolutely. I think that HDS has been a godsend in this area. It's incredibly important if you’re going to win in a payment model that includes a global budget that you know how you’re doing against the global budget wherever the patients may go, right?. So, you go from having to have situational awareness at the point of care to situational awareness at every point of care whether you control it or not. And so, the ability to pull in paid claims data as quickly as it is born, and back that into the care getting experience is incredibly important. And with HDS and Anodyne we have the ability to optimize the performance of a network of doctors that you may or may not totally employee and be able to tell what medical record to be on et cetera.

On the fee-for-service side you’ve got what Anodyne does, and on the global budget or risk side you’ve got what HDS does. And our work today, if you try to get that into one single seamless offering for the managers of networks, for the managers of networks of physicians whether they’re employed or in a IPA or a PHO or a Do-Re-Mi. And so we’re -- we obviously wouldn’t have bought the company if we want it enamored with the -- both the surveillance and the action planning that HDS deploys. So, HDS doesn’t only surveil these claims that identifies the gaps and cares and then drives them to work less, pulls data from athenaClinicals, but also foreign EMRs in order to see if metrics have been captured.

So, you have three different ways of interacting with HDS. You have athena native or a foreign medical records system. You have what the payer says, payer based insight as to a patients care which is based on claim. And then you have the ability to interact directly with HDS and push data back upstream. So, if payer and EMR are blank then you can just -- a nurse or a doctor can work a call list, update a metric and push that information back to payer and EMR. And in that way run a population across a myriad of different systems that have varying degrees of reliability.

Sean Wieland - Piper Jaffray & Co.

All right. Let me take another crack at it. What about …

Jonathan Bush

I got the wrong answer?

Sean Wieland - Piper Jaffray & Co.

Yeah. Well, I will give you a B on it. But the area predictive analytics of using the data to predict outcomes of patients based on if they change behaviors, and …

Jonathan Bush

Oh, okay.

Sean Wieland - Piper Jaffray & Co.

… a little more forward-looking analytics.

Jonathan Bush

We don’t have shift there, maybe that was the issue you’re looking for. What we have the ability to do is take the insight that exists today to a quality program, much of which are just ridiculous and not very insightful. But anyway the payers or the NCQA is saying this is why quality equals. We had the ability to play that game and win using HDS. We also have the ability to actually do care coordination that is offered by the client that the client truly believes correlates to health. And that work requires the insight of the client at this point. So, at no place in athena today are we the ones coming up with the correlations between activity and health.

Now we’re launching athena research next month when Josh Gray, who has been at the advisory board for years joins us and he will be reporting into our Chief Medical Officer, Todd Rothenhaus and leading, starting and leading athena research. It's worth noting that we have three times as many doctors as -- and three times as much ongoing data flow as Kaiser Permanente on one single database with a lot more sort of biodiversity of the gene pool, if you will. You have the academic thing, you have city clinics, then you have community private practices, all on one database. So we believe over time we will be able to provide this kind of insight to client, but today we’ve nothing at all other than a guy who is committed to join us next month.

Sean Wieland - Piper Jaffray & Co.

Okay. That’s great. Thanks a lot.

Jonathan Bush

How was that answer?

Operator

Thank you. The next question is from Ryan Daniels from William Blair. Please go ahead.

Ryan Daniels - William Blair & Co.

Yeah, morning, guys. Thanks for taking my question. I wanted to go back to something you had in your written prepared comments. You talked a lot about the clinical data conversion to help with rip-and-replace opportunities. So two questions there, can you talk a little bit more on about the what you’ve done to make the process more fluid for docs? And second I’m curious if that’s manifesting yet in a higher win rate or better opportunities in rip-and-replace, as you kind of take that fluidity out to the market and make it easier for doctors to make the change?

Jonathan Bush

Hi. We worked with a consulting firm to create kind of a platinum, a gold and a bronze rip-and-replace service. At this point I think we’ve been a little weak in the product marketing and delivery of this offering, primarily because I think we believe in our heart of hearts that 99% of these clients are wrong about the viability of the data they have in their legacy EMRs. And that we – where there is awkward situation where during the sales process the sales guy saying, well yeah we’ve an offering that does that and we do, but when we get closer to the core delivery folks at athena, they’re saying yeah we can do it, but you will hate it. And so it still remains the case whether we’re right or wrong, that we slow down the sale with the confrontation of the reality that probably most of the data that these guys have been trying to curate in their legacy sort of pre-Internet EMRs are not very reusable. Now we’re working on that and we’re working on whether we really have to say that or whether this project that these product is prepackaged services with LK Consulting aren’t more valuable than some of our core delivery people think they are. But its still, I would say, in its infancy and not moving close rates much at all right now. So we’re going to get better at delivering it and develop the confidence to make promises that we’re good at delivering it more convincingly where we’re just going to have to get better at explaining to people why their Flock of Seagulls EMR is going to go to the same place that their Flock of Seagulls vinyl albums went.

Ryan Daniels - William Blair & Co.

All right, that’s helpful color. And then a totally different follow-up. I’ve heard Jonathan, you comment a little bit about maybe becoming the medical record for inpatient facilities as well, and I think you might be piloting something. Can you talk a little bit about that initiative, kind of on the clinical side; and then what you might be doing on the billing partnership for hospitals as well?

Jonathan Bush

Well, we’re not doing anything yet. But Eddie and I both went through the implementation online training materials for a – for an inpatient EMR that I think the majority of our hospital clients use and at the end of it we were like that’s it? That’s what all the fuss is about? And suddenly occurred to us that we have accidentally taken on the hard part, which is the unbelievably diverse, unbelievably complex small dollar world of ambulatory healthcare. And you have the smaller number of [combine] cars that have more things attached, but through more reliable interface, that the HL7 standard is easy, even Epic which goes out as a – which is a wonderful company and goes out with this one system story, we go through it, and we are like (indiscernible) 31 different systems, but they have a really reliable interface protocol between them. And I’m like well, could we just interface to the 31 systems or to 30 of them and replace the one that is EpicCare? So we haven’t done anything with it yet, but we were kind of trying to figure out what we’ve – what we’re missing and we had a couple of hospitals express some interest. And if we can’t find what we’re missing in the next couple of months, we may find ourselves just toying with it once with somebody who is a trusted partner on the client side and seeing if its not what we thought it was. So there is no real news there, other than intellectually if you think about what – its columns and rows that attach measurements to a patient ID. We are kind of doing that. We don’t do bed lists, we don’t do rounding routs, but that’s kind of not that much. So, I don’t know, maybe it is -- maybe it is. We’ll find out.

Ryan Daniels - William Blair & Co.

Okay. We’ll stay tuned. Thanks.

Jonathan Bush

Yeah, stay tuned. Nothing to report there other than intense curiosity.

Operator

Thank you. And the next question is from Greg Bolan from Sterne, Agee. Please go ahead.

Gregory Bolan - Sterne, Agee & Leach

Hey, thanks, guys. So, can you talk about the progress with up-selling Coordinator core users to Coordinator Plus; and what would you call it, say is the biggest pushback among hospitals are you’re trying to up-sell Plus too?

Jonathan Bush

Most Coordinator core users aren’t getting a lot of -- aren’t doing a lot of pre-certs. So, the value of Coordinator Plus is that you do -- that A; we do your pre-certs and B; we do the pre-authorization of the people sending to you in order to save that scutwork and create a more consistent record. If the sender’s record and the receiver’s record were all different the payer will deny. So, by doing them with the same team, you get a more reliable record for the payer.

So, if you’re not doing a lot of pre-certifications for your work you aren’t -- you’re not going to find a huge amount of value with Plus. We have only barely begun to learn how to sell Plus, and in the athena way and it's finally started to kick at the end of the year. And we’re thrilled with the end of the year and we did have a couple of guys getting trophies at the sales meeting the day before yesterday on nothing but Coordinator Plus. So, my confidence in 2013 is a lot higher than it was in 2012. And on core; this is the thing that I’d like to see if we can take viral in partnership with Epocrates.

We've already got a remote sales force of just a couple of people in Alpharetta that knockout a sale and an implementation in a couple of hours per client. And so, we believe that, that simple receiver app is something that we can get to go very viral. And we probably wouldn’t use a huge amount of energy to swing back and sell them Plus. Hopefully what they’ll do is ask us about Collector, Clinicals and Communicator at that point.

Timothy M. Adams

Greg, one more thing on the ROI on Coordinator Plus and with these hospital CFO’s it just takes a little time, because on one hand they see it as a new cost that’s being introduced into their very tight P&L. And what we have to get them comfortable with is the increase of physician royalty because they’re easier to do business with. Reduction in denial rates, reduction in bad debt rates. We have metrics that we can share with them and it just takes some time to get through that conversation because they’re running P&L’s on very tight margins. But again, we think the ROI is very real and there is value at it. And as John, mentioned we did see some nice traction in the second half of the year. We’re hoping for more in the beginning of the year but it came later in the year.

Jonathan Bush

I’ll throw in one more on this. This has been an area of a lot of focus for us during 2012 and we’ve struggled with it quite a lot. I was just over at our athenahealth India retreat which was phenomenal. What an incredible source of positive emotional energy that was. But one of the things they’re doing now is taking the newly rewritten Coordinator app and picking off the pieces that they can do either through a BPO or electronically in India. So, while they can’t do the pre-cert yet they can at least get the eligibility and benefits right off the website 50% of the time. So there’s a break. As they get more traction we can look at the price of Coordinator. So, today the Coordinator price for Plus isn’t that much as Tim points out, not that much cheaper than what a hospital CFO really focused on cost could deliver on their own without us. We’re not generating right off the data great big savings at $8 or $9 per pre-cert. But, if we can drive our cost way down we can value price that a little more aggressively and still have room not to grow broke, but it's a lot of painful process engineering that we’ve been going through and shout out to all the folks on Coordinator who had such a stressful year having their jobs twisted around in circles as we try to make this thing scale.

Gregory Bolan - Sterne, Agee & Leach

That's very helpful. And just a quick one. Tim, if you think about the number of physicians within the Anodyne installed base, what percentage would you say has been penetrated by one of athena’s service offerings?

Timothy M. Adams

The number is still pretty low, what are we up to now being the 20,000 providers with Anodyne give or take, roughly. Health Management being the largest account that has come onboard, 900 docs, 1,200 providers. So it’s still a pretty low penetration rate, I don’t have the exact number.

Gregory Bolan - Sterne, Agee & Leach

Got it. Okay, great. Thanks, guys.

Operator

Thank you. And the next question is from Eric Coldwell from Robert W. Baird. Please go ahead.

Eric Coldwell - Robert W. Baird & Co.

Thanks. I’ve got a couple. The first one is, got some math to it, so bear with me. But if I look at G&A, and I back out the accrual adjustments that were noted in each of the first three quarters, and I take out your deal costs of $1.3 million in the fourth quarter, we wind up with a situation where your average revenue for the first three quarters was about $102 million, your average G&A was $12.2 million. And in the fourth quarter, you had $14 million more in revenue, but your G&A was down to about $11 million. So you go from an average 12% G&A cost to 9.5%. I’m just curious, what happened in the fourth quarter that allowed you to get so much more leverage in your G&A? And is that something that’s sustainable?

Timothy M. Adams

Yeah. Eric, let me try to paint the picture on the full-year basis and then come back to Q4. So, all of the earnouts throughout the year gave us a net decrease of G&A of about $5 million. So Anodyne was expense, Proxsys was income, so we have a $5 million pre-tax good guy in the P&L. The deal cost for the full-year were about $1.4 million, we had a little bit in Q3. So, you’ve got about $3.7 million benefit in G&A for the full-year. So if you were to normalize G&A we reported, I think it was about $57 million for the year, if we add the $3.7 back, call it roughly $61 million of G&A, gives you about 14% of revenue. I think its 25% growth year-over-year. But it was down about a point as a percentage of revenue on a year-over-year basis.

So our focus with G&A is to invest accordingly in the people and systems that we need to run the business. But that is the leverage point for us. So there is always focus and we will continue to be focused on appropriate leverage add up G&A. In the quarter, I mentioned that $1.3 million of deal cost, that increased G&A earlier, there was about a $300,000 benefit from a Proxsys earnout reversal that was included in that $5 million for the year that I mentioned earlier. So there is about an additional $1 million of G&A cost in Q4 net-net between those two items, primarily the deal cost. But that did show us about 12% of revenue that’s a couple of points below where we were a year-ago.

And again, it’s really more of a leverage point. There is always the year-end bonus accrual true up, I think that gave us a small benefit in the quarter, really not all that material. So, I think the takeaway for you is that we invest accordingly to grow this business and we’re trying to manage and get some leverage out of G&A and that’s really what – if you take a little bit of the noise out from earnouts and deal costs and set that aside, its really coming in line. Came in a little bit better on a full-year basis than we had budgeted, which is good. So we’re being a little more efficient.

Eric Coldwell - Robert W. Baird & Co.

Okay. If I can just shift gears quickly and do a couple on the revenue side, very, very strong flu season, six decade high in whooping cough cases. I’m curious what your thoughts are in terms of claims activity, office visits, and what that might mean for collections in the first quarter and then also realizing your heavy Northeast presence, with Sandy hitting in the quarter, is there a tail on that in terms of claims activity? Or can you quantify the impact of Sandy in the quarter? Thanks.

Timothy M. Adams

Yeah on the flu season, we saw a little bit of a tick-up, it was probably more December on a year-over-year basis. So the early sign is it, it is up a little bit in our numbers. Sandy was very real. We estimated about $600,000 loss of revenue in the quarter from the impact on Sandy, in that lower Northeast corridor places were just shut down and under water. You know it’s hard to predict if those claims do happen in Q1 or if they’re lost for good. But it hit us by about $600,000 in revenue. And that would have put us, if that did not happen would have put us right on target with our forecast for the quarter.

Eric Coldwell - Robert W. Baird & Co.

Okay. That's great. Thanks, Tim.

Operator

Thank you. And the next question is from Richard Close from Avondale Partners. Please go ahead.

Richard Close - Avondale Partners

Yeah, good morning. With respect to the order based pricing, I believe you said 20% of Clinicals is under order-based pricing now, and then 80% of the new clinical deals. Can you talk a little bit about, I guess, how much of the revenue is being paid by the receivers on that side or any type of feel of the trend developing there?

Jonathan Bush

That’s even worse. The receiver order volume is just still a trickle. There’s also been a phenomenon where a lot of orders, people switch to orders based pricing and then don’t send any orders, or send them in some other way which is obviously against the agreement. So, it's all still in its infancy and going to need a lot of focus and attention on your operation side to explain it. But, right now that’s just the percentage of clients not the percentage of revenues which is 95.5% or worse.

Richard Close - Avondale Partners

Do you have a team that goes out and works with these guys on a regular basis? Or how are you trying to push them?

Jonathan Bush

We're reorienting the entire account management team around not just managing the pricing and revenue of order based pricing, but managing the upside of orders based pricing. So, they are now equipped with reports that they can pull out and show clients, all of the people that they refer to by volume, they’re got canned letters that they can get the client to sign, to introduce the athena receiver sales agent into places that they send a lot of stuff to, so that we could begin following the -- essentially following the virus, pushing the virus out down these referral line and that is going to be a major focus during 2013. It was not -- we did not get to it as a successful focus amongst account management. During 2012 we were barely able to get the sales force around learning how to talk about it. It always -- it seems, it take a lot longer to get 2400 of your favorite people to do something than to just say you’re going to do it.

Richard Close - Avondale Partners

Okay. And then …

Jonathan Bush

That’s the aspects of my job.

Richard Close - Avondale Partners

Okay. With respect to More Disruption Please, I think you said six integrated this year; and then a pretty – a pretty stretch goal, I guess, of 25 in 2013. How much effort -- time and effort does it take to properly vet out those partners and then integrate them within the system?

Jonathan Bush

Well, we've a brilliant humble young man by the name of Kyle Armbrester who with his team of truly high-value colleagues all from the temple of capitalism over and often have just gotten after this with a relish. Of course because they’re from HDS I wonder if they’ll be as good as the ugly cranking out the deeps on the backend as the were at the sensational and fabulous having the convening parties at the front end. I think they will be but we’re -- we've assigned the R&D team a fair amount of attention. Probably their biggest gating factor is that this causing us to re-architect, to re-factor the architecture of athenaNet to make it more modular. So, athenaNet today, the benefit of lean development right is that you only add pieces to the puzzle that you need but the result is you have a, what looks like a very messy and wondering path of code and so one of the things you need to do every little while when you do this type of development approach is go back and re-factor for what you have built. And so, that is going to be a key project during 2013 is the re-factoring of the athenaNet code. There will be many benefits, fewer bugs and releases, easier to ramp up a new developer, because you don’t have to learn the entire saga of how athenaNet was born in order to be able to write new code in it and probably most importantly from a particle short-term benefit perspective we will be able to have APIs that seamlessly integrate allied applications without as much nervousness and work as it would take today. So, there are many steps that need to happen. I have absolutely no doubt that the team will be able to paper and reach agreement with 26 companies. The number that actually get truly integrated and out being resold by account managers and service, right now its really barely happening at all with just a couple of pilot clients. So, 26 new companies in the door, I don’t know how many with their shoulder at the wheel yet. That’s a stretch goal for the year. I think they could do it, but good one to stay focused on.

Richard Close - Avondale Partners

Are you getting – is that a revenue share with those companies as you bring them into your accounts? Or how does all that work?

Jonathan Bush

Well, what we are, the Kyle has been very diligent about sort of keeping this tightly focused against our hedgehog. This mission – piece of the mission statement about they’ve got a – our clients need to make more cash doing the right thing. And so he is going to be doing a lot of analytics on what happens to the key performance indicators of the clients that choose these allied partners. And if they improve we will have a sense of what its worth to the client and we will also have a sense of what commission we might ask for doing this. Right now we’re not asking for any money, we’re just trying to get the program off the ground.

Richard Close - Avondale Partners

Great. Thank you.

Operator

Thank you. And the next question is from George Hill from Citigroup. Please go ahead.

George Hill - Citigroup Inc.

Hey, good morning, guys. Thanks for taking the question. Looks like I need to dial in earlier. I guess, Jonathan, is it too early to talk about where you guys are going to put the goal posts in how you’ll measure the Epocrates acquisition with regard to how fast you guys can bring doctors into the Collector, Communicator, Coordinator fold?

Jonathan Bush

We – its certainly too easy – too early to tell the likes of you guys about that we’ve put them down in the field some, but we pull the goal post right out of our personal database, if you will. So we don’t know enough yet, I think that there are some core Epocrates healing activities that need to go on first. We need to become one team, we need to get a P&L flowing and you got to get the core administration and culture integrated. I think that while it’s a 10 times bigger deal than we’ve ever done, I think it’s what we’re starting with is quite profound and we have a lot of fellow feeling to each other. But that’s going to be the first focal point and that could be the line share of the year, we will certainly be trying during the year, but most of the fruit of that trying will be to develop what our goals will be for the next year. And I think 2014 will be the first time that we can start to say hey, we think we’d be able to keep growing this fast because of this or we think that we will get a little bit of efficiency on our, what we’re up to now $0.50 -- $0.58, $0.56 per dollar of bookings, sales expense, growth expense, all of that stuff will come into clear focus by the end of the year.

George Hill - Citigroup Inc.

Okay. And then maybe just a follow-up, as we talk about the growth of the transaction ..

Jonathan Bush

Wait, wait, very important – somebody is scribbling, we did actually have one account already. They said I love you (indiscernible) you must be great and it’s [tied up]. So its – whatever that is, we’ve gone from $292 million to $291,900,000 to amortize, so I thought I would throw that in there.

George Hill - Citigroup Inc.

We will call it success now. And then maybe just a follow-up on the transaction model. As we think about the evolution of the healthcare space and the move towards ACOs and bundled payments, how does that impact you guys take the transaction model to market? Because you would imagine the fees that you guys are going to want to collect on the transaction model are going to want to get squeezed by these IDNs that want to incorporate all the providers into the ACO and control all the transactions inside the ACO. Maybe talk to us a little bit about how you think about the ability to sell that service.

Jonathan Bush

Sure. So first of all, it’s important to note that all of the current global risk or other models that we’ve seen on global budget do not dispense with claims. So, the budget is determined by claims volume. People still need to process and adjudicate claims and so, those revenue models will remain intact. But you’re pointing out that actually a lot of the payment work will be in the realm of that what we call the mediclaim, essentially the claim about how much the entire episode of care or the entire life of covered care was worth. In those instances we will charge a percentage of the PMPM. So instead of charging a percentage of the claim, we will charge a very, very small, way less than 1% -- percentage of the per member per month total budget in return for our global budget management services. So, that’s the way we’ll go to market. We may, as we learn more about the savings we create, I would like to see us go at risk, so lets say it's -- what if it's 25 basis points on the $450 per member per month, plus or minus 10% based on whether you get at your targeted bonus pool or not, kind of thing. So, that’s the goal was to be similarly aligned with the client at risk the way we are with the other services and with similarly no upfront cost.

George Hill - Citigroup Inc.

Okay. And is there – I mean, I guess, the last part of that would just be, is there any risk that there is some other vendor, you mentioned Judy and me earlier -- don't make Judy angry. You won't like her when she’s angry.

Jonathan Bush

I don’t want to make her angry. I love you girlfriend, I love you.

George Hill - Citigroup Inc.

I mean, that the provider organization is just -- or that some other -- that some provider organization that uses some other technology is just as, we don't want to work with you, or no, we're just not going to pay?

Jonathan Bush

Well, so the care coordination service or HDS we sell it to the manager of the rep. So in that case, obviously they don’t have, but they wouldn’t -- they wouldn’t matter, because if they didn’t hire us we wouldn’t have to worry about whether they pay. In terms of care coordination, in terms of athenaCoordinator you cannot pay and we’ll still connect to you. We’ll just charge our clients whenever they chose to send someone to you. So, if LabCorp never comes around, it doesn’t pay, that’s fine. We’ll just still connect beautiful pipe to LabCorp won't curate it, manage it as if it was our very own baby, and we’ll charge every client who sends an order to LabCorp a dollar for every order they send and LabCorp will be chosen when they’re chosen. And if there’s a regional lab next door that decides to pay the dollar, we’ll also build a beautiful pipe to them, the doctor will decide, maybe LabCorp is just so fabulous at reading pap smears that the doctor will feel like it's worth paying the dollar of LabCorp dollar for them, and maybe not. And I think it will probably be a little above, and I don’t know where LabCorp, is I’m just using it as an example, you all know the name out there, probably awesome. They’re probably already signed up for all I know.

George Hill - Citigroup Inc.

Good deal. That's great color. Thank you.

Operator

Thank you. And the next question is from Bret Jones from Oppenheimer. Please go ahead.

Bret Jones - Oppenheimer & Co. Inc.

Hi, good morning, and thank you for taking the questions. I wanted to drill down into the gross margin a little bit. The acquisition of Proxsys anniversaried over a year ago, and so I just wanted to better understand the drag. I was wondering if you can parse out what the impact was from the Communicator promotion that’s been running, maybe orders based pricing you’ve talked about for Clinicals on this call. And also it sounded like Proxsys margin – if I heard correctly, was negative; and I was just wondering if you could break those pieces out, and what impact it had on gross margin.

Timothy M. Adams

Yeah. Bret, I’ll give you a little color. We don’t break it out a lot in detail. As John, said earlier Coordinator certainly was a disappointment; and the margin was not attractive and we have a lot of work to do. So, we’re going to focus on that. At the beginning of the year when we gave the gross margin guidance for 2012 compared to where we were in 2011, we said hey; it's going to be down a little bit year-over-year, and Coordinator is roughly a couple of points of that, and it's trended roughly in line with that. I think that’s the primary driver. Yes, we do run some promotions from time to time and again the way we think about all these things, we are investing to get customers on this network and they’re going to stay for a long time. And if there’s a little promotion here and there, John and I work with the sales guys on that, we’re fine with all of those, because we know that clients stick around for a long time and that’s really what we’re after is to get them on the network. We talked back at the Investor Day about our continued desire to invest in service line enhancement, credentialing, insurance package work that we do for our clients. We’ll continue to do that work and that’ll pinch gross margin a little bit and over time that just creates clients I think that are more satisfied and willing to stay on for a long time. So, that’s basically what you see going on.

Bret Jones - Oppenheimer & Co. Inc.

Okay, now that's helpful. And then in a similar vein, I was just curious; collections grew faster than revenue growth and that’s the first time I’ve seen that since 2008 when you brought CVS on board. And I’m just wondering. Is this similar? Is this some promotion activity? Is it just the mix of enterprise deals as they become a greater proportion of revenue. Or is there something else going on there?

Timothy M. Adams

It's really more of a mix of the enterprise accounts, it's really the two factors. We look at the collection growth. We look at the rates on the collections. And you probably saw all that tick down a little bit, and we’re fine with that; because when we really look at these deals, when they come onboard it’s the revenue per claim, we know the cost per claim, what’s the gross margin and you’re going to get some accounts, we have a couple of that really came in with some very sizable collections per claim therefore the rate is going to be lower. So, it’s more of that dynamic its what going on.

Jonathan Bush

If we ever get rural-metro live, all of their claims are ambulance runs, and that’s a tiny little percentage. You will see a huge drop.

Bret Jones – Oppenheimer & Co. Inc.

Okay. That’s helpful. Thank you.

Operator

Thank you. And the last question will be from Dave Windley from Jefferies. Please go ahead.

David Windley, Jefferies & Co.

Hi. Thanks for taking the question. This one may be a little bit along the lines of the last one. But I guess more broadly, I’m wondering as you’ve moved over the last year or so clients toward athenaOne pricing model, what impact does that have on the contingency rate that you charge, the impact on the blended rate? If you could quantify that at all, that would be helpful.

Timothy M. Adams

Yeah. David, there is a modest discount. So, if you’re going to buy all three services from us, there is a modest 5% discount. We’re happy to do that. So again …

Jonathan Bush

But you have a much less painful implementation process, you get all three of them done for the same fee, all at one as opposed to the restart and the restart and the restart. And each one has collateral benefits on the other. So it’s more just that we’ve gotten safe and good enough at doing them altogether that clients believe us when we say they will prefer it that way. So there is a not a huge impact in price.

Timothy M. Adams

And the deeper we can go with these clients that they’re buying more and more services from us, we’re that much more relevant and we’re going to be around that much longer. So that’s our perspective on that.

David Windley, Jefferies & Co.

Okay. Understood. And then as you think about it and you just mentioned of making continual enhancements, I think credentialing was mentioned. How does that – as you come into renewals with these clients, how does that impact pricing? Does that give you an opportunity to increase your rate? Does it prevent the rate from going down? How should we think about the service you’re providing vis-à-vis the rate you’re able to yield?

Timothy M. Adams

Well credentialing is something that we do charge separately for. So there is an additional fee. But a lot of the other things, the additional work that we take on it clearly helps us preserve the price that we had. It gives us that opportunity to go in and raise price. But it certainly preserves price over time. Clients when they come up for renewal and if they want to push us hard on the price, its easy to remind them that the athenaNet they’re on today is a lot different than what it was three years ago. So they’re getting so much more value. And again, that’s why you see the retention rate so high.

David Windley, Jefferies & Co.

And finally, do you – you may dismiss this out of hand; but as you’re approaching new potential customers, is the pricing environment, the very low price by ECW and perhaps some competitive response out of the troubled guys, how much pressure is there in the pricing environment currently?

Jonathan Bush

When you compare it your self, if you’re athena and you’re going to be the medical records department and be the billing department and be the night time receptionist. You’re never going to prepare – compare favorably to somebody who is going to rent you their code or sell you a copy of their code and not be there to do any work. So that is been a challenge that we have been selling against for years, in fact it was accentuated when hospitals went out and bought, realms and realms of Allscripts licenses, remember that? When everybody went in the Long Island Jewish has got 1,500 copies, and pretty soon every hockey coach on Long Island is going to be on Allscripts – and then offering it for less than free to the maximum amount legal to all the docs. So, we've been dealing with free software isn’t as good as a full priced network, as a sales challenge for years. And it remains a really hard sales challenge, it's a real education, it's why we – lean on corporate visits in institutes so heavily and at these meetings that we've are so important even though they’re not scalable and sexy from a internet sales perspective, they’re necessary to get people around to the difference between a cloud-based service that sells results and software and so I don’t think there’s been any -- I certainly -- we haven’t perceived, I wasn’t even aware of whatever you’re talking about with ECW, but we believe that that challenge is there.

Timothy M. Adams

David, I would just add to that, in many ways it's simple. You get what you pay for. And if you want to sit down and compare clinical pricing, then we've to make sure we talk about document services, because that is a lot of work that we take on, on behalf of our clients and if you’re going to buy a software then you’re going to read 1,000 plus factors a month that come in for your docs and you got to make sure you put all that medical information in the right place. And I think our sales team does a nice job of really laying out the total cost of ownership when you try to do that comparison and you get a lot of work from athena and you don’t get any work from software. So, we've to make sure our prospects really digest that, because the value profit is there.

David Windley - Jefferies & Co.

Got it. Thank you. And my last question, Jonathan, is ;are you going to be on CNBC today, because I don't want to miss it if you are.

Jonathan Bush

You missed it. They gave it to Fox last night. A man named Ashley interviewed me.

David Windley - Jefferies & Co.

Okay.

Jonathan Bush

It's available, we can send you the link.

David Windley - Jefferies & Co.

All right. Have a great day. Thank you very much.

Jonathan Bush

Thanks a lot.

Timothy M. Adams

Thank you.

Operator

We have no further questions at this time. I'll now turn the call back to Jonathan Bush for closing remarks. Jonathan, you may begin.

Jonathan Bush

Thank you, operator. I actually gave my closing remarks at the end of my prepared remarks. I think that, it's coming into focus now that my bank account has more money in it than I thought I would ever have. It can’t be that I am doing it for the money, but I never like to believe that I never like being told what to do, or to feel as a child and my parents were kind enough to let me be okay with that, and tell me I was okay with that; and healthcare does feel like a place where that’s not as okay as it should be, when you consider how important healthcare is and the times in our lives that we come into close quarters with it that our individuality might be stifled at those sacred times when loved ones are ill or when we ourselves are sort of towing with death. We know the outcome is always the same. We always all die.

So it really becomes a question of how, how much we’ve spent and how we felt in the journey, and when it happens. And all of that seems to me to be made better by more personal power in the hand of more people and it's just coming into focus that, that we earned all of it but we're one of the many ingredients that must be in that stew. And so, we’re all very inspired by it I think and we're all very grateful that you all keep us valued and capitalized the way we're, because it give us credibility and that moves our mission forward. So have a great year all of you. I look forward to many more of these check-ins along the way.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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