athenahealth's (ATHN) CEO Jonathan Bush on Q2 2014 Results - Earnings Call Transcript

Jul.18.14 | About: athenahealth, Inc. (ATHN)

athenahealth, Inc. (NASDAQ:ATHN)

Q2 2014 Earnings Conference Call

July 18, 2014 8:00 AM ET

Executives

Dana Quattrochi - IR

Jonathan Bush - Chairman, President and CEO

Karl Stubelis - Acting CFO

Analysts

Sean Wieland - Piper Jaffray

Richard Close - Avondale Partners

Mohan Naidu - Stephens Inc.

Garen Sarafian - Citi Research

Ryan Daniels - William Blair

Jamie Stockton - Wells Fargo Securities

Donald Hooker - KeyBanc Capital Markets

Eric Percher - Barclays Capital

Bret Jones - Oppenheimer

Steven Halper - FBR Capital Markets

Robert Jones - Goldman Sachs

Eric W. Coldwell - Robert W. Baird

Michael Cherny - ISI Group

David Francis - RBC Capital

Gavin Weiss - J.P. Morgan

Steve Rubis - Stifel Nicolaus & Company

Greg T. Bolan - Sterne Agee

David Windley - Jefferies

Operator

Welcome to athenahealth Second Quarter 2014 Earnings Conference Call. My name is Stephanie, and I will 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 would now turn the call over to Dana Quattrochi. Dana, 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 Karl Stubelis, our Acting 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.

We would 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 financial and operational performance, including growth rates, key metrics, operating expenditures, tax rate and profitability, our selling and marketing efforts, market opportunity, and service offering benefits, growth in leads from sales channels and our partnering activity, expected long-term value creation from our investments, client implementation timelines including those relating to athenaCoordinator Enterprise, our bookings and traction, further integration of our services and the resulting benefit, integration of Epocrates and the expected benefits, developments in our enterprise business, increasing barriers to competitive entry against us, and our business expansion and creation of a national network of service providers and the expected long-term benefits.

Forward-looking statements may often be identified with words such 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 Web-site at investors.athenahealth.com and on the SEC's Web-site 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'll refer to certain non-GAAP financial measures in which we exclude certain non-cash or 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 second quarter fiscal year 2014 results available on our Web-site for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

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

Jonathan Bush

Thank you, Dana. Ladies and gentlemen, welcome to the athenahealth second quarter earnings call. Every day the athenahealth team shows up for work to build the nation's health information backbone, and we do it three ways. First, we bring more doctors onto the platform. This quarter over 2,500 providers joined our network bringing the total on athenaNet to over 55,000.

Second, we launch ever-more potent services to help our clients do well doing the right thing for patients, and we deepen the services we already offer increasing the value our clients experience from us and increasing barriers to competitive entry against us. For example, our credentialing service now takes on the work of provider setup and configuration which was formally part of the client's manual implementation work. Over time we expect the credentialing team to eliminate most, if not all, of this setup work performed by our implementation services and by physicians alike, so that getting onto athenaNet will be not that much different from getting a home on the Airbnb.

And finally, we organize our services for mutual network effect. The athenaNet Rules Engine fired 13.6 million times in Q2 to prevent denied claim and our electronic data interchange team built 17,800 interfaces in Q2 to eliminate 1.8 million faxes. Improvements to our network reward athenahealth profit and client power in equal measure. By now you know we are all about growing the network and we still believe 30% year-over-year bookings growth is our correct target.

One reason we believe this is the emergence of organic leads from within the athenahealth and Epocrates community. Leads from athena owned channels like Epocrates and current clients are growing much faster than our 30% goal. In fact, these channels grew by 169% over last year and now represent almost 16% of total lead volume in the second quarter of 2014. We're also thrilled at our strategic relationship with Henry Schein. Henry Schein brings us 600 new service reps and account relationships with large numbers of clinics that we've never met before.

Henry Schein also brings us Dentrix. As you may know, Dentrix is a leading EMR or dentist in United States and it's already helping us serve the nation's federally qualified health centers without distracting our core research and development efforts. This relationship will be a wonderful complement to our fabulous eight-year relationship with McKesson PSS which continues to get better every year.

In terms of service expansion and market expansion, as we discussed many times, a major strategic initiative at athenahealth is to move the surface area of our medical records across entire continuum of care, including the hospital. The athenaCoordinator Enterprise implementation at Steward and Griffin are progressing well. Both of these clients are expected to go live by the end of the year when we'll have proof points of our value in the hospital.

Meanwhile, our enterprise sales team keeps building the pipeline. In fact, we're thrilled to announce the third enterprise client, Arise Austin Medical Center, has joined athenaCoordinator Enterprise and successful Coordinator Enterprise implementation will not only position us as the master medical record for any health system but also for the entire continuum of care outside the health system which is critically important as the Internet of things finally emerges in healthcare.

In terms of network effect, the 55,000 healthcare providers we serve enjoyed a busy and productive quarter. In the course of delivering $3.7 billion of patient care across the network, our clients saw 13.9 million patients raising the total number of medical records in the athenaNet to 56.7 million.

While the network grows both in size and scope, it also gets deeper. Our network executed over 470 million electronic exchanges of clinical information between our clients and the rest of the healthcare supply chain in the second quarter by leveraging more than 127,000 interfaces that we've built to-date. And in the past 12 months, order volume that is handled in network has risen from 1.3% of all orders a year ago to 9.8% across 9,200 senders and 4,500 receivers on athenaCoordinator in June of 2014.

We are thrilled with the forward progress but we are no way paperless yet. For example, this past quarter the operations team still had to shepherd 13.2 million faxes, up from 9 million a year ago. They moved 79.6 tons of mail up from 67.2 tons a year ago. When you look at our total automation rate, 51% of financial, clinical and patient facing messages combined still have yet to be sucked into the cloud. Now that's up from 53% a year ago, but we're almost halfway there and the work goes a positive shift towards network effect. Our progress thus far at automation generates a wonderfully plump 63% gross margin, more fuel for value driven investments in sales, marketing, research and development, and of course further operations improvement. All of this is expected to deliver progressing profitability, earnings per share and shareholder value for a very long time.

In addition to the efficiencies discussed above, we are increasing the capability of the network by increasing its surface area, even if that means having to attach legacy software systems of yesteryear to our cloud. In fact, this quarter we went live with our first real-time bidirectional clinical interface with Epic, an integration that was simple to build and replicated everywhere else in the country allowing information to flow in and out of the hospitals and the communities they serve.

In terms of people, athenahealth’s one-of-a-kind culture drives much of our success building the nation's health information backbone. We've built a 3,300 strong workforce, each soul ready to learn a new thing, changed rules, changed locations and changed points of view. The departure of Tim Adams was another change. We lost a Chief Financial Officer but we found a Chief Financial and Administrative Officer able to deliver equal passion in daily operations and [indiscernible]. We did this to preserve our unique culture as we expand geographically and in the services we deliver.

Having achieved financial and administrative officer will also allow us to take full advantage of the extraordinary team that Tim has built for us by giving them more career growth here. So please join me in welcoming Kristi Matus to the athenahealth leadership team. Kristi was the Chief Financial Officer at USAA, my single favorite large-scale service company ever. So you can imagine my thrill at bringing aboard such a talent. On top of being CFO, she launched and led business units at USAA, Thrivent and Aetna. As soon as we met, we recognized there's one of us. She brings a combination of passion and prowess that we adore here and we feel ready to follow her lead. Kristi reports for duty this coming Monday and I look forward to introducing her to you on our next earnings call.

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

Karl Stubelis

Thank you, Jonathan. The athenahealth team continue to execute against our ever expanding internal goals in Q2 2014. First, we delivered strong financial results outperforming both our internal revenue and profitability goals this quarter. Second, our professional services team and the value of our nerve centers helped us to surpass our implementation goals. As a result of their efforts, we grew our network by 26% this quarter bringing total providers to over 55,000. Finally, we are also pleased that our automation rate hit our goal of 49%, positioning us well as we pursue a next higher-level goal as we move forward. This 49% achievement contributed to a non-GAAP adjusted gross margin rate of 63%.

Now that we are halfway into the year and based on our visibility into the second half of the year, we're confident in our ability to deliver against our full-year guidance. As a result, we are reaffirming our guidance for full-year fiscal 2014 which was initially communicated in December 2013; consolidated GAAP revenue from $725 million to $755 million; non-GAAP adjusted gross margin from 62.5% to 63.5%; non-GAAP adjusted operating income from $70 million to $80 million; and non-GAAP adjusted net income per diluted share from $0.98 to $1.10.

We're very pleased with our progress made in the quarter, but as a reminder we think it is important to the investment committee to focus on our full-year results as there are multiple factors that affect each quarter, including seasonal trends, timing of new enterprise deals and timing of onboarding of new clients in [inaudible].

Now let's discuss our quarterly results in more detail. Starting with the top line, our Q2 2014 revenue of $185.9 million grew 27% over last year. Revenue from our athenahealth branded services was $170.3 million, representing growth of 32% over Q2 2013. On a consolidated basis, our non-GAAP adjusted gross margin rate was 63% in Q2 2014 compared to 62.4% in Q2 2013 and improved by 320 basis points over Q1 2014, largely driven by our top line performance.

As planned, we continued to invest in both growth and innovation increasing our GAAP selling and marketing expense by 24% and our GAAP research and development expense by 15% compared to Q2 2013. Our GAAP selling and marketing expense was 27% of revenue for Q2 2014 compared to 28% for Q2 2013 as we continue to invest in expanding our teams as well as awareness building and lead generation programs.

Our GAAP research and development expense was 9% of revenue for Q2 2014 compared to 10% in Q2 2013 as we continue to invest in enhancing the caregiver's experience, running our marketing services and continuing to invest in automating our high-value service offering.

Our non-GAAP adjusted operating income of $21.6 million increased 93% from $11.2 million in Q2 2013, primarily driven by top line improvement and return driven allocation to capital. As you may recall, we had a significant tax benefit in Q1 2013 which reversed in Q2 2013. Primarily driven by this tax provision in Q2 2013, we had a non-GAAP adjusted net loss of $3.1 million or a loss of $0.08 per diluted share. This compares to non-GAAP adjusted net income of $12.2 million or $0.32 per diluted share in Q2 2014.

For 2014, we're using a non-GAAP tax rate of 40% to normalize the tax impact to our non-GAAP adjusted net income per diluted share. If this approach had been used in 2013, our Q2 2013 non-GAAP adjusted net income per diluted share would've been $0.17 instead of an $0.08 loss.

In closing, I too would like to welcome Kristi to the athenahealth. I look forward to working with her and continuing to address the needs of the investment community going forward. With that, we'd be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We have a question from Sean Wieland from Piper. Your line is open.

Sean Wieland - Piper Jaffray

So my question is around Epocrates. Can you give us some of the pieces there that drove the year-over-year decline in revenues, and then tell us in your opinion what's the contribution that Epocrates is making to the core business above and beyond the reported numbers?

Jonathan Bush

The decline in revenues is related to a decline in sales bookings and that was related to kind of stagnation in the product mix and in the salesforce that we've been working through for a long time. We believe that that is behind us. I think I hope we haven't said that all the way yet, because I haven't really delved into the core all the way until now, we just did a refresh of our strategy and they just got the first new set of products in over seven years and the first set – the first work that athena had started on and contributed to the Epoc sponsored product group actually went into salesforce hand this past Wednesday. So they now have something besides the DocAlert which is sort of the holdover from the original e-mail blast that Epocrates has been living on for 15 years to sell, and there was jubilation by all those who built it, those who are now in position to sell it, and we expect that to improve.

The other thing that has been going on is that the Epoc Plus, which they call Essentials, they will be changing the name, had been struggling. It's very hard to renew your sponsorship, the act of getting your credit card into Epocrates is exhausting. That too has now been rebuilt and we expect something like 80% abandon rate associated with people trying to renew to, drop-down to obviously a dramatically lower number.

So this has been a full-on two-year turnaround and we are coming up on the halfway mark with the second year and it's looking up, it's looking brighter. The first wave of revenue loss was just product, so we didn't want to sell it all. The second wave of revenue loss was just sort of a drag old – of salesforce to drag old product. I hope that we have now hit the bottom and we're going to start to go up.

You blessedly threw in at the end of that question, why do we have Epocrates, what other benefit are they providing, because while this is all going on and users of Epocrates is going up and the net promoter score among those users has been strong as ever, I think it actually went up, still the number one rated mobile app for physicians in the country and it's starting to be associated with athenahealth. So they're starting to generate leads for our core business and we are starting to build functionality into Epocrates that makes Epocrates – for those of you who are Clay Christensen fans, Epocrates is positioned to become a low end disruptor to athenaClinicals and to every other clinical record in the country.

So as of the end of this year, every physician of the country will be able to login, download and then secure text about patients, including adding a little snapshot that works functionally as well as a medical record. And so just that Apple's range didn't displace all of the software laptops in the world, they sort of drained use of laptop in the more appropriate mobile devices that are better in the moment. We think we can move the computing activities of physicians to a better place, a better economic time-based and geographic place than the clunky EMRs that have to comply with government nonsense and be more of a strict record.

So that's the exciting thing. I know you saw in-network orders, I know you always ask about that and you saw those go up in the quarter. What you haven't seen yet, which is coming soon is, the Epocrates users once the secured text messaging goes out become nodes on that network themselves right through their Epocrates app. All of that work is ongoing, none of that work is quick and easy, but we hate quick and easy stuff because then what would you do, you just need to press and you'd have to shoot your character in the end game. So there, that's the answer on the larger Epocrates context and that remains true and strong as ever.

Operator

Our next question comes from Richard Close with Avondale Partners. Your line is open.

Richard Close - Avondale Partners

Just want to hit on the R&D spend. I guess at your Analyst Day you really highlighted the increase in R&D spend and through the first half of this year it's been tracking below my expectations. So just comment on the trends I guess going forward on R&D.

Karl Stubelis

So you're right, on the Analyst Day we did talk about sort of a 14% cash R&D. Currently we're running about 7.7% on the R&D line, 7.7% of revenue on the R&D line, and we're tracking about 13.2%, so about 80 basis points below where we had initially thought we'd be. It's largely driven by our personnel and our headcount. We are always endeavoring to find the best and the brightest, the market has picked up a little bit here I think, it's evidenced a little bit by more turnover than we've initially planned for or want. So that as it relates to getting new people in here and working on the new products and services that we so desperately want and need, we're just lagging a little bit behind there.

There is no concerted effort to sort of make us the hiring in the back half of the year as we're always looking for the best and the brightest and that would be in place if we could actually have them in place today. So in terms of modeling and thinking about going forward, there is not a big wave to come through. We wish they were here already and we're going to continue on to try to onboard them.

Jonathan Bush

I agree with Karl. Remember in that earnings call, that Investor Day, we talked about moving on already blistering 30% annual growth rate of R&D spend up by 50% to a 45% year-over-year increase. Now we knew that our hiring has gotten better and our recruiting and our onboarding and our ability to having more R&D centers besides Watertown was going to help but it just so far haven’t gotten us all the way up to a 45% growth in those [indiscernible] as Karl points out it's pretty darn high growth rate. I think we have about 700 people in the largest definition of our R&D organization today which is – that's more people we had in the whole company for most of our life, so exciting for us.

Operator

Our next question comes from Mohan Naidu with Stephens. Your line is open.

Mohan Naidu - Stephens Inc.

Jonathan, a lot of good stuff in the quarter, I just want to talk about the bookings weaknesses that is implied in the scorecard. Can you comment on where the weakness is coming and how do you see the enterprise deals that enter the price pipeline going through the second half of the year?

Jonathan Bush

Bookings are always a drama, so we're hammered pretty hard by Epocrates which had a very big miss. Everybody else is sort of in the strike zone, the small groups was lighter than usual – small groups is ridiculous, they never miss anything. And so frankly I engineered a miss. I called several doctors and told them to refuse to buy just to have these kids have the experience of losing at something. No, I'm kidding. But Epocrates is about half what we thought we would get by now.

And you're right, you haven't seen the great big logos. The way the enterprise market works is you've got a small number of giant silverback gorillas roaming the woods and when you get one the village eats for a year. And in the meantime, what we do is we enjoy the fact that most of our enterprise clients are highly acquisitive to professionally run companies that are allowing us to kind of waterski behind their growth, and so the enterprise came in that far off their number year-to-date even though we haven't shown you a great news press release yet.

And then of course there's Epocrates which we knew would be a tough road, hard to plan, how hard a road it would be and how much to plan for and it's going to be a miss on the year and falls down a level, but we know why and we're no less excited about it. Failing is a great way to learn.

Operator

Our next question comes from Garen Sarafian with Citigroup. Your line is open.

Garen Sarafian - Citi Research

I guess I want to maybe focus on satisfaction. We appreciate the balanced growth guide that you guys give out each quarter , but that segment sort of stood out. When I look at the past quarters, I know that the metric has changed in definition of it but the mid 80s range isn't the comfort you guys have been since I think the last six or seven quarters. So I'm wondering could you just elaborate on that a little bit, it looks like it's the net promoter score line but is it due to new implementations, is it small group versus enterprise that's pulling you guys down, if you guys could elaborate on that?

Jonathan Bush

Good question. We just had quarterly reviews all week and it's probably the number one focal point for the Company among many but it touches a lot of things that we need to change organizationally about how we do R&D. The specific thing that was different this quarter than others, there's lots of things we're working on to move our net promoter score up, but the one thing that sort of caught us off-guard and made us go backwards a little besides the usual stuff is, a few of the releases that went out to customers, and we're doing a lot of work and will be doing a lot of work on our athenaCommunicator service which is a service that practices use to connect with their patients, and when something about a new release – if you're doing lean development, you give releases all the time, something about a new release in the athena tradition goes wrong, you usually hear about it in the CSC right away, the client support center right away, you put the release out there when there's a few people still in the office so you can catch early indications of something that you may have missed.

In this case, the release went out and the practice didn't notice it at all, it was funky things related to how the patients interacted with their practice online. And so you had a delayed response, right. It's sort of like looking at in-patient data for flu because you have a lot of patients out, they get frustrated enough with the portal that they think to tell the manager of the practice, then you have to have enough managers of the practice get frustrated with those calls that they take the call into athena, and so we left our clients caught off-guard and we changed the way we do releases to patient functionality, so that we have eyes on the street to make sure that those releases don't surprise our clients going forward.

That was the one thing that was different. There's tons and tons of things that we're working on in terms of shortening the case age, we've got a team called Athena Care that's doing 100% outbound calling to practices instead of waiting for them to call us, we notice when they are performing badly and should be calling us and just call them proactively, we think that will move net promoter score. We've got purple coming out this next month, a whole new user experience, which includes within an express version of athenaClinicals called [Streamline] (ph), thanks to naming team for that one. And so we think those kind of things, Athena Care and purple and [Streamline] (ph) will make it go the right way, and of course we're not going to do consumer facing releases same way anymore. Good question.

Operator

Our next question comes from Ryan Daniels with William Blair. Your line is open.

Ryan Daniels - William Blair

Jonathan, can you talk a little bit more about athenaCoordinator Enterprise, maybe talking about the development, some of the early successes and challenges and then where that stands versus your expectations?

Jonathan Bush

One of the really challenges which actually excites me is that in order for Coordinator to work, all of the various resources within the health system have to make their appointments available. So you have an interesting phenomena in United States right now where hospitals are carrying 35% to 40% excess capacity but everybody in the hospital says they are too busy to see a new patient, and this is vesting for hospital executives and will be really vesting for everyone in the hospital when those hospitals close we'd say if they don't change that, they need to market for new market share and then they need to absorb that market share within the cost-based, the fixed cost assets that they have, not just add pavilions and parking garages et cetera.

So that has led to a wonderful partnership with Accenture whom we are supporting to come in and build the practice of getting organizations to truly open themselves up to an open table type environment, and that's been really neat work and it's slower than we wanted it to be what we are identifying some very interesting sort of nub issues of health system governance. When the health systems say their biggest problem is 'leakage' where people are referring somewhere besides the network that they just formed even when they are employed by that network, we're getting operational reasons why those things are going on that we think will change the need to employ doctors at all to gain market share, and so the work with Accenture is the most exciting. It's a little behind but it's not that far behind, getting the hospital comfortable with getting athena into the in-patient side is almost a sale because we've never dealt with people on the in-patient side.

And lastly inside of athena the R&D work, to build something called the network facesheet which is sort of a free EMR version of athenaClinicals that anybody who is in a admitting position in the community can use to see what's going on with a patient they've never seen before and to text anybody who has ever seen that patient in real-time, that's in the garage getting built.

And by the way, we're thrilled that we signed a third ACE customer, we're thrilled with our ACE pipeline. We're thrilled with the fact that it's now called ACE and people are talking about it in the hallways and getting it. There is no longer the usual resistance to new things around ACE anymore. We've accepted it into the tribe most of the way. I think somebody gave it a pillow attack last night but it was minor and hey recovered quickly.

Operator

Our next question comes from Jamie Stockton with Wells Fargo. Your line is open.

Jamie Stockton - Wells Fargo Securities

I guess maybe just on the huge growth in internal leads, is that primarily Epocrates?

Jonathan Bush

Hold on, growth in what?

Jamie Stockton - Wells Fargo Securities

Internal leads.

Jonathan Bush

Okay.

Jamie Stockton - Wells Fargo Securities

Is it primarily Epocrates or are you seeing – I think maybe last year you were seeing better traction with referrals coming from existing customers.

Jonathan Bush

Yes. First of all, the 169% growth is aided by the fact that last year number was incredibly small, so you can have big huge percentages for a while, while you grow into something which is why we include the fact that it did actually now amounts to a real chunk of our leads, 16%, so that's terrific. It is both Epocrates and client source leads. We had a team – one of the non-successful items on the 2013 strategy was a program called AM 1000 and that's where the account managers of athenahealth were going to bring in 1,000 new leads to the offer and we knocked out a good solid 78 leads during 2013. So we had to retrain and reorient our account management teams, we've taken a really great sales leader, [indiscernible] and [Scott Andrews] (ph) to get that team equipped to be the salespeople that they actually are, that is what account management is at some level, and it's working. So that's great. And then of course the addition of outside channel partners helps as well, we mentioned Henry Schein.

My greatest frustration is to have this incredibly integrated network of loyal people that love us and not ask them for a friend. The other thing is, our employees aren't totally clear on this but it's a lot easier to be in practice if your trading partners are also on the same national network. You don't have to register the patient, you don't have to fill out intake forms. All of the work of your neighbor comes zipping into your practice electronically if you are both on athenaNet, and I don't think our client base gets that yet, and so we're going to work on educating them more and get that number continue to grow way out ahead of the 30% growth that we need overall.

Operator

Our next question comes from Donald Hooker with KeyBanc. Your line is open.

Donald Hooker - KeyBanc Capital Markets

So I want to ask you a quick question about your revenue guidance for the year, I mean it seems like you've had a pretty decent first six months on the top line versus I guess some expectations. When I look at the low end of the revenue guidance, it would seem like kind of a rough second half maybe. What in a bare case situation would get you to the lower end of your guidance for revenues for this calendar year?

Karl Stubelis

I think when we looked at it as an organization, we're on plan year-to-date. It's probably prudent not to raise or lower guidance based upon where we think we are internally here. One of the things that we are facing is, as Jonathan mentioned, the Epocrates bookings. So bookings in the latter half of 2013 and the beginning of this year in 2014 have been below what we had hoped them to be, which in turn would make some headwind in revenue for us in the back half of the year as well. And we're confident and comfortable where we are right now and we just think it's prudent to reaffirm our guidance for the year as it stands.

Operator

Our next question comes from Eric Percher with Barclays Capital. Your line is open.

Eric Percher - Barclays Capital

A question on seasonality of volume or claims. When we look at the first two quarters, I wonder as you look back at the March quarter, do you now feel that it was simply weather or flu or holidays and one time in nature or do you think you're seeing seasonality or any structural changes that lead to something that will occur in other years and forward years? And then if we think about the back half versus the first half, it feels like your guidance suggests the continuation of that first half not necessarily the second quarter, so I'd be curious if there's any seasonality or anything you expect that extends into the next two quarters notwithstanding the Epocrates commentary?

Karl Stubelis

I think as you look at the Q1, it's a little bit of yes in there. In terms of seasonality, yes, I do think there's going to be some seasonality going forward in Q1. As we mentioned in the first, in the Q1 call, we thought the weather and the weaker flu season hadn't impacted us. You'll also note that the DAR had a reset which would impact the deductibles, which actually saw an impact upon our collections. So we're happy and quite pleased with the results in Q2, but going forward I do think what you'll see is some form of seasonality in the Q1 timeframe in years in the future.

Operator

Our next question comes from Bret Jones with Oppenheimer. Your line is open.

Bret Jones - Oppenheimer

My question is around the Enterprise Coordinator, and Jonathan, you touched on this a little bit talking about some of the work you're doing still on the facesheet and the network scheduling, can you talk about all the five functions that were listed in the prepared remarks, where they are from an operational standpoint and whether all three Enterprise Coordinator clients have contracted for all the services?

Jonathan Bush

All three Enterprise clients have all the services. And something about all five, something, what was the all five?

Dana Quattrochi

It's the thread, so the text messaging, pop-up management, centralized patient access, just the components of the…

Jonathan Bush

Okay. So the pieces that are – we have some of it that we use today all over the country, so we use pop health and we use the global cost analysis and we use precertification, all the enterprise access stuff, today on many, many hospitals around the country. And so that stuff we're trying to get to go first, and then as we finish out the secured text messaging and the network facesheet – excuse me, then the second thing is to get the calendars open. So that involves some internal politicking on the part of our team and our Accenture partners. And then finally the network facesheet is the thing that we can roll out to the larger community. So I think I covered five there. So it's three waves of functionality. And sometimes you run into internal needs to have the waves go at different times at the client but I think once we get ourselves together we'll be able to do it more quickly. And net-net, we want to have them all live this year. Dana, scribble that point.

Operator

Our next question comes from Steven Halper with FBR. Your line is open.

Steven Halper - FBR Capital Markets

Just a follow-up on the patient – on the customer satisfaction scores in the scorecard. Are you able to assess whether or not that is becoming an issue for potential new clients and bookings?

Jonathan Bush

No, not yet. I don't think that our dip in net promoter score has affected our ability to book business, not at all. I mean not yet. It's a very small dip and we're all over it and it's related to the fact that we're going to first place on patient communications and we're forcing our clients through a painful transition to get them ready for meaningful use stage two which requires them to be texting with their patients. Some of these guys have never done that, they are nervous about it and we are dragging them across the finish line, it's a real blitz here, and it's causing necessary pain. Now we could make the necessary pain better and less 'less' but it's going to be hard.

Operator

Our next question comes from Robert Jones with Goldman Sachs. Your line is open.

Robert Jones - Goldman Sachs

I know you guys touched on R&D but I wanted to ask on OpEx more broadly. In the quarter, OpEx came in better than we expected and the OpEx ratio was certainly better than we've seen in 2Q, at least relative to the last couple of years. Yet if I look at the unchanged guidance for revenue and gross profit margin, it would seem that you are implying the OpEx ratio won't stay at these levels. So I was wondering if maybe you could just talk about your expectations a little bit in the back half as far as your spend, obviously you mentioned R&D but also in G&A and selling and marketing and SG&A?

Karl Stubelis

So you're right, Q2 specifically we came in, we got some good expansion across the board in scalability. If you look at the gross margin, it's up 60 basis points year-over-year, expanded nicely. Scale through sales and marketing, R&D and G&A, as I mentioned earlier on the R&D comment, what we see is that we've got new hires. We're behind in new hires not only in R&D but in some sales and marketing areas in G&A and the direct side as well. So we're trying to hire as I mentioned the best and the brightest there.

So of course anybody – we did not get a chance to hire in Q1 and Q2, it's sort of a tailwind in cost, you don't have to carry the full cost for the entire year. We are going to continue to invest, invest wisely in all of these areas. There is not – again, you shouldn't be modelling I don't think to have this big blip in hiring coming in, in any of the quarters, we're hiring as fast as we can but it's probably correct to think that the hiring rate that we've established thus far is going to continue through the year.

We've also got some new facilities coming online. We've increased our geographical footprint in Atlanta, Austin as well as relocation of the San Francisco, so we're going to be spending a little bit more in G&A. But all-in-all, we continue to reinvest in a smart and efficient way through proper capital allocation.

Jonathan Bush

And don't forget, we're very sensitive to revenue, so being a little light on the Epoc revenue coming back through the OpEx looks worse even though they're doing a fantastic job.

Operator

Our next question comes from Eric Coldwell with Robert W Baird. Your line is open.

Eric W. Coldwell - Robert W. Baird

I've got two, one on automation and one on attrition rate. First on total automation rate…

Jonathan Bush

One thing only, one thing only.

Eric W. Coldwell - Robert W. Baird

Okay, alright, I'll stick with automation rates. Almost half of all activity today, congrats on that. I guess what is the ultimate practical goal for total automation? I would assume that you'll always be bringing on new functionality and new solutions and perhaps this will be a less automated upfront, so I'm not sure you'll ever be at 100%, but what is the ultimate goal and what pace should we expect you to trend towards that?

Jonathan Bush

It's interesting because you've got tons of headwinds and tailwinds to try to reconcile. So for example some numbers [indiscernible] move our gross margin a lot and some of them move them very little. You've got the client base growing depending on where it grows. It could grow in places where we are highly automated or could grow in places where we are not automated and then move us backwards. And then you've got the actual EDI team growing making it easier to build interfaces into these old systems. And then the last trend is you've got the emergence of cloud based technologies where one single API to API interface eliminates the need for interfaces ever going forward with that system. And so there's all kinds of stuff going on.

What I like is that even with the halfway mark in sight, we're able to generate a 63% gross margin, and so I don't know but it looks pretty good, it looks like we can keep growing incrementally generating new margin through automation for many years to come. I don't have a sense of next year will be at 70% or 60% of 52% or what, I will tell you that we moved from 53% to 51%.

Dana Quattrochi

That needs to be…

Jonathan Bush

Yes, so we moved it two points in one year. If we moved it two points every year for the next two years, every year for the next two years, it wouldn't be too terrible.

Karl Stubelis

And that's on top of the increase in tonnage of mail that we've got in it, imagine.

Jonathan Bush

Yes, imagine what that tonnage would be if we hadn't done that.

Karl Stubelis

We got expanding base and we are actually expanding automation, so it's a double win.

Operator

Our next question comes from Michael Cherny with ISI Group. Your line is open.

Michael Cherny - ISI Group

Jonathan, lot of time spent on this call as well as go back to the Analyst Day on the enterprise side, and obviously Coordinator had a rollout I think pretty effective by your standards, looking back to the slide deck from the Analyst Day you talked about getting the entire product portfolio over the next few years into the in-patient market. As you think about the conversations you're having now particularly in the Enterprise Coordinator side, how much can you kind of lift the bail or open the kimono, a term you select so much, regarding the ability to display a product roadmap for the in-patient side on a long-term basis and particularly in the vein that there are a lot of potential larger placements and/or other deals coming down the market, kind of I guess how much can you let them know ahead of time versus your internal R&D?

Jonathan Bush

Let who know ahead of time?

Michael Cherny - ISI Group

The in-patient customer base, how much can you promise them that right now the Enterprise Coordinator…

Jonathan Bush

Right, right. They all know, anybody who's close enough can tell that it's inevitable what's going to happen over time with any disruptive technology, it keeps adding on and adding on and adding on and then all of a sudden they don't need the old stuff. But when and how do you time your decisions based on that and do you want to be – nobody wants to be the first guy on athena's in-patient thing and nobody wants to be the last guy to drop a quarter billion dollars on [epic] (ph), and so they're sitting and trying to figure out which wolf to feed when they come out of their tepee, and I pity them, it's a hard decision. That's what I like about Enterprise Coordinator because it allows us – it allows them to take the capabilities that they know we are good at, that they can trust us on and use it as a holding movement for a while to see whether, A., we mature, or B, whether other things in the market come together that prevents them from needing to be a prisoner of a closed system.

So that's the idea of focusing on Enterprise Coordinator, and we're getting together with our Board of Directors and some key clients that are interested in, that have been with us and they trust us and that are enterprising in their own way of thinking, that are interested in seeing us do more and we're eager to find those early partners because those guys will be the shining lights and make people who are more cautious feel ready to try.

Operator

Our next question comes from David Francis with RBC Capital. Your line is open.

David Francis - RBC Capital

Jonathan, I think you said that the enterprise outpatient sales organization is not far off of their numbers from where they're supposed to be. I was wondering if you could maybe give us a little bit more color there relative to the lack of announcements on new deals as you have [in the first half] (ph), just kind of what gives us the visibility of the fact that they are performing where you expect them to be and the new gas is coming into the gas tank?

Jonathan Bush

So what's going on with the enterprise segment right now is, the existing enterprise clients, most of whom are for-profit, multistate, professionally run, professionally capitalized institutions are themselves succeeding in their bookings, they are buying hospitals, opening clinics, opening retail stores, et cetera. And as they do that our bookings expand, we add new units onto the network. In addition, we are enjoying rollouts in places where people had to make EMR software decisions before athenaClinicals is matured and now they realize that athenaClinicals is mature, and so they are rolling back through installed bases and switching on Clinicals. And so the wave of Clinicals across the existing base and the wave of new businesses acquired or launched by existing clients, both bring us nearly to the mid-year goal, I think they missed by less than 10% on the mid-year goal but not the – wait a minute, that was the quarter goal, they might have missed by less than 21% on the mid-year goal. And then it's just these big tickets that add another unit of capacity or another unit of pull to the sleigh.

Operator

Our next question comes from Gavin Weiss with J.P. Morgan. Your line is open.

Gavin Weiss - J.P. Morgan

I just wanted to touch base on the Arise, I guess ACE is what we're calling it now that deal, I know it's pretty small but I don't think there seeing a customer previously which I think is pretty exciting. So can you talk about the sales process there and how they came to identify Athena is right for them?

Jonathan Bush

Gavin, I love your questions. Yes, because that's the point, right. Hospitals that employ doctors, their problem – if I go and tell you can improve the collections of your doctors by 6%, reduce their payments, settle them at 20% into the first [indiscernible], who cares, because doctors only represent 10%, 15% of health system revenues. So a 6% improvement on 10% of revenues is not so much.

Now if I say, look I'm going to change the way you enfront the ordering physician and sort of care seeking patient community around you, that is a big conversation for them, and by the way it will work better if we get all your doctors on the network, sure take them. Frankly it's a different order of attack. To be able to go to a community hospital and say, we are your outreach patient access engine and that includes pleasing your physician community, making them please that punch off of your physicians, that becomes the value prop there as opposed to group of physicians whose entire life is just the physician piece of the business, they are only physician business.

And so the ability to go in with the thing that the hospital cares about first, the most important job to do if you will, and then throw in the other stuff as an enabler, that's a much easier conversation and we just literally at the sales meeting, quarterly reviews here we're saying, in August we are going to start training these guys, when you go into a community hospital you start with ACE and athena one becomes your sort of enabling technology, it's a backup play or it's a secondary play. So very interesting phenomenon, you suddenly have the actual thing that the community hospital cares about to go first.

Operator

Our next question comes from Steve Rubis with Stifel Nicolaus & Company. Your line is open.

Steve Rubis - Stifel Nicolaus & Company

Long time listener, first time caller, thanks for taking my question. In terms of the More Disruption Please program, you're obviously leveraging patient scheduling with [Vital] (ph), ZocDoc and others. Can you talk about what's the next wave of innovation might be, but then also any commentary you can give around the opportunity that would involve biometric device tracking, kind of what you're seeing going on at Apple and Google and others?

Jonathan Bush

Good question, you can call again. So inside More Disruption Please, the leading edge, the sort of exciting new bubbling up from the primordial venture capital ooze is a generation of companies that are performing on the cloud across many clients in a single instance, activities that used to sit in a hospital information system. So suddenly entrepreneurs and hospitals are saying, these giant enterprise software companies, these single instance software companies actually won't make it and they are old and there's going to be an opportunity to sell into the nurses and the pharmacists and the inventory management people at the hospital. And so you're seeing a collection of cloud-based sort of athena architecture but more like a salesforce business model, kind of a monthly user rent type business model community of apps that represent in total kind of 80% of the surface area of a complete hospital information system in API connected independent little cool apps.

John Halamka, the CIO of Beth Israel just in his very well read blog, was the first guy I have ever seen in that class as sort of Harvard-ian giant to say he chooses option B because he sees the emergence of a community of apps and he knows that his generation of teaching and learning sort of cookie doctors that one of the on the edge want that. That used to not be possible, it was impossible for an entrepreneur to think of it, it was impossible for hospitals to buy it and have it work, and we're seeing that starting to emerge. We've got a person now dedicated, Vick on the – a woman named Vick, don't be fooled she's gorgeous, working through all of those companies and putting together a neat portfolio for hospital clients to choose from, in addition to of course we are happy to having stay on Cerner or Epic or whatever. That's on the inside.

On the outside, you see an enormous need, I see, I don't know if our clients see it totally, I think they do, in the need for – in the correlation between the need for market share and the need to talk about things that patients give a darn about because patients are mostly not patients, right. 91% of us aren't patients at all until we break a bones or have a baby, right. We get screened because we get told we should but even now we're sort of saying, I’m not sure I even want to get - [indiscernible] the numbers are uneven, the mammogram thing, the numbers are uneven, so you've got 62 million Americans who don't claim a primary care doctor, you have 85% of the Medicare beneficiaries not doing their fully paid Medicare wellness visits.

So the question is, how do you get market share to 100 million conscientious objectors, and the answer is, you reach out to them with things that they actually do care about. They care about their weight and their body and their love life and the people that they give care to, they care about instrumenting the life that they have outside of the health care system with the health lint, and that's what Apple tapped into and that's what we are trying to tap into with athenaCommunicator going forward. It's a little bit like what we tapped into with doctors where we try to tap into their lives as doctors outside of the boards of their clinic or their hospital.

And so we are very excited looking forward at connecting up to the new stuff that Apple is building, despite Apple's decline that docs still are very, very loyal Apple folks. They view the Apple as the gourmet product and sort of 80% of Epocrates docs are on Apple product, not the quickly rising Samsung stuff. And so we plan on building a lot of stuff in there, not just for docs but actually more for patients to be involved in health with the doctors even though they're not going in for appointment, and that's an exciting wave for us to help doctors gain market share from less engaged doctors or hospital systems in the future. And we've got to do that. We believe that's a key ingredient in helping doctors do well doing the right thing. It gives them the rest of the conversation on their portal, at their practice Web-site so that patients will engage with them when the time comes and real intervention is needed.

Operator

Our next question comes from Greg Bolan with Sterne Agee. Your line is open.

Greg T. Bolan - Sterne Agee

So wanted to talk about days and accounts receivable, just thinking about, I think Jonathan you've talked about in the past that patient, collecting from the patient has kind of been somewhat of a rate limiting step in terms of lowering DARs, and so now that you have access to some of those patients vis-a-vis the portal, do you feel like that in the future you might be able to break the barrier if you will on DARs now that you possibly can improve collections from the patient?

Jonathan Bush

Yes, we can and we must. We have avoided this thing. It's been a big elephant sitting in the room with us for years now and we need to take it on head-on, and all the signals are telling us, I mean meaningful use stage two is all about patient engagement. Now that Obamacare has sort of stopped moving around and people know what it is, it is a huge rise in deductibles, and as I described earlier, you got all this excess capacity to be a battle for market share and that means engaging with patients.

So on every dimension, the [indiscernible] days in AR, and the market share and the government [indiscernible], we need to be way better and we are – that is our bright red reddest light for the second half of this year, is to make step function improvement in the ability of this Company to help our clients interact with patients better, and that includes getting their money, love and money in equal measure. Next question.

Operator

Our next question comes from David Windley with Jefferies. Your line is open.

David Windley - Jefferies

My question is on Clinicals. So Jonathan, I went back in time, happened to go see scores but not particularly mater the amount and over that period of time your attachment rate, as you call it double barrel attachment rate is somewhere around 80%. If I look at that number, it suggests a certain amount of growth in clinical doc adds or clinical provider adds that the numbers do not bear out, they fall short of that. And so my question is, is that a backlog, is that attrition off of Clinicals, is it double barrel purchases where the client has for some reason not decided to go forward with the clinical piece, what's the reason for several – kind of an implied several thousand docs that bought double barrel but have not added Clinicals?

Jonathan Bush

Good, you insighted [menu] (ph). Yes, so first of all, those are deal rates not docs, so almost all of the small groups buy everything in one swing and they go live in one swing but they don't work – they don't get all the docs at once. Whereas the enterprises, they may buy them all eventually but they do go at different times, and in fact at the enterprise level we do have a large number of collector docs live with Clinicals waiting in the wings.

And actually if you see 2000, I bet you that number could be covered by 2000 enterprise docs where they are live on Collector but the enterprise is yet to roll out where they are bracing themselves and getting through governance issues about what templates they are going to use and should all cardiologists across this or that system behave exactly the same way. But the attach rate is on deals, not on docs, just so you understand that piece. There's no backsliding at athena and there's no backsliding among doctors buying Clinicals but then only taking Collector, that has not been happening.

And it's 9 o'clock and we had feedback that we go on and on. Nobody likes a guy who goes on and on. So we will stop right here and thank you for your time and hope that you continue to watch the athena show for many exciting episodes to come.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and everyone have a great day.

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