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athenahealth (NASDAQ:ATHN)

Q2 2012 Earnings Call

July 20, 2012 8:00 am ET

Executives

Dana Quattrochi - Director of Investor Relations

Jonathan Bush - Executive Chairman, Chief Executive Officer, President and Co-Founder

Timothy M. Adams - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Analysts

Sean W. Wieland - Piper Jaffray Companies, Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

Ryan Daniels - William Blair & Company L.L.C., Research Division

Michael Cherny - ISI Group Inc., Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Atif A Rahim - JP Morgan Chase & Co, Research Division

David Larsen - Leerink Swann LLC, Research Division

George Hill - Citigroup Inc, Research Division

Steven P. Halper - Lazard Capital Markets LLC, Research Division

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

Anthony V. Vendetti - Maxim Group LLC, Research Division

Leo F. Carpio - Caris & Company, Inc., Research Division

Stephen B. Shankman - UBS Investment Bank, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Operator

Welcome to the athenahealth Q2 2012 Earnings Conference Call. My name is Donna. I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Dana Quattrochi. Please go ahead.

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. 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 and operational financial 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 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 website at investors.athenahealth.com and on the SEC's website at sec.gov. These statements speak only as of the date hereof, and the company undertakes 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 noncash or nonrecurring item 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 2012 results available on our website 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, and good morning, everyone. I am very pleased with our performance so far this year. 2012 is the year most heavily laden we have ever had with new initiatives, yet the athenahealth team continues to rise to the occasion across all 3 of our strategic initiatives: Jedi, Beautiful and Coordinate.

Our continuing success and the learning we gain from failing along the way is bringing us ever closer to this goal we have of becoming medical caregivers' most trusted service.

First, let's go through the strategy. Our Jedi strategy is moving forward through our service line expansions and transformative client training. First, we continue to redefine our "co-sourcing" model by shifting work from clients over to athenahealth as we get more sophisticated in our understanding of what that work is. This "co-sourcing" strategy reflects the shifting lines of comparative advantage of the company and the network. We're constantly adding new services, which give us life and provide incremental support to our clients.

This year, we added provider credentialing and the handling of eligibility-related denials, work that we used to let clients do. These expanded services are planned for general release in the next 6 to 12 months and aim to improve both client performance and client satisfaction. Our expectation is that over full rollout of this incremental work service set, we will reduce the work that clients have to do to be on our service by up to 60% over time. We continue to streamline the process of ramping physicians on to athenaClinicals with our new athenaCare support service.

Next, our Beautiful strategy focuses on constantly improving the visceral gratification provided to clients and employees when they interact with our company and our network. Currently, our core focus is the athenaClinicals user experience as experienced by physicians and on the gear that our employees use day-to-day. For our clients, athenaNet is now more beautiful, with the launch of our mobile application. We have 1,800 physicians on athenaClinicals for mobile, which is only just released in June. Our iPhone application provides physicians a chance to move through their inboxes while out of the office and keep their undone tasks under control. We started with out-of-office workflows for the iPhone and plan to release functionality for the iPad in Q3 2012, and then we plan to release workflows to move patients through the office on the iPad in 2013. In addition, we kicked off our cross-browser beta program in June, and we expect full support of the Safari browser app during 2013.

Finally, our engagement with IDEO, the design firm, on future medical record user experiences is starting to yield great fruit. This project will not only change how our clients interact with medical records, but will change how own athenistas view design. As for our employees, they now have the ability to make personal choices that allow them to bring their whole selves to work through the choices that they make in what technology they use. We now support iPhone and iPad inside of our secure network for employees to use if they so choose.

Finally, we've run into a few obstacles on our third initiative, the Coordinate strategy. We believe this is the right thing to do, though, and we're going to continue to focus on it to see if improved execution will lead to improved results. The reorganization of our sales force is complete and has sparked improved alignment and coordination across all sales segments. That said, our coordinated market attack strategies are only just starting to gain traction, with the goal of driving awareness and market share.

We introduced our transaction-based pricing model last quarter and have become the first sustainable social network in health care. We have now provided viable economic incentives for physicians to exchange patient information properly, and in turn, gain benefit for recruiting new physicians into such an exchange relationship. We are almost 400 accounts now signed on, with 1,800 physicians included, but yet order volume has not yet spiked up under this model. We're going to keep working on it and see what we can improve in the second half of the year.

Our More Disruption Please program is well underway. Under the leadership of Derek Hedges, we are recruiting fellow disruptive technology entrepreneurs to health care in general and to our client base in particular. In terms of core performance for clients, I'm happy to share with you an update on our balanced scorecard results. There were 5 major components to the scorecard: stability, operational performance, client satisfaction, financial performance and growth. We again performed well across all of these categories in Q2 2012, resulting in a combined score of 103% of goal. The 3 great strengths were: Days in A/R in the client work buckets, client tickets per provider and client satisfaction. Days in accounts receivable in the client work buckets was 7.6 days compared to a goal of 8.5. That means both fewer tasks that we are giving clients to work and the ability for clients to work them faster. Second, in terms of client tickets per provider, we're beating our goal there. This metric improved by another 5% during Q2 2012, and we outperformed our goal by almost 7%.

Finally, the metric that we are most excited about is client satisfaction, which reached a record high of 89.8% this quarter, far exceeding the goal of 85%. We conducted this survey with about half of our clients, almost 90% of them responded. And they gave us a 4 or 5 out of 5 in answer to the question "I would refer athenahealth to my most trusted friend and colleague."

Areas that require additional focus are provider documentation time and corporate citizenship metrics. The provider documentation time was 5.35 minutes per encounter. We wanted to get 5.23, and our goal is to get down as low as 5 minutes flat by the end of the year.

In addition, our corporate citizenship, which is a new metric we're trying to keep track of administrative tasks that our employees need to complete, like doing appraisals of their peers, we got 80% of the tasks done that we set out to do against a goal of 95%. And we will be improving that performance aggressively over the rest of the year.

Finally, all of this infrastructure does not move us towards our mission of being the medical caregivers' most trusted service if medical caregivers don't buy. Therefore, most exciting to me this quarter was the decision of Health Management Associates to move all 1,200 employee providers on to the athenaNet network and to work collaboratively with us to bring the 10,000 members of their affiliate physician network on as well. Similarly, we were thrilled to add MedExpress, one of the great entrepreneurial ventures in healthcare delivery on to athenaNet.

In sum, we continue to believe we can grow at least 30% a year. We continue to believe that our mission is good and needed, and we continue to believe that our cloud-based service approach places us on the right side of history.

I will now let Tim take a minute to review key financial details, and then we'll go to your questions.

Timothy M. Adams

Thank you, Jonathan. Good morning, everyone. We are very pleased with our financial performance for the quarter. We achieved our revenue goal, exceeded our operating income goal and produced a combined financial balanced scorecard result of 107% for the quarter. Year-to-date, our financial balanced scorecard results are 113% of goal. Our quarterly revenue surpassed the $100 million mark for the first time in company history and grew 33% over Q2 of 2011. Our non-GAAP adjusted gross margin was 62.6%, down almost 200 basis points from Q2 2011. As previously discussed, this year-over-year compression in gross margin was primarily driven by our newest service offering, athenaCoordinator. We continue to expand our investments in growth and innovation while leveraging our G&A expenses. Investments and GAAP sales and marketing expense and GAAP R&D expense grew faster than revenue at 46% and 67%, respectively, over Q2 of 2011.

In addition, we posted non-GAAP adjusted earnings per share of $0.24, representing a $0.07 sequential increase and $0.02 or 11% growth compared to our same quarter last year.

Finally, our balance sheet remains healthy, as cash, cash equivalents and available-for-sale investments increased over $23 million from last quarter to $156.9 million. Given our strong financial performance in the first half of 2012 and increased visibility into our expected performance in the second half of 2012, we are revising our expectations for full year 2012 as follows: $425 million to $430 million in total revenue. At the midpoint, this represents 32% growth over fiscal year 2011. Non-GAAP adjusted gross margin of 62% to 63% of total revenue. At the midpoint, this represents 29% growth in non-GAAP adjusted gross profit over fiscal year 2011. Non-GAAP adjusted operating income of $59 million to $65 million. At the midpoint, this represents 15% growth in non-GAAP adjusted operating income over fiscal year 2011. Non-GAAP adjusted net income per diluted share of $0.90 to $1. At the midpoint, this represents 8% growth in non-GAAP adjusted net income per diluted share over fiscal year 2011. This also reflects an anticipated fiscal year 2012 GAAP effective tax rate of approximately 45% to 46%.

The anticipated increase in our effective tax rate is primarily driven by the change in the fair value of the Anodyne contingent consideration. An increase in the Anodyne contingent consideration is not deductible for income tax purposes, and thus, increases the GAAP effective tax rate.

We are pleased with athenahealth's performance so far this year and are thrilled to see athenahealth's growth, operations and financial house in such good order midway through the year. In keeping with our strategic priorities, we will continue to leverage our strong financial position to make investments to secure our position as medical caregivers' most trusted service, while at the same time, ensuring long-term shareholder value creation.

With that, we would be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Sean Wieland from Piper Jaffray.

Sean W. Wieland - Piper Jaffray Companies, Research Division

So the Coordinator product, can you just give us a little bit more information there on maybe what clients are saying about it, what the pushback is? And when you're talking about a rebranding and looking at the go-to-market strategy, exactly what are you thinking there on that product line?

Jonathan Bush

So Sean, the -- I think, first of all, all organizations and organisms of all kinds love homeostasis. And for -- change always takes longer and is harder than one would imagine. And so teaching all of our sales folks how you -- teaching ourselves how to talk about Coordinator was just as hard as teaching ourselves how to talk about Clinical. Actually harder, because it requires one to understand how broken the referral of patients is from one provider to another, which is kind of a deep cut in health care, whereas all of us understand intuitively that there's something about medical records that's broken. Then you have the fact that all these people have big plans and goals that don't include Coordinator, and that they're having it added. So we had 2 different names for it, 3 different names at the beginning of the year. We weren't ready to talk to clients about it at the User Conference. It was sort of the slapdash effort there. The actual operation that delivers the Coordinator service was kind of in entrepreneurial mode when we bought it, so we've had to really stabilize and make investments in the way we operate, which makes it harder to show off with it. All of those sort of early-stage entrepreneurial growing pains -- I wouldn't call them entrepreneurial, what would you call them, kind of mid-stage company growing pains where you’re trying to get entrepreneurial innovation to happen really, really fast inside of a shell. They're all happening. Now I'm signing up for them to be grown out of here, and I don't think that they're going kill us or they're going to cause us to change our mind about a free and sustainable market for the exchange of patient information. But it's hard. The biggest thing -- I had our Physician Advisory Board in yesterday. The biggest thing that they said is, "Listen, it makes perfect sense, both as a receiver and as a sender, to be on this Coordinator service. The problem is it's not really worth doing as a sender unless there's a lot of receivers, and it's not worth really doing as a receiver unless there are a lot of senders." So I bought 5 chickens, and I am going to figure out how these freaking eggs get going. And by the -- literally, I do have 5 chickens since Coordinator went down -- not went down, but didn't grow up as fast as I wanted. And I'm working on this chicken-and-egg phenomena is the last piece.

Timothy M. Adams

Sean, it's Tim. I would just add one thing to what John said. I would liken it to what we saw in year 1 with Anodyne, you go back to 2010.

Jonathan Bush

Another good example.

Timothy M. Adams

And Anodyne, we had very high expectations getting out of the gate. I think with any acquisition, things always take a little longer than you originally think. Anodyne was probably a year behind schedule. And the great news, as I think everyone knows, the health management win that we announced a couple of days ago was an existing Anodyne customer. So it took Anodyne a while to get its legs under it, but it really has performed very well, and that cross-sell channel really has kicked in very nicely. So I think it's a little bit of that going on with Coordinator as well.

Operator

Our next question comes from Richard Close with Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

Just really quick. Can you give us an update on the University Hospital implementation? It looks like that is being pushed out a little bit. And then what is going on with the Detroit Medical Center?

Jonathan Bush

Well, one of the great lessons that we all learned in The Princess Bride is never get involved in a land war in Cleveland. No, the truth is that this is a complex organization. It's our first really big teaching institution. We are being brought into the academic side of the organization after successful performance on the community side of the organization. The community side has more of a kind of a for-profit self-sustaining orientation. The academic side, obviously, has an academic mission, in addition to their patient care mission. And therefore, more moving parts in what they do with information. And therefore, more caution about moving the management of it, no matter how painful the current management of it may be. Everybody at UH is on the same team, and everybody at UH continues to agree that the goal here is to get everybody on to athenaCollector. Are they on Communicator too? I don't know. I should know that. But the -- it's really just a question of the tactical steps. So we remain on the same page. Athena's interest in page-turning is a little faster than theirs. But we are going to get there.

Richard C. Close - Avondale Partners, LLC, Research Division

Detroit Medical Center?

Jonathan Bush

Same situation, except it's an entire organization. So you have a high-performing, profit-oriented, bottom-lining type institution in Vanguard taking over an institution that is, well, Detroit Medical Center. And so they are having to do assessment on how that thing can best be moved from its historic culture, which doesn't include that important bottom line orientation to the Vanguard culture, which does. And this is why Vanguard is doing so well, and this is why Detroit was so wise to partner up with them. But anyway, that -- the tactical steps between the shared intention of getting there and the getting-there are slowing us down. I remain confident that we're going to get there. I also think we are learning a lot about -- in these massive organizational shifts, what role best we play to help move things along. And as we get smarter, I imagine future large-scale implementations that involve a culture shift, and this is really what both of these are. We'll be able to play a more and more and more valuable role. But they'll always be our slowest implementation.

Operator

Our next question comes from Ryan Daniels from William Blair.

Ryan Daniels - William Blair & Company L.L.C., Research Division

I'm curious on the end market and your growth opportunities, if you're seeing more replacement opportunities today than 6 to 12 months ago, and then if so, maybe a few comments, can you hit on your win rate there? And then my big curiosity, is that primarily on the larger groups that have been using a system for a while? Or are you starting to see that replacement cycle kind of filter down to the smaller groups as well who are actively making switches to your technology and services?

Jonathan Bush

Well, Ryan, thank you for bringing up one of my favorite parts of the athena hospital, the Burn Unit. No question about it, the Burn Unit is getting busier and busier across all segments. I actually saw the KLAS survey did something recently, 30% to 50% -- was it 40% to 50% of large groups are engaged now in replacing the EMR that they rushed out to buy, because they rushed out to buy the one that they knew when the Obama administration told them they needed one, and that was the software-based flock-of-seagulls era EMR system that they had looked at and chose not to buy in the early 90s. And they rushed out to get it, not realizing that time had moved on and innovation had progressed, and that this Internet thing was here. Nowadays, our awareness efforts are landing the occasional punch, and these guys are finding out that there's a cloud-based way of doing this to specifically change the things that cause the most pain. The idea of administration gone wild, where a whole bunch of settings get changed and tweaked over time until each individual provider that's gone and tweaked themselves into a corner is happy, but the central administration of the thing is impossible. Getting rid of paperwork, actually dealing with the fact that even if you're electronic, no one around you is. And even if they are around you, electronic, their electronic doesn't connect to your electronic. All of these phenomena are, of course, not issues on a cloud-based service like athenahealth. And so as they discover us, they switch. I should know more numbers for you, but last time I looked, I already gave you that number and it was years ago. It was over 30% off all Clinicals purchased were a replacement. Now a year later, we're hearing KLAS report that I'm getting signals. But yes, we're over that number now. 35% of all our Clinical sales are people checking into the Burn Unit. And in fact, I think one of the blitzes, one of that tweaks for focus in the second half of the year, having just done the sales review, is the -- or the growth review, is that we will work on some features of our implementation that make those burn unit replacements go smooth -- more smoothly. Make a bigger investment in identifying mappable data fields within the legacy EMR and bringing them into ours. Taking responsibility for some of the template work that doctors have done in the old EMR. Sometimes the key is to throw those things out, but at least take responsibility to tell them that. This is an area of great success, and therefore, we're going to make it an area of great focus.

Operator

Our next question comes from Michael Cherny from ISI Group.

Michael Cherny - ISI Group Inc., Research Division

So in the prepared remarks, you noted an expansion of the relationship with Steward. Obviously, it's been a key customer for you guys. Can you give a little more color in terms of what they're doing from a Clinicals perspective and the potential opportunity for you with them in terms -- because I think they do have a -- installed EMR at this point?

Jonathan Bush

Yes. So Stewart has -- is a member of the Burn Unit and is rerolling Clinicals to most of their docs. They had a group that ended up pretty well-performing on eClinicalWorks. And so that group remains on eClinicalWorks, although over time, we certainly expect the implementation to catch them, too. They're all on Collector. And as they acquire and grow, we are under the -- obviously, the assumption that we'll continue to be chosen by their management team whom we love. Even if they don't choose us, we’ll love them, but we like them better if they choose us. The affiliate program was the most recent rollout. So what they did is figure out a legal and appropriate way to pay in advance for our services so that docs in the community could buy them at a discount. And they found a really neat treatment of that and bought a bunch of it from us. So there's a whole rack of kind of prepaid services available for the Steward management team to bring in to highly influential practices that they would like to more tightly Coordinate care with. Obviously, that makes it great news for our community sales force because you can sell something that's already partially paid for. And those guys are very happy now, and they've already closed several of those affiliate deals out there, helping Steward bind more tightly clinically to independent practices.

Operator

Our next question comes from Jamie Stockton from Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Maybe real quick. If you could touch on the big sequential step-up in sales and marketing spend, any color there would be great. And then maybe your thoughts on implementation capacity and how you're thinking about the next 1.5 years or so, which should be pretty busy, especially for Clinicals.

Timothy M. Adams

Jamie, it's Tim. So on sales and marketing, I think, we're really moving along according to our plan. What we talked at the Investor Day last year, we said we wanted to continue investing heavily in sales and marketing throughout the year, growing at least as fast as the revenue growth rate. Yes, it grew faster in Q2 than revenue. But this is the time of the year where we're investing a lot more in the different dinner activities, flywheel activities, other marketing events. It's a good time of year for us to be in market. So when we look at where we are 6 months into the year for the sales and marketing investment, we're really on our internal plan. And it makes sense to get a lot of that money to work at the beginning of the year. Implementation capacity, I think we're fine across the board. That is a very important area in the company. We pay a lot of attention to it. The gentleman that runs that group is just terrific. And we have been staffing up aggressively to stay ahead of the curve on that front.

Jonathan Bush

I will point out, though, that we're -- our implementation team has not necessarily ever had to be involved in large organizational re-acculturation. And that sucks up capacity. And typically, when an organization has had to do that, we've kind of skipped over them and moved on to the next one. Increasingly, now as the mix of our bookings moves towards enterprise and our National Accounts team, which, as you know, is doing quite well, we're going to have to develop competency in and around the implementation team to do that. For example, we've started kicking off these relationships with a governance meeting that includes the account managers and management team that will be responsible for these accounts, post-COLI [ph]. And they are beginning the relationship, the sort of, I would say, political side of the relationship much earlier in the process with these accounts in hopes of being a more useful kind of co-shepherd of this organizational change with the management teams of our new clients.

Operator

Our next question comes from Atif Rahim from JPMorgan.

Atif A Rahim - JP Morgan Chase & Co, Research Division

I guess good work on your scorecard overall, but the thing that drew my attention was despite HMA coming in, you're a little bit below your plan for the year. I think you’re at 97% of target. So could you tell us what's driving the lag there? And I know you don't give us your quarterly progression target, but if you could say at this point whether you're at or above 50% of your target?

Jonathan Bush

Are we at or above 50%? I don't know. But I -- let me handle the first one. The -- just as -- last year, we told you about the incubation of our new National Accounts team and how happy we were with the progress, but you got to bake it for a long time before you can get muffins out of it. We also, at the beginning of this year, launched a fourth sales unit, the group practice sales force, that was targeted at essentially the lower end of what used to be called the large group and is now called the enterprise. So we've got now 4 segments. Small groups, which goes to 4 doctors; group, which goes 4 to 20 doctors, which is a new sales force populated almost exclusively by new people who have had to build new pipeline; then enterprise, which consists largely of our former large group sales force; and then National Accounts. The one group that will probably not get to their number this year because of their newness is that group, group. The group, group. They might get there, but it will take heroics in the second half of the year. The other segments are not new or certainly not people to buy new people and new funnel, and so they're doing fine. Were it not for the outperformance on the National Accounts side, that group segment would have pulled us down quite a bit. Their funnel started empty and they had a hard time filling it in the beginning of the year. We don't share upper funnel metrics with you, but the upper funnel for those guys was a dusty ghost town as they got trained and got comfortable and sometimes got rotated out within 90 days of being hired. And now we feel like, just when we started the small groups team, just like when we started the National Accounts team, this team is starting to fire on many of their cylinders. So that's really what you saw there, Atif, which is obviously, as you get bigger and bigger and you continue to obstinately hold to your 30% growth goals, you need a bigger and bigger portfolio not just of products, but of segments and of sales forces. And that's why I keep pushing us in that regard, and that's why I'm very happy right now.

Timothy M. Adams

Atif, it's Tim. I would just add to John's comment. It was this time a year ago, the small group team and the group team were ahead of their plan, and the large enterprise group was falling a little bit behind. And they did a great job to catch up at the end of the year. So we do think there's a little mix going on here. We do think there's a little timing. To your question of 50% progression, we don't break that out in detail. I can tell you we do set very aggressive plans for our sales team every quarter. We are constantly growing those numbers year-over-year, sequentially, again, focusing on that 30% growth long-term.

Operator

Our next question comes from David Larsen from Leerink Swann.

David Larsen - Leerink Swann LLC, Research Division

Just a quick question on your overall portfolio of products. You've now got Proxsys and Anodyne and Communicator. Is there anything that you guys are thinking about that you might want to, say, acquire or build over the next, say, 18 months or so? Is there something specific that you're looking at or not really?

Jonathan Bush

Yes, we've just started negotiating with Capex [ph] to buy them, and it's great. They're very willing to go at a discount. No, I mean, I think you know our acquisition screen. We've got 3 things: We want products that fit into our suite, we want capabilities that allow us to build or enhance products down the road, and we want access to large numbers of physicians for cross-sell. And for us, access means we want to make them customers of a light, web-native recur deliver -- recurring delivery service of some kind. So we're always on the lookout for folks that are delivering a lightweight recurring delivery service to large numbers of doctors on the Internet that would like to partner up with a big sister of some kind. Or a co-sister, you never know. I don't know. But that's -- or a little sister, we are after all for sale on the Internet via the stock market. But that's the screen. We're always looking at things. We're always working with things. In order to accelerate that process, we've invested more in this concept, More Disruption Please, which is an association of entrepreneurial sort of disruptive technology ventures, focused on health care. That allows us to partner more quickly, get to know management in a deeper way, capitalize potentially, who knows, companies that need a little boost. And then certainly, as we know them and work with them better, be in a position to feel comfortable acquiring as well.

Operator

Our next question comes from George Hill from Citigroup.

George Hill - Citigroup Inc, Research Division

Jonathan or Tim, one of the things I kind of model is sales force productivity. And I don't know if this is a result of kind of the breakout of the sales forces as you just described them. But it kind of continues to stagnate, and I know a lot of new reps are new.

Jonathan Bush

Wait, we're stagnating? What are the other guys -- if we're stagnating -- well, go ahead. Finish your question.

George Hill - Citigroup Inc, Research Division

Well, I'm saying your productivity per rep is down.

Jonathan Bush

Yes, right. You add new people by the drove, they start stinky and then they mature. If you look at the productivity per rep who's been here for more than 2 years, it's off the charts.

George Hill - Citigroup Inc, Research Division

Okay. So you're kind of getting to my question, which is so when should we expect to see the inflection point and the return, the upward trend begin of productivity per rep? And for my modeling purposes, I backed out enterprise and modeled that separately, so as I look at everybody x enterprise.

Jonathan Bush

Yes. So we actually, I believe, have incubation cycles by segment. So you have a small group guy who's in her 20s, shows up and she plugs into a desk, it's like getting on a bull, and the demos come pouring in. And she's doing demos like the Beatles when they worked at those strip clubs back in the '60s. They do 10 to 15 shows a day, they get very good very quickly. And you see their close rates pop up into the normal sort of 20% close rate range within a quarter, 2 quarters max. Then you get the group segment. These people have to actually go and help get their leads, as well as sell them. So they're ramping up more like over a year. And then, obviously, as you point out, that 2 enterprise segments, those deals take years, and sometimes, it takes months to get in to start one. And so you need maybe a 2-year model for a rep in that segment. And then lastly, National Accounts, it isn't rep-specific. It's really Steve Kahane and Mark Kowetski [ph] and Paul Merald [ph] and me, and then more people get added, but they get added to the same deals that are in the pipe. There are so many rivulets of sales energy that need to be put into one of these deals. They're all very team-based, and it's hard to do rep unit analysis at that level.

Timothy M. Adams

Yes, George, I will tell you that we take a look at this every quarter for the small group, the group and the enterprise teams. And so we know what kind of ramp times we expect the team to come up on. We've invested a lot in the training, invested a lot in the demos. And we watch that very carefully. I think maybe where it gets a little bit hard to model that out from the outside looking in is we're constantly adding new reps to the fold. We'll probably add another 30 reps this year, more back-end loaded. So that is going to skew it a little bit when you try to do the numbers. But it is something -- we do a stack ranking of all the reps and really pay a lot of attention to their productivity once they hit that full ramp time.

Operator

Our next question comes from Steve Halper from Lazard Capital Markets.

Steven P. Halper - Lazard Capital Markets LLC, Research Division

Of the net new Collector adds in the quarter, what percentage of that went to existing clients in terms of scope expansion?

Timothy M. Adams

Yes, Steve, probably about 30% of the new adds were existing. 70% were new. So we've seen 70/30 mix for about 2 or 3 quarters now, so mostly on the new side.

Operator

Our next question comes from Bret Jones from Oppenheimer.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

I was wondering if you could give us the contribution of Proxsys or Coordinator in terms of revenue in the quarter. And I'm just trying to get kind of the organic growth rate of the base business. And then what kind of impact that actually had on the gross margin. I think you broke that out last time.

Timothy M. Adams

Yes. Bret, it's Tim. So on gross margin, Proxsys is pushing down the overall corporate margin very consistently with what we said back at the Investor Day, roughly a couple of points. It is behind plan, both at a revenue level and a new sales level. And so we're putting a lot of additional energy behind that. And John touched on it all earlier in the call that these deals are just taking a little more time to close. Strategically, we think it's absolutely the right bet to make, and we're glad that we have it under the fold. So the revenue run rate is consistent pretty much with where it was when it came out of the end of the year last year.

Operator

Our next question comes from Sandy Draper from Raymond James.

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

I guess, my question, Jonathan, when you think about the longer-term runway and to grow 20% -- I mean, to grow 30%, you've got a couple of channels. One is, obviously, adding docs. I thought it was an interesting comment. I think it was in your prepared comments in the K, talking about focusing on not just MDs, but actually total providers since you're adding more. And then the final piece would be things like Coordinator. How would you sort of bucket the near-term growth and the long-term growth to drive 30%? How do you rank which are the most important components? And then just lastly, maybe Tim, can you just comment quickly on the drop on G&A?

Jonathan Bush

That's a great question, Sandy, because all of the handy-dandy units of measure that you all have come up with -- needing to, of course, appropriately, come up with keep rendering themselves obsolete as the definition of a doctor changes, as the product mix changes. So I mean, I honestly -- and I find myself reduced to just looking at dollars. I think one thing we need to have available for you guys that I need to start looking at is more of that kind of cable company view of market share. So there are -- fewer than I thought, but a good 2,000 doctors that are "on athenaNet" because they're just using the free sender service on what used to be Proxsys and is now Coordinator, the full service Coordinator. There's 20,000 doctors on Anodyne. I mean, Anodyne is probably one of the great long-term blossoms that we've had where not only has this company taught us about business intelligence at a level that didn’t -- we just did not trend management information before we started learning from Anodyne. But they brought us some of our biggest accounts, including Health Management, by the way. And they provide a prospect meeting where you know exactly where the pitch is going to go. You know what their pinpoints are before hello, before shaking hands and forking over your business card. And we don't really -- we ought to be -- we ought to take the install dates of these light services more seriously in terms of how we plan and how we report to you all since I believe disproportionately over time it is those light services, whether through allies or owned subsidiaries, that we are going to get our most predictable and exciting growth. So I don't have something for you right now, Sandy, but I acknowledge the need to start reporting that way. Certainly, it is the -- as we continue to believe we can grow 30%, we're going to need to establish hunting grounds that are ever larger, and these kinds of light service partners and subsidiaries have got to be a key element of that.

Timothy M. Adams

Sandy, it's Tim. So on that G&A, so about half of that decrease that you see sequentially is a reduction in the benefit rate in Q2 versus Q1. Q1 is always a high quarter for benefits. And then the other piece is related to the final accounting of the earn-out for Anodyne. So the good news is they brought us a very nice deal in Health Management. And now that we have the final actual bookings, we go back into what was a fair value probability-weighted reserve analysis coming out of Q1. Now we have the final numbers. So Anodyne, reversing out that reserve to the tune of about $900,000 on the first contingent consideration for Proxsys, we have determined that we're not going to meet that minimum revenue threshold. So that picked up about another $300,000 in the quarter. So on a pretax basis, and this all runs through G&A, G&A was reduced by about $1.2 million. So that falls to the bottom line because the Anodyne piece is not subject to tax. So it did give us a benefit in the quarter of about $0.03, those 2 items combined. If you remember back to Q1, we did all the estimates on both of those contingent considerations. We had bumped up Anodyne at that time. Again, we do not get a tax deduction for it, so it actually lowered EPS in Q1 by about $0.03. And you see that in the effective tax rate in Q1 being so high at 54%. So net-net, on a year-to-date basis, there is no impact on EPS. What will survive the year is about a $1.1 million, $1.2 million benefit on a pretax basis, but it is going to cause a higher tax rate for the year as a whole. So for the year as a whole, based on what we've accounted for through the 6 months, there is no impact on EPS. But it is going to push that tax rate up to that 45% to 46% range that we provided in the guidance.

Jonathan Bush

And that's why we have a great CFO.

Operator

Our next question comes from Anthony Vendetti from Maxim Group.

Anthony V. Vendetti - Maxim Group LLC, Research Division

Can you just give a little bit more color on the HMA deal? Obviously, it's a big win for you guys. It's a 3-year contract from what I understand. A little bit -- just a little bit more color on how that's financially structured for you.

Jonathan Bush

Life, Anthony. It's a contract for life. All of our contacts are for life. They can all leave whenever they want, but hopefully, we don't get boring. We keep changing our outfits, and they stay forever. We cut our hair short, we let it grow long. We have contracts for life. This is the most exciting deal for us, because we have -- well, first of all, never signed such a large amount of full service business -- we've never signed such a large amount of business full stop, but full service. This is everything we've got. They're doing an alliance with us to the community docs. They're doing Collector, they're doing Clinicals, they're doing Communicator, they're already doing Coordinator 2, 3 kinds [ph]. And Anodyne, their success on Anodyne is a key driver of them coming to athena. So I don't -- what is that, a sexta [ph]? Is there such a thing as a sexta [ph] barrel deal? But I think the thing that's most exciting is we have never had such unfettered open access and collaboration through the entire -- from individual docs who are on these committees, 250 docs on committees evaluating us against Epic and Allscripts, all the way up through the president of the physician enterprise and the CEO and CFO of the organization. That means to me that not only are we going to get a big piece of business, but we're going to get a big piece of reference, if this is going to be a place where we can be our absolute best selves. And so that's probably the thing that's most exciting to me. We've already done a video kickoff. I've done a video kind of a briefing to all the CEOs of all the hospitals. They got together down at Marco Island. And you can talk to them about their plans. But from my perspective, my confidence in athena's ability to deliver its best results has just simply never been higher due to the aligned mission and the aligned access.

Operator

Our next question comes from Leo Carpio from Caris & Company.

Leo F. Carpio - Caris & Company, Inc., Research Division

Quickly on the competitive environment, since Jonathan raised the issue here. What are you seeing in the competitive environment, especially in terms of has it become more intense or the same? And have your sales reps started seeing any leads coming in from the Allscripts space or Gateway? Or just maybe give us a better sense of how the field look like right now.

Jonathan Bush

Yes, yes. We -- I call it O negative day, that earnings call from Allscripts when they became a universal donor. And we continue to seek out Allscripts' clients. But I think in general, I just -- I actually just finished the 5 forces [ph] for our board retreat next week, and the change that I see in the competitive environment is, originally, we sort of view these software-based players as substitutes, not competitors, because they don't offer the service. But then we got scared. The beginning of last year, our big concern was hospitals were going to buy these things, learn how to administer them and run them and then the hospitals themselves would go from prospect to direct competitor. Not from prospect to lost business, but prospect to direct competitors. And one of the things we've learned over the last 12 months is that hospitals are not succeeding at becoming cloud-based services in their own right using flock-of-seagulls technology. And so that's great news for us. It means that hospitals are now -- think they -- the IT department gets us our access to the VPN or whatever, is not really going to go out and satisfy hundreds of voluntary physicians that like to have things just so using this old technology. And that -- as that discovery kind of dawns on the hospital segment, then we suddenly -- and our awareness, as they become increasingly aware that we exist, we become an attractive substitute or an attractive second wife. And that's what we're really looking forward to. We've really seen a decline in the relevance of the traditional non-Internet software companies as we've seen hospitals try and fail to make them look like they're on the Internet. Now it's not over, there are still people slugging away at it. But it is the stalled, bogged-down implementations and the -- basically, 0 sales from these various subsidiaries that IT departments have put together to sell to doctors in the community, even when they're selling at a massive loss, by the way, that is the fodder for most of our enterprise and National Accounts deals. And I'll point out, obviously, Health Management’s had the exact same situation. They had a big legacy EMR, and we got lots of conversations down in the field on that. And it's true. And I have to say there is nothing wrong with the version of NextGen or the setup of NextGen that they had. They just couldn't get a lot of doctors to use it because it wasn't -- it's not the job of NextGen -- NextGen never set itself out to be in there all day long, every day, all year, years after the contract has closed and the implementation is complete, twittering with doctors and pushing them and arguing with them and saying, "No, you have to assign that to an assistant." All the things that we do with 80% of our energy, 80% of our energy on average, even with our growth rate, is post-implementation, right? And so there's nothing wrong with NextGen. There's nothing wrong with Allscripts, really. I mean, pretending that lots of acquired companies are all-in [ph] companies as you see us flounder with our 3 acquisitions, taking 3 times as long to get our little deals aligned. Details aside, the fact is it's an architecture and business model problem. That's what I meant in the closing of my prepared remarks by it's our business model that's on the side of history. Now I am not smarter than those other guys. We didn't start out better, we're not better people, we don't work longer hours. We're attracting the next generation of brilliant developer because the business model makes sense to people. So over time, we might actually end up with a better raft of people and a more inspired raft of customers. But I really think it really boils down to just the accident of our stumbling upon to this business model, low those 13 years ago.

Operator

Our next question comes from Stephen Shankman from UBS.

Stephen B. Shankman - UBS Investment Bank, Research Division

Maybe taking a step back and looking at the bigger picture here. I was wondering if you sensed any pause in demand from your provider base during the quarter. We had heard from some hospital executives who are waiting for the Supreme Court ACA decision before potentially making any big decisions. And obviously, we still have Stage 2 Meaningful Use still not finalized. So wondering if those factors had any noticeable effect during the quarter.

Jonathan Bush

No. Those didn't, but I think the one big picture item that hasn't come up in our script or on this call is with the ACA decision kind of out of the way, the focus on access to the global dollar, either being an effective ACO, taking episodic risk, if you're a single specialty group or hospital, or forming IPA-type capability to get ahold of the price element, the total cost element and the price element within it of health care expense. So we have hospital systems who are actually planning -- publicly planning to make the hospital part 1/4 of their revenue over the next 5 years. That is a -- and then they plan on making money by actually having patients of their systems use less hospital. Can you imagine being a hospital company whose plan is to have his patients use less hospital? That is a recent development. That is a post-Papakah [ph], whatever it's called, ACA development. We have venture capitalists that are in there saying, "We want to give the infrastructure to medical groups to go and take risks and recreate the incredible success that the guys at HealthCare Partners [ph] had.” I'm sure you all saw that exit in the billions to a bunch of inspired primary care doctors in Southern California. That idea of equipping doctors on athenaNet with global cost information and giving them the power and agency to shop, to shop for whether something is needed and, if it's needed, shop for where it's going to get done. That idea, whether you're a hospital system that's built a greased chute through your own assets so you can drive your cost per event down, or whether you are a medical group that wants to beat up hospitals against one another, both are going on in our network, both require the same contribution from athena over the years, which is the intelligence and the shopping infrastructure. So in the order screen of athenaClinicals a year from now ought to be not just that you need an MRI, but when you click on MRI, it ought to have every MRI that's within 20 miles of you, which ones are clinically integrated via Coordinator, which ones are part of your health system and which ones -- or the other one -- and how much the other ones cost. That's all information that is kind of part of this big picture movement. We are a nation of shoppers. And the reason health care sucks so much, both from a satisfaction and a cost perspective, is nobody's allowed to shop. It turns out, the way policy has gone, the consumer will not be shopping for a while. That was on the rise. Since the inauguration, that has been on the fall. But it turns out the doctor could shop. The doctor could be the first generation of American shopper for health care, just the way the guys at HealthCare Partners [ph] did so well, just the way guys at other institutions out there that we serve. SynerMed is an example of another IPA that focuses on the Medi-Cal population. So that's the big trend. If you want to step back and say what's next, it's this idea of not just analyzing whether your claim is going to go through the hoops or not, but analyzing where the most cost-effective place to send your patients are and then making sure they get there. So that's the next big kind of evolution for us. And I can't wait.

Operator

Our next question comes from Ricky Goldwasser from Morgan Stanley.

Ricky Goldwasser - Morgan Stanley, Research Division

Going back to the HMA deal. You disclosed that HMA is going to start phase implementation in the fourth quarter. How long do you expect it will take to move the 1,200 employed providers to the athena network? And how should we think about that kind of like initial step-up?

Jonathan Bush

And that's why they pay you the big bucks, Ricky. I don't know. I mean, part of the thing when you get to a good allegiance with the senior management of one of these institutions, you don't want to be the guy who says, how about now, how about now and it's not a good idea. So we are going to work in a lockstep with the senior management there. This is a group of absolute wheelhouse medical groups. This is not some sort of esoteric faculty practice that's doing the only brain replacements in the nation, et cetera. This is a group of community doctors. This is essentially 1,200 year-2 athenahealth clients, all in one corporate organization. So in terms of our capacity to knock them out, we can go like rolling thunder. But the goal here is for this to be a lift in cultural energy within the health management community. And so the timing and the communication and the celebrations along the way and the putting on the brakes when somebody feels hurt has got to be led by their management team, and we will be absolutely happy with whenever they go live. Some of our other for-profit clients, they've been implementing -- I mean, I want -- Steven Halper asked earlier in this call, hey, what percentage is new and what percentage is -- I don't even know what new means. These clients are always -- if a client buys a hospital or a group of doctors stumbles on their flock-of-seagulls architecture and then is ready to get on to the Internet, what -- I don't know what you call each of those. They’re all a sale, we always send out a guy to demo and explain what it's going to be like. We always have the pizza party when they go live or, whatever, now, I guess, it's like a vegetable party because we don't want diabetes. But that's the way we think about it. It makes it hard for you guys to model. The only thing that you got to know is that if I don't think we're going to be growing by 30%, I'm going to tell you. And if I think we're going to be growing by a lot more than 30%, I'm going to tell you. And trying to read these signals as tea leaves in between, I assume, will more than not lead to disappointment.

Operator

Our next question comes from Greg Bolan from Sterne Agee.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

So just to clarify, so is HMA senior management's thinking aligned with the group practices, meaning is it 100% probability that all 900 docs will move to athena? And then could you maybe just talk about HMA-like in revised [ph] accounts and kind of how this would -- how it may look going forward as it relates to senior management's thinkings versus the own practice’s thinking as well?

Jonathan Bush

Well, good question, Greg. I mean, the first thing to know is it's 100% likely that nothing will happen 100% of the time. So I -- but I will say that the level of corporate alignment from community doctors who spend 100% of their time seeing patients but volunteer to be on the selection committee through the CEO and the president of the physician organization, the regional president, I've never -- my first presentation to this organization, I was able to present to all of the regional presidents and the CFO and the president of the medical organization. It was the greatest -- one of the greatest sales moments of my life, because it was an unfettered day in court. So I walked out of there and I gave Gogo [ph], the guy who brought this home for us, a hug. And I said, "Listen. If you lose, it's all your fault. Because that’s as good as I can --" and it wasn't all his fault. He was a hero. All of the guys who took it on were heroes. But the idea that anything will happen exactly according to any plan is, obviously, preposterous. But the fact is I've never seen more top-to-bottom alignment and organization, and this is one of the things that's neat about the Burn Unit. These people have gone in and tried it with all their might and been burned, whole stretches of their body looking like a hotdog abandoned on the grill. And that's a kind of group that can appreciate the difference between a cloud-based service and a software application, which a software application used properly can do everything that athena can do. You just got to have somebody to read all the faxes and categorize them right 100% of the time. And somebody's got to be watching and be there 24/7 to answer their questions and yada, yada, yada, and then yes. And you've got to be able to reprogram it all the time, but that's just hard to do at scale, right? And you hear about these units within the hospital systems, 200, 300 people administering the brand new copy of Epic, like, wow. But that's exactly what you should do if you have legacy software is administer the heck out of it. Otherwise, it'll become this horrible burn. And so these guys are actually culturally more ready for what it is that is our comparative advantage over software. And so obviously, it's the early days. We're on our honeymoon here. But I'm -- my confidence and my -- my ammo in the area of excuses is 0. I really don't have any excuse if this doesn't go well.

Operator

We have no further questions. Do you have any closing remarks?

Jonathan Bush

No. I mean, I'm -- I think this quarter speaks for itself. I do think that we took on, as I said in the beginning of my prepared remarks, more than we could chew. And so we won't be done chewing by the end of the year in terms of our bolder projects. But anyway, that makes it less hard to figure out what to do next year. And we get the joy and the binding experience that comes from a little bit of failure along the way, which keeps us real because we are so much smaller than this mission we're on, and we have so much, so much farther to go. And obviously, thank you all of you for your enthusiasm on the little ticker thing, seeing us get the recognition that these 2,100 of us working so hard, I think, so richly deserve. We’ll see you all next quarter.

Operator

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

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