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athenahealth, Inc. (NASDAQ:ATHN)

Q3 2012 Earnings Call

October 19, 2012 8:00 am ET

Executives

Dana Quattrochi – Director-Investor Relations

Jonathan Bush – Chairman, President and Chief Executive Officer

Timothy M. Adams – Senior Vice President and Chief Financial Officer

Mark Gowetski – Vice President Enterprise-Sales

Analysts

Michael Cherny – ISI Group LLC

Jamie Stockton – Wells Fargo Securities, LLC

Mohan A. Naidu – Piper Jaffray, Inc.

Richard Close – Avondale Partners, LLC

George Hill – Citigroup Inc.

David Larsen – Leerink Swann LLC

Ryan Daniels – William Blair & Co. LLC

Charles Rhyee – Cowen and Company, LLC

Sandy Draper – Raymond James

Bret Jones – Oppenheimer & Co. Inc.

Operator

Welcome to the athenahealth Q3 2012 Earnings Conference Call. My name is Sandra and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Dana Quattrochi

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

On today’s call, management will share brief highlights from the prepared remarks we published yesterday, and then take questions from the audience. 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 financial and operational financial performance, including operational expenditures, growth rates, and profitability; our integrated service strategy; selling and marketing efforts, service offering benefits, and research and development plans and timelines, the client development potential of our coordinate strategy, and our creation of an ecosystem of networked service providers.

Forward-looking statements may often be identified with 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 we undertake no obligation to update or revise the information contained in this call.

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

Please refer to yesterday’s press release announcing our third 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 now turn the call over to Jonathan Bush.

Jonathan Bush

Thank you, Dana, and good morning, everyone. First of all, we are thrilled to report 51 quarters of consecutive revenue growth. That said, revenue growth was only 26% over Q3 2011, and that’s below my goal of 30%. The reason for this was an implementation delay or two in National Accounts, which we’ve discussed in the past calls.

Furthermore, Q3 was a stretch for us bookings wise, but while we are disappointed, we still believe that 30% is the right target growth rate for athenahealth at this current stage. Meanwhile our strategic position is stronger than ever. Our efforts to ensure our clients’ success in a market increasingly driven by global risk and coordination of care are bearing fruit.

In October, we acquired Healthcare Data Services, which will enable our clients to use insurance company paid claims data to refine both their population management and the care coordination efforts. With this acquisition, we’ve strengthened our ability to help our clients succeed with risk-based payment models such as global risk and ACOs.

Very few doctors in this country know the effectiveness or cost of the referral partners that receive patients from them. As a result of this acquisition, we need not have this be true of any athenahealth client. As reimbursement moves from volume to value and as our providers take on risk contracts or form ACOs, we are well positioned to equip our clients with that age-old American skill, the ability to shop.

along with the HDS acquisition, we were thrilled to convene the second annual offsite meeting of More Disruption Please or MDP as we lovingly call it where we can attract and support innovation partners and identify future acquisitions like HDS. MDP is a gathering of CEOs of new disruptive technology companies in healthcare.

This year, 100 of members joined us for a two-day retreat at point lookout in Maine, among the activities was a friendly bake-off that ended in sales pitches by a number of these ventures including Entrada, iTriage, Epion, Wellframe, and Healthfinch, delivered YoY WebEx to the athenahealth client base. the winner, iTriage will pilot the sale of their services through the athenahealth client base later this year.

We are also actively working to integrate seven MDP member companies on to athenaNet before year-end, and expect to have the capacity to add another 25 companies next year. athenahealth remains committed to helping new technologies accelerate their growth using our open cloud-based platform and the robust pace of our early adopting providers that we love serving.

We view the creation of this ecosystem as strategically essential to achieving our vision of an information backbone that helps make healthcare work as it should. I am also pleased to report that our coordinate market strategy is starting to gain traction. The premise behind this strategy is that our clients will affectively become channel partners, once they understand the true value of an integrated network. Following this approach, our athenaClinicals clients are starting to introduce us to their supply chain partners whom we are signing up as coordinator receivers.

There are some examples. In Ohio when athenaClinicals client received their first invoice with $1 charge for each order sent to a non-receiver. Since many of the charges were the lab orders. the client contacted two competing lab companies, asking them both to get on to the athenahealth receiver network, and since both are interested in gaining more insight into their referral partners and in being better trading partners, we are negotiating to sign both.

in New Jersey, an influential pediatric group with an interest in creating an in-network business partners sent us a complete list of their referral partners. We’ve already signed up the radiology partner and are working to add the others to the receiver network.

Finally in Georgia, an OB/GYN clinic decided to redirect their imaging referrals away from one entity to another center that decided to be a receiver on athenaCoordinator. As a result, this practice can exchange health information more efficiently with one of their critical supply chain partners.

Now overall, volume on this network is still small. As in-network orders represented only 1% of the total volume this quarter. However, these examples signal that athenaCoordinator and Clinicals with order based pricing can and should create real incentives for clients to connect using our network. By expanding the number of senders and receivers on the network, we will be able to build a sustainable market in the efficient and open exchange of health information.

I’m also happy to report that our sales team is making progress, we see athenaCoordinator network. since the flow of the athenahealth information usually begins with primary care, we have focused on signing large independent primary clinics to our network. By expanding our primary care base, we believe that we can gain further access to hospitals and other downstream referrals of receivers that have been hard to meet with otherwise.

Since our last earning call, we’ve signed several important primary care clinics that are leaders in their markets. Palmetto Medical Group in South Carolina, Martin’s Point Health Care in Maine and Mid Dakota Clinic in North Dakota.

Finally, we’ve noticed in Q2 and Q3 that the unplugged trend is officially here in the EMR market. In past calls, we’ve described the new adopters, the second wave adopters, and then a third trend of those unplugging from earlier waves. Class reports that 30% to 50% of large practices are replacing legacy EMRs as we speak. As the deck gets reshuffled, we are reaping rewards with 45% of all second half 2012 deals in the active pipe coming off of other EMRs.

Some are realizing that their systems won’t meet the requirements of Stage 2 Meaningful Use or ICD-10 beyond that. Others are being forced off of systems that are being sunset by struggling software vendors. Seizing on this new movement in the market, we are sharpening our focus to make sure that switching to athenaClinicals is dramatically less painful than staying on legacy software.

Our athenahealth burn unit is now able to manage the entire transition process for our clients, migrating objective data out of legacy systems into athenaNet and providing access to historic full charts through links inside the athenaClinicals’ record.

This two-pronged solution will ensure that our clients get the benefit of any object data that they have well maintained in their legacy systems and ensure that they can see full charts’ that were originally constructed. I’m confident that this service set will provide our burn victims what they have not yet had in the healthcare IT market, a smooth and efficient transition with minimal disruption to their clinical practice.

The athenahealth team remains maniacally focused on delivering against our full year 2012 goals. We are turning up the dial on efforts to close more business and bring clients on to the network faster than ever. I feel great about what we’ve accomplished so far this year and believe we will enter 2013 with significant momentum. I will now let Tim take a minute to review our key financial details, and afterwards, we both look forward to your questions.

Timothy M. Adams

Thank you Jonathan and good morning everyone. As Jonathan mentioned, we are disappointed with the revenue growth and booking shortfall this quarter. However, we are still confident that we have a highly differentiated service and a huge market opportunity remains. Despite the implementation and ramping delays at a few of our national account clients, our implementation team brought a record high new business live on to our network this quarter. The quarter was also highlighted by record net physician additions across our three core service offerings.

During Q3 2012, we grew total revenue by 26% over Q3 2011 to $105.9 million and grew our non-GAAP adjusted gross profit by 24% to $66.4 million or 62.7% of total revenue. we continue to invest in growth and innovation, increasing our GAAP, selling and marketing expense by 23% to $25.6 million and our GAAP research and development expense by 42% to $8.7 million in Q3 2012.

Our non-GAAP adjusted EBITDA grew by 38% to $26 million or 24.6% of revenue during Q3 2012. In addition, we posted non-GAAP adjusted earnings per share of $0.30, representing a 26% increase or $0.06 compared to the same quarter last year. The non-GAAP and per share of $0.30 includes an approximate $0.05 income item related to a reduction in the Proxsys contingent consideration.

Finally our balance sheet remains healthy as cash and cash equivalents increased by over $25 million from last quarter to $182.3 million. Based on our Q3 2012 financial results, we believe that our full-year revenue will be closer to the lower end of our previously issued guidance, while non-GAAP adjusted gross margin will be closer to the midpoint of our previously issued guidance. The non-GAAP adjusted operating income and non-GAAP adjusted earnings per diluted share will be closer to the high-end of our previously issued guidance.

It is important to note that both the non-GAAP adjusted operating income and non-GAAP adjusted earnings per diluted share include the favorable impact from the Proxsys contingent consideration adjustment. As you know, we set the bar high and target very ambitious goals for ourselves. We believe that this is the right approach as we work toward our vision of building a health information backbone that helps healthcare work as it should. We look forward to providing you an update to our financial outlook and growth strategy at our upcoming Investor Summit on December 6, 2012.

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

Question-and-Answer Session

Operator

(Operator Instructions) And the first question is from Michael Cherny from ISI Group. Please go ahead.

Michael Cherny – ISI Group LLC

Good morning guys

Timothy M. Adams

Hi, Michael

Michael Cherny – ISI Group LLC

First, I want to dig a little bit into the utilization comment on the prepared remarks, it seems like the trend soften a little bit first where you were in the first half of the year. If other healthcare companies we’re seeing definitely weaker commentary than you would had, and I think that was throughout the rest of the year. You talked a little bit about any of the pockets of why you may have seen utilization flowing, and then any color or thoughts you have around utilization 4Q or may be if it’s not too early kind of some early thoughts where you’ve seen October so far?

Timothy M. Adams

Yeah. Hey, Michael this is Tim. So, you’re right. In the first half of the year, we look at the volume of claims per doc on the same-store basis and the collection per claim. And in Q1 and Q2 we had favorable trends, on a year-over-year basis. I think we said it was up modestly. Others in the healthcare world were reporting that it wasn’t so favorable in the first half of the year, but we were bucking that trend and we were ahead. We took that optimism from the first half of the year, when we tightened the guidance range we included that by tightening the lower end. And we just didn’t see it in the third quarter. It was barely up on a year-over-year basis kind of across the board. When we look at our client basis, it’s really hard to call out any pocket in particular, but it was a positive tailwind first half of the year, flattish, barely up in the third quarter. So I’d say, I think we need to be a little more cautious as we go into Q4 where that really could play out.

Michael Cherny – ISI Group LLC

Great, thanks. And then just on the doc add number, obviously a very strong result across all three business lines. Clearly 3Q is typically seasonally strong. Can you talk a little bit about with regards to the doc adds what came from probably the existing customer base for some of the new deals you’re ramping. And did you see that same kind of approach of the new residence coming online in the summer. And any kind of break that it will be greatly appreciated.

Jonathan Bush

Yeah, so Michael you're right 2,000 doc adds in the quarter, record quarter for us, we were thrilled by that. Probably about two thirds of that did come from new deals, a third coming from add-ons to existing deals. You do get a little bit of the residency effect that happens in Q3 every year.

Two big lives in the quarter, MedExpress is fully up and running, that’s one of the big enterprise deals that we announced in Q4 last year. 250 docs, 460 providers ProMedica another one of those big accounts is up and running nicely probably about a third of that account is up and running in live. There was nothing from health management in the quarter there’s slid into start to go live roughly in December of this year. So it’s 2,000 doc adds we're excited about that and it doesn't include one of our new big wins that we had just back in Q2. But that's going to get started in December, and work its way through, probably the first half of 2013.

Michael Cherny – ISI Group LLC

Great Tim thanks, very helpful.

Operator

Thank you, and the next question is from Jamie Stockton from Wells Fargo. Please go ahead.

Jamie Stockton – Wells Fargo Securities, LLC

Yeah good morning. I guess may be the progress towards the bookings goal during the quarter is going to be a big focus. If you could give us some sense for how those numbers trended in 2011, or whether or not, there was quarter, or whether there was a big deviation, like there was in this quarter?

Timothy M. Adams

Sure Jamie. And I would just have to say, in honor of our response to the pressure of the share, all of our share scorecard results entry year with the investment community are welcome to our night in there. We swept this throughout every year of the last 15. And in fact Q3 is always our worst, on average over the last four years, we’ve been at 78% in Q3. Every year we trim down the goal so that we will look better, so that we will be more accurately forecasting the year, but every year August and sales meeting and whatever summer vacations hit us. And so far, most years, we squeak it back out at the end of the year. Many, many, many folks in the traditional enterprise software space get a ridiculous amount of their bookings in Q4 and we are not quite that bad, but not a total exception.

I'll give you a small example, like we were at 86% of the goal one of the ones that we were sure that we would be in, ended up trickling over the line, it made it into the script Palmetto, with Palmetto we are at 96.

Jonathan Bush

90.

Timothy M. Adams

I'm sorry 90 instead of 86. So a little less painful of a look, but this is exactly what goes on every year. And you’re absolutely right, it’s not new, it's still terrifying. We on some tight day, insecure folks, and it’s always a good [sweet] in the jaw to see that gaping more staring at us. Less than three months away.

Jamie Stockton – Wells Fargo Securities, LLC

Okay, and then may be Jonathan if you could just touch on win rate. I think that's the other thing that’s probably going to be a big question for people whether or not there has been any change in the comprehensive dynamic?

Jonathan Bush

Yeah. So the one mega trend that I think is a mega sort of maybe mega in our little world is kind of a two-year trend or one year trend, that we were seeing emerge, is the elongation and sort of increasing stuttering of the Independent group market. So what's going on is in many markets these big academics are buying a huge copy of Epic and going out [Wexner] or whoever, but the examples that I have heard about are Epic, because they spend so much. They convinced themselves that the way they are going to pay for it is, they get all these independent doctors to use it.

So they got out and sort of do some Bush Doctrine saying, in three years we're going to be live with this thing and it's going to slice and dice and bring world peace, and you either going to be on it or not allowed in our hospital. Now, practically speaking that is not going to be happen right these guys have the patients, the hospitals will need patients more than ever, the idea of making everybody in an entire marketplace get on to one system that systematically slows you down, if you’re an independent practices, it’s just not going to happen.

But when doctors hear this, you'll be cut out of our ACO, you’re going to not be clinically integrated with us, if you're not on this thing, they freeze up and they say, jeez how do we respond to that, and it causes our sales guys who is only talking about improving patient flow, improving collections, improving Pay-for-Performance they are not talking about being cut out or included in some special network in that market.

They lose their lose the advantage, now we working very hard with a fair number of these independent practices to build a pretty impressive set of clinical integration, it's a very probably the top priority for next year is just to rolling it out, the clinical integration that’s enabled by coordinator and the interfacing capability of our last mile team.

So the doctors know that they can be on the best system for them, and still clinically integrate, is just actually not true that you have to be on one piece of software to be clinically integrated. I believe that all of the banks in America may not be on one instance of one software and get all of us can stumble up to any cash machine we want and exchange information. It’s a ludicrous, pre-Internet idea that’s true, but that is affecting, it's making our sales cycle 20% longer and it's making our close rate a couple of percent lower.

And I think it's even affecting our upper funnel where people say yeah, I'd like to talk to you, but not yet. Where do we feel how things sort out in the market before we meet with you? So, I’d say that’s probably our biggest challenge going in next year, and now remember we are just a (inaudible) in the ocean, with 5% of the docs and trying to get to 7%. We're not needing to recreate a mega trend in order to hit on numbers, but you’ve tapped into a, this sort of center of the strategic rift, the fundamental unintended adverse consequence of the HITECH Act is the idea of hospitals creating monopoly, not all hospitals are doing it, most hospitals are trying to earn there business, but some are going other way. And we will need to have to fight those.

Jamie Stockton – Wells Fargo Securities, LLC

Okay. Thank you.

Operator

Thank you, and the next question is from Mohan Naidu from Piper Jaffray. Please go ahead.

Mohan A. Naidu – Piper Jaffray, Inc.

Good morning guys, so getting back to the bookings growth number, where do you guys need to be by the year-end to support a 30% revenue growth into 2013?

Jonathan Bush

Believe me we need the growth about 30% more than we did last year Mohan, and it kind of keeps going that way, and so I don’t think we need all of it, we certainly don’t need anything to get to 30%, this year we got a major slow down in physician practice productivity, we could miss the year, but I think that’s extremely unlikely. In terms of next year, you’re absolutely right we don’t need all of our bookings goal, we don’t set our bookings goal right at 30%. We give ourselves a little cushion, but will need most of it otherwise we’ll be getting on in the Q4, whatever in January or February, whenever we talk to you and say yeah, this year is looking more like 25 or whatever, but right now we are still planning on growing bookings 30% every year, which gives us a little cushion on growing revenues that way.

Timothy M. Adams

Yeah, Mohan let me just throw something in there as well, so I think may be concern you probably raising is you saw the 86% year-to-date to give a set confidence rolling into a 30% growth for next year, the number needs to be higher than 86%, but it doesn’t have to be 100%.

I certainly get a lot more comfortable the closer to 100%, we guess because it takes pressure off of the other metrics that drive revenues and those don’t have to be quite as final attempt. So we need to get a little bit better and John mentioned Palmetto that’s great and that puts us to the 90% year-to-date so I’m feeling better about that. We will just focused on having a strong Q4 as we had in many other years to finish out strong that give us better visibility and confidence for next year.

Mohan A. Naidu – Piper Jaffray, Inc.

All right, as the next question, so you guys added about 2,000 plus docs in the quarter, and the difference I guess is one of the reasons you guys right about missing the revenues National Accounts taking longer to implement, but you guys had a strong doc add, how much are right in the offset you’re lengthening into National Accounts implementation.

Jonathan Bush

We just had two situations, where we lack the political and sort of people management prowess in extremely sort of tense political situations to get to the top of the list. We believe we would have been a unifying positive influence in these two institutions, but we did not make our case well enough. we got moved to the bottom of the page, one of them is now on track, and the other one is still off track, but the strategy of the institution is still us.

I needed both clients that we really love, really believe we can help. But they have really ambitious agendas before them, and it’s wonderful for me, because when you get stung like this, you dig in deep and you’ll learn, what our DNA is really capable of, and in some cases, I think we’ve sort of, our DNA was wrong. And in some cases, we just need little more pushups to get strong. And so it’s easy to start doing pushups, when you get to the third day, it’s like oh, God, you got to be kidding me.

So that’s kind of where we are. I don’t think it’s a total systemic breakdown, but I do think we need more organizational capacity to navigate and be relevant in politically tensed markets. If anybody on the call knows any investment bankers that are considering shooting their young, we’d love to have them in sales. I know that market is falling apart, and we are taking off. And we have no air made ties in the building and we need some, we need the guys who can nearly work through management teams and get people aligned.

Mohan A. Naidu – Piper Jaffray, Inc.

All right, thank you. The last question I guess, the sales force expansion you guys targeting to add 18 more. But referring to the new additions that you did in Q4 of last year, how are they performing right now, are they up to what your expectations are?

Jonathan Bush

Mohan, based on the number we posted for Q3, there certainly was some underperformance. In general, folks do ramp up and track according to the plan, if not we’ve had some change outs in the sales force, but Q3 was not their strongest quarter in terms of sales rep productivity that we’d take a look at every quarter.

Mohan A. Naidu – Piper Jaffray, Inc.

And it’s not any particular segment, is their weakness?

Jonathan Bush

No, I wouldn’t call it out at that granular level.

Mohan A. Naidu – Piper Jaffray, Inc.

Thank you.

Jonathan Bush

The National Account team has actually done a great job on a year-to-date basis.

Mohan A. Naidu – Piper Jaffray, Inc.

Yeah.

Jonathan Bush

They had a great win in Q2 that we’ve talked about Children’s Hospital of LA was a nice win that we had in Q3 coming from the National Accounts. so that team on a year-to-date basis is performing well.

Mohan A. Naidu – Piper Jaffray, Inc.

Thank you so much guys.

Timothy M. Adams

Thanks, Mohan.

Operator

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

Richard Close – Avondale Partners, LLC

Yeah. Just curious on the two National Accounts that’s left, what is the, I guess the biggest issue that is causing those to either be put on hold or continue to slip. I mean anything you can just put your finger on specifically?

Jonathan Bush

Yeah, absolutely. In every institution that we begin to serve of every size, we run into somebody who is the primary beneficiary of unique knowledge of the old system, and when you get bigger those established players, get more powerful and entrenched, and more resistant, more able to resist change. What’s been important about athena is that the scale, the financial scale of the change is big enough to either get those people to change their mind or get people around them to overrule them, but as you get into these more complex organizations, we don’t always, we don’t always have access to the folks, to sort of at the highest level. and we don’t always have access to the people on the ground where we can go and say like this isn’t going to be so bad.

So in the for-profit sector, we need to make sure that they led us into the frontline, and led us coach people, because we’re very, I mean this is all we do, what is that line, being a capsule right now? And we have earned the right to be trusted enough to be out there and helping among the frontline, and in the academic and sort of big hospital setting. we got to get to see enough people that really care about cost of ownership in a fundamental way.

And we’re chipping away of these things, I think that these are focal points of ours, has been throughout basically, since Steve Kahane joined, and he has made great headway in moving us towards a performance coach, produciary key press relationships at higher levels. but we’re still going, I mean in contrast of the two big stalls, we had an implementation, pretty much a record time, not quite record time at National Account in MedExpress, bullish to move their 100 centers that’s a situation where the sales started with meeting the CEO and his biggest backer, knowing it’s biggest backer in this case is a private equity funded kind of the big run-up type of business plan, and boy, that helped?

I mean I may have spent 11 minutes with the guy on average per month since then, but that’s enough. I’m just knowing that this imperative is where the organization is going, allows our people to get their calls returned, say no when they need to and not worry if they’re going to get enough doubt. So this is, I think part of the reason why we’ve done so much better in for-profit institutions and institutions that are under financial pressure, than we have done in not-for-profit institutions or institutions that are not under financial pressure. That’s not a across the board comment, sometimes new management comes into a wealthy not-for-profit institution and they create an imperative to do something new. but that’s what we’re learning right now, that’s kind of in our sort of formation bucket, it’s not a core competence of ours, it’s one we believe we need to be built still.

Richard Close – Avondale Partners, LLC

And then just as a follow-up, do you think that with HDS and then you have coordinator, are you making waves in terms of getting the hospitals, essentially to buy into athenaCollector, athenaClinicals, I mean are you having success penetrating that fortress I guess?

Jonathan Bush

Yes. We are; it’s just popping. It doesn’t really shown the numbers, so I stood to that age-old lame tradition of giving anecdotes on an earnings call, because I wanted you to know, but it’s not a huge presence of volume. but I’ll just give you an excellent example; we’re now up to 900 clients that are on Coordinator as sender and receiver.

And in fact in Q3 alone, we sold 11 plus deals, the full pre-reg or pre-cert deals year-to-date. and just in Q3, we sold 29 net new Coordinator core receivers that aren’t on athena. they just want to be on the core kind of social network, and we’ve only got one guy implementing those. I met him; he is in our Atlanta office where I was yesterday. and boy, he is a new employee and he is either just about popping out of his hat. It was the coolest thing. It is actually two, one woman who is a former client of ours actually in the northeast moves down there to make this happen, and it’s exciting. It’s finally kind of popping and I think over the coming earnings calls, I’ve been announcing that we’re going to track total docs on the network across all services eminently for about three years now.

But Brazil was announcing that they were going to be a growth economy for many years and now they are. so maybe soon, we will report on it that way. It is fun. It is an area of excitement within athena to see these guys pop, and to see the more established labs try to deny this from the happening and seeing the docs that are glinting their eye, I don’t really understand and kind of get out their pitchforks and their torches. so it’s going to be a lot of fun to see that thing start to pop and we think of course, the primary goal here is to make Clinicals cheaper for our clients, but still be able to afford the full service kind of cloud-based service that we deliver. and so making this two-sided market work has been great.

I will say that I do believe that learning it and adding it to the sale has been very hard on our core sales force. Adding a Coordinator receiver does not add any revenue. so you now have to sell two customers to get $1 of revenue, the same dollar, right. so we started paying them commissions to go out and get these receivers even though it doesn’t add to the total revenues booked to the athena, I mean it theoretically it might, because there are caps.

but learning how to do that and absorbing the distraction of selling the same number of dollars of revenues from more than one person is something that has been a wind in our face this year. next year, we’re going to have a core team down at Atlanta that it’s obvious most of this work. so that our guys can just focus on the athena one part of the deal. But this is, I’m glad you asked the question, it is taking off. It has been hard to swallow it all while not changing on our growth path, but we’re going to be very glad, we did it, I’m still confident.

Richard Close – Avondale Partners, LLC

All right, thank you.

Operator

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

George Hill – Citigroup Inc.

Hey, good morning, Tim and Jonathan, thanks for taking the question. Maybe, coming back to utilization rate a little bit, Tim?

Timothy M. Adams

Yeah.

George Hill – Citigroup Inc.

How should we think about utilization with respect to, is it physicians seeing in more patients per day and general softness in healthcare utilization? Or is it mix of doctors that are using the service? or is it doctors choosing not to run transactions through the network? should we feel like we’re impacting utilization and how should we think about those three buckets?

Jonathan Bush

They know, they never choose not to run transactions through the network.

Timothy M. Adams

Yeah.

Jonathan Bush

This is a slowing of their productivity.

Timothy M. Adams

Yes. George, it’s definitely not the latter as Jon mentioned. Its volume and rate is the way we really try to break it down. We don’t really cut it so much by the different pockets geographically or by specialty groups. And what we saw on Q3, the volume and the rate were pretty flat on a year-over-year basis whereas in the first half of the year, we saw some positive trends on both volume and rate, and it varies by quarter a little bit. We thought we would see that trend continue in the second half of the year, we didn’t see it in Q3.

Now back in the first half of the year, the labs and the hospitals, and the medical device companies, a bunch of others in the industry were reporting some downtick in those metrics, we didn’t see it. Preliminary indications are that they are reporting that again in Q3 and we are seeing it in Q3. So I would be cautious about how you model that out and think about it in Q4. We will know more and by the time, we get to the Investor Day, we can certainly chat a little bit more about that, because we’ll have a couple of months of live data behind us.

George Hill – Citigroup Inc.

All right. so then probably safety model, proper up tick seasonality, but year-over-year strength is probably not to be expected?

Timothy M. Adams

I think that’s right.

George Hill – Citigroup Inc.

Yeah. And then another thing, maybe talk a little bit about pricing, given the strength of the cross-sell, I would have expected athena’s take rate, the amount of money that you guys keep versus total collections to be a little stronger than it was than 444 basis points?

Timothy M. Adams

Yeah.

George Hill – Citigroup Inc.

Is there something going on there with the mix that the larger accounts that are coming on are getting better pricing, so we’re seeing a compression across some of the product channels or we’re discounting for some other region and certain regions? I guess can you talk about what’s happening there?

Timothy M. Adams

Yes. the primary driver of that really is mix. You’ll see some of these large specialty groups that have high dollar volume claims will come in at a lower percentage. The number that Jon and I always look at, we don’t disclose this publically is, what is the revenue rate, the revenue dollar amount per claim that we’re getting that helps us drive pricing, and think about gross margin. We’re not seeing any degradation in pricing. We do have promotions from time-to-time back at the user conference we had talked about Communicator for three-month frame and that helped with the take rate. And you’re seeing the triple barrel attach rate again is very strong this quarter.

Jonathan Bush

Helped with the attach rate and hurt the take rate.

Timothy M. Adams

Yeah. So it pinches the take rate a little bit, there a little bit. But that’s three months and you keep these clients for a long time that’s a great ROI on that investment. So that’s probably pinched it a little bit, but I think that’s pretty small. Mix is the primary driver, but we’re just not seeing any pressure on the overall rate per claim across the board, dollar per claim across the board.

George Hill – Citigroup Inc.

Okay. and then one last follow-up for, Jonathan. Jonathan, seasonality, these stuttering docs, how do we get them into voice therapy? how do we get them moving forward?

Jonathan Bush

It’s really very simple. they need to have another practice in their market that’s in the catchment area of the hospital they’re worried about connected. With one doctor, one practice seamlessly, clinically integrated with the hospital, and therefore included in any kind of clinical integration contract or ACO attribution model if they want to be, we can get everyone.

George Hill – Citigroup Inc.

No, why we are…

Jonathan Bush

It’s the idea that they might get smoked after spending all the time in and money switching to athena that is causing this stutter step. They need a colleague that’s already been through the running man game and lived.

George Hill – Citigroup Inc.

The very old fashion, you just need a local reference site?

Jonathan Bush

We need a local reference site. Yeah, it’s obviously not a reference on the service, we don’t need that. It’s a reference on the service being allowed to coexist in fact profitably coexisting with the hospital or two that they care about most.

George Hill – Citigroup Inc.

Got it. All right, I appreciate the color guys. thanks.

Jonathan Bush

Sure, thanks.

Operator

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

David Larsen – Leerink Swann LLC

Hi, can you guys talk about your Credentialing and Denials Management and Contract Management services. Is that Contract Management? Are you referring to managed care contracting, and it sounds to me like this is a lot of work, is that having an impact on your cost of goods, and are you charging more for those services? How is that going?

Jonathan Bush

So the credentialing is essentially getting a doctor good to go, goodwill to a carrier. I mean it is something that we will someday soon hopefully resell to hospitals who have to do the same kind of work to make a doctor good to go to use their operating rooms to be on the core voluntary step. It has been a lot of work, which is why we haven’t done it, but we’ve had a depth in R&D team working on it for several years to where we’ve been able to get it down to a work level that we can accommodate. And in fact, at a relatively short time after piloting it, it’s now quite scalable. And I believe next year, we’ll have it available for everyone. And so that’s one that we kind of incubated longer than most. So it spent most of its negative gross margin time with very few clients. And now it’s something that’s respectable gross, I don’t know that brings the thing up, but it sure does make life easier for clients on Collector.

One of the categories of hold up for us is something called Manager Hold. these are claims that can’t go out; because of something at a manager level like the doctor isn’t credential for this payer et cetera. If we can do that work for the client, those claims drop out of hold, turn into revenue, and make everybody happy.

So there’s two reasons for doing it. Contract Management is specifically to switch now. Contract Management is specifically analyzing these managed care fee-for-service contracts and calculating how much to expect for each procedure in each possible combination of diagnosis and locations that it goes out under.

In order to assess whether the payment that comes in, a payer can mark a claim is paid, but as one of that procedure code paid at 50% of what was expected and another one paid at zero. and it will slip through, if the clients can’t tell us what their deal is. And the claims that is paid and it’s paid at the amounts that it’s always been paid, we’ll let that go through as paid. When actually, if we had the original contract, we could go back and say, wait a minute, your deal is that these will all be paid at the full rate or your full rate is 1.3 times Medicare, now 1.2 times Medicare or whatever.

Some not all of our clients have that information all that do give it to us and we load it into system today. This is a service to go out and help the clients that don’t know, and don’t know how to figure it out. And it goes out like a consulting service. And I don’t think it’s that distracting, because it’s not that many clients that are in that little nexus point of a problem.

David Larsen – Leerink Swann LLC

Great, thanks very much. I appreciate it.

Operator

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

Ryan Daniels – William Blair & Co. LLC

Yes, good morning guys, thanks for taking my question. A little bit of a follow-up if you will, on the last term, I'm curious about what pricing flexibility you may have going forward just to drive same-store growth if utilization stays weak, obviously you are adding a lot of services like what you’ve talked about potentially in contract management and also, I think you're beginning to offer things like the mobile solutions which a lot of other vendors charge additional fees for, so, curious how you look at that going forward, is that's an opportunity.

Jonathan Bush

Well as you know there is this edge, athena that we're the best in the world to getting doctors paid for doing the right thing. Most of these allied services that you described, have the side effect of making it easier for these guys to get paid and we benefit from that on that side. So there is the rate we charge, but there is also the improvement in yield we get on the rate, we are already charging on other products. So, if the doctors collection goes up then it's easier, for taking loose fee around rounding sheets at the hospital because they've got their iPhone on them. That has the chart and the codes, that's money for us. So far we have not contemplated charging for any software. So viewing our software on a Mac or an iPhone or an iPad doesn’t really fit our philosophy, as a cloud-based service. We try to charge people for outcomes.

Now, if some day there is some outcome they can only be attained through some app, yeah, we will charge that outcome. At this point, I can't think of any and my e-mail, so free to send them to me, if you can think of another thing to sell. The number of allied services that we are going to need to build up over the next decade to complete this picture are numerous, and all of them are hinge on key outcomes that are currently a big fat mess in healthcare. So, I doubt we’ll start stoop to charging for software in an era of Basels.

Timothy M. Adams

Yes, Ryan we always plan in our gross margin budgets for the year, that we want to reinvest some of those gross margin dollars back into enhancing service for our customers and you see that in the customer satisfaction, loyalty scores and you'll see that in the retention rate, it has maintained a very strong number over time because we're constantly delivering a higher valued service to customers year-over-year.

Jonathan Bush

That's a really good plan. I'll add, I don't know if you all watched the mid-year Class survey, where we popped up pretty significantly and all the other names that they cover popped down pretty significantly, well obviously one of the reasons that we're just better people no I'm kidding. One of the really most profound reasons for that is that there is no coefficient of drag, between seeing a problem with our software and fixing it. There is now a goal; there is another module, another app, we need to get paid for that. We've been paid in advance for our software to get better every year that's the deal and so the teams out in the company don't need to check in with central command about whether they can give stuff to people.

And that changes the pace at which we can innovate, and the key is for us, it's a real that the key for Tim and me and Derek Hedges and Ryan Wise and the guys who are building this product is to make sure, they're designed so that whether you make money on in it or not today, if we get good enough over enough time, we'll make wonderful money and that nobody in the scene has to worry about money or else maybe once a year the account manager has to make sure that the price is right, and that everything else it's about the payers money, that we need to keep focused on and that has worked very well for us in our innovation tracking definitely don't want to get in the way of that.

Ryan Daniels – William Blair & Co. LLC

Right, great and one thank you for all the color. One quick follow-up, if I could just thinking about the growth going forward obviously, it had some very successful partnerships, yeah, with PSS as an example, and I'm curious, how you look at that number one, in developing new partners with doc symmetries, the properties of the world. Number two, as the opportunity changes to more of the unplug as you said it’s a bigger part of your pipeline, does that you have to change your partnerships or your sales mentality all in more of a written replace versus the Greenfield. Thanks.

Jonathan Bush

Yeah, that's excellent. We really do need some new partners, we are loyal to PSS and I'd like to scale a little bit on the distribution space. We have spent a very long time working with those 630 women and men getting them up to speed on a very complicated concept, and I don't really want to demotivate them by trying to get the incremental deal that they don't have, I'd rather equip them to take new business. But as you point out, there is all these live products and I’m very interested in seeing Rob, who is a brilliant marketer be able to spend more of his time in the, what has to be the emerging social network amongst position, that these guys sell out to hospitals. They don't sell their identity. They still have agency, buying power, curiosity, I mean we do train these guys for a third of their lives as deconstructors, right?

That's what doctors are and so providing them a venue to search question buy, sell, specially as they get attached to these bigger institutions, they can't respond to each individual curiosity. It's going to be essential, so you're right, it's the properties and Doximity and physician interactive and Netscape and the regular old kind of words for company are interesting to us, and I would add there is a whole category of HIT company that we don’t look at, we think about everyone is going on Cerner or Epic, where Cerner resumed a news, but those guys are really only targeted at less than half or even less than a quarter of the hospitals.

We ought to be out there helping the little hospitals. And we’ve been doing that primarily through our key for-profit clients who go out and buy and run these little hospitals. but there are many that you don’t know and we don’t do anything right now in terms of channel alliance to get out to them despite setting out to do it, writing it on my list in the morning many times. So, thank you for the kick in the shorts, I’ll go out and do it now.

Ryan Daniels – William Blair & Co. LLC

All right, it sounds good. Thank you.

Operator

Thank you. The next question is from Charles Rhyee from Cowen. Please go ahead.

Charles Rhyee – Cowen and Company, LLC

Thanks for taking the questions. Going back to the bookings real quick, can you remind us, was HMA in that 64%, and if it was, can you talk about what you’re seeing then, maybe not in the enterprise for the market? Are you seeing more competition in the small and the marketing group?

Jonathan Bush

HMA is health; we would like to call it Health Management Associates, please. And I learned that from my partners at Health Management Associates. so I’ll now call them Health Management Associates, please do the same, that was Q2, so that’s not in the deal. probably the PTSD, can’t finishing that deal has something to do with Q3, I hope Mark Gowetski spent most of Q3 in the horizontal position on some beach, because he brought that deal with great effort led us there. And once he wakes up again, I’m sure he’ll do it again for us.

Mark Gowetski

He just didn’t children’s out there.

Jonathan Bush

Oh, yeah, yeah.

Mark Gowetski

Yeah. and the answer is not, please no.

Jonathan Bush

Mark, please go to the beach. But anyway, the fact is that the bookings is, it’s really the one place where we really feel it, is these independent groups who aren’t sure what’s going to happen to them. I’m not going to sell my practice, I’m not going to be able to get on to hospital contract without selling out, it’s the government kind of make me do something that I’m not aware of yet is something available, going to be made available from the hospital for free, any minute now. And so they’re just frozen by uncertainty. I am sure that almost regardless of which resolution that uncertainty resolved into, we’re going to do fine. but please don’t talk to me right now, I’m overwhelmed.

I’ll throw in another one, one of my favorite new clients was actually going to sign in Q3 slipped out. They were waiting for the election. They felt like that their feelings would be, might be affected by what happened during the last stretch of the Presidential election. I don’t know, how widely that we shared, but certainly the idea of too many balls in the air right now, waiting for some to hit the ground before deciding on something that’s major is in here, and it’s primarily in the independent group market, which is where we are primarily down the strongest, these are the best pricing most loyal, fastest implementation time, shorter close cycle, highest close rate.

Charles Rhyee – Cowen and Company, LLC

Right.

Jonathan Bush

And we love them, and we will love them forever. but we need to help them get unstuck.

Charles Rhyee – Cowen and Company, LLC

Jonathan, you kind of mentioned earlier that you thought that this situation is being sort of untended quite consequence of the HITECH Act. Could you say that is not necessarily the HITECH Act, but really the ACA where, basically, as we move to an outcome base model, hospitals are looking at kind of a care organizations and it’s this sort of vertical integration that’s pushing them to acquire practices and practices have to become part of these sort of regional sort of groups. If they really sort of hope to survive, and do you find that, and so you’re hearing from some of the other vendors that you’re getting the sort of geographic areas where it tells to where its predominantly an one vendor environment, because it allows for the easier move information. It doesn’t mean that you have to be in areas. Does it get to a point where the table shifts so far that it’s easier to fight in an area where is this a steel made let’s say?

Jonathan Bush

So, Charles, everyone listening, please just take Charles’ question, remove the question mark? And yes, that’s my answer. It’s exactly, it’s the ACA piece of it that’s causing the current freeze. The ball started rolling with HITECH, but it’s the idea of, am I going to be left out of some key clinically integrated network, but with some decision I’m about to make, right. And whether that I’m going to get partnered, and whether that that I have to be one particular copy of a piece of software to be included, because there is no such thing as information exchange in healthcare. What is it going to be, right.

so like Massachusetts just announced so proudly, that they built a new HIE, right after every other one in the country, absolutely fell on its space and broke its nose. And they are absolutely couldn’t break their arms, patting themselves on the back and what a joke? But anyway, now everyone say jeez, am I supposed to be in this thing, and what do we need to do and our phones ring up, we’re going to be in that, yes, if we have to be in it, we’ll be in it. But you’re absolutely right, if this idea of, I am now dependent, I may be dependent on the hospital for full revenue in some ways. I don’t know what way yet, I’m afraid, right. We need to get to the message no matter, who ends up being point our risk dollar, we will connect to them to you. And by the way, doctor, in case if any doctor is listening, you may decide to change who you want to be connected to, based on who rises and falls. and then I think about these clouds, as they can connect to everyone.

Charles Rhyee – Cowen and Company, LLC

But, you’re talking about trying to convincing doctors, but this may be a different approach than to really go to the hospital and say hey, you might be on an ethic environment, but we can get you that information regardless.

Jonathan Bush

Excuse me, you’re absolutely right. This is a 50-50 play, right this is the outside-in and the inside-out. So fully half of our revenue is helping hospitals goes out to these independent practices and say, and they agree with us. Here is athena, it's violent, it’s ready to go, you can see the logo of our hospital and each of our ancillaries and our labs and our pharmacies you never have to worry about being clinically integrated to us again, and we will look at your financials.

athena won’t show us your personal take-home pay et cetera, et cetera. We’re doing that, we’re the highest close rate of any channel partner program in the history of athenahealth is the one that we are running right now with Health Management Associates. I'm going to tell you this close rate, and I want you to delete this and take, because I’m sure it will get worse, but right now the meetings to-date these little dinner parties with the Health Management executives comes and athena executives comes to the doctor communities, the close rate is 50%, 50% close rate. You know our close rate?

Timothy M. Adams

Unheard of, right.

Jonathan Bush

It's off the charts. So we really believe that getting those hospitals, getting on the same team with the hospitals or at least getting the hospital to grudgingly connect to us, depending on which hospitality it is, is the strategy, and I apology, you’re absolute right. First choice is to get in their arm-in-arm with the hospital as we have done with so many of our hospital clients and hit the streets. Stuart we got a wonderful shared program going across Massachusetts right now, with Stuart Healthcare. There's a couple of them that are really, really snapping and we just need to get the rest of them build. Let’s go to another one, just we're running a little bit out of time.

Operator

Thank you. The next question is from Sandy Draper from Raymond James. Please go ahead.

Sandy Draper – Raymond James

Thanks very much. Most of my questions have actually been answered, but maybe one follow-up Tim, when you think about the pricings out in the quarter and coming in little, I think about it in two ways one; you said utilization has a little bit of pressure, but also just on the math side, when you guys have a really strong doc add number, typically you don’t feel a lot of productivity when you think about the pricing coming in a little slower, (inaudible) pricing I mean, just how we calculate and not what you guys are actually getting paid. Now, how would you compare the strong doc add number just making the denominator bigger, nudging your productivity versus actually utilization pressure the size there, at 50:50, how do you handicap that? Thanks.

Timothy M. Adams

Well, I think you zoom in so close this quarter-on-quarter, you do see a little ripples, we almost lost the big deal, one of the big deals that went live this quarter, and we absolutely drop our pants to get it, and now it’s going live and it’s growing and it’s going to be terrific and we’ll hopefully add some other products that are better priced to recover from what we did to get the business, but it’s in there now, and we hopefully are on our way back to a slightly better thing. But I don’t think there’s any another systemic view.

Timothy M. Adams

No. Treat that more as a one-off, you get a large enterprise account. Sandy, there was the ramping of some of these national accounts in the quarter and what we see for the second half of the year is a little bit slower than what we thought back in July. If we think, they get on track where they need to be, it just didn’t quite ramp in Q3 the way we had thought and we probably feel a little bit of that in Q4 as well.

Jonathan Bush

All right. We have to work last one. Two more?

Timothy M. Adams

One more. Then I have to work after this, so but we got to stop with last one.

Operator

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

Bret Jones – Oppenheimer & Co. Inc.

Hi, good morning, and thank you for squeezing me in. I just wanted to hit on the revenue guidance, I know Jonathan, you expressed confidence that you will be able to achieve the guidance or maybe you’re referring to the 30%, I realized that it was a very large doc add quarter in 3Q, but how much will impact in that current quarter have on revenues in the fourth quarter and I’m just trying to figure out, is there some kind of seasonal anomaly that would cause the fourth quarter to be dramatically higher than what we’ve seen in the past?

Jonathan Bush

There is a seasonal anomaly and Q4 is always stronger, Tim do you want to?

Timothy M. Adams

Yeah. Bret, I would tell you do not model anything greater than 425 for the year. It could be a couple of million less than that on a full year basis, to put a floor on that we’re going to come in at 30% or better growth for the year on a year-over-year basis. It is hard to predict how the utilization is going to play out for us in Q4. Q4 is generally a good quarter, a strong quarter. based on what I saw on Q3, I want to be more cautious about where Q4 comes in, we shared with you guys a plan in this scorecard at the beginning of the year, that said 430, we’re not going to hit that number. It’s not going to be 425, so I want to be a little cautious as we roll into Q4, because utilization is a very hard thing to predict.

Bret Jones – Oppenheimer & Co. Inc.

I was having trouble getting to the 425, so that’s why I was wondering was there some, I know we had the ANSI 5010 earlier and you’re writing off, there’s still a catch up and that could benefit you above and beyond in 4Q?

Timothy M. Adams

Right. When you pencil out the math on the year-to-date revenue, what it takes in Q4 to get to the 425, that would be a banner quarter and I just want everyone to be a little cautious. I’d bump the 425 down a couple of million, use that as a target. Let’s see if we can do better than that and folks are very focused on working in that direction. But really you can’t predict and control the utilization.

Bret Jones – Oppenheimer & Co. Inc.

Okay. Thank you very much.

Jonathan Bush

Okay.

Operator

This concludes the question-and-answer session of today’s call. I will now turn the call back over to Jonathan Bush for final thoughts.

Jonathan Bush

Okay everybody, thank you very much. as I said in the preamble there, I do believe that 30% is the right goal for this place. I think we’ll probably get there this year. I think we ought to be able to keep getting there for several more years to come. But the reason I think it’s the right goal, is very hard. I don’t expect to always get our goals, if I did, I’ll make the goals bigger. I wanted also just to take a minute to focus on the fact that we’ve done a great job in berthing a new way of paying for health information here this year while delivering on some pretty aggressive challenges. And I believe that that accomplishment of getting medical records to be a two-sided market against all manner of obstacle will help us dramatically convince people to adopt. And I think I convince other entrepreneurs to, and establish businesses, to sell technology not as a tool, but by the result.

We’ve seen in it in the retail space, and in other social network type spaces, and the business community needs it terribly, badly, particularly in healthcare. I want to also say thank you to LA children’s who joined us on the network, but didn’t make it into the comment. Those are 250 of the hardest working pediatric specialists in the world, taking all matter occasion for not a lot of money and we are thrilled to be able to help them connect, get there, do financially and then also being easier to do business with by the pediatricians in the Los Angeles community.

I really do see us starting to become a national resource here. I mean I know that’s an ambitious thing to see, and I know I’m squinting when I see it. But we are at risk for financial improvement now in a way that we never imagine we could be or we stopped imagining we can be, when we had to sell our birth center. And it is totally and completely invigorating to me and I think I see it in the eyes of the 2,300 of us that are working on this really cool project.

Thank you all very much. I hope to see you at our investor gathering on December.

Timothy M. Adams

6.

Jonathan Bush

6, later this year.

Operator

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

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