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athenahealth, Inc. Reports Fourth Quarter and Full Year 2013 Results

Q4 2013 Financial Results

  • 48% Revenue Growth Over Fourth Quarter of 2012
  • Non-GAAP Adjusted Operating Income of $34.1 million
  • GAAP Net Income of $13.1 million, or $0.34 Per Diluted Share
  • Non-GAAP Adjusted Net Income of $22.1 million, or $0.57 Per Diluted Share

Full Year 2013 Financial Results

  • 41% Revenue Growth Over Full Year 2012
  • Non-GAAP Adjusted Operating Income of $74.0 million
  • GAAP Net Income of $2.6 million, or $0.07 Per Diluted Share
  • Non-GAAP Adjusted Net Income of $44.3 million, or $1.16 Per Diluted Share

WATERTOWN, Mass., Feb. 6, 2014 (GLOBE NEWSWIRE) -- athenahealth, Inc. (Nasdaq:ATHN) ("athenahealth" or "we"), a leading provider of cloud-based services for electronic health record (EHR), practice management, and care coordination, today announced financial and operational results for the fourth quarter and full year 2013. We will conduct a conference call tomorrow, Friday, February 7, 2014, at 8:00 a.m. Eastern Time to discuss these results and management's outlook for future financial and operational performance.

  • Total revenue for the three months ended December 31, 2013, was $171.6 million, compared to $116.3 million in the same period last year, an increase of 48%.
    ◦ Excluding revenue from Epocrates-branded services of $18.9 million and other revenue consisting of third-party tenant revenue of $3.7 million, core athenahealth revenue was $149.0 million, an increase of 28% over for the three months ended December 31, 2012.
  • Total revenue for full year 2013 was $595.0 million, compared to full year 2012 revenue of $422.3 million, an increase of 41%.
    ◦ Excluding revenue from Epocrates-branded services of $52.4 million and other revenue consisting of third-party tenant revenue of $9.7 million, core athenahealth revenue was $532.9 million, an increase of 26% over full year 2012.

"2013 was a pivotal year for athenahealth. We made marked progress on the evolution of the caregiver user experience, demonstrated resounding success in the enterprise segment, and have begun to revolutionize client on-boarding and performance management with the launch of our nerve centers," said Jonathan Bush, athenahealth's Chairman and Chief Executive Officer. "While information exchange in health care remains mostly an abstract concept, we have made considerable advancements towards our vision of becoming the nation's health information cloud. Following a vertical learning curve, we are innovating and disrupting the status quo, helping our clients be the best at knowing their patients, knowing their problems and for the first time, turning care coordination from a noun into a verb."

  • For the three months ended December 31, 2013, Non-GAAP Adjusted Gross Margin was 66.2%, up from 63.4% in the same period last year.
  • For the three months ended December 31, 2013, Non-GAAP Adjusted Operating Income was $34.1 million, or 19.9% of total revenue, compared to Non-GAAP Adjusted Operating Income of $19.7 million, or 16.9% of total revenue, in the same period last year.
    ◦ Non-GAAP Adjusted Operating Income excludes $0.4 million of integration costs relating to the acquisition of Epocrates which closed on March 12, 2013.
  • For the three months ended December 31, 2013, GAAP Net Income was $13.1 million, or $0.34 per diluted share, compared to $5.9 million, or $0.16 per diluted share, in the same period last year.
  • For the three months ended December 31, 2013, Non-GAAP Adjusted Net Income was $22.1 million, or $0.57 per diluted share, compared to $10.8 million, or $0.29 per diluted share, in the same period last year.

"The athenahealth team delivered another great year. We grew our physician network by 28%, achieved our 30% bookings growth goal for our core business and made significant investments in innovation to stay ahead of the ever-changing health care marketplace," said Tim Adams, athenahealth's Chief Financial Officer. "Each day we are expanding our capabilities in the delivery of health care information technology services into our multi-billion dollar market opportunity. We are thrilled with the progress we have made in 2013 and are well-positioned to continue our success in 2014 and over the long-term."

  • For the year ended December 31, 2013, Non-GAAP Adjusted Gross Margin was 63.0%, up from 62.6% for the year ended December 31, 2012.
  • For the year ended December 31, 2013, Non-GAAP Adjusted Operating Income was $74.0 million, or 12.4% of total revenue, compared to Non-GAAP Adjusted Operating Income of $65.5 million, or 15.5% of total revenue, for the year ended December 31, 2012.
  • For the year ended December 31, 2013, GAAP Net Income was $2.6 million, or $0.07 per diluted share, compared to $18.7 million, or $0.50 per diluted share, for the year ended December 31, 2012.
  • For the year ended December 31, 2013, Non-GAAP Adjusted Net Income was $44.3 million, or $1.16 per diluted share, compared to $37.2 million, or $1.00 per diluted share, for the year ended December 31, 2012.
  • Our full year non-GAAP effective tax rate of 37% was lower than we anticipated primarily due to better than expected research and development tax credits. This lower non-GAAP effective tax rate increased our Non-GAAP Adjusted Net Income per Diluted Share for the year ended December 31, 2013, by approximately $0.08.
  • As of December 31, 2013, we had cash and cash equivalents of $65.0 million and outstanding indebtedness of $223.8 million.

Use of Non-GAAP Financial Measures

In our earnings releases, prepared remarks, conference calls, slide presentations, and webcasts, we may use or discuss non-GAAP financial measures, as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure, are included in this press release after the consolidated financial statements. Our earnings press releases containing such non-GAAP reconciliations can be found in the Investors section of our web site at www.athenahealth.com.

Conference Call Information

To participate in athenahealth's live conference call and webcast, please dial 877-853-5645 (or 408-940-3868 for international calls) using conference code No. 30311330, or visit the Investors section of our web site at www.athenahealth.com. A replay will be available for one week following the conference call at 855-859-2056 (and 404-537-3406 for international calls) using conference code No. 30311330. A webcast replay will also be archived on our website.

About athenahealth

athenahealth is a leading provider of cloud-based services for electronic health record (EHR), practice management, and care coordination. athenahealth's mission is to be caregivers' most trusted service, helping them do well doing the right thing. For more information, please visit www.athenahealth.com.

Forward-Looking Statements

This press release contains forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements reflecting management's expectations for future financial and operational performance and operating expenditures, expected growth, and business outlook; statements regarding the benefits of our service offerings and demands for our service offerings; statements regarding the potential expansion of our network; statements regarding our market opportunity; statements regarding changes in the health care industry, including an increased emphasis on cloud-based services for medical providers, and our positioning in regard to those changes; statements regarding our progress with client on-boarding and performance management; and statements found under our "Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures" section of this release. The forward-looking statements in this release do not constitute guarantees of future performance. These statements are neither promises nor guarantees, and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. In particular, the risks and uncertainties include, among other things: our fluctuating operating results; our variable sales and implementation cycles, which may result in fluctuations in our quarterly results; risks associated with the acquisition and integration of companies and new technologies to achieve expected synergies, including those related to our ability to successfully integrate the services and offerings of Epocrates and realize the expected benefits; risks associated with our ability to realize the expected benefits from the purchase of the Arsenal on the Charles campus in Watertown, Massachusetts; risks associated with our expectations regarding our ability to maintain profitability; the impact of increased sales and marketing expenditures, including whether increased expansion in revenues is attained and whether impact on margins and profitability is longer term than expected; changes in tax rates or exposure to additional tax liabilities; the highly competitive industry in which we operate and the relative immaturity of the market for our service offerings; and the evolving and complex governmental and regulatory compliance environment in which we and our clients operate. 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 neither promises nor guarantees, and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise the information contained in this press release, whether as a result of new information, future events or circumstances, or otherwise. For additional disclosure regarding these and other risks faced by us, please see the disclosures contained in our public filings with the Securities and Exchange Commission, available on the Investors section of our website at http://www.athenahealth.com/ and on the SEC's website at http://www.sec.gov/.

         
athenahealth, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share amounts)
         
      December 31, December 31,
      2013 2012
Assets        
Current assets:        
Cash and cash equivalents      $ 65,002  $ 154,988
Short-term investments     38,092
Current portion of restricted cash     3,000 1,357
Accounts receivable - net     87,343 61,916
Deferred tax assets     6,118 6,907
Prepaid expenses and other current assets     17,194 10,924
Total current assets     178,657 274,184
         
Property and equipment - net     213,018 54,035
Capitalized software costs - net     29,987 16,050
Purchased intangible assets - net     168,364 21,561
Goodwill     198,049 48,090
Deferred tax assets     11,759
Investments and other assets     8,321 2,773
Total assets      $ 796,396  $ 428,452
         
Liabilities & Stockholders' Equity        
Current liabilities:        
Line of credit      $ 35,000 $ —
Current portion of long-term debt     15,000
Accounts payable     3,930 1,733
Accrued compensation     44,444 36,393
Accrued expenses     24,297 19,683
Current portion of deferred revenue     27,002 8,209
Current portion of deferred rent     83 799
Total current liabilities     149,756 66,817
Deferred rent, net of current portion     1,478 2,854
Long-term debt, net of current portion     173,750
Deferred revenue, net of current portion     53,172 45,515
Long-term deferred tax liability - net     21,421
Other long-term liabilities     5,511 1,618
Total liabilities     405,088 116,804
         
Stockholders' equity:        
 Preferred stock, $0.01 par value: 5,000 shares authorized; no shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively    
 Common stock, $0.01 par value: 125,000 shares authorized; 38,600 shares issued and 37,322 shares outstanding at December 31, 2013; 37,572 shares issued and 36,294 shares outstanding at December 31, 2012     387 376
Additional paid-in capital     380,967 303,547
Treasury stock, at cost, 1,278 shares     (1,200) (1,200)
Accumulated other comprehensive loss     (446) (81)
Retained earnings     11,600 9,006
Total stockholders' equity     391,308 311,648
Total liabilities and stockholders' equity      $ 796,396  $ 428,452
         
         
athenahealth, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)
         
  Three Months Ended Twelve Months Ended
  December 31, December 31,
  2013 2012 2013 2012
Revenue:        
Business services  $ 162,529  $ 112,581  $ 563,237  $ 408,496
Implementation and other 9,050 3,723 31,766 13,775
Total revenue 171,579 116,304 595,003 422,271
Expense:        
Direct operating 62,852 45,208 238,672 166,886
Selling and marketing 37,947 27,580 149,488 104,300
Research and development 16,322 9,263 57,639 33,792
General and administrative 22,339 14,952 99,776 57,025
Depreciation and amortization 12,864 7,677 43,575 25,641
Total expense 152,324 104,680 589,150 387,644
Operating income 19,255 11,624 5,853 34,627
Other (expense) income:        
Interest expense (1,319) (143) (3,905) (407)
Other income 136 160 283 658
Total other (expense) income (1,183) 17 (3,622) 251
Income before income tax benefit (provision) 18,072 11,641 2,231 34,878
Income tax benefit (provision) (4,927) (5,701) 363 (16,146)
Net income  $ 13,145  $ 5,940  $ 2,594  $ 18,732
Net income per share – Basic  $ 0.35  $ 0.16  $ 0.07  $ 0.52
Net income per share – Diluted  $ 0.34  $ 0.16  $ 0.07  $ 0.50
Weighted average shares used in computing net income per share:        
Basic 37,262 36,264 36,856 35,956
Diluted 38,645 37,420 38,257 37,133
         
         
athenahealth, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
         
      Year Ended December 31,
      2013 2012
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income      $ 2,594  $ 18,732
Adjustments to reconcile net income to net cash (used in) provided by operating activities:        
Depreciation and amortization     61,853 29,144
Amortization of premium on investments     84 1,270
Provision for uncollectible accounts     791 153
Excess tax benefit from stock-based awards     (6,910) (14,179)
Deferred income tax     (7,044) (890)
Change in fair value of contingent considerations     76 (5,118)
Stock-based compensation expense     42,648 27,236
Other reconciling adjustments     (151) (178)
Changes in operating assets and liabilities:        
Accounts receivable     (4,190) (12,764)
Prepaid expenses and other current assets     3,283 12,096
Other long-term assets     (66) 111
Accounts payable     (233) 13
Accrued expenses     (21) 3,898
Accrued compensation     5,775 7,959
Deferred revenue     (3,090) 2,969
Deferred rent     (2,091) (239)
Net cash provided by operating activities     93,308 70,213
CASH FLOWS FROM INVESTING ACTIVITIES:        
Capitalized software development costs     (29,123) (15,657)
Purchases of property and equipment     (38,260) (23,904)
Proceeds from sales and disposals of property and equipment     172
Proceeds from sales and maturities of investments     56,245 160,340
Purchases of investments     (2,000) (118,919)
Payments on acquisitions, net of cash acquired     (410,161) (5,798)
Change in restricted cash     (1,643) 3,650
Net cash used in investing activities     (424,942) (116)
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from issuance of common stock under stock plans and warrants     31,133 18,699
Taxes paid related to net share settlement of restricted stock awards     (12,075) (4,248)
Excess tax benefit from stock-based awards     6,910 14,179
Proceeds from long-term debt     200,000
Proceeds from line of credit     155,000
Payments on line of credit     (120,000)
Payments on long-term debt and capital lease obligations     (11,250)
Net settlement of acquired company's board of directors equity shares     (5,806)
Debt issuance costs     (1,699)
Payment of contingent consideration accrued at acquisition date     (525) (1,550)
Net cash provided by financing activities     241,688 27,080
Effects of exchange rate changes on cash and cash equivalents     (40) 30
Net (decrease) increase in cash and cash equivalents     (89,986) 97,207
Cash and cash equivalents at beginning of period     154,988 57,781
Cash and cash equivalents at end of period      $ 65,002  $ 154,988
         
         
athenahealth, Inc.
STOCK-BASED COMPENSATION
(Unaudited, in thousands)
         
Set forth below is a breakout of stock-based compensation impacting the Consolidated Statements of Income for the three and twelve months ended December 31, 2013, and 2012:
         
  Three Months Ended Twelve Months Ended
   December 31, December 31,
  2013 2012 2013 2012
Stock-based compensation charged to Consolidated Statements of Income:        
Direct operating  $ 2,160  $ 1,547  $ 7,778  $ 5,619
Selling and marketing 2,848 2,312 12,057 7,717
Research and development 991 306 4,238 3,213
General and administrative 2,925 2,553 18,575 10,687
 Total stock-based compensation expense 8,924 6,718 42,648 27,236
Amortization of capitalized stock-based compensation related to software development (1) 347 257 1,027 257
 Total  $ 9,271  $ 6,975  $ 43,675  $ 27,493
         
(1) In addition, for the three and twelve months ended December 31, 2013, $0.5 million and $2.2 million, respectively, of stock-based compensation was capitalized in the line item Capitalized Software Costs in the Consolidated Balance Sheet for which $0.3 million and $1.0 million, respectively, of amortization was included in the line item Depreciation and Amortization Expense in the Consolidated Statements of Income. The amount of stock-based compensation related to capitalized software development costs in prior periods was not significant.
         
         
athenahealth, Inc.
CASH, CASH EQUIVALENTS, AND AVAILABLE-FOR-SALE INVESTMENTS
(Unaudited, in thousands)
         
Set forth below is a breakout of total cash, cash equivalents, and available-for-sale investments as of December 31, 2013, and December 31, 2012:
         
      December 31, 2013 December 31, 2012
         
Cash, cash equivalents      $ 65,002  $ 154,988
Short-term investments     38,092
 Total      $ 65,002  $ 193,080
         
         
athenahealth, Inc.
REVENUE AND NON-GAAP ADJUSTED OPERATING INCOME BY BUSINESS
(Unaudited, in thousands)
         
Set forth below is a breakout of revenue and "Non-GAAP Adjusted Operating Income" by business for the three and twelve months ended December 31, 2013, and 2012:
         
  Three months ended Twelve months ended
  December 31, December 31,
  2013 2012 2013 2012
Revenue:        
Business services:        
 athenahealth  $ 143,624  $ 112,581  $ 510,857  $ 408,496
 Epocrates 18,905 52,380
Implementation and other:        
 athenahealth 5,406 3,723 22,029 13,775
 Other 3,644 9,737
Total revenue  $ 171,579  $ 116,304  $ 595,003  $ 422,271
         
  Three months ended Twelve months ended
  December 31, December 31,
  2013 2012 2013 2012
Non-GAAP Adjusted Operating Income:        
 athenahealth  $ 29,636  $ 19,699  $ 69,441  $ 65,479
 Epocrates 2,773 82
Other 1,710 4,439
Total Non-GAAP Adjusted Operating Income 34,119 19,699 73,962 65,479
Stock-based compensation expense 8,924 6,718 42,648 27,236
Integration and transaction costs 397 9,024
Amortization of capitalized stock-based compensation related to software development 347 257 1,027 257
Gain on early termination of lease (2,468)
Amortization of purchased intangible assets 5,196 1,100 17,878 3,359
Total operating income 19,255 11,624 5,853 34,627
Other (expense) income (1,183) 17 (3,622) 251
Income before income tax (provision) benefit 18,072 11,641 2,231 34,878
Income tax (provision) benefit (4,927) (5,701) 363 (16,146)
Net income  $ 13,145  $ 5,940  $ 2,594  $ 18,732
         
         
athenahealth, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO COMPARABLE GAAP MEASURES
(Unaudited, in thousands, except per share amounts)
 
The following is a reconciliation of the non-GAAP financial measures used by us to describe our financial results determined in accordance with accounting principles generally accepted in the United States of America ("GAAP"). An explanation of these measures is also included below under the heading "Explanation of Non-GAAP Financial Measures."
 
While management believes that these non-GAAP financial measures provide useful supplemental information to investors regarding the underlying performance of our business operations, investors are reminded to consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. In addition, it should be noted that these non-GAAP financial measures may be different from non-GAAP measures used by other companies, and management may utilize other measures to illustrate performance in the future. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP.
 
Please note that these figures may not sum exactly due to rounding.
 
Non-GAAP Adjusted Gross Margin
Set forth below is a presentation of our "Non-GAAP Adjusted Gross Profit" and "Non-GAAP Adjusted Gross Margin," which represents Non-GAAP Adjusted Gross Profit as a percentage of total revenue.
         
(unaudited, in thousands) Three Months Ended Twelve Months Ended
  December 31, December 31,
  2013 2012 2013 2012
         
Total revenue  $ 171,579  $ 116,304  $ 595,003  $ 422,271
Direct operating expense 62,852 45,208 238,672 166,886
         
 Total revenue less direct operating expense 108,727 71,096 356,331 255,385
 Add: Stock-based compensation allocated to direct operating expense 2,160 1,547 7,778 5,619
 Add: Amortization of purchased intangible assets allocated to direct operating expense 2,777 1,100 10,617 3,359
         
Non-GAAP Adjusted Gross Profit  $ 113,664  $ 73,743  $ 374,726  $ 264,363
         
Non-GAAP Adjusted Gross Margin 66.2% 63.4% 63.0% 62.6%
         
Non-GAAP Adjusted EBITDA
Set forth below is a reconciliation of our "Non-GAAP Adjusted EBITDA" and "Non-GAAP Adjusted EBITDA Margin," which represents Non-GAAP Adjusted EBITDA as a percentage of total revenue.
         
(unaudited, in thousands) Three Months Ended Twelve Months Ended
  December 31, December 31,
  2013 2012 2013 2012
         
Total Revenue  $ 171,579  $ 116,304  $ 595,003  $ 422,271
         
GAAP net income 13,145 5,940 2,594 18,732
 Add: Provision for (benefit) from income taxes 4,927 5,701 (363) 16,146
 Add: Total other expense (income) 1,183 (17) 3,622 (251)
 Add: Stock-based compensation expense 8,924 6,718 42,648 27,236
 Add: Depreciation and amortization 12,864 7,677 43,575 25,641
 Add: Amortization of purchased intangible assets 5,196 1,100 17,878 3,359
 Add: Integration and transaction costs 397 6,865
 Add: Non-tax deductible transaction costs 2,159
 Less: Gain on early termination of lease (2,468)
         
Non-GAAP Adjusted EBITDA  $ 46,636  $ 27,119  $ 116,510  $ 90,863
         
Non-GAAP Adjusted EBITDA Margin 27.2% 23.3% 19.6% 21.5%
 
Non-GAAP Adjusted Operating Income
Set forth below is a reconciliation of our "Non-GAAP Adjusted Operating Income" and "Non-GAAP Adjusted Operating Income Margin," which represents Non-GAAP Adjusted Operating Income as a percentage of total revenue.
         
(unaudited, in thousands) Three Months Ended Twelve Months Ended
  December 31, December 31,
  2013 2012 2013 2012
         
Total revenue  $ 171,579  $ 116,304  $ 595,003  $ 422,271
         
GAAP net income 13,145 5,940 2,594 18,732
 Add: Provision for (benefit) from income taxes 4,927 5,701 (363) 16,146
 Add: Total other expense (income) 1,183 (17) 3,622 (251)
 Add: Stock-based compensation expense 8,924 6,718 42,648 27,236
 Add: Amortization of capitalized stock-based compensation related to software development 347 257 1,027 257
 Add: Amortization of purchased intangible assets 5,196 1,100 17,878 3,359
 Add: Integration and transaction costs 397 6,865
 Add: Non-tax deductible transaction costs 2,159
 Less: Gain on early termination of lease (2,468)
         
Non-GAAP Adjusted Operating Income  $ 34,119  $ 19,699  $ 73,962  $ 65,479
         
Non-GAAP Adjusted Operating Income Margin 19.9% 16.9% 12.4% 15.5%
         
Non-GAAP Adjusted Net Income
Set forth below is a reconciliation of our "Non-GAAP Adjusted Net Income" and "Non-GAAP Adjusted Net Income per Diluted Share."
         
(unaudited, in thousands) Three Months Ended Twelve Months Ended
  December 31, December 31,
  2013 2012 2013 2012
         
GAAP net income  $ 13,145  $ 5,940  $ 2,594  $ 18,732
 Add: Stock-based compensation expense 8,924 6,718 42,648 27,236
 Add: Amortization of capitalized stock-based compensation related to software development 347 257 1,027 257
 Add: Amortization of purchased intangible assets 5,196 1,100 17,878 3,359
 Add: Integration and transaction costs 397 6,865
 Less: Gain on early termination of lease (2,468)
         
 Sub-total of tax deductible items 14,864 8,075 65,950 30,852
         
 Less: Tax impact of tax deductible items (1) (5,946) (3,230) (26,380) (12,341)
 Add: Non-tax deductible transaction costs 2,159
         
Non-GAAP Adjusted Net Income  $ 22,063  $ 10,785  $ 44,323  $ 37,243
         
Weighted average shares - diluted 38,645 37,420 38,257 37,133
         
Non-GAAP Adjusted Net Income per Diluted Share  $ 0.57  $ 0.29  $ 1.16  $ 1.00
(1) Tax impact calculated using a statutory tax rate of 40%.
         
(unaudited, in thousands) Three Months Ended Twelve Months Ended
  December 31, December 31,
  2013 2012 2013 2012
         
GAAP net income per share - diluted  $ 0.34  $ 0.16  $ 0.07  $ 0.50
 Add: Stock-based compensation expense 0.23 0.18 1.11 0.73
 Add: Amortization of capitalized stock-based compensation related to software development 0.01 0.01 0.03 0.01
 Add: Amortization of purchased intangible assets 0.13 0.03 0.47 0.09
 Add: Integration and transaction costs 0.01 0.18
 Less: Gain on early termination of lease (0.06)
         
 Sub-total of tax deductible items 0.38 0.22 1.72 0.83
         
 Less: Tax impact of tax deductible items (1) (0.15) (0.09) (0.69) (0.33)
 Add: Non-tax deductible transaction costs 0.06
         
Non-GAAP Adjusted Net Income per Diluted Share  $ 0.57  $ 0.29  $ 1.16  $ 1.00
         
Weighted average shares - diluted 38,645 37,420 38,257 37,133
(1) Tax impact calculated using a statutory tax rate of 40%.
         

Explanation of Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States of America, or GAAP. However, management believes that, in order to properly understand our short-term and long-term financial and operational trends, investors may wish to consider the impact of certain non-cash or non-recurring items, when used as a supplement to financial performance measures in accordance with GAAP. These items result from facts and circumstances that vary in frequency and impact on continuing operations. Management also uses results of operations before such items to evaluate the operating performance of athenahealth and compare it against past periods, make operating decisions, and serve as a basis for strategic planning. These non-GAAP financial measures provide management with additional means to understand and evaluate the operating results and trends in our ongoing business by eliminating certain non-cash expenses and other items that management believes might otherwise make comparisons of our ongoing business with prior periods more difficult, obscure trends in ongoing operations, or reduce management's ability to make useful forecasts. Management believes that these non-GAAP financial measures provide additional means of evaluating period-over-period operating performance. In addition, management understands that some investors and financial analysts find this information helpful in analyzing our financial and operational performance and comparing this performance to our peers and competitors.

Management defines "Non-GAAP Adjusted Gross Profit" as total revenue, less direct operating expense, plus (1) stock-based compensation expense allocated to direct operating expense and (2) amortization of purchased intangible assets allocated to direct operating expense, and "Non-GAAP Adjusted Gross Margin" as Non-GAAP Adjusted Gross Profit as a percentage of total revenue. Management considers these non-GAAP financial measures to be important indicators of our operational strength and performance of our business and a good measure of our historical operating trends. Moreover, management believes that these measures enable investors and financial analysts to closely monitor and understand changes in our ability to generate income from ongoing business operations.

Management defines "Non-GAAP Adjusted EBITDA" as the sum of GAAP net income before provision for (benefit) from income taxes, total other (income) expense, stock-based compensation expense, depreciation and amortization, amortization of purchased intangible assets, integration costs, transaction costs, and gain on early termination of lease and "Non-GAAP Adjusted EBITDA Margin" as Non-GAAP Adjusted EBITDA as a percentage of total revenue. Management defines "Non-GAAP Adjusted Operating Income" as the sum of GAAP net income before provision for (benefit) from income taxes, total other (income) expense, stock-based compensation expense, amortization of capitalized stock-based compensation related to software development, amortization of purchased intangible assets, integration costs, transaction costs, and gain on early termination of lease and "Non-GAAP Adjusted Operating Income Margin" as Non-GAAP Adjusted Operating Income as a percentage of total revenue. Management defines "Non-GAAP Adjusted Net Income" as the sum of GAAP net income before stock-based compensation expense, amortization of capitalized stock-based compensation related to software development, amortization of purchased intangible assets, integration costs, transaction costs, gain on early termination of lease and any tax impact related to these items, and "Non-GAAP Adjusted Net Income per Diluted Share" as Non-GAAP Adjusted Net Income divided by weighted average diluted shares outstanding. Management considers all of these non-GAAP financial measures to be important indicators of our operational strength and performance of our business and a good measure of our historical operating trends, in particular the extent to which ongoing operations impact our overall financial performance.

Management excludes each of the items identified below from the applicable non-GAAP financial measure referenced above for the reasons set forth with respect to that excluded item:

  • Stock-based compensation expense and amortization of capitalized stock-based compensation related to software development — excluded because these are non-cash expenditures that management does not consider part of ongoing operating results when assessing the performance of our business, and also because the total amount of the expenditure is partially outside of our control because it is based on factors such as stock price, volatility, and interest rates, which may be unrelated to our performance during the period in which the expenses are incurred.
  • Amortization of purchased intangible assets — purchased intangible assets are amortized over their estimated useful lives and generally cannot be changed or influenced by management after the acquisition. Accordingly, this item is not considered by management in making operating decisions. Management does not believe such charges accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.
  • Integration costs —integration costs are the severance and retention bonuses for certain employees relating to the Epocrates acquisition. Accordingly, management believes that such expenses do not have a direct correlation to future business operations, and therefore, these costs are not considered by management in making operating decisions. Management does not believe such charges accurately reflect the performance of our ongoing operations for the period in which such charge is incurred.
  • Transaction costs — transaction costs are non-recurring costs related to specific transactions. Accordingly, management believes that such expenses do not have a direct correlation to future business operations, and therefore, these costs are not considered by management in making operating decisions. Management does not believe such charges accurately reflect the performance of our ongoing operations for the period in which such charges are incurred.
  • Gain on early termination of lease — gain on early termination of lease is a non-recurring gain related to the early termination of the Arsenal on the Charles lease. Accordingly, management believes that this gain does not have a direct correlation to future business operations, and therefore, this gain is not considered by management in making operating decisions. Management does not believe such gain accurately reflects the performance of our ongoing operations for the period in which such gain is recorded.
Dana Quattrochi
athenahealth, Inc. (Investors)

(617) 402-1329

Holly Spring
athenahealth, Inc. (Media)

(617) 402-1631
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