Athenahealth, Inc. Cuts Financial Outlook and 9% of Its Workforce

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It's a different era for athenahealth, Inc. (NASDAQ: ATHN). Investors hoped the cloud-based healthcare applications provider had begun a return to higher growth levels when the company reported its second-quarter results in July. Less than two weeks after those generally positive results were announced, though, Athenahealth stated that it was shaking things up on its board of directors, with its management team, and with big spending cuts.

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The company announced its third-quarter results after the market closed on Thursday. It also provided an update on those spending cuts. Here are the highlights. 

Athenahealth results: The raw numbers

Metric 

Q3 2017 

Q3 2016 

Year-Over-Year Change

Sales

 $304.6 million  $276.7 million

10%

Net income from continuing operations

 $13.0 million  $13.9 million

(6.5%)

Adjusted EPS

 $0.56  $0.60

(6.7%)

What happened with Athenahealth this quarter?

While Athenahealth's revenue increased compared to the prior-year period, none of its financial results are that great considering the company's historical performance. The days when Athenahealth regularly achieved year-over-year sales growth of close to 30%, or even better, appear to be gone.

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The company's worsening bottom line stemmed largely from higher research and development costs. In the third quarter of 2017, Athenahealth spent $44.8 million on R&D -- up nearly 45% from the same period last year. That huge increase more than offset the company's discipline in holding the line on other operational costs.

Another significant factor behind Athenahealth's year-over-year earnings decline was tax payments. The company paid $4.2 million in income taxes during the third quarter of 2017 compared to a $100,000 tax benefit in the prior-year period. 

Athenahealth achieved steady growth for its athenaOne ambulatory applications. The company reported 6% sequential quarterly growth for athenaOne Collector and Clinical providers, and 7% growth for Communicator providers. Its athenaOne for hospitals and health systems achieved 40% sequential growth in discharge bed days. The company's population health product grew covered lives by 17% compared to the previous quarter.

What management had to say

Athenahealth CEO Jonathan Bush said:

Today, Athenahealth benefits from a solid operating foundation. We are the most universally connected healthcare network in the country. The value we offer to our clients is as strong as ever. At the same time, the market in which we operate is changing. The actions we are announcing today follow a comprehensive review of our operations and cost structure, and are designed to ensure that we are best positioned to drive continued success and profitable growth in this new environment. We are changing the way we work to become a more nimble and efficient organization while directing investments to our greatest return opportunities.

Looking forward

The biggest news from Athenahealth wasn't about what happened during the third quarter. Instead, the main story related to what's happening now and in the future.

Athenahealth announced a major organizational shake-up that will result in layoffs for around 9% of its workforce. The company is closing its offices in San Francisco and Princeton. It expects to generate $100 million to $115 million of gross pre-tax expense savings, most of which will be realized by the end of 2018.

The company also cut its full-year 2017 revenue outlook and updated its operating income guidance. Athenahealth now projects 2017 revenue of between $1.2 billion and $1.22 billion, down from the previous range of $1.21 billion to $1.25 billion. GAAP operating income for the full year is expected to come in between $29 million and $53 million, with non-GAAP adjusted operating income between $135 million and $150 million. Athenahealth's prior guidance called for GAAP operating income of between $36 million and $46 million, with non-GAAP adjusted operating income of $120 million to $140 million.

Athenahealth attributed the guidance update to "weaker utilization trends and a more challenging demand environment." The company also stated that some initiatives outside of its core athenaOne applications aren't growing sales as quickly as expected. In addition, hurricanes Harvey and Irma could negatively affect 2017 revenue to the tune of roughly $4 million.

While Athenahealth isn't growing like it has in the past, the company's fundamental business still looks solid. The cost-cutting initiatives will probably be painful, but they could help Athenahealth return to stronger earnings growth down the road. As I said earlier, it's a different era now for Athenahealth. Investors should evaluate the company based on where it is now and where it's going rather than where it's been. 

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Athenahealth. The Motley Fool has a disclosure policy.