Why Athenahealth Is Soaring Today

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What happened

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Shares of Athenahealth (NASDAQ: ATHN), a provider of software used in the healthcare industry, rose 10% in early-morning trading on Friday in response to the release of third-quarter earnings.

So what

Here are the key takeaways from the third quarter:

  • Revenue grew 10% to $304.6 million. That was shy of the $311.1 million that Wall Street had projected.
  • GAAP net income was $13 million, or $0.32 per share. Adjusted net income was $22.9 million, or $0.56 per share. That surpassed the $0.50 in adjusted earnings that market watchers were looking for.
  • Athenahealth's board approved a comprehensive strategic plan to generate $100 million to $115 million of gross pretax expense savings by the end of 2018. To achieve these results, the company is laying off 9% of its workforce and is closing offices in San Francisco and Princeton.

CEO Jonathan Bush offered investors the following commentary on the cost-cutting decision:

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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.

Traders are feeling bullish about the board's measures to improve profitability, which is why shares are rising today.

Now what

The weak third-quarter revenue caused the company to revise its full-year 2017 outlook. It now projects revenue to land between $1.2 billion and $1.22 billion, down from its prior range of $1.21 billion to $1.25 billion. GAAP operating income is expected to come in between $29 million and $53 million, which is a much wider range than its previous guidance of $36 million to $46 million. On a non-GAAP basis, adjusted operating income range was increased to $135 million and $150 million, up from its prior outlook of $120 million to $140 million.

Interim CFO Jack Kane stated:

We are committing to significant operating margin improvement next year. We are holding ourselves accountable to achieve at least 15% non-GAAP operating margin in 2018. We are confident the actions we're taking position us well to drive profitable growth and enhance shareholder value going forward.

Its glory days of huge revenue growth appear to be over, so it makes sense that the company is focusing on cost-cutting measures in order to drive profit growth. However, it isn't clear at this point whether Athenahealth will be able to innovate and grow with a more streamlined workforce. The best move for shareholders might be to just sit tight and watch this situation continue to play out.

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