athenahealth, Inc. Reports Second Quarter Fiscal Year 2014 Results

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Company Reaffirms Full Year Fiscal 2014 Guidance

Q2 2014 Financial Results

  • 27% Revenue Growth Over Second Quarter of 2013
  • Non-GAAP Adjusted Operating Income of $21.6 million
  • GAAP Net Loss of $2.2 million, or $0.06 Per Diluted Share
  • Non-GAAP Adjusted Net Income of $12.2 million, or $0.32 Per Diluted Share

WATERTOWN, Mass., July 17, 2014 (GLOBE NEWSWIRE) -- athenahealth, Inc. ATHN ("athenahealth" or "we"), a leading provider of cloud-based services for electronic health record (EHRs), practice management, and care coordination, today announced financial and operational results for the second quarter of fiscal year 2014. We will conduct a conference call tomorrow, Friday, July 18, 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 June 30, 2014 was $185.9 million, compared to $146.3 million in the same period last year, an increase of 27%.

    -  Revenue from athenahealth-branded services was $170.3 million, an increase of 32% over $129.5 million for the three months ended June 30, 2013. 

    -  Revenue from Epocrates-branded services was $11.3 million, a decrease of 23% from $14.6 million for the three months ended June 30, 2013. 

    -  Other revenue was $4.3 million, an increase of 95% over $2.2 million for the three months ended June 30, 2013.

"We continue to make progress in bringing the value of cloud-based, software-enabled services to health care," said Jonathan Bush, athenahealth's chairman and chief executive officer. "We're adding more health care providers and organizations onto our national cloud network and we are growing the number of insight-driven services and workflows we deliver to further our clients' financial and operational performance. Our services are aimed at enhancing the value and efficiency of our network, our clients' productivity, and our own business growth and profitability. While there remains a great deal of work yet to be done, we are confident that we are making smart, targeted investments that will drive value creation for the remainder of 2014 and beyond."

  • For the three months ended June 30, 2014, Non-GAAP Adjusted Gross Margin was 63.0%, up slightly from 62.4% in the same period last year.
     
  • For the three months ended June 30, 2014, Non-GAAP Adjusted Operating Income was $21.6 million, or 11.6% of total revenue, compared to Non-GAAP Adjusted Operating Income of $11.2 million, or 7.6% of total revenue, in the same period last year. 
     
  • For the three months ended June 30, 2014, GAAP Net Loss was $2.2 million, or $0.06 per diluted share, compared to GAAP Net Loss of $12.4 million, or $0.34 per diluted share, in the same period last year.
     
  • For the three months ended June 30, 2014, Non-GAAP Adjusted Net Income was $12.2 million, or $0.32 per diluted share, compared to Non-GAAP Adjusted Net Loss of $3.1 million, or $0.08 per diluted share, in the same period last year. 

    -  For 2014, we are using a non-GAAP tax rate of 40% to normalize the tax impact to our Non-GAAP Adjusted Net Income per Diluted Share based on the fact that a relatively small change in pre-tax GAAP income (loss) could result in a volatile GAAP effective tax rate. If this approach had been used for the three months ended June 30, 2013, Non-GAAP Adjusted Net Income per Diluted Share would have been $0.17 instead of Non-GAAP Adjusted Net Loss per Diluted Share of $0.08.

"The athenahealth team delivered a strong quarter, outperforming our internal goals on both the top and bottom line," said Karl Stubelis, athenahealth's acting chief financial officer. "We continue to build on our strong momentum, growing our core physician network by 28%, signing on new strategic relationships, like Henry Schein, and increasing our automation rate to our 49% goal. As such, we are pleased to reaffirm our guidance for full year fiscal 2014."

Our fiscal year 2014 guidance communicated at our 6th Annual Investor Summit on December 12, 2013, is summarized in the following table: 

 
For the Fiscal Year Ending December 31, 2014
Forward Looking Guidance
GAAP Total Revenue $725 - $755 million
Non-GAAP Adjusted Gross Margin 62.5% - 63.5%
Non-GAAP Adjusted Operating Income $70 - $80 million
Non-GAAP Adjusted Net Income per Diluted Share $0.98 - $1.10
Non-GAAP Tax Rate 40%

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 condensed 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 our live conference call and webcast, please dial 877-853-5645 (or 408-940-3868 for international calls) using conference code No. 59551365, or visit the Investors section of our website 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. 59551365. 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 (EHRs), 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 demand for our service offerings; statements regarding the 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, and our positioning in regard to those changes; statements regarding the expected value creation from our investments; statements regarding our clients' financial and operational performance; 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 impacts on margins and profitability; 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", "aim", 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 www.athenahealth.com and on the SEC's website at www.sec.gov.

athenahealth, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share amounts)
         
      June 30,
2014
December 31,
2013
Assets        
Current assets:        
Cash and cash equivalents      $ 56,245  $ 65,002
Marketable securities     53,200
Restricted cash     45 3,000
Accounts receivable, net     97,561 87,343
Deferred tax assets, net     119 6,118
Prepaid expenses and other current assets     19,964 17,194
Total current assets     227,134 178,657
         
Property and equipment, net     234,962 213,018
Capitalized software costs, net     45,184 29,987
Purchased intangible assets, net     152,532 168,364
Goodwill     198,049 198,049
Investments and other assets     7,791 8,321
Total assets      $ 865,652  $ 796,396
         
Liabilities & Stockholders' Equity        
Current liabilities:        
Line of credit      $ 35,000  $ 35,000
Long-term debt     15,000 15,000
Accounts payable     9,021 3,930
Accrued compensation     48,884 44,444
Accrued expenses     39,183 24,380
Deferred revenue     26,874 27,002
Deferred tax liability, net     6,884
Total current liabilities     180,846 149,756
Deferred rent, net of current portion     4,911 1,478
Long-term debt, net of current portion     166,250 173,750
Deferred revenue, net of current portion     54,556 53,172
Long-term deferred tax liability, net     22,592 21,421
Other long-term liabilities     7,121 5,511
Total liabilities     436,276 405,088
         
Stockholders' equity:        
Preferred stock, $0.01 par value: 5,000 shares authorized; no shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
Common stock, $0.01 par value: 125,000 shares authorized; 39,211 shares issued and 37,933 shares outstanding at June 30, 2014; 38,600 shares issued and 37,322 shares outstanding at December 31, 2013 393 387
Additional paid-in capital     396,597 380,967
Treasury stock, at cost, 1,278 shares     (1,200) (1,200)
Accumulated other comprehensive income (loss)     32,203 (446)
Retained earnings     1,383 11,600
Total stockholders' equity     429,376 391,308
Total liabilities and stockholders' equity      $ 865,652  $ 796,396
         
         
athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)
         
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2014 2013 2014 2013
Revenue:        
Business services  $ 175,949  $ 137,919  $ 330,451  $ 259,382
Implementation and other 9,973 8,382 18,506 12,515
Total revenue 185,922 146,301 348,957 271,897
Expense:        
Direct operating 74,774 59,390 146,922 112,575
Selling and marketing 50,722 41,035 93,949 73,957
Research and development 16,417 14,269 31,572 26,213
General and administrative 30,443 24,670 59,800 55,747
Depreciation and amortization 15,186 11,107 29,435 19,448
Total expense 187,542 150,471 361,678 287,940
Operating loss (1,620) (4,170) (12,721) (16,043)
Other (expense) income:        
Interest expense (1,275) (1,001) (2,541) (1,165)
Other (expense) income (6) 63 (176) 117
Total other expense (1,281) (938) (2,717) (1,048)
Loss before income tax benefit (provision) (2,901) (5,108) (15,438) (17,091)
Income tax benefit (provision) 739 (7,313) 5,221 5,370
Net loss $ (2,162) $ (12,421) $ (10,217) $ (11,721)
Net loss per share – Basic $ (0.06) $ (0.34) $ (0.27) $ (0.32)
Net loss per share – Diluted $ (0.06) $ (0.34) $ (0.27) $ (0.32)
Weighted average shares used in computing net loss per share:        
Basic 37,860 36,760 37,673 36,598
Diluted 37,860 36,760 37,673 36,598
         
         
athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
         
      Six Months Ended June 30,
      2014 2013
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss     $ (10,217) $ (11,721)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization     45,301 26,226
Deferred income tax     (5,478) (5,492)
Stock-based compensation expense     26,565 24,042
Other reconciling adjustments     143 174
Changes in operating assets and liabilities:        
Accounts receivable, net     (10,218) (8,259)
Prepaid expenses and other current assets     (3,043) (5,069)
Other long-term assets     (388) 493
Accounts payable     4,571 2,864
Accrued expenses and other long-term liabilities     9,526 (796)
Accrued compensation     3,852 (1,307)
Deferred revenue     1,256 2,232
Deferred rent     1,882 (3,632)
Net cash provided by operating activities     63,752 19,755
CASH FLOWS FROM INVESTING ACTIVITIES:        
Capitalized software development costs     (26,218) (12,993)
Purchases of property and equipment     (28,991) (16,601)
Proceeds from sales and maturities of investments     56,245
Payments on acquisitions, net of cash acquired     (410,161)
Change in restricted cash     2,955 1,357
Other investing activities     (250)
Net cash used in investing activities     (52,504) (382,153)
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from issuance of common stock under stock plans and warrants 13,845 12,248
Taxes paid related to net share settlement of stock awards     (26,520) (9,924)
Proceeds from line of credit     155,000
Proceeds from long-term debt     200,000
Payments for long-term debt     (7,500) (3,750)
Payments for line of credit     (105,000)
Net settlement of acquired company's board of directors equity shares (5,806)
Debt issuance costs     (1,592)
Net cash (used in) provided by financing activities     (20,175) 241,176
Effects of exchange rate changes on cash and cash equivalents     170 (208)
Net decrease in cash and cash equivalents     (8,757) (121,430)
Cash and cash equivalents at beginning of period     65,002 154,988
Cash and cash equivalents at end of period      $ 56,245  $ 33,558
         
         
athenahealth, Inc.
STOCK-BASED COMPENSATION
(Unaudited, in thousands)
         
Set forth below is a breakout of stock-based compensation impacting the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014, and 2013:
         
  Three Months Ended
June 30,
Six Months Ended 
June 30,
  2014 2013 2014 2013
Stock-based compensation charged to Condensed Consolidated Statements of Income:        
Direct operating  $ 3,222  $ 2,047  $ 5,818  $ 3,764
Selling and marketing 4,202 3,275 7,226 6,151
Research and development 2,135 965 3,800 2,288
General and administrative 4,655 4,017 9,721 11,759
Total stock-based compensation expense 14,214 10,304 26,565 23,962
Amortization of capitalized stock-based compensation related to software development (1) 481 222 880 378
Total  $ 14,695  $ 10,526  $ 27,445  $ 24,340
         
(1)  In addition, for the three months ended June 30, 2014, and 2013, $1.0 million and $0.5 million, respectively, of stock-based compensation was capitalized in the line item Capitalized Software Costs, net in the Condensed Consolidated Balance Sheets for which $0.5 million and $0.2 million, respectively, of amortization was included in the line item Depreciation and Amortization in the Condensed Consolidated Statements of Income. For the six months ended June 30, 2014 and 2013, $1.8 million and $0.9 million, respectively, of stock-based compensation was capitalized in the line item Capitalized Software Costs, net in the Condensed Consolidated Balance Sheets for which $0.9 million and $0.4 million, respectively, of amortization was included in the line item Depreciation and Amortization in the Condensed Consolidated Statements of Income.
         
         
athenahealth, Inc.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS
(Unaudited, in thousands)
         
Set forth below is a breakout of amortization of purchased intangible assets impacting the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014, and 2013:
         
  Three Months Ended
June 30,
Six Months Ended
June 30,
Amortization of purchased intangible assets allocated to: 2014 2013 2014 2013
Direct operating  $ 2,716  $ 2,405  $ 6,655  $ 4,145
Selling and marketing 5,820 2,421 8,971 2,421
Total amortization of purchased intangible assets  $ 8,536  $ 4,826  $ 15,626  $ 6,566
         
         
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
June 30,
Six Months Ended
June 30,
  2014 2013 2014 2013
         
Total revenue  $ 185,922  $ 146,301  $ 348,957  $ 271,897
Direct operating expense 74,774 59,390 146,922 112,575
         
Total revenue less direct operating expense 111,148 86,911 202,035 159,322
Add: Stock-based compensation allocated to direct operating expense 3,222 2,047 5,818 3,764
Add: Amortization of purchased intangible assets allocated to direct operating expense 2,716 2,405 6,655 4,145
         
Non-GAAP Adjusted Gross Profit  $ 117,086  $ 91,363  $ 214,508  $ 167,231
         
Non-GAAP Adjusted Gross Margin  63.0%  62.4%  61.5%  61.5%
         
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
June 30,
Six Months Ended
June 30,
  2014 2013 2014 2013
         
Total revenue  $ 185,922  $ 146,301  $ 348,957  $ 271,897
         
GAAP net loss (2,162) (12,421) (10,217) (11,721)
Add: (Benefit) from provision for income taxes (739) 7,313 (5,221) (5,370)
Add: Total other expense 1,281 938 2,717 1,048
Add: Stock-based compensation expense 14,214 10,304 26,565 23,962
Add: Depreciation and amortization 15,186 11,107 29,435 19,448
Add: Amortization of purchased intangible assets 8,536 4,826 15,626 6,566
Add: Integration and transaction costs 2,220 6,014
Add: Non-tax deductible transaction costs 244 2,159
Less: Gain on early termination of lease (2,468) (2,468)
         
Non-GAAP Adjusted EBITDA  $ 36,316  $ 22,063  $ 58,905  $ 39,638
         
Non-GAAP Adjusted EBITDA Margin 19.5% 15.1% 16.9% 14.6%
         
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
June 30,
Six Months Ended
June 30,
  2014 2013 2014 2013
         
Total revenue  $ 185,922  $ 146,301  $ 348,957  $ 271,897
         
GAAP net loss (2,162) (12,421) (10,217) (11,721)
Add: (Benefit) from provision for income taxes (739) 7,313 (5,221) (5,370)
Add: Total other expense 1,281 938 2,717 1,048
Add: Stock-based compensation expense 14,214 10,304 26,565 23,962
Add: Amortization of capitalized stock-based compensation related to software development 481 222 880 378
Add: Amortization of purchased intangible assets 8,536 4,826 15,626 6,566
Add: Integration and transaction costs 2,220 6,014
Add: Non-tax deductible transaction costs 244 2,159
Less: Gain on early termination of lease (2,468) (2,468)
         
Non-GAAP Adjusted Operating Income  $ 21,611  $ 11,178  $ 30,350  $ 20,568
         
Non-GAAP Adjusted Operating Income Margin 11.6% 7.6% 8.7% 7.6%
         
Non-GAAP Adjusted Net Income (Loss)
Set forth below is a reconciliation of our "Non-GAAP Adjusted Net Income (Loss)" and "Non-GAAP Adjusted Net Income (Loss) per Diluted Share."
     
(unaudited, in thousands) 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
  2014 2013 2014 2013
         
GAAP net loss $ (2,162) $ (12,421) $ (10,217) $ (11,721)
Add: Stock-based compensation expense 14,214 10,304 26,565 23,962
Add: Amortization of capitalized stock-based compensation related to software development 481 222 880 378
Add: Amortization of purchased intangible assets 8,536 4,826 15,626 6,566
Add: Integration and transaction costs 2,220 6,014
Less: Gain on early termination of lease (2,468) (2,468)
         
Sub-total of tax deductible items 23,231 15,104 43,071 34,452
         
Less: Tax impact of tax deductible items (1) (9,292) (6,042) (17,228) (13,781)
Add: Non-tax deductible transaction costs 244 2,159
Add: Tax impact resulting from applying non-GAAP tax rate (2) 421 954
         
Non-GAAP Adjusted Net Income (Loss)  $ 12,198 $ (3,115)  $ 16,580  $ 11,109
         
Weighted average shares - diluted 37,860 36,760 37,673 36,598
         
Non-GAAP Adjusted Net Income (Loss) per Diluted Share  $ 0.32 $ (0.08)  $ 0.44  $ 0.30
(1)  Tax impact calculated using a statutory tax rate of 40%.
(2)  Represents adjusting the GAAP net loss at a non-GAAP tax rate of 40%. For 2014, we are using a non-GAAP tax rate of 40% to normalize the tax impact to our Non-GAAP Adjusted Net Income (Loss) per Diluted Share based on the fact that a relatively small change in pre-tax GAAP income (loss) could result in a volatile GAAP effective tax rate. If this approach had been used for the three months ended June 30, 2013, the tax impact from applying a non-GAAP tax rate would have been $9,259 and our Non-GAAP Adjusted Net Income per Diluted Share would have been $0.17, or an increase of $0.25. For the six months ended June 30, 2013, the tax impact from applying a non-GAAP tax rate would have been $603 and our Non-GAAP Adjusted Net Income per Diluted Share would have been $0.32, or an increase of $0.02.
     
(unaudited, in thousands) 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
  2014 2013 2014 2013
         
GAAP net loss per share - diluted $ (0.06) $ (0.34) $ (0.27) $ (0.32)
Add: Stock-based compensation expense  0.38  0.28  0.71  0.65
Add: Amortization of capitalized stock-based compensation related to software development  0.01  0.01  0.02  0.01
Add: Amortization of purchased intangible assets  0.23  0.13  0.41  0.18
Add: Integration and transaction costs  —   0.06  —   0.16
Less: Gain on early termination of lease  —   (0.07)  —   (0.07)
         
Sub-total of tax deductible items  0.62  0.41  1.14  0.94
         
Less: Tax impact of tax deductible items (1)  (0.25)  (0.16)  (0.46)   (0.38)
Add: Non-tax deductible transaction costs  —   0.01  —   0.06
Add: Tax impact resulting from applying non-GAAP tax rate (2)  0.01  —   0.03  — 
         
Non-GAAP Adjusted Net Income (Loss) per Diluted Share  $ 0.32 $ (0.08)  $ 0.44  $ 0.30
         
Weighted average shares - diluted 37,860 36,760 37,673 36,598
(1)  Tax impact calculated using a statutory tax rate of 40%.
(2)  Represents adjusting the GAAP net loss at a non-GAAP tax rate of 40%. For 2014, we are using a non-GAAP tax rate of 40% to normalize the tax impact to our Non-GAAP Adjusted Net Income (Loss) per Diluted Share based on the fact that a relatively small change in pre-tax GAAP income (loss) could result in a volatile GAAP effective tax rate. If this approach had been used for the three months ended June 30, 2013, the tax impact from applying a non-GAAP tax rate would have been $9,259, and our Non-GAAP Adjusted Net Income per Diluted Share would have been $0.17, or an increase of $0.25. For the six months ended June 30, 2013, the tax impact from applying a non-GAAP tax rate would have been $603 and our Non-GAAP Adjusted Net Income per Diluted Share would have been $0.32, or an increase of $0.02.

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 (loss) 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 (loss) 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 (Loss)" as the sum of GAAP net income (loss) before 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 any tax impact related to these preceding items, and an adjustment to the tax provision for the non-GAAP tax rate and "Non-GAAP Adjusted Net Income (Loss) per Diluted Share" as Non-GAAP Adjusted Net Income (Loss) 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 or adjusts 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 payments 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 charges are 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 was a non-recurring gain related to the early termination of the Arsenal on the Charles lease. Accordingly, this gain was not considered by management in making operating decisions, and management believes that this gain does not have a direct correlation to future business operations. Management does not believe such gain accurately reflects the performance of our ongoing operations for the period in which such gain was recorded.
     
  • Non-GAAP tax rate — For 2014, we are using a non-GAAP tax rate of 40% to normalize the tax impact to our Non-GAAP Adjusted Net Income (Loss) per Diluted Share based on the fact that a relatively small change in pre-tax GAAP income (loss) could result in a volatile GAAP effective tax rate.
CONTACT: Dana Quattrochi athenahealth, Inc. (Investors) investorrelations@athenahealth.com (617) 402-1329 Holly Spring athenahealth, Inc. (Media) media@athenahealth.com (617) 402-1631

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