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| ATHN > SEC Filings for ATHN > Form 10-Q on 19-Oct-2012 | All Recent SEC Filings |
19-Oct-2012
Quarterly Report
collected by us on behalf of our clients, so the key drivers of our revenue
include growth in the number of physicians and other medical providers working
within our client accounts, the collections of these physicians, and the number
of services purchased. To provide these services, we incur expenses in several
categories, including direct operating, selling and marketing, research and
development, general and administrative, and depreciation and amortization
expense. In general, our direct operating expense increases as our volume of
work increases, whereas our selling and marketing expense increases in
proportion to our intended growth rate of adding new accounts to our network of
physician clients. Our other expense categories are less directly related to
growth of revenues and relate more to our planning for the future, our overall
business management activities, and our infrastructure. We manage our cash and
our use of credit facilities to ensure adequate liquidity, in adherence to
related financial covenants.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP
requires us to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities as of the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
Significant estimates and assumptions are used for, but are not limited to:
(1) revenue recognition; including our estimated expected customer life;
(2) asset impairments; (3) depreciable lives of assets; (4) fair value of stock
options; (5) allocation of direct and indirect expenses; (6) fair value of
contingent consideration and acquired intangible assets; and (7) litigation
reserves. Future events and their effects cannot be predicted with certainty,
and accordingly, our accounting estimates require the exercise of judgment. The
accounting estimates used in the preparation of our consolidated financial
statements will change as new events occur, as more experience is acquired, as
additional information is obtained and as our operating environment changes. We
evaluate and update our assumptions and estimates on an ongoing basis and may
employ outside experts to assist in our evaluations. Actual results could differ
from the estimates we have used.
Critical accounting policies are those policies that affect our more significant
judgments and estimates used in the preparation of our condensed consolidated
financial statements. We believe our critical accounting policies include our
policies regarding revenue recognition, and business combinations related to
purchased intangibles and contingent consideration. For a more detailed
discussion of our critical accounting policies, please refer to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with
the SEC on February 16, 2012.
Financial Operations Overview
Revenue. We derive our revenue from two sources: from business services
associated with our revenue cycle management, electronic health record
management, patient communication management, care coordination and analytics
offerings and from implementation and other services. Implementation and other
revenue consist primarily of professional services fees related to assisting
clients with the initial implementation of our services and for ongoing training
and related support services. Business services accounted for approximately 97%
of our total revenues for the nine months ended September 30, 2012 and 2011.
Business services revenue are typically 2% to 8% of a practice's total
collections depending upon the services purchased, the size, complexity, and
other characteristics of the practice, plus a per-statement charge for billing
statements that are generated for patients. Accordingly, business services
revenue is largely driven by: the number of physician practices and other
service providers we serve, the number of physicians and other medical providers
working in those physician practices, the volume of activity and related
collections of those physicians, the mix of our services used by those physician
practices and other medical providers, and our contracted rates. There is
moderate seasonality in the activity level of physician practices. Typically,
discretionary use of physician services declines in the late summer and during
the holiday season, which leads to a decline in collections by our physician
clients about 30 to 50 days later. Additionally, the volume of activity and
related collections vary from year to year based in large part on the severity,
length and timing of the onset of the flu season. While we believe that the
severity, length and timing of the onset of the cold and flu season will
continue to impact collections by our physician clients, there can be no
assurance that our future sales of these services will necessarily follow
historical patterns. Implementation and other revenue are largely driven by the
increase in the volume of our new business. As a result, we expect
implementation and other revenue to increase in absolute terms for the
foreseeable future but to remain relatively consistent as a percentage of total
revenue. None of our clients accounted for more than 10% of our total revenues
for the three and nine months ended September 30, 2012 and 2011.
Direct Operating Expense. Direct operating expense consists primarily of
salaries, benefits, claim processing costs, other direct expenses, and
stock-based compensation related to personnel who provide services to clients,
including staff who implement new clients. We expense implementation costs as
incurred. We include in direct operating expense all service costs associated
with athenaCollector, athenaClinicals, athenaCommunicator, athenaCoordinator and
Anodyne solutions. Although in we expect that direct operating expense will
increase in absolute terms for the foreseeable future, the direct operating
expense is expected to decline as a percentage of revenue as we increase
automation. Direct operating expense does not include allocated amounts for
rent, occupancy and other indirect costs (including building maintenance and
utilities), depreciation, and amortization, except for amortization related to
purchased intangible assets.
Selling and Marketing Expense. Selling and marketing expense consists primarily
of marketing programs (including trade shows, brand messaging, and on-line
initiatives) and personnel-related expense for sales and marketing employees
(including salaries, benefits, commissions, stock-based compensation,
non-billable travel, lodging, and other out-of-pocket employee-related
expenses). Although we recognize substantially all of our revenue when services
have been delivered, we recognize a large portion of our sales commission
expense at the time of contract signature and at the time our services commence.
Accordingly, we incur a portion of our sales and marketing expense prior to the
recognition of the corresponding revenue. We have increased our sales and
marketing expenses from year to year and we expect to continue to increase our
investment in sales and marketing by hiring additional direct sales personnel
and support personnel to add new clients and increase sales to our existing
clients and expand awareness through paid search and other similar initiatives.
We also plan to expand our marketing activities, such as attending trade shows,
expanding user groups, and creating new printed materials. As a result, we
expect that, in the near-term, sales and marketing expense will increase in line
with or slightly higher than revenue growth.
Research and Development Expense. Research and development expense consists
primarily of personnel-related expenses for research and development employees
(including salaries, benefits, stock-based compensation, non-billable travel,
lodging, and other out-of-pocket employee-related expenses) and consulting fees
for third-party developers. We expect that, in the near-term, research and
development expenditures will increase in absolute terms and will likely
increase in line with revenue growth as we develop and enhance new and existing
services; however the amount of expenditures that should be capitalized as
software development costs verses expensed as research and development could
vary based on the specific projects we undertake.
General and Administrative Expense. General and administrative expense consists
primarily of personnel-related expense for administrative employees (including
salaries, benefits, stock-based compensation, non-billable travel, lodging, and
other out-of-pocket employee-related expense), occupancy and other indirect
costs (including building maintenance and utilities), and insurance premiums;
software as a service fees; outside professional fees for accountants, lawyers,
and consultants; and compensation for temporary employees. We expect that
general and administrative expense will increase in absolute terms as we invest
in infrastructure to support our growth. Though expenses are expected to
continue to rise in absolute terms, we expect general and administrative expense
to decline as a percentage of total revenue over time.
Depreciation and Amortization Expense. Depreciation and amortization expense
consists primarily of depreciation of fixed assets and amortization of
capitalized software development and acquisition costs, which we amortize over a
two to three-year period from the time of release of related software code. As
we grow, we will continue to make capital investments in the infrastructure of
the business and we will continue to develop software that we capitalize. In the
near term we expect depreciation and amortization expense to increase as a
percentage of total revenue.
Other Income (Expense). Interest income represents earnings from our cash, cash
equivalents, and investments. We expect that our interest expense will be
insignificant until such time we determine it is appropriate to draw down on our
credit facility.
Income Tax Provision. Income tax provision consists of federal and state income
taxes in the United States and India. The difference between our effective tax
rate and our statutory rate is mainly related to any changes in the fair value
of contingent considerations related to non-tax deductible goodwill, the
treatment of Incentive Stock Options ("ISOs") and the impact of certain tax
deduction limits related to certain of our highly compensated officers. The
changes in fair value of contingent consideration related to non-tax deductible
goodwill and the treatment of disqualifying dispositions related to ISOs are
also treated as discrete items which means they are recorded in the quarter in
which they occur and could cause significant differences between the quarterly
and annual effective tax rate. Also, we substantially ceased issuing ISOs in
2009, but we expect continued volatility related to these options since we
cannot anticipate when disqualifying dispositions related to these options will
occur.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2012 and 2011
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(in thousands) (in thousands)
Business services $ 102,256 $ 80,640 $ 21,616 27 % $ 295,915 $ 223,475 $ 72,440 32 %
Implementation
and other 3,630 3,100 530 17 % 10,052 8,080 1,972 24 %
Total $ 105,886 $ 83,740 $ 22,146 26 % $ 305,967 $ 231,555 $ 74,412 32 %
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Revenue. Total revenue for the three and nine months ended September 30, 2012, increased almost entirely due to an
increase in business services revenue.
Business Services Revenue. The increase in business services revenue is
primarily driven by the growth in the number of physicians and medical providers
using our services. The summary of changes in the physicians and active medical
providers using our revenue cycle management service, athenaCollector,
electronic health record management service, athenaClinicals, and patient
communication management service, athenaCommunicator are as follows:
As of September 30,
2012 2011 Change
Amount Amount Amount Percent
Physicians - revenue cycle management service 27,013 22,477 4,536 20 %
Active medical providers - revenue cycle
management service 38,145 31,675 6,470 20 %
Physicians - electronic health record management
service 7,340 4,202 3,138 75 %
Active medical providers - electronic health
record management service 10,062 5,849 4,213 72 %
Physicians - patient communication management
service 8,739 2,931 5,808 198 %
Active medical providers - patient communication
management service 12,149 4,117 8,032 195 %
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Also contributing to this increase was the growth in related collections on behalf of these physicians and medical providers. The amount of collections processed are as follows:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2012 2011 Amount Percent 2012 2011 Amount Percent
Implementation and Other Revenue. The increase in revenue from implementation and other revenue was driven by new client implementations and increased professional services for our larger client base. The increase in implementation and other revenue is the result of the increase in the volume of our new business.
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(in thousands) (in thousands)
Direct operating costs $ 41,866 $ 31,695 $ 10,171 32 % $ 121,678 $ 87,985 $ 33,693 38 %
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Direct Operating Costs. The increase in direct operating expense is primarily due to an increase in the number of claims that we processed on behalf of our clients and the related expense of providing services, including transactions expense and employee-related costs. The total claims submitted on behalf of clients are as follows:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(in millions) (in millions)
Total Claims submitted 17.7 14.9 2.8 19 % 53.0 42.9 10.1 24 %
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Also contributing to this increase was the direct operating employee-related costs, including stock-based compensation, primarily due to the 24% increase in headcount since September 30, 2011. We increased headcount to meet the current and anticipated demand for our services as our customer base has expanded and includes larger medical groups.
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2012 2011 Amount Percent 2012 2011 Amount Percent
(in thousands) (in thousands)
Selling and
marketing $ 25,603 $ 20,784 $ 4,819 23 % $ 76,720 $ 56,540 $ 20,180 36 %
Research and
development 8,746 6,141 2,605 42 % 24,529 16,386 8,143 50 %
General and
administrative 11,913 11,869 44 - % 42,073 35,306 6,767 19 %
Depreciation and
amortization 6,683 4,749 1,934 41 % 17,964 11,884 6,080 51 %
Total $ 52,945 $ 43,543 $ 9,402 22 % $ 161,286 $ 120,116 $ 41,170 34 %
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Selling and Marketing Expense. Selling and marketing expense primarily increased
due to employee-related costs, including stock-based compensation expense,
internal sales commissions and external partner channel commission of
$3.3 million and $11.8 million for the three and nine months periods,
respectively, due to an increase in headcount, an increase in the fair value of
our recently issued stock-based compensation awards and an increase in amount
paid to external channel partners. Our sales and marketing headcount increased
by 38% since September 30, 2011, as we hired additional sales personnel to focus
on adding new customers and increasing penetration within our existing markets.
The increase was also due to a $1.0 million and $7.6 million increase in
travel-related expenses, consulting, online marketing, offline marketing and
other marketing events for the three and nine months period, respectively.
Research and Development Expense. Research and development expense increased due
to higher employee-related costs, including stock-based compensation expense, of
$2.3 million and $6.9 million for the three and nine month periods as a result
of the increased headcount and increase in the fair value of our recently issued
stock-based compensation awards. Our research and development headcount
increased 43% since September 30, 2011, as we hired additional research and
development personnel in order to upgrade and extend our service offerings and
develop new technologies.
General and Administrative Expense. General and administrative expense was
primarily impacted by higher employee-related costs, an increase in
infrastructure expenditures and changes in the fair value of the certain
contingent consideration. An increase in higher employee-related costs,
including stock-based compensation expense, of $2.1 million and $6.0 million is
due to an increased headcount and increase in the fair value of our recently
issued stock-based compensation awards for the three and nine months period
respectively. Our general and administrative headcount increased by 22% since
September 30, 2011, as we added personnel to support our growth. The increase in
headcount drove an increase in our expenditures related to infrastructure by
$1.3 million and $2.6 million, respectively.
The fair value considerations related to each of the contingent considerations
are fully disclosed in Note 3 to the Condensed Consolidated Financial
Statements. The impact of those described changes in the fair value of the
contingent considerations on General and Administrative Expense in the Condensed
Consolidated Statement of Income are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
(in thousands) (in thousands)
First Anodyne contingent consideration $ - $ - $ - $ -
Second Anodyne contingent consideration - 116 1,310 340
First Proxsys contingent consideration - - (2,420 ) -
Second Proxsys contingent consideration (3,675 ) - (3,675 ) -
Total $ (3,675 ) $ 116 $ (4,785 ) $ 340
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Depreciation and Amortization Expense. Depreciation and amortization increased due to higher depreciation from fixed asset expenditures and software development costs in 2011 and 2012.
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