0001131096-18-000210.txt : 20181109 0001131096-18-000210.hdr.sgml : 20181109 20181109160447 ACCESSION NUMBER: 0001131096-18-000210 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20181109 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATHENAHEALTH INC CENTRAL INDEX KEY: 0001131096 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 043387530 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-33689 FILM NUMBER: 181173099 BUSINESS ADDRESS: STREET 1: 311 ARSENAL STREET CITY: WATERTOWN STATE: MA ZIP: 02472 BUSINESS PHONE: 617-402-1000 MAIL ADDRESS: STREET 1: 311 ARSENAL STREET CITY: WATERTOWN STATE: MA ZIP: 02472 8-K 1 athnq32018form8k.htm 8-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 9, 2018
athenahealth, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
001-33689
 
04-3387530
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
 
311 Arsenal Street, Watertown, MA 02472
 
 
(Address of principal executive office, including zip code)
 
Registrant’s telephone number, including area code: 617-402-1000
________________________________________________________________________________
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
[   ]
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
[   ]
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
[   ]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
[   ]
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company    ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐





Item 2.02
Results of Operations and Financial Condition.
On November 9, 2018, athenahealth, Inc. (the "Company") issued a press release regarding its financial and operational results for the quarter ended September 30, 2018. The Company also posted prepared remarks with respect to its third quarter results on the Investors section of its website at www.athenahealth.com. Copies of the press release and prepared remarks are furnished herewith as Exhibit 99.1 and Exhibit 99.2, respectively, and are incorporated herein by reference.
The information included in this Current Report on Form 8-K pursuant to Item 2.02, including Exhibit 99.1 and Exhibit 99.2 attached hereto, is intended to be furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as expressly set forth by specific reference in such filing.

Item 9.01    Financial Statements and Exhibits.
(d) Exhibits.
Exhibit No.
 
Description
 
Press release issued by athenahealth, Inc. on November 9, 2018, furnished herewith.
 
Prepared remarks dated as of November 9, 2018, furnished herewith.





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
athenahealth, Inc.
 
 
(Registrant)

November 9, 2018
 
/s/ Marc A. Levine
 
 
Marc A. Levine
 
 
Principal Executive Officer and Chief Financial Officer



 EX-99.1 2 athnq32018earningsrelease.htm EXHIBIT 99.1 Exhibit



Exhibit 99.1
athenahealthlogoa11.jpg
athenahealth Reports Third Quarter Fiscal Year 2018 Results

Company Reaffirms Fiscal Year 2018 Financial Outlook

WATERTOWN, MA – November 9, 2018 – athenahealth, Inc. (NASDAQ: ATHN) (“athenahealth” or “we”), a leading provider of network-enabled services for hospital and ambulatory clients nationwide, today announced financial and operational results for the third quarter of fiscal year 2018. We will hold a conference call on Monday, November 12, 2018, at 5:00 p.m. Eastern Time to discuss these results and management’s outlook for future financial and operational performance.
“We delivered another quarter of solid financial results and have reaffirmed our financial outlook for the year. During Q3, we achieved stable top-line growth on a comparable basis and significantly improved profitability and operating cash flow year-over-year,” said Marc Levine, chief financial officer of athenahealth. “We are confident in the opportunities available to athenahealth. athenahealth maintains a differentiated position in the market, and continues to drive positive change for our clients, expand the value of our core offerings, and unlock value for our shareholders.”
Q3 2018 Financial Results
We adopted a new revenue recognition standard on January 1, 2018. Please note that the financial results presented below include both amounts “as presented,” which reflect implementation of the new revenue recognition standard, as well as amounts prior to the impact of the new revenue recognition standard to allow for comparability against historical results. Starting in fiscal year 2019, we will no longer present our GAAP and Non-GAAP financial results under the previous revenue recognition standard. For additional information and reconciliations of our financial results between the new and previous revenue recognition standard, see the additional tables included in this press release and in the Form 10-Q filed with the Securities and Exchange Commission on November 9, 2018.
•
Total Revenue as presented for the three months ended September 30, 2018 was $329.5 million. Total Revenue prior to the impact of the new revenue recognition standard for the three months ended September 30, 2018 was $331.4 million, compared to $304.6 million in the same period last year, an increase of 9%.
•
GAAP Gross Margin as presented for the three months ended September 30, 2018 was 53.1%. GAAP Gross Margin prior to the impact of the new revenue recognition standard for the three months ended September 30, 2018 was 52.3%, compared to 52.7% in the same period last year.
•
Non-GAAP Gross Margin as presented for the three months ended September 30, 2018 was 54.9%. Non-GAAP Gross Margin prior to the impact of the new revenue recognition standard for the three months ended September 30, 2018 was 54.0%, compared to 54.4% in the same period last year.
•
GAAP Operating Income as presented for the three months ended September 30, 2018 was $38.2 million, or 11.6% of total revenue. GAAP Operating Income prior to the impact of the new revenue recognition standard for the three months ended September 30, 2018 was $31.8 million,

1

or 9.6% of total revenue, compared to $18.6 million, or 6.1% of total revenue, in the same period last year.
•
Non-GAAP Operating Income as presented for the three months ended September 30, 2018 was $61.0 million, or 18.5% of revenue. Non-GAAP Operating Income prior to the impact of the new revenue recognition standard for the three months ended September 30, 2018 was $54.6 million, or 16.5% of total revenue, compared to $39.5 million, or 13.0% of total revenue, in the same period last year.
•
GAAP Net Income as presented for the three months ended September 30, 2018 was $26.4 million, or $0.64 per diluted share. GAAP Net Income prior to the impact of the new revenue recognition standard for the three months ended September 30, 2018 was $21.5 million, or $0.52 per diluted share, compared to $13.0 million, or $0.32 per diluted share, in the same period last year.
•
Non-GAAP Net Income as presented for the three months ended September 30, 2018 was $44.5 million, or $1.08 per diluted share. Non-GAAP Net Income prior to the impact of the new revenue recognition standard for the three months ended September 30, 2018 was $39.7 million, or $0.96 per diluted share, compared to $22.9 million, or $0.56 per diluted share, in the same period last year.
•
Total Bookings for the three months ended September 30, 2018 were $46.6 million, compared to $65.7 million for the three months ended September 30, 2017. Total Bookings for the three months ended September 30, 2018 included a large enterprise client chargeback originally signed in 2016. Excluding this chargeback, the decline in bookings year-over-year was consistent with the prior quarter.
Network Growth
Network growth metrics for ambulatory (athenaOne), hospital (athenaOne for Hospitals & Health Systems), and population health (athenahealth Population Health) services from Q2 2018 to Q3 2018 were as follows:
 
athenaOne (Ambulatory)
 
athenaOne (Hospital)
 
Population Health
 
Collector Providers
Clinicals Providers
Communicator Providers
 
Discharge Bed Days
 
Covered Lives
Ending Balance as of 6/30/18
115,724

64,317

74,333

 
33,352

 
3,329,133

Sequential Growth
4,470

3,350

3,957

 
6,463

 
(241,124
)
Ending Balance as of 9/30/18
120,194

67,667

78,290

 
39,815

 
3,088,009

Sequential Growth %
4
%
5
%
5
%
 
19
%
 
(7
)%
Network growth metrics for ambulatory (athenaOne), hospital (athenaOne for Hospitals & Health Systems), and population health (athenahealth Population Health) services from Q3 2017 to Q3 2018 were as follows:

2

 
athenaOne (Ambulatory)
 
athenaOne (Hospital)
 
Population Health
 
Collector Providers
Clinicals Providers
Communicator Providers
 
Discharge Bed Days
 
Covered Lives
Ending Balance as of 9/30/17
106,482

57,936

67,590

 
19,790

 
3,242,628

Growth vs. Prior Year
13,712

9,731

10,700

 
20,025

 
(154,619
)
Ending Balance as of 9/30/18
120,194

67,667

78,290

 
39,815

 
3,088,009

Growth vs. Prior Year %
13
%
17
%
16
%
 
101
%
 
(5
)%
Fiscal Year 2018 Outlook
We are reaffirming our fiscal year 2018 financial guidance to reflect our year-to-date performance and our expectations for the fourth quarter. Our fiscal year 2018 guidance is prior to the impact of the new revenue recognition standard to allow for comparability against historical results. Our updated fiscal year 2018 financial guidance under the previous revenue standard is summarized in the following table:
Previous Revenue Standard
For the Fiscal Year Ending December 31, 2018
Forward-Looking Guidance
Financial Measures
 
GAAP Total Revenue
$1,330 million - $1,360 million
GAAP Operating Income
$128 million - $155 million
GAAP Operating Margin
9.6% - 11.4%
Non-GAAP Operating Income
$219 million - $238 million
Non-GAAP Operating Margin
16.5% - 17.5%
We are also reaffirming our fiscal year 2018 guidance under the new revenue recognition standard. Our fiscal year 2018 financial guidance under the new revenue standard is summarized in the following table:
New Revenue Standard
For the Fiscal Year Ending December 31, 2018
Forward-Looking Guidance
Financial Measures
 
GAAP Total Revenue
$1,335 million - $1,365 million
GAAP Operating Income
$153 million - $187 million
GAAP Operating Margin
11.5% - 13.7%
Non-GAAP Operating Income
$244 million - $270 million
Non-GAAP Operating Margin
18.3% - 19.8%
Use of Non-GAAP Financial Measures
In our earnings press releases, prepared remarks, conference calls, slide presentations, and webcasts, we may use or discuss non-GAAP financial measures, as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a

3

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 website at www.athenahealth.com.
Conference Call Information
To participate in our live conference call and webcast on Monday, November 12, 2018, at 5:00 p.m. Eastern Time, please dial 877-853-5645 (or 408-940-3868 for international calls) using conference code no. 7667835, or visit the Investors section of our website at www.athenahealth.com. A webcast replay will also be archived on our website.
About athenahealth, Inc.
athenahealth partners with hospital and ambulatory customers to drive clinical and financial results. We offer medical record, revenue cycle, patient engagement, care coordination, and population health services. We combine insights from our network of over 120,000 providers and approximately 117 million patients with deep industry knowledge and perform administrative work at scale. For more information, please visit www.athenahealth.com.
Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding management’s expectations for future financial and operational performance and operating expenditures, expected growth, and business outlook; statements regarding our business focus; our fiscal year 2018 guidance; and statements found under our “Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures for Fiscal Year 2018 Guidance” section of this release. Forward-looking statements may be identified with words such as “will,” “may,” “expect,” “plan,” “anticipate,” “upcoming,” “believe,” “estimate,” or similar terminology, and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance, 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. These risks and uncertainties include: the impact of changes in our senior management team; the impact of our evaluation of strategic alternatives and of our cost-reduction measures; our highly competitive industry and our ability to compete effectively and remain innovative; the development of the market for cloud-based healthcare information technology services; changes in the healthcare industry and their impact on the demand for our services; our ability to maintain consistently high growth rates due to lengthening customer sales cycles; the impact of changes in our business model and structure; our ability to effectively manage our growth; our ability to protect our intellectual property; current and future litigation, including for intellectual property infringement; our dependence on third-party providers; risks and costs associated with our worldwide operations; our ability to attract and retain highly-skilled employees; our fluctuating operating results; our ability to retain our clients and maintain client revenue; our tax liability; our variable sales and implementation cycles; the timing at which we recognize certain revenue and our ability to evaluate our prospects; defects and errors in our software or services, or interruptions or damages to our systems or those of third parties on which we rely; a data security breach; limitations on our use of data; the effect of payer and provider conduct; the failure of our services to provide accurate and timely information; changing government regulation and the costs and challenges of compliance; the potential for illegal behavior by employees or subcontractors; and the price volatility of our common stock. Forward-looking statements speak only as of the date hereof and, except as required by law, we

4

undertake no obligation to update or revise these forward-looking statements. For additional information regarding these and other risks faced by us, refer to our public filings with the Securities and Exchange Commission (“SEC”), available on the Investors section of our website at www.athenahealth.com and on the SEC’s website at www.sec.gov.

Contact Info:
Dana Quattrochi
athenahealth, Inc. (Investors)
investorrelations@athenahealth.com
(617) 402-1329

John Fox
athenahealth, Inc. (Media)
media@athenahealth.com
(617) 402-8001


5

athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in millions, except per share amounts)
 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017 (1)
 
2018
 
2017 (1)
Revenue
 
$
329.5

 
$
304.6

 
$
982.2

 
$
891.1

Cost of revenue
 
154.4

 
144.0

 
460.4

 
432.2

Gross profit
 
175.1

 
160.6

 
521.8

 
458.9

Other operating expenses:
 
 
 
 
 
 
 
 
Selling and marketing
 
47.6

 
61.8

 
146.2

 
192.5

Research and development
 
50.9

 
44.8

 
147.5

 
130.0

General and administrative
 
38.4

 
35.4

 
104.7

 
104.5

Total other operating expenses
 
136.9

 
142.0

 
398.4

 
427.0

Operating income
 
38.2

 
18.6

 
123.4

 
31.9

Other expense
 
(1.8
)
 
(1.4
)
 
(6.8
)
 
(4.3
)
Income before income tax provision
 
36.4

 
17.2

 
116.6

 
27.6

Income tax provision
 
10.0

 
4.2

 
22.7

 
6.1

Net income
 
$
26.4

 
$
13.0

 
$
93.9

 
$
21.5

Net income per share – Basic
 
$
0.65

 
$
0.33

 
$
2.32

 
$
0.54

Net income per share – Diluted
 
$
0.64

 
$
0.32

 
$
2.28

 
$
0.53

Weighted average shares used in computing net income per share:
 
 
 
 
 
 
 
 
Basic
 
40.5

 
39.9

 
40.4

 
39.8

Diluted
 
41.2

 
40.7

 
41.2

 
40.6

(1)
Amounts are not restated and represent the amounts recognized under generally accepted accounting principles in place during that period.



6

athenahealth, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except per share amounts)
 
 
September 30, 2018
 
December 31,
2017 (1)
Assets
 

 

Current assets:
 

 

Cash and cash equivalents
 
$
303.4

 
$
165.1

Accounts receivable, net
 
167.4

 
169.5

Contract assets
 
79.9

 
—

Prepaid expenses and other current assets
 
63.7

 
46.8

Total current assets
 
614.4

 
381.4

Property and equipment, net
 
337.0

 
355.1

Capitalized software costs, net
 
154.7

 
139.7

Purchased intangible assets, net
 
96.6

 
108.6

Goodwill
 
281.3

 
274.4

Deferred tax assets, net
 
1.1

 
41.8

Other assets
 
103.9

 
31.3

Total assets
 
$
1,589.0

 
$
1,332.3

Liabilities & Stockholders’ Equity
 

 

Current liabilities:
 

 

Accounts payable
 
$
2.9

 
$
10.6

Accrued compensation
 
112.0

 
94.7

Accrued expenses
 
52.0

 
51.5

Current portion of long-term debt
 
25.8

 
20.2

Deferred revenue
 
31.3

 
30.7

Total current liabilities
 
224.0

 
207.7

Deferred rent, net of current portion
 
30.1

 
29.3

Long-term debt, net of current portion
 
232.3

 
252.6

Deferred tax liability, net
 
27.6

 
—

Deferred revenue, net of current portion
 
0.8

 
46.5

Other long-term liabilities
 
6.3

 
4.7

Total liabilities
 
521.1

 
540.8

Stockholders’ equity:
 

 

Preferred stock, $0.01 par value: 5.0 shares authorized; no shares issued and outstanding at September 30, 2018 and December 31, 2017
 
—

 
—

Common stock, $0.01 par value: 125.0 shares authorized; 40.6 shares issued and outstanding at September 30, 2018; 40.1 shares issued and outstanding at December 31, 2017
 
0.4

 
0.4

Additional paid-in capital
 
687.2

 
646.7

Accumulated other comprehensive loss
 
(1.9
)
 
(0.4
)
Retained earnings
 
382.2

 
144.8

Total stockholders’ equity
 
1,067.9

 
791.5

Total liabilities and stockholders’ equity
 
$
1,589.0

 
$
1,332.3

(1)
Amounts are not restated and represent the amounts recognized under generally accepted accounting principles in place during that period.


7

athenahealth, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
 
Nine Months Ended
September 30,
 
 
2018
 
2017 (1)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
93.9

 
$
21.5

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization of property, equipment, capitalized software, and purchased intangible assets
 
112.0

 
109.3

Amortization of deferred commissions and contract fulfillment costs
 
6.1

 
—

Deferred income tax
 
20.0

 
4.2

Stock-based compensation expense
 
38.5

 
42.5

Other reconciling adjustments
 
6.4

 
(0.1
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
2.5

 
(2.2
)
Contract assets
 
(2.5
)
 
—

Prepaid expenses and other current assets
 
(16.9
)
 
(8.6
)
Deferred commissions and contract fulfillment costs and other long-term assets
 
(23.9
)
 
(6.8
)
Accounts payable
 
(6.7
)
 
0.6

Accrued expenses, deferred rent, and other long-term liabilities
 
9.2

 
2.0

Accrued compensation
 
12.0

 
(4.0
)
Deferred revenue
 
7.7

 
2.4

Net cash provided by operating activities
 
258.3

 
160.8

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capitalized software costs
 
(64.9
)
 
(59.3
)
Purchases of property and equipment
 
(31.9
)
 
(66.8
)
Payments on acquisitions, net of cash acquired
 
(10.1
)
 
(41.1
)
Other investing activities
 
3.5

 
—

Net cash used in investing activities
 
(103.4
)
 
(167.2
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from issuance of common stock under stock plans
 
15.6

 
13.4

Taxes paid related to net share settlement of stock awards
 
(15.9
)
 
(17.1
)
Payments on long-term debt
 
(15.0
)
 
(15.0
)
Other financing activities
 
0.1

 
0.1

Net cash used in financing activities
 
(15.2
)
 
(18.6
)
Effect of exchange rate changes on cash and cash equivalents
 
(1.4
)
 
0.3

Net increase (decrease) in cash and cash equivalents
 
138.3

 
(24.7
)
Cash and cash equivalents at beginning of period
 
165.1

 
147.4

Cash and cash equivalents at end of period
 
$
303.4

 
$
122.7

(1)
Amounts are not restated and represent the amounts recognized under generally accepted accounting principles in place during that period.

8

athenahealth, Inc.
RECONCILIATION OF CHANGES IN REVENUE STANDARD
(Unaudited, in millions, except per share amounts)

 
 
Three Months Ended September 30,
 
Change
 
 
2018
 
2017
 
Amount
 
Percent
 
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Revenue
 
$
329.5

 
$
1.9

 
$
331.4

 
$
304.6

 
$
26.8

 
8.8
 %
Cost of revenue
 
154.4

 
3.7

 
158.1

 
144.0

 
14.1

 
9.8
 %
Gross profit
 
175.1

 
1.8

 
173.3

 
160.6

 
12.7

 
7.9
 %
Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 


Selling and marketing
 
47.6

 
4.6

 
52.2

 
61.8

 
(9.6
)
 
(15.5
)%
Research and development
 
50.9

 
—

 
50.9

 
44.8

 
6.1

 
13.6
 %
General and administrative
 
38.4

 
—

 
38.4

 
35.4

 
3.0

 
8.5
 %
Total other operating expenses
 
136.9

 
4.6

 
141.5

 
142.0

 
(0.5
)
 
(0.4
)%
Operating income
 
38.2

 
6.4

 
31.8

 
18.6

 
13.2

 
71.0
 %
Other expense
 
(1.8
)
 
—

 
(1.8
)
 
(1.4
)
 
(0.4
)
 
28.6
 %
Income before income tax provision
 
36.4

 
6.4

 
30.0

 
17.2

 
12.8

 
74.4
 %
Income tax provision
 
10.0

 
1.5

 
8.5

 
4.2

 
4.3

 
102.4
 %
Net income
 
$
26.4

 
$
4.9

 
$
21.5

 
$
13.0

 
$
8.5

 
65.4
 %
 
 
 
 
 
 
 
 
 
 
 
 


Net income per share – Basic
 
$
0.65

 
$
0.12

 
$
0.53

 
$
0.33

 
$
0.20

 
60.6
 %
Net income per share – Diluted
 
$
0.64

 
$
0.12

 
$
0.52

 
$
0.32

 
$
0.20

 
62.5
 %


9

 
 
Nine Months Ended September 30,
 
Change
 
 
2018
 
2017
 
Amount
 
Percent
 
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Revenue
 
$
982.2

 
$
1.4

 
$
983.6

 
$
891.1

 
$
92.5

 
10.4
 %
Cost of revenue
 
460.4

 
11.8

 
472.2

 
432.2

 
40.0

 
9.3
 %
Gross profit
 
521.8

 
10.4

 
511.4

 
458.9

 
52.5

 
11.4
 %
Other operating expenses:
 
 
 
 
 
 
 

 
 
 


Selling and marketing
 
146.2

 
12.4

 
158.6

 
192.5

 
(33.9
)
 
(17.6
)%
Research and development
 
147.5

 
—

 
147.5

 
130.0

 
17.5

 
13.5
 %
General and administrative
 
104.7

 
—

 
104.7

 
104.5

 
0.2

 
0.2
 %
Total other operating expenses
 
398.4

 
12.4

 
410.8

 
427.0

 
(16.2
)
 
(3.8
)%
Operating income
 
123.4

 
22.8

 
100.6

 
31.9

 
68.7

 
215.4
 %
Other expense
 
(6.8
)
 
—

 
(6.8
)
 
(4.3
)
 
(2.5
)
 
58.1
 %
Income before income tax provision
 
116.6

 
22.8

 
93.8

 
27.6

 
66.2

 
239.9
 %
Income tax provision
 
22.7

 
5.6

 
17.1

 
6.1

 
11.0

 
180.3
 %
Net income
 
$
93.9

 
$
17.2

 
$
76.7

 
$
21.5

 
$
55.2

 
256.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share – Basic
 
$
2.32

 
$
0.42

 
$
1.90

 
$
0.54

 
$
1.36

 
251.9
 %
Net income per share – Diluted
 
$
2.28

 
$
0.42

 
$
1.86

 
$
0.53

 
$
1.33

 
250.9
 %


athenahealth, Inc.
DISAGGREGATION OF REVENUE AS PREVIOUSLY PRESENTED
(Unaudited, in millions)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
Previous Revenue Standard
Business services
 
$
322.7

 
$
295.8

 
$
959.6

 
$
867.1

Implementation and other
 
8.7

 
8.8

 
24.0

 
24.0

Total revenue
 
$
331.4

 
$
304.6

 
$
983.6

 
$
891.1


10

athenahealth, Inc.
STOCK-BASED COMPENSATION
(Unaudited, in millions)

Set forth below is a breakout of stock-based compensation impacting the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Stock-based compensation charged to Condensed Consolidated Statements of Income:
 
 
 
 
 
 
 
Cost of revenue
$
3.6

 
$
2.7

 
$
10.8

 
$
10.5

Selling and marketing
3.2

 
4.3

 
9.4

 
13.2

Research and development
3.7

 
3.2

 
11.1

 
10.3

General and administrative
3.6

 
2.3

 
7.2

 
8.5

    Total stock-based compensation expense
14.1

 
12.5

 
38.5

 
42.5

Amortization of capitalized stock-based compensation related to software development allocated to cost of revenue (1)
0.4

 
0.5

 
1.4

 
2.1

Amortization of capitalized stock-based compensation related to software development allocated to research and development (1)
0.2

 
—

 
0.2

 
0.1

    Total
$
14.7

 
$
13.0

 
$
40.1

 
$
44.7

(1)
In addition, for the three months ended September 30, 2018 and 2017, $0.7 million and $0.6 million, respectively, of stock-based compensation was capitalized in the line item Capitalized software costs, net in the Condensed Consolidated Balance Sheets. For the nine months ended September 30, 2018 and 2017, $2.2 million and $1.9 million, respectively, of stock-based compensation was capitalized in the line item Capitalized software costs, net in the Condensed Consolidated Balance Sheets.

athenahealth, Inc.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS
(Unaudited, in millions)

Set forth below is a breakout of amortization of purchased intangible assets impacting the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Amortization of purchased intangible assets allocated to:
 
 
 
 
 
 
 
Cost of revenue
$
1.5

 
$
1.9

 
$
4.7

 
$
4.3

Selling and marketing
3.3

 
3.2

 
9.9

 
9.7

Total amortization of purchased intangible assets
$
4.8

 
$
5.1

 
$
14.6

 
$
14.0



11

athenahealth, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO COMPARABLE GAAP MEASURES
(Unaudited, in millions, 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.

12

Non-GAAP Gross Margin
Set forth below is a presentation of our “Non-GAAP Gross Profit” and “Non-GAAP Gross Margin,” which represents Non-GAAP Gross Profit as a percentage of total revenue, for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions)
Three Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
329.5

 
$
1.9

 
$
331.4

 
$
304.6

 
$
26.8

 
8.8
%
Cost of revenue
154.4

 
3.7

 
158.1

 
144.0

 
14.1

 
9.8
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Gross Profit
175.1

 
1.8

 
173.3

 
160.6

 
12.7

 
7.9
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Gross Margin
53.1
%
 

 
52.3
%
 
52.7
%
 
(0.4
)%
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
  Add: Stock-based compensation allocated to cost of revenue
3.6

 
—

 
3.6

 
2.7

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development allocated to cost of revenue
0.4

 
—

 
0.4

 
0.5

 
 
 
 
  Add: Amortization of purchased intangible assets allocated to cost of revenue
1.5

 
—

 
1.5

 
1.9

 
 
 
 
  Add: Integration and transaction costs allocated to cost of revenue
0.2

 
—

 
0.2

 
0.1

 
 
 
 
  Add: Exit costs, including restructuring costs allocated to cost of revenue
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Gross Profit
$
180.8

 
$
1.8

 
$
179.0

 
$
165.8

 
$
13.2

 
8.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Gross Margin
54.9
%
 

 
54.0
%
 
54.4
%
 
(0.4
)%
 
NM

NM indicates percentage is not meaningful.

13

(unaudited, in millions)
Nine Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
982.2

 
$
1.4

 
$
983.6

 
$
891.1

 
$
92.5

 
10.4
%
Cost of revenue
460.4

 
11.8

 
472.2

 
432.2

 
40.0

 
9.3
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Gross Profit
521.8

 
10.4

 
511.4

 
458.9

 
52.5

 
11.4
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Gross Margin
53.1
%
 

 
52.0
%
 
51.5
%
 
0.5
%
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
  Add: Stock-based compensation allocated to cost of revenue
10.8

 
—

 
10.8

 
10.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development allocated to cost of revenue
1.4

 
—

 
1.4

 
2.1

 
 
 
 
  Add: Amortization of purchased intangible assets allocated to cost of revenue
4.7

 
—

 
4.7

 
4.3

 
 
 
 
  Add: Integration and transaction costs allocated to cost of revenue
0.4

 
—

 
0.4

 
0.2

 
 
 
 
  Add: Exit costs, including restructuring costs allocated to cost of revenue
0.8

 
—

 
0.8

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Gross Profit
$
539.9

 
$
10.4

 
$
529.5

 
$
476.0

 
$
53.5

 
11.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Gross Margin
55.0
%
 

 
53.8
%
 
53.4
%
 
0.4
%
 
NM

NM indicates percentage is not meaningful.


14

Non-GAAP EBITDA
Set forth below is a reconciliation of our “Non-GAAP EBITDA” and “Non-GAAP EBITDA Margin,” which represents Non-GAAP EBITDA as a percentage of total revenue, for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions)
Three Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
329.5

 
$
1.9

 
$
331.4

 
$
304.6

 
$
26.8

 
8.8
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income
26.4

 
4.9

 
21.5

 
13.0

 
8.5

 
65.4
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Provision for income taxes
10.0

 
1.5

 
8.5

 
4.2

 
 
 
 
  Add: Total other expense
1.8

 
—

 
1.8

 
1.4

 
 
 
 
  Add: Stock-based compensation expense
14.1

 
—

 
14.1

 
12.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.6

 
—

 
0.6

 
0.5

 
 
 
 
  Add: Depreciation and amortization
33.1

 
—

 
33.1

 
30.7

 
 
 
 
  Add: Amortization of purchased intangible assets
4.8

 
—

 
4.8

 
5.1

 
 
 
 
  Add: Amortization of deferred commissions and contract fulfillment costs
2.2

 
2.2

 
—

 
—

 
 
 
 
  Add: Integration and transaction costs
2.6

 
—

 
2.6

 
2.8

 
 
 
 
  Add: Exit costs, including restructuring costs
0.7

 
—

 
0.7

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP EBITDA
$
96.3

 
$
8.6

 
$
87.7

 
$
70.2

 
$
17.5

 
24.9
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP EBITDA Margin
29.2
%
 

 
26.5
%
 
23.0
%
 
3.5
%
 
NM

NM indicates percentage is not meaningful.


15

(unaudited, in millions)
Nine Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
982.2

 
$
1.4

 
$
983.6

 
$
891.1

 
$
92.5

 
10.4
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income
93.9

 
17.2

 
76.7

 
21.5

 
55.2

 
256.7
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Provision for income taxes
22.7

 
5.6

 
17.1

 
6.1

 
 
 
 
  Add: Total other expense
6.8

 
—

 
6.8

 
4.3

 
 
 
 
  Add: Stock-based compensation expense
38.5

 
—

 
38.5

 
42.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
1.6

 
—

 
1.6

 
2.2

 
 
 
 
  Add: Depreciation and amortization
95.4

 
—

 
95.4

 
92.7

 
 
 
 
  Add: Amortization of purchased intangible assets
14.6

 
—

 
14.6

 
14.0

 
 
 
 
  Add: Amortization of deferred commissions and contract fulfillment costs
6.1

 
6.1

 
—

 
—

 
 
 
 
  Add: Integration and transaction costs
9.1

 
—

 
9.1

 
6.8

 
 
 
 
  Add: Exit costs, including restructuring costs
5.3

 
—

 
5.3

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP EBITDA
$
294.0

 
$
28.9

 
$
265.1

 
$
190.1

 
$
75.0

 
39.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP EBITDA Margin
29.9
%
 
 
 
27.0
%
 
21.3
%
 
5.7
%
 
NM

NM indicates percentage is not meaningful.


16

Non-GAAP Operating Income
Set forth below is a reconciliation of our “Non-GAAP Operating Income” and “Non-GAAP Operating Margin,” which represents Non-GAAP Operating Income as a percentage of total revenue, for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions)
Three Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
329.5

 
$
1.9

 
$
331.4

 
$
304.6

 
$
26.8

 
8.8
%
 
 
 
 
 
 
 
 
 
 
 

GAAP net income
26.4

 
4.9

 
21.5

 
13.0

 
8.5

 
65.4
%
  Add: Provision for income taxes
10.0

 
1.5

 
8.5

 
4.2

 
 
 
 
  Add: Total other expense
1.8

 
—

 
1.8

 
1.4

 
 
 
 
GAAP operating income
$
38.2

 
$
6.4

 
$
31.8

 
$
18.6

 
$
13.2

 
71.0
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP operating margin
11.6
%
 

 
9.6
%
 
6.1
%
 
3.5
%
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
  Add: Stock-based compensation expense
14.1

 
—

 
14.1

 
12.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.6

 
—

 
0.6

 
0.5

 
 
 
 
  Add: Amortization of purchased intangible assets
4.8

 
—

 
4.8

 
5.1

 
 
 
 
  Add: Integration and transaction costs
2.6

 
—

 
2.6

 
2.8

 
 
 
 
  Add: Exit costs, including restructuring costs
0.7

 
—

 
0.7

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Operating Income
$
61.0

 
$
6.4

 
$
54.6

 
$
39.5

 
$
15.1

 
38.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Operating Margin
18.5
%
 

 
16.5
%
 
13.0
%
 
3.5
%
 
NM

NM indicates percentage is not meaningful.



17

(unaudited, in millions)
Nine Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
982.2

 
$
1.4

 
$
983.6

 
$
891.1

 
$
92.5

 
10.4
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income
93.9

 
17.2

 
76.7

 
21.5

 
55.2

 
256.7
%
  Add: Provision for income taxes
22.7

 
5.6

 
17.1

 
6.1

 
 
 
 
  Add: Total other expense
6.8

 
—

 
6.8

 
4.3

 
 
 
 
GAAP operating income
$
123.4

 
$
22.8

 
$
100.6

 
$
31.9

 
$
68.7

 
215.4
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP operating margin
12.6
%
 

 
10.2
%
 
3.6
%
 
6.6
%
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
  Add: Stock-based compensation expense
38.5

 
—

 
38.5

 
42.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
1.6

 
—

 
1.6

 
2.2

 
 
 
 
  Add: Amortization of purchased intangible assets
14.6

 
—

 
14.6

 
14.0

 
 
 
 
  Add: Integration and transaction costs
9.1

 
—

 
9.1

 
6.8

 
 
 
 
  Add: Exit costs, including restructuring costs
5.3

 
—

 
5.3

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Operating Income
$
192.5

 
$
22.8

 
$
169.7

 
$
97.4

 
$
72.3

 
74.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Operating Margin
19.6
%
 

 
17.3
%
 
10.9
%
 
6.4
%
 
NM

NM indicates percentage is not meaningful.



18

Non-GAAP Net Income
Set forth below is a reconciliation of our “Non-GAAP Net Income” for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions, except per share amounts)
Three Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
GAAP net income
$
26.4

 
$
4.9

 
$
21.5

 
$
13.0

 
$
8.5

 
65.4
%
  Add: Stock-based compensation expense
14.1

 
—

 
14.1

 
12.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.6

 
—

 
0.6

 
0.5

 
 
 
 
  Add: Amortization of purchased intangible assets
4.8

 
—

 
4.8

 
5.1

 
 
 
 
  Add: Integration and transaction costs
2.6

 
—

 
2.6

 
2.8

 
 
 
 
  Add: Exit costs, including restructuring costs
0.7

 
—

 
0.7

 
—

 
 
 
 
  Add: Loss on investments, net
0.1

 
—

 
0.1

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Sub-total of reconciling items
22.9

 
—

 
22.9

 
20.9

 
2.0

 
9.6
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Tax impact of reconciling items (1)
(5.7
)
 
—

 
(5.7
)
 
(8.4
)
 
 
 
 
  Add: Tax impact resulting from applying non-GAAP tax rate (2)
0.9

 
0.1

 
1.0

 
(2.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income
$
44.5

 
$
4.8

 
$
39.7

 
$
22.9

 
$
16.8

 
73.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - Diluted
41.2

 
41.2

 
41.2

 
40.7

 
0.5

 
1.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income per Share - Diluted
$
1.08

 
$
0.12

 
$
0.96

 
$
0.56

 
$
0.40

 
71.4
%
(1)
Tax impact calculated using a statutory tax rate of 25% for Q3 2018 and 40% for Q3 2017.
(2)
Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 25% for Q3 2018 and 40% for Q3 2017.

19

(unaudited, in millions, except per share amounts)
Nine Months Ended September 30,

Change
 
2018

2017

Amount

Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
GAAP net income
$
93.9

 
$
17.2

 
$
76.7

 
$
21.5

 
$
55.2

 
256.7
%
  Add: Stock-based compensation expense
38.5

 
—

 
38.5

 
42.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
1.6

 
—

 
1.6

 
2.2

 
 
 
 
  Add: Amortization of purchased intangible assets
14.6

 
—

 
14.6

 
14.0

 
 
 
 
  Add: Integration and transaction costs
9.1

 
—

 
9.1

 
6.8

 
 
 
 
  Add: Exit costs, including restructuring costs
5.3

 
—

 
5.3

 
—

 
 
 
 
  Add: Loss on investments, net
1.6

 
—

 
1.6

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Sub-total of reconciling items
70.7

 
—

 
70.7

 
65.5

 
5.2

 
7.9
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Tax impact of reconciling items (1)
(17.7
)
 
—

 
(17.7
)
 
(26.2
)
 
 
 
 
  Add: Tax impact resulting from applying non-GAAP tax rate (2)
(6.4
)
 
0.1

 
(6.3
)
 
(4.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income
$
140.5

 
$
17.1

 
$
123.4

 
$
55.9

 
$
67.5

 
120.8
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - Diluted
41.2

 
41.2

 
41.2

 
40.6

 
0.6

 
1.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income per Share - Diluted
$
3.41

 
$
0.42

 
$
3.00

 
$
1.38

 
$
1.62

 
117.4
%
(1)
Tax impact calculated using a statutory tax rate of 25% for 2018 and 40% for 2017.
(2)
Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 25% for 2018 and 40% for 2017.





20

Non-GAAP Net Income per Diluted Share
Set forth below is a reconciliation of our “Non-GAAP Net Income per Diluted Share” for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions, except per share amounts)
Three Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
GAAP net income per share - diluted
$
0.64

 
$
0.12

 
$
0.52

 
$
0.32

 
$
0.20

 
62.5
%
  Add: Stock-based compensation expense
0.34

 
—

 
0.34

 
0.31

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.01

 
—

 
0.01

 
0.01

 
 
 
 
  Add: Amortization of purchased intangible assets
0.12

 
—

 
0.12

 
0.13

 
 
 
 
  Add: Integration and transaction costs
0.06

 
—

 
0.06

 
0.07

 
 
 
 
  Add: Exit costs, including restructuring costs
0.02

 
—

 
0.02

 
—

 
 
 
 
  Add: Loss on investments, net
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Sub-total of tax deductible items
0.56

 
—

 
0.56

 
0.51

 
0.05

 
9.8
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Tax impact of reconciling items (1)
(0.14
)
 
—

 
(0.14
)
 
(0.21
)
 
 
 
 
  Add: Tax impact resulting from applying non-GAAP tax rate (2)
0.02

 
—

 
0.02

 
(0.06
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income per Share - Diluted
$
1.08

 
$
0.12

 
$
0.96

 
$
0.56

 
$
0.40

 
71.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - Diluted
41.2

 
41.2

 
41.2

 
40.7

 
0.5

 
1.2
%
(1)
Tax impact calculated using a statutory tax rate of 25% for Q3 2018 and 40% for Q3 2017.
(2)
Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 25% for Q3 2018 and 40% for Q3 2017.


21

(unaudited, in millions, except per share amounts)
Nine Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
GAAP net income per share - diluted
$
2.28

 
$
0.42

 
$
1.86

 
$
0.53

 
$
1.33

 
250.9
%
  Add: Stock-based compensation expense
0.93

 
—

 
0.93

 
1.05

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.04

 
—

 
0.04

 
0.05

 
 
 
 
  Add: Amortization of purchased intangible assets
0.35

 
—

 
0.35

 
0.34

 
 
 
 
  Add: Integration and transaction costs
0.22

 
—

 
0.22

 
0.17

 
 
 
 
  Add: Exit costs, including restructuring costs
0.13

 
—

 
0.13

 
—

 
 
 
 
  Add: Loss on investments, net
0.04

 
—

 
0.04

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Sub-total of tax deductible items
1.72

 
—

 
1.72

 
1.61

 
0.11

 
6.8
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Tax impact of reconciling items (1)
(0.43
)
 
—

 
(0.43
)
 
(0.65
)
 
 
 
 
  Add: Tax impact resulting from applying non-GAAP tax rate (2)
(0.16
)
 
—

 
(0.15
)
 
(0.12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income per Share - Diluted
$
3.41

 
$
0.42

 
$
3.00

 
$
1.38

 
$
1.62

 
117.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - Diluted
41.2

 
41.2

 
41.2

 
40.6

 
0.6

 
1.5
%
(1)
Tax impact calculated using a statutory tax rate of 25% for 2018 and 40% for 2017.
(2)
Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 25% for 2018 and 40% for 2017.




22

athenahealth, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO COMPARABLE GAAP MEASURES FOR FISCAL YEAR 2018 GUIDANCE
(Unaudited, in millions)
Please note that the figures presented below may not sum exactly due to rounding.
Non-GAAP Operating Income Guidance - Previous Revenue Standard
Set forth below is a reconciliation of our “Non-GAAP Operating Income” and “Non-GAAP Operating Margin” guidance for fiscal year 2018, which represents Non-GAAP Operating Income as a percentage of total revenue. Fiscal year 2018 guidance is prior to the impact of the new revenue recognition standard to allow for comparability against historical results. We will present our Condensed Consolidated Statements of Net Income for our fiscal year 2018 results including the impact of the new revenue recognition standard and will provide a separate reconciliation to results prior to the impacts resulting from the new revenue recognition standard. Finally, the Non-GAAP adjusting line items should not be relied upon individually, as we are not guiding on individual line items, but upon the total operating income metrics, as included within our guidance table below.
(unaudited, in millions)
Previous Revenue Standard
 
LOW
 
HIGH
 
Fiscal Year Ending December 31, 2018
Total revenue
$
1,330

 
$
1,360

 
 
 
 
GAAP operating income
$
128

 
$
155

 
 
 
 
GAAP operating margin
9.6
%
 
11.4
%
 
 
 
 
  Add: Stock-based compensation expense
53

 
47

  Add: Amortization of capitalized stock-based compensation related to software development
2

 
2

  Add: Amortization of purchased intangible assets
19

 
19

  Add: Integration and transaction costs
12

 
11

  Add: Exit costs, including restructuring
5

 
4

 
 
 
 
Non-GAAP Operating Income
$
219

 
$
238

 
 
 
 
Non-GAAP Operating Margin
16.5
%
 
17.5
%


23

Non-GAAP Operating Income Guidance - New Revenue Standard
Set forth below is a reconciliation of our “Non-GAAP Operating Income” and “Non-GAAP Operating Margin” guidance for fiscal year 2018, which represents Non-GAAP Operating Income as a percentage of total revenue. Please note that the fiscal year 2018 guidance detailed below includes the impact of the new revenue recognition standard. Finally, the Non-GAAP adjusting line items should not be relied upon individually, as we are not guiding on individual line items, but upon the total operating income metrics, as included within our guidance table below.
(unaudited, in millions)
New Revenue Standard
 
LOW
 
HIGH
 
Fiscal Year Ending December 31, 2018
Total revenue
$
1,335

 
$
1,365

 
 
 
 
GAAP operating income
$
153

 
$
187

 
 
 
 
GAAP operating margin
11.5
%
 
13.7
%
 
 
 
 
  Add: Stock-based compensation expense
53

 
47

  Add: Amortization of capitalized stock-based compensation related to software development
2

 
2

  Add: Amortization of purchased intangible assets
19

 
19

  Add: Integration and transaction costs
12

 
11

  Add: Exit costs, including restructuring
5

 
4

 
 
 
 
Non-GAAP Operating Income
$
244

 
$
270

 
 
 
 
Non-GAAP Operating Margin
18.3
%
 
19.8
%




24

Explanation of Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles 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 Gross Profit” as total revenue, less cost of revenue, plus (1) stock-based compensation expense allocated to cost of revenue, (2) amortization of purchased intangible assets allocated to cost of revenue, (3) integration and transactions costs allocated to cost of revenue, and (4) exit costs, including restructuring costs allocated to cost of revenue; and “Non-GAAP Gross Margin” as Non-GAAP Gross Profit as a percentage of total revenue. Management considers these non-GAAP financial measures and metrics 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 and metrics 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 EBITDA” as the sum of GAAP net income (loss) before provision for (benefit from) income taxes; total other expense; stock-based compensation expense; amortization of capitalized stock-based compensation related to software development; depreciation and amortization; amortization of purchased intangible assets; amortization of deferred commissions and contract fulfillment costs; integration and transaction costs; and exit costs, including restructuring costs; and “Non-GAAP EBITDA Margin” as Non-GAAP EBITDA as a percentage of total revenue. Management defines “Non-GAAP Operating Income” as the sum of GAAP net income (loss) before provision for (benefit from) income taxes; total other expense; stock-based compensation expense; amortization of capitalized stock-based compensation related to software development; amortization of purchased intangible assets; integration and transaction costs; and exit costs, including restructuring costs; and “Non-GAAP Operating Margin” as Non-GAAP Operating Income as a percentage of total revenue. Management defines “Non-GAAP Net Income” 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 and transaction costs; exit costs, including restructuring costs; and gain or loss on investments 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 Net Income per Share - Diluted” as Non-GAAP Net Income divided by weighted average diluted shares outstanding. 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

25

these measures enable investors and financial analysts to closely monitor and understand changes in our ability to generate income from ongoing business operations.
Management excludes or adjusts each of the items identified below from the applicable non-GAAP financial measure or metric referenced above for the reasons set forth below 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 and transaction costs — integration costs are the severance payments and retention bonuses for certain employees related to specific transactions. Transaction costs are costs related to strategic 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.
•
Exit costs, including restructuring costs — represent costs incurred as a result of strategic realignments including those related to workforce reductions, termination of certain lease or other agreements, and non-cash charges related to the write down of certain assets. Management does not believe such costs accurately reflect the performance of our ongoing operations for the period in which such costs are incurred.
•
Gain or loss on investments — represents unrecognized or recognized gains or losses on the fair value, sales, or conversions of our investments, such as marketable securities and More Disruption Please Accelerator investments. Management does not believe such gains or losses accurately reflect the performance of our ongoing operations for the period in which such gains or losses are reported. Upon the adoption of the new financial instruments accounting standard effective for 2018, we present gains or losses on investments in Other income (expense) on our Condensed Consolidated Statement of Income which is not included in Operating Income but is included in the subtotal Income before income tax provision.
•
Non-GAAP tax rate — our statutory tax rates of 25% for fiscal year 2018 and 40% for fiscal year 2017 are applied to normalize the tax impact to our Non-GAAP Net Income per Diluted Share based on the fact that historically a relatively small change in pre-tax GAAP income (loss) in any one period could result in a volatile GAAP effective tax rate.


26
 EX-99.2 3 athnq32018preparedremarks.htm EXHIBIT 99.2 Exhibit







Exhibit 99.2

athenahealthlogoa11.jpg
Third Quarter Fiscal Year 2018
Prepared Remarks and Supplemental Metrics    November 9, 2018
Jeffrey R. Immelt, Executive Chairman of the Board of Directors
Marc A. Levine, Chief Financial Officer
About These Remarks
The following commentary is provided by management in conjunction with the third quarter fiscal year 2018 earnings press release issued by athenahealth, Inc. (“athenahealth” or “we”). These remarks represent management’s current views on our financial and operational performance and are provided to give investors and analysts more time to analyze and understand our performance in advance of the earnings conference call. These prepared remarks will not be read on the conference call. A complete reconciliation between generally accepted accounting principles (“GAAP”) and non-GAAP results, as well as a summary of supplemental metrics and definitions, is provided in the tables following these prepared remarks.
Earnings 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. 7667835, or visit the Investors section of our website at www.athenahealth.com. A webcast replay will also be archived on our website.
Safe Harbor and Forward-Looking Statements
These remarks contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding management’s expectations for future financial and operational performance and operational expenditures, expected growth, and business outlook; statements regarding our strategic alternatives process; statements regarding our fiscal 2018 guidance; statements regarding the benefits and demand for our service offerings; and statements found under our “Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures for Fiscal Year 2018 Guidance” sections of these remarks. Forward-looking statements may be identified with words such as “will,” “may,” “expect,” “plan,” “anticipate,” “upcoming,” “believe,” “expect,” or similar terminology, and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance, 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. These risks and uncertainties include: the impact of changes in our senior management team; the impact of our evaluation of strategic alternatives and of our cost-reduction measures; our highly competitive industry and our ability to compete effectively and remain innovative; the development of the market for cloud-based healthcare information technology services; changes in the healthcare industry and their impact on the demand for our services; our ability to maintain consistently high growth rates due to lengthening client sales cycles; the impact of changes in our business model and structure; our ability to effectively manage our growth; our ability to protect our intellectual property; current and future litigation, including for intellectual property infringement; our dependence on third-party providers; risks and costs associated with our worldwide operations; our ability to attract and retain highly skilled employees; our fluctuating operating results; our ability to retain our clients and maintain client revenue; our tax liability; our variable sales and implementation cycles; the timing at which we recognize certain revenue and our ability to evaluate our prospects; defects and errors in our software or services, or interruptions or damages to our systems or those of third parties on which we rely; a data security breach; limitations on

1

our use of data; the effect of payer and provider conduct; the failure of our services to provide accurate and timely information; changing government regulation and the costs and challenges of compliance; the potential for illegal behavior by employees or subcontractors; and the price volatility of our common stock. Forward-looking statements speak only as of the date hereof and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. For additional information regarding these and other risks faced by us, refer to our public filings with the Securities and Exchange Commission (“SEC”), available on the Investors section of our website at www.athenahealth.com and on the SEC’s website at www.sec.gov.
Use of Non-GAAP Financial Measures
These remarks contain 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 following these prepared remarks and can be found within our third quarter fiscal year 2018 earnings press release in the Investors section of our website at www.athenahealth.com.
About athenahealth
athenahealth partners with hospital and ambulatory customers to drive clinical and financial results. We offer medical record, revenue cycle, patient engagement, care coordination, and population health services. We combine insights from our network of over 120,000 providers and approximately 117 million patients with deep industry knowledge and perform administrative work at scale.
Strategic Alternatives Process
In June 2018, we announced that our Board of Directors initiated a process to explore strategic alternatives and had begun working with financial advisors. As part of this process, our Board will consider a sale, merger or other transaction involving our company as well as continuing as an independent company.
Results Overview
We adopted a new revenue recognition standard on January 1, 2018. Please note that the financial results presented below include both amounts “as presented,” which reflect implementation of the new revenue recognition standard, as well as amounts prior to the impact of the new revenue recognition standard to allow for comparability against historical results. Starting in fiscal year 2019, we will no longer present our GAAP and Non-GAAP financial results under the previous revenue recognition standard. For additional information and reconciliations of our financial results between the new and previous revenue recognition standard, see the additional tables included in these prepared remarks, in our third quarter 2018 earnings press release, as well as in the Form 10-Q filed with the Securities and Exchange Commission on November 9, 2018.

athenahealth’s top line results for the third quarter of fiscal year 2018 reflect solid growth in athenaCollector providers. Stable revenue growth combined with expense management drove strong profitability during the third quarter.
•
Total Revenue:
◦
Total Revenue as presented was $329.5 million in Q3 2018.
◦
Total Revenue prior to the impact of the new revenue recognition standard was $331.4 million in Q3 2018, representing 9% growth over $304.6 million in Q3 2017.
•
GAAP Gross Profit and Margin:
◦
GAAP Gross Profit as presented was $175.1 million, or 53.1% of total revenue, in Q3 2018.

2

◦
GAAP Gross Profit prior to the impact of the new revenue recognition standard was $173.3 million, or 52.3% of total revenue, in Q3 2018, an increase of 8% over $160.6 million, or 52.7% of total revenue, in Q3 2017.
•
Non-GAAP Gross Profit and Margin:
◦
Non-GAAP Gross Profit as presented was $180.8 million, or 54.9% of total revenue, in Q3 2018.
◦
Non-GAAP Gross Profit prior to the impact of the new revenue recognition standard was $179.0 million, or 54.0% of total revenue, in Q3 2018, an increase of 8% over $165.8 million, or 54.4% of total revenue, in Q3 2017.
•
GAAP Selling and Marketing expense:
◦
GAAP Selling and Marketing expense as presented was $47.6 million, or 14.4% of total revenue, in Q3 2018.
◦
GAAP Selling and Marketing expense prior to the impact of the new revenue recognition standard was $52.2 million, or 15.8% of total revenue, in Q3 2018, a decrease of 16% from $61.8 million, or 20.3% of total revenue, in Q3 2017.
•
GAAP Research and Development expense:
◦
GAAP Research and Development expense as presented was $50.9 million, or 15.4% of total revenue, in Q3 2018.
◦
GAAP Research and Development expense prior to the impact of the new revenue recognition standard was $50.9 million, or 15.4% of total revenue, in Q3 2018, an increase of 14% over $44.8 million, or 14.7% of total revenue, in Q3 2017.
•
GAAP General and Administrative expense:
◦
GAAP General and Administrative expense as presented was $38.4 million, or 11.7% of total revenue, in Q3 2018.
◦
GAAP General and Administrative expense prior to the impact of the new revenue recognition standard was $38.4 million, or 11.6% of total revenue, in Q3 2018, an increase of 8% from $35.4 million, or 11.6% of total revenue, in Q3 2017.
•
GAAP Operating Income and Margin:
◦
GAAP Operating Income as presented was $38.2 million, or 11.6% of total revenue, in Q3 2018.
◦
GAAP Operating Income prior to the impact of the new revenue recognition standard was $31.8 million, or 9.6% of total revenue, in Q3 2018, an increase of 71% over $18.6 million, or 6.1% of total revenue, in Q3 2017.
•
Non-GAAP Operating Income and Margin:
◦
Non-GAAP Operating Income as presented was $61.0 million, or 18.5% of revenue, in Q3 2018.
◦
Non-GAAP Operating Income prior to the impact of the new revenue recognition standard was $54.6 million, or 16.5% of total revenue, in Q3 2018, an increase of 38% over $39.5 million, or 13.0% of total revenue, in Q3 2017.
•
GAAP Net Income:
◦
GAAP Net Income as presented was $26.4 million, or $0.64 per diluted share, in Q3 2018.

3

◦
GAAP Net Income prior to the impact of the new revenue recognition standard was $21.5 million, or $0.52 per diluted share, in Q3 2018, an increase of 65% over $13.0 million, or $0.32 per diluted share, in Q3 2017.
•
Non-GAAP Net Income:
◦
Non-GAAP Net Income as presented was $44.5 million, or $1.08 per diluted share, in Q3 2018.
◦
Non-GAAP Net Income prior to the impact of the new revenue recognition standard was $39.7 million, or $0.96 per diluted share, in Q3 2018, an increase of 73% over $22.9 million, or $0.56 per diluted share, in Q3 2017.
•
Total Bookings
◦
Total Bookings were $46.6 million in Q3 2018, compared to $65.7 million in Q3 2017. Total Bookings in Q3 2018 included a large enterprise client chargeback originally signed in 2016. Excluding this chargeback, the decline in bookings year-over-year was consistent with the prior quarter.
athenahealth’s client base continues to expand while client adoption of other services in the athenahealth service suite grows. As our client base expands outside the traditional ambulatory market, we believe that total providers, covered lives, and discharge bed days managed by or transacted across our network are appropriate metrics to use when measuring our market share. During Q3 2018:
•
83% of all new athenaCollector deals included athenaClinicals in Q3 2018, compared to 71% in Q3 2017.
•
81% of all new athenaCollector deals included athenaClinicals, athenaCommunicator, and athenaCoordinator in Q3 2018, compared to 67% in Q3 2017.
•
56% of total athenaCollector providers have adopted athenaClinicals as of Q3 2018, consistent with 56% as of Q2 2018.
•
65% of total athenaCollector providers have adopted athenaCommunicator as of Q3 2018, compared to 64% as of Q2 2018.
Network Growth
Network growth metrics for ambulatory (athenaOne), hospital (athenaOne for Hospitals & Health Systems), and population health (athenahealth Population Health) services from Q2 2018 to Q3 2018 were as follows:
 
athenaOne (Ambulatory)
 
athenaOne (Hospital)
 
Population Health
 
Collector Providers
Clinicals Providers
Communicator Providers
 
Discharge Bed Days
 
Covered Lives
Ending Balance as of 6/30/18
115,724

64,317

74,333

 
33,352

 
3,329,133

Sequential Growth
4,470

3,350

3,957

 
6,463

 
(241,124
)
Ending Balance as of 9/30/18
120,194

67,667

78,290

 
39,815

 
3,088,009

Sequential Growth %
4
%
5
%
5
%
 
19
%
 
(7
)%
Network growth metrics for ambulatory (athenaOne), hospital (athenaOne for Hospitals & Health Systems), and population health (athenahealth Population Health) services from Q3 2017 to Q3 2018 were as follows:

4

 
athenaOne (Ambulatory)
 
athenaOne (Hospital)
 
Population Health
 
Collector Providers
Clinicals Providers
Communicator Providers
 
Discharge Bed Days
 
Covered Lives
Ending Balance as of 9/30/17
106,482

57,936

67,590

 
19,790

 
3,242,628

Growth vs. Prior Year
13,712

9,731

10,700

 
20,025

 
(154,619
)
Ending Balance as of 9/30/18
120,194

67,667

78,290

 
39,815

 
3,088,009

Growth vs. Prior Year %
13
%
17
%
16
%
 
101
%
 
(5
)%
Revenue Discussion
Q3 2018 revenue as presented was $329.5 million. Q3 2018 revenue prior to the impact of the new revenue recognition standard was $331.4 million and grew by 9% (or $26.8 million) over Q3 2017. Q3 2018 business services revenue growth was driven by a 13% increase in athenaCollector providers. Revenue prior to the impact of the new revenue standard for the nine months ended September 30, 2018 was $983.6 million and grew by 10% (or $92.5 million) over the same period last year.
(unaudited, in millions)
 
Previous Revenue Standard
 
 
Three Months Ended September 30,
 
 
2018
 
2017
 
YoY Growth %
Business services
 
$
322.7

 
$
295.8

 
9
 %
Implementation and other
 
8.7

 
8.8

 
(1
)%
Total revenue
 
$
331.4

 
$
304.6

 
9
 %
(unaudited, in millions)
 
Previous Revenue Standard
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
YoY Growth %
Business services
 
$
959.6

 
$
867.1

 
11
%
Implementation and other
 
24.0

 
24.0

 
—
%
Total revenue
 
$
983.6

 
$
891.1

 
10
%
Non-GAAP Gross Margin Discussion
Non-GAAP Gross Margin as presented was 54.9% for Q3 2018. Non-GAAP Gross Margin prior to the impact of the new revenue recognition standard was 54.0% for Q3 2018, down approximately 40 basis points from 54.4% in Q3 2017. During the third quarter, we continued to appropriately invest in our client work reduction efforts, our customer success initiatives, as well as our platform initiatives aimed at increasing the scale and reliability of athenaNet.
Balance Sheet and Cash Flow Highlights
As of September 30, 2018, we had cash and cash equivalents of $303.4 million and outstanding indebtedness of $258.8 million. Net operating cash flow increased by $97.5 million to $258.3 million for the nine months ended September 30, 2018 compared to net operating cash flow of $160.8 million for the nine months ended September 30, 2017. The increase in net cash provided by operating activities is mainly driven by an increase in net income excluding the effect of non-cash items. The increase in net income is a result of continued revenue growth as well as continued execution on our plans to reduce expenses and operate more efficiently. Our free cash flow, defined as operating cash flow less investments in capitalized software and capital expenditures, increased by $126.8 million from a net inflow of $34.7

5

million for the nine months ended September 30, 2017 to a net inflow of $161.5 million for the nine months ended September 30, 2018.
(unaudited, in millions)
Nine Months Ended
 
September 30,
 
2018
 
2017
 
$ Change
Operating cash flow
$
258.3

 
$
160.8

 
$
97.5

Less: Capitalized software costs
(64.9
)
 
(59.3
)
 
(5.6
)
Less: Purchases of property and equipment
(31.9
)
 
(66.8
)
 
34.9

Free cash flow
$
161.5

 
$
34.7

 
$
126.8

Fiscal Year 2018 Outlook
We are reaffirming our fiscal year 2018 financial guidance to reflect our year-to-date performance and our expectations for the fourth quarter. Our fiscal year 2018 guidance is prior to the impact of the new revenue recognition standard to allow for comparability against historical results. Our updated fiscal year 2018 financial guidance under the previous revenue standard is summarized in the following table:
Previous Revenue Standard
For the Fiscal Year Ending December 31, 2018
Forward-Looking Guidance
Financial Measures
 
GAAP Total Revenue
$1,330 million - $1,360 million
GAAP Operating Income
$128 million - $155 million
GAAP Operating Margin
9.6% - 11.4%
Non-GAAP Operating Income
$219 million - $238 million
Non-GAAP Operating Margin
16.5% - 17.5%
We are also reaffirming our fiscal year 2018 guidance under the new revenue recognition standard. Our fiscal year 2018 financial guidance under the new revenue standard is summarized in the following table:
New Revenue Standard
For the Fiscal Year Ending December 31, 2018
Forward-Looking Guidance
Financial Measures
 
GAAP Total Revenue
$1,335 million - $1,365 million
GAAP Operating Income
$153 million - $187 million
GAAP Operating Margin
11.5% - 13.7%
Non-GAAP Operating Income
$244 million - $270 million
Non-GAAP Operating Margin
18.3% - 19.8%

6

Reconciliation of Changes in Revenue Standard, Stock-Based Compensation Expense, Amortization of Purchased Intangible Assets, and Reconciliation of Non-GAAP Financial Measures


athenahealth, Inc.
RECONCILIATION OF CHANGES IN REVENUE STANDARD
(Unaudited, in millions, except per share amounts)

 
 
Three Months Ended September 30,
 
Change
 
 
2018
 
2017
 
Amount
 
Percent
 
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Revenue
 
$
329.5

 
$
1.9

 
$
331.4

 
$
304.6

 
$
26.8

 
8.8
 %
Cost of revenue
 
154.4

 
3.7

 
158.1

 
144.0

 
14.1

 
9.8
 %
Gross profit
 
175.1

 
1.8

 
173.3

 
160.6

 
12.7

 
7.9
 %
Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 


Selling and marketing
 
47.6

 
4.6

 
52.2

 
61.8

 
(9.6
)
 
(15.5
)%
Research and development
 
50.9

 
—

 
50.9

 
44.8

 
6.1

 
13.6
 %
General and administrative
 
38.4

 
—

 
38.4

 
35.4

 
3.0

 
8.5
 %
Total other operating expenses
 
136.9

 
4.6

 
141.5

 
142.0

 
(0.5
)
 
(0.4
)%
Operating income
 
38.2

 
6.4

 
31.8

 
18.6

 
13.2

 
71.0
 %
Other expense
 
(1.8
)
 
—

 
(1.8
)
 
(1.4
)
 
(0.4
)
 
28.6
 %
Income before income tax provision
 
36.4

 
6.4

 
30.0

 
17.2

 
12.8

 
74.4
 %
Income tax provision
 
10.0

 
1.5

 
8.5

 
4.2

 
4.3

 
102.4
 %
Net income
 
$
26.4

 
$
4.9

 
$
21.5

 
$
13.0

 
$
8.5

 
65.4
 %
 
 
 
 
 
 
 
 
 
 
 
 


Net income per share – Basic
 
$
0.65

 
$
0.12

 
$
0.53

 
$
0.33

 
$
0.20

 
60.6
 %
Net income per share – Diluted
 
$
0.64

 
$
0.12

 
$
0.52

 
$
0.32

 
$
0.20

 
62.5
 %



7

 
 
Nine Months Ended September 30,
 
Change
 
 
2018
 
2017
 
Amount
 
Percent
 
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Revenue
 
$
982.2

 
$
1.4

 
$
983.6

 
$
891.1

 
$
92.5

 
10.4
 %
Cost of revenue
 
460.4

 
11.8

 
472.2

 
432.2

 
40.0

 
9.3
 %
Gross profit
 
521.8

 
10.4

 
511.4

 
458.9

 
52.5

 
11.4
 %
Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Selling and marketing
 
146.2

 
12.4

 
158.6

 
192.5

 
(33.9
)
 
(17.6
)%
Research and development
 
147.5

 
—

 
147.5

 
130.0

 
17.5

 
13.5
 %
General and administrative
 
104.7

 
—

 
104.7

 
104.5

 
0.2

 
0.2
 %
Total other operating expenses
 
398.4

 
12.4

 
410.8

 
427.0

 
(16.2
)
 
(3.8
)%
Operating income
 
123.4

 
22.8

 
100.6

 
31.9

 
68.7

 
215.4
 %
Other expense
 
(6.8
)
 
—

 
(6.8
)
 
(4.3
)
 
(2.5
)
 
58.1
 %
Income before income tax provision
 
116.6

 
22.8

 
93.8

 
27.6

 
66.2

 
239.9
 %
Income tax provision
 
22.7

 
5.6

 
17.1

 
6.1

 
11.0

 
180.3
 %
Net income
 
$
93.9

 
$
17.2

 
$
76.7

 
$
21.5

 
$
55.2

 
256.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share – Basic
 
$
2.32

 
$
0.42

 
$
1.90

 
$
0.54

 
$
1.36

 
251.9
 %
Net income per share – Diluted
 
$
2.28

 
$
0.42

 
$
1.86

 
$
0.53

 
$
1.33

 
250.9
 %


athenahealth, Inc.
DISAGGREGATION OF REVENUE AS PREVIOUSLY PRESENTED
(Unaudited, in millions)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
Previous Revenue Standard
Business services
 
$
322.7

 
$
295.8

 
$
959.6

 
$
867.1

Implementation and other
 
8.7

 
8.8

 
24.0

 
24.0

Total revenue
 
$
331.4

 
$
304.6

 
$
983.6

 
$
891.1





8

athenahealth, Inc.
STOCK-BASED COMPENSATION
(Unaudited, in millions)

Set forth below is a breakout of stock-based compensation impacting the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Stock-based compensation charged to Condensed Consolidated Statements of Income:
 
 
 
 
 
 
 
Cost of revenue
$
3.6

 
$
2.7

 
$
10.8

 
$
10.5

Selling and marketing
3.2

 
4.3

 
9.4

 
13.2

Research and development
3.7

 
3.2

 
11.1

 
10.3

General and administrative
3.6

 
2.3

 
7.2

 
8.5

    Total stock-based compensation expense
14.1

 
12.5

 
38.5

 
42.5

Amortization of capitalized stock-based compensation related to software development allocated to cost of revenue (1)
0.4

 
0.5

 
1.4

 
2.1

Amortization of capitalized stock-based compensation related to software development allocated to research and development (1)
0.2

 
—

 
0.2

 
0.1

    Total
$
14.7

 
$
13.0

 
$
40.1

 
$
44.7

(1)
In addition, for the three months ended September 30, 2018 and 2017, $0.7 million and $0.6 million, respectively, of stock-based compensation was capitalized in the line item Capitalized software costs, net in the Condensed Consolidated Balance Sheets. For the nine months ended September 30, 2018 and 2017, $2.2 million and $1.9 million, respectively, of stock-based compensation was capitalized in the line item Capitalized software costs, net in the Condensed Consolidated Balance Sheets.

athenahealth, Inc.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS
(Unaudited, in millions)

Set forth below is a breakout of amortization of purchased intangible assets impacting the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Amortization of purchased intangible assets allocated to:
 
 
 
 
 
 
 
Cost of revenue
$
1.5

 
$
1.9

 
$
4.7

 
$
4.3

Selling and marketing
3.3

 
3.2

 
9.9

 
9.7

Total amortization of purchased intangible assets
$
4.8

 
$
5.1

 
$
14.6

 
$
14.0



9

athenahealth, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO COMPARABLE GAAP MEASURES
(Unaudited, in millions, 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 generally accepted accounting principles 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.


10

Non-GAAP Gross Margin
Set forth below is a presentation of our “Non-GAAP Gross Profit” and “Non-GAAP Gross Margin,” which represents Non-GAAP Gross Profit as a percentage of total revenue, for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions)
Three Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
329.5

 
$
1.9

 
$
331.4

 
$
304.6

 
$
26.8

 
8.8
%
Cost of revenue
154.4

 
3.7

 
158.1

 
144.0

 
14.1

 
9.8
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Gross Profit
175.1

 
1.8

 
173.3

 
160.6

 
12.7

 
7.9
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Gross Margin
53.1
%
 

 
52.3
%
 
52.7
%
 
(0.4
)%
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
  Add: Stock-based compensation allocated to cost of revenue
3.6

 
—

 
3.6

 
2.7

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development allocated to cost of revenue
0.4

 
—

 
0.4

 
0.5

 
 
 
 
  Add: Amortization of purchased intangible assets allocated to cost of revenue
1.5

 
—

 
1.5

 
1.9

 
 
 
 
  Add: Integration and transaction costs allocated to cost of revenue
0.2

 
—

 
0.2

 
0.1

 
 
 
 
  Add: Exit costs, including restructuring costs allocated to cost of revenue
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Gross Profit
$
180.8

 
$
1.8

 
$
179.0

 
$
165.8

 
$
13.2

 
8.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Gross Margin
54.9
%
 

 
54.0
%
 
54.4
%
 
(0.4
)%
 
NM

NM indicates percentage is not meaningful.


11

(unaudited, in millions)
Nine Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
982.2

 
$
1.4

 
$
983.6

 
$
891.1

 
$
92.5

 
10.4
%
Cost of revenue
460.4

 
11.8

 
472.2

 
432.2

 
40.0

 
9.3
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Gross Profit
521.8

 
10.4

 
511.4

 
458.9

 
52.5

 
11.4
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP Gross Margin
53.1
%
 

 
52.0
%
 
51.5
%
 
0.5
%
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
  Add: Stock-based compensation allocated to cost of revenue
10.8

 
—

 
10.8

 
10.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development allocated to cost of revenue
1.4

 
—

 
1.4

 
2.1

 
 
 
 
  Add: Amortization of purchased intangible assets allocated to cost of revenue
4.7

 
—

 
4.7

 
4.3

 
 
 
 
  Add: Integration and transaction costs allocated to cost of revenue
0.4

 
—

 
0.4

 
0.2

 
 
 
 
  Add: Exit costs, including restructuring costs allocated to cost of revenue
0.8

 
—

 
0.8

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Gross Profit
$
539.9

 
$
10.4

 
$
529.5

 
$
476.0

 
$
53.5

 
11.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Gross Margin
55.0
%
 

 
53.8
%
 
53.4
%
 
0.4
%
 
NM

NM indicates percentage is not meaningful.


12

Non-GAAP EBITDA
Set forth below is a reconciliation of our “Non-GAAP EBITDA” and “Non-GAAP EBITDA Margin,” which represents Non-GAAP EBITDA as a percentage of total revenue, for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions)
Three Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
329.5

 
$
1.9

 
$
331.4

 
$
304.6

 
$
26.8

 
8.8
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income
26.4

 
4.9

 
21.5

 
13.0

 
8.5

 
65.4
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Provision for income taxes
10.0

 
1.5

 
8.5

 
4.2

 
 
 
 
  Add: Total other expense
1.8

 
—

 
1.8

 
1.4

 
 
 
 
  Add: Stock-based compensation expense
14.1

 
—

 
14.1

 
12.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.6

 
—

 
0.6

 
0.5

 
 
 
 
  Add: Depreciation and amortization
33.1

 
—

 
33.1

 
30.7

 
 
 
 
  Add: Amortization of purchased intangible assets
4.8

 
—

 
4.8

 
5.1

 
 
 
 
  Add: Amortization of deferred commissions and contract fulfillment costs
2.2

 
2.2

 
—

 
—

 
 
 
 
  Add: Integration and transaction costs
2.6

 
—

 
2.6

 
2.8

 
 
 
 
  Add: Exit costs, including restructuring costs
0.7

 
—

 
0.7

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP EBITDA
$
96.3

 
$
8.6

 
$
87.7

 
$
70.2

 
$
17.5

 
24.9
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP EBITDA Margin
29.2
%
 

 
26.5
%
 
23.0
%
 
3.5
%
 
NM

NM indicates percentage is not meaningful.

13

(unaudited, in millions)
Nine Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
982.2

 
$
1.4

 
$
983.6

 
$
891.1

 
$
92.5

 
10.4
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income
93.9

 
17.2

 
76.7

 
21.5

 
55.2

 
256.7
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Provision for income taxes
22.7

 
5.6

 
17.1

 
6.1

 
 
 
 
  Add: Total other expense
6.8

 
—

 
6.8

 
4.3

 
 
 
 
  Add: Stock-based compensation expense
38.5

 
—

 
38.5

 
42.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
1.6

 
—

 
1.6

 
2.2

 
 
 
 
  Add: Depreciation and amortization
95.4

 
—

 
95.4

 
92.7

 
 
 
 
  Add: Amortization of purchased intangible assets
14.6

 
—

 
14.6

 
14.0

 
 
 
 
  Add: Amortization of deferred commissions and contract fulfillment costs
6.1

 
6.1

 
—

 
—

 
 
 
 
  Add: Integration and transaction costs
9.1

 
—

 
9.1

 
6.8

 
 
 
 
  Add: Exit costs, including restructuring costs
5.3

 
—

 
5.3

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP EBITDA
$
294.0

 
$
28.9

 
$
265.1

 
$
190.1

 
$
75.0

 
39.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP EBITDA Margin
29.9
%
 
 
 
27.0
%
 
21.3
%
 
5.7
%
 
NM

NM indicates percentage is not meaningful.



14

Non-GAAP Operating Income
Set forth below is a reconciliation of our “Non-GAAP Operating Income” and “Non-GAAP Operating Margin,” which represents Non-GAAP Operating Income as a percentage of total revenue, for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions)
Three Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
329.5

 
$
1.9

 
$
331.4

 
$
304.6

 
$
26.8

 
8.8
%
 
 
 
 
 
 
 
 
 
 
 

GAAP net income
26.4

 
4.9

 
21.5

 
13.0

 
8.5

 
65.4
%
  Add: Provision for income taxes
10.0

 
1.5

 
8.5

 
4.2

 
 
 
 
  Add: Total other expense
1.8

 
—

 
1.8

 
1.4

 
 
 
 
GAAP operating income
$
38.2

 
$
6.4

 
$
31.8

 
$
18.6

 
$
13.2

 
71.0
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP operating margin
11.6
%
 

 
9.6
%
 
6.1
%
 
3.5
%
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
  Add: Stock-based compensation expense
14.1

 
—

 
14.1

 
12.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.6

 
—

 
0.6

 
0.5

 
 
 
 
  Add: Amortization of purchased intangible assets
4.8

 
—

 
4.8

 
5.1

 
 
 
 
  Add: Integration and transaction costs
2.6

 
—

 
2.6

 
2.8

 
 
 
 
  Add: Exit costs, including restructuring costs
0.7

 
—

 
0.7

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Operating Income
$
61.0

 
$
6.4

 
$
54.6

 
$
39.5

 
$
15.1

 
38.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Operating Margin
18.5
%
 

 
16.5
%
 
13.0
%
 
3.5
%
 
NM

NM indicates percentage is not meaningful.


15

(unaudited, in millions)
Nine Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
Total revenue
$
982.2

 
$
1.4

 
$
983.6

 
$
891.1

 
$
92.5

 
10.4
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income
93.9

 
17.2

 
76.7

 
21.5

 
55.2

 
256.7
%
  Add: Provision for income taxes
22.7

 
5.6

 
17.1

 
6.1

 
 
 
 
  Add: Total other expense
6.8

 
—

 
6.8

 
4.3

 
 
 
 
GAAP operating income
$
123.4

 
$
22.8

 
$
100.6

 
$
31.9

 
$
68.7

 
215.4
%
 
 
 
 
 
 
 
 
 
 
 
 
GAAP operating margin
12.6
%
 

 
10.2
%
 
3.6
%
 
6.6
%
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
  Add: Stock-based compensation expense
38.5

 
—

 
38.5

 
42.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
1.6

 
—

 
1.6

 
2.2

 
 
 
 
  Add: Amortization of purchased intangible assets
14.6

 
—

 
14.6

 
14.0

 
 
 
 
  Add: Integration and transaction costs
9.1

 
—

 
9.1

 
6.8

 
 
 
 
  Add: Exit costs, including restructuring costs
5.3

 
—

 
5.3

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Operating Income
$
192.5

 
$
22.8

 
$
169.7

 
$
97.4

 
$
72.3

 
74.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Operating Margin
19.6
%
 

 
17.3
%
 
10.9
%
 
6.4
%
 
NM

NM indicates percentage is not meaningful.


16

Non-GAAP Net Income
Set forth below is a reconciliation of our “Non-GAAP Net Income” for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions, except per share amounts)
Three Months Ended September 30,
 
Change
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
GAAP net income
$
26.4

 
$
4.9

 
$
21.5

 
$
13.0

 
$
8.5

 
65.4
%
  Add: Stock-based compensation expense
14.1

 
—

 
14.1

 
12.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.6

 
—

 
0.6

 
0.5

 
 
 
 
  Add: Amortization of purchased intangible assets
4.8

 
—

 
4.8

 
5.1

 
 
 
 
  Add: Integration and transaction costs
2.6

 
—

 
2.6

 
2.8

 
 
 
 
  Add: Exit costs, including restructuring costs
0.7

 
—

 
0.7

 
—

 
 
 
 
  Add: Loss on investments, net
0.1

 
—

 
0.1

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Sub-total of reconciling items
22.9

 
—

 
22.9

 
20.9

 
2.0

 
9.6
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Tax impact of reconciling items (1)
(5.7
)
 
—

 
(5.7
)
 
(8.4
)
 
 
 
 
  Add: Tax impact resulting from applying non-GAAP tax rate (2)
0.9

 
0.1

 
1.0

 
(2.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income
$
44.5

 
$
4.8

 
$
39.7

 
$
22.9

 
$
16.8

 
73.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - Diluted
41.2

 
41.2

 
41.2

 
40.7

 
0.5

 
1.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income per Share - Diluted
$
1.08

 
$
0.12

 
$
0.96

 
$
0.56

 
$
0.40

 
71.4
%
(1)
Tax impact calculated using a statutory tax rate of 25% for Q3 2018 and 40% for Q3 2017.
(2)
Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 25% for Q3 2018 and 40% for Q3 2017.



17

(unaudited, in millions, except per share amounts)
Nine Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
GAAP net income
$
93.9

 
$
17.2

 
$
76.7

 
$
21.5

 
$
55.2

 
256.7
%
  Add: Stock-based compensation expense
38.5

 
—

 
38.5

 
42.5

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
1.6

 
—

 
1.6

 
2.2

 
 
 
 
  Add: Amortization of purchased intangible assets
14.6

 
—

 
14.6

 
14.0

 
 
 
 
  Add: Integration and transaction costs
9.1

 
—

 
9.1

 
6.8

 
 
 
 
  Add: Exit costs, including restructuring costs
5.3

 
—

 
5.3

 
—

 
 
 
 
  Add: Loss on investments, net
1.6

 
—

 
1.6

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Sub-total of reconciling items
70.7

 
—

 
70.7

 
65.5

 
5.2

 
7.9
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Tax impact of reconciling items (1)
(17.7
)
 
—

 
(17.7
)
 
(26.2
)
 
 
 
 
  Add: Tax impact resulting from applying non-GAAP tax rate (2)
(6.4
)
 
0.1

 
(6.3
)
 
(4.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income
$
140.5

 
$
17.1

 
$
123.4

 
$
55.9

 
$
67.5

 
120.8
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - Diluted
41.2

 
41.2

 
41.2

 
40.6

 
0.6

 
1.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income per Share - Diluted
$
3.41

 
$
0.42

 
$
3.00

 
$
1.38

 
$
1.62

 
117.4
%
(1)
Tax impact calculated using a statutory tax rate of 25% for 2018 and 40% for 2017.
(2)
Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 25% for 2018 and 40% for 2017.



18

Non-GAAP Net Income per Diluted Share
Set forth below is a reconciliation of our “Non-GAAP Net Income per Diluted Share” for the three and nine months ended September 30, 2018 and 2017:
(unaudited, in millions, except per share amounts)
Three Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
GAAP net income per share - diluted
$
0.64

 
$
0.12

 
$
0.52

 
$
0.32

 
$
0.20

 
62.5
%
  Add: Stock-based compensation expense
0.34

 
—

 
0.34

 
0.31

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.01

 
—

 
0.01

 
0.01

 
 
 
 
  Add: Amortization of purchased intangible assets
0.12

 
—

 
0.12

 
0.13

 
 
 
 
  Add: Integration and transaction costs
0.06

 
—

 
0.06

 
0.07

 
 
 
 
  Add: Exit costs, including restructuring costs
0.02

 
—

 
0.02

 
—

 
 
 
 
  Add: Loss on investments, net
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Sub-total of tax deductible items
0.56

 
—

 
0.56

 
0.51

 
0.05

 
9.8
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Tax impact of reconciling items (1)
(0.14
)
 
—

 
(0.14
)
 
(0.21
)
 
 
 
 
  Add: Tax impact resulting from applying non-GAAP tax rate (2)
0.02

 
—

 
0.02

 
(0.06
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income per Share - Diluted
$
1.08

 
$
0.12

 
$
0.96

 
$
0.56

 
$
0.40

 
71.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - Diluted
41.2

 
41.2

 
41.2

 
40.7

 
0.5

 
1.2
%
(1)
Tax impact calculated using a statutory tax rate of 25% for Q3 2018 and 40% for Q3 2017.
(2)
Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 25% for Q3 2018 and 40% for Q3 2017.



19

(unaudited, in millions, except per share amounts)
Nine Months Ended September 30,
 
Change
 
2018
 
2017
 
Amount
 
Percent
 
As Presented
 
Impact of New Revenue Standard
 
Previous Revenue Standard
GAAP net income per share - diluted
$
2.28

 
$
0.42

 
$
1.86

 
$
0.53

 
$
1.33

 
250.9
%
  Add: Stock-based compensation expense
0.93

 
—

 
0.93

 
1.05

 
 
 
 
  Add: Amortization of capitalized stock-based compensation related to software development
0.04

 
—

 
0.04

 
0.05

 
 
 
 
  Add: Amortization of purchased intangible assets
0.35

 
—

 
0.35

 
0.34

 
 
 
 
  Add: Integration and transaction costs
0.22

 
—

 
0.22

 
0.17

 
 
 
 
  Add: Exit costs, including restructuring costs
0.13

 
—

 
0.13

 
—

 
 
 
 
  Add: Loss on investments, net
0.04

 
—

 
0.04

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Sub-total of tax deductible items
1.72

 
—

 
1.72

 
1.61

 
0.11

 
6.8
%
 
 
 
 
 
 
 
 
 
 
 
 
  Add: Tax impact of reconciling items (1)
(0.43
)
 
—

 
(0.43
)
 
(0.65
)
 
 
 
 
  Add: Tax impact resulting from applying non-GAAP tax rate (2)
(0.16
)
 
—

 
(0.15
)
 
(0.12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Net Income per Share - Diluted
$
3.41

 
$
0.42

 
$
3.00

 
$
1.38

 
$
1.62

 
117.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - Diluted
41.2

 
41.2

 
41.2

 
40.6

 
0.6

 
1.5
%
(1)
Tax impact calculated using a statutory tax rate of 25% for 2018 and 40% for 2017.
(2)
Represents adjusting the GAAP net income (loss) to a non-GAAP tax rate of 25% for 2018 and 40% for 2017.



20

athenahealth, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO COMPARABLE GAAP MEASURES FOR FISCAL YEAR 2018 GUIDANCE
(Unaudited, in millions)
Please note that the figures presented below may not sum exactly due to rounding.
Non-GAAP Operating Income Guidance - Previous Revenue Standard
Set forth below is a reconciliation of our “Non-GAAP Operating Income” and “Non-GAAP Operating Margin” guidance for fiscal year 2018, which represents Non-GAAP Operating Income as a percentage of total revenue. Fiscal year 2018 guidance is prior to the impact of the new revenue recognition standard to allow for comparability against historical results. We will present our Condensed Consolidated Statements of Net Income for our fiscal year 2018 results including the impact of the new revenue recognition standard and will provide a separate reconciliation to results prior to the impacts resulting from the new revenue recognition standard. Finally, the Non-GAAP adjusting line items should not be relied upon individually, as we are not guiding on individual line items, but upon the total operating income metrics, as included within our guidance table below.
(unaudited, in millions)
Previous Revenue Standard
 
LOW
 
HIGH
 
Fiscal Year Ending December 31, 2018
Total revenue
$
1,330

 
$
1,360

 
 
 
 
GAAP operating income
$
128

 
$
155

 
 
 
 
GAAP operating margin
9.6
%
 
11.4
%
 
 
 
 
  Add: Stock-based compensation expense
53

 
47

  Add: Amortization of capitalized stock-based compensation related to software development
2

 
2

  Add: Amortization of purchased intangible assets
19

 
19

  Add: Integration and transaction costs
12

 
11

  Add: Exit costs, including restructuring
5

 
4

 
 
 
 
Non-GAAP Operating Income
$
219

 
$
238

 
 
 
 
Non-GAAP Operating Margin
16.5
%
 
17.5
%



21

Non-GAAP Operating Income Guidance - New Revenue Standard
Set forth below is a reconciliation of our “Non-GAAP Operating Income” and “Non-GAAP Operating Margin” guidance for fiscal year 2018, which represents Non-GAAP Operating Income as a percentage of total revenue. Please note that the fiscal year 2018 guidance detailed below includes the impact of the new revenue recognition standard. Finally, the Non-GAAP adjusting line items should not be relied upon individually, as we are not guiding on individual line items, but upon the total operating income metrics, as included within our guidance table below.
(unaudited, in millions)
New Revenue Standard
 
LOW
 
HIGH
 
Fiscal Year Ending December 31, 2018
Total revenue
$
1,335

 
$
1,365

 
 
 
 
GAAP operating income
$
153

 
$
187

 
 
 
 
GAAP operating margin
11.5
%
 
13.7
%
 
 
 
 
  Add: Stock-based compensation expense
53

 
47

  Add: Amortization of capitalized stock-based compensation related to software development
2

 
2

  Add: Amortization of purchased intangible assets
19

 
19

  Add: Integration and transaction costs
12

 
11

  Add: Exit costs, including restructuring
5

 
4

 
 
 
 
Non-GAAP Operating Income
$
244

 
$
270

 
 
 
 
Non-GAAP Operating Margin
18.3
%
 
19.8
%




22

Explanation of Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles 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 Gross Profit” as total revenue, less cost of revenue, plus (1) stock-based compensation expense allocated to cost of revenue, (2) amortization of purchased intangible assets allocated to cost of revenue, (3) integration and transactions costs allocated to cost of revenue, and (4) exit costs, including restructuring costs allocated to cost of revenue; and “Non-GAAP Gross Margin” as Non-GAAP Gross Profit as a percentage of total revenue. Management considers these non-GAAP financial measures and metrics 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 and metrics 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 EBITDA” as the sum of GAAP net income (loss) before provision for (benefit from) income taxes; total other expense; stock-based compensation expense; amortization of capitalized stock-based compensation related to software development; depreciation and amortization; amortization of purchased intangible assets; amortization of deferred commissions and contract fulfillment costs; integration and transaction costs; and exit costs, including restructuring costs; and “Non-GAAP EBITDA Margin” as Non-GAAP EBITDA as a percentage of total revenue. Management defines “Non-GAAP Operating Income” as the sum of GAAP net income (loss) before provision for (benefit from) income taxes; total other expense; stock-based compensation expense; amortization of capitalized stock-based compensation related to software development; amortization of purchased intangible assets; integration and transaction costs; and exit costs, including restructuring costs; and “Non-GAAP Operating Margin” as Non-GAAP Operating Income as a percentage of total revenue. Management defines “Non-GAAP Net Income” 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 and transaction costs; exit costs, including restructuring costs; and gain or loss on investments 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 Net Income per Share - Diluted” as Non-GAAP Net Income divided by weighted average diluted shares outstanding. 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.

23

Management excludes or adjusts each of the items identified below from the applicable non-GAAP financial measure or metric 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 and transaction costs — integration costs are the severance payments and retention bonuses for certain employees related to specific transactions. Transaction costs are costs related to strategic 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.
•
Exit costs, including restructuring costs — represent costs incurred as a result of strategic realignments including those related to workforce reductions, termination of certain lease or other agreements, and non-cash charges related to the write down of certain assets. Management does not believe such costs accurately reflect the performance of our ongoing operations for the period in which such costs are incurred.
•
Gain or loss on investments — represents unrecognized or recognized gains or losses on the fair value, sales, or conversions of our investments, such as marketable securities and More Disruption Please Accelerator investments. Management does not believe such gains or losses accurately reflect the performance of our ongoing operations for the period in which such gains or losses are reported. Upon the adoption of the new financial instruments accounting standard effective for 2018, we present gains or losses on investments in Other income (expense) on our Condensed Consolidated Statement of Income which is not included in Operating Income but is included in the subtotal Income before income tax provision.
•
Non-GAAP tax rate — our statutory tax rates of 25% for fiscal year 2018 and 40% for fiscal year 2017 are applied to normalize the tax impact to our Non-GAAP Net Income per Diluted Share based on the fact that historically a relatively small change in pre-tax GAAP income (loss) in any one period could result in a volatile GAAP effective tax rate.






24








Supplemental Metrics and Definitions

 
 
 
Fiscal Year 2017
 
Fiscal Year 2018
 
 
 
 
 
 
 
Q1

Q2

Q3

Q4

 
Q1

Q2

Q3

Network Growth
 
 
 
 
 
 
 
 
 
 
Total Providers on athenaCollector
 
98,948

100,306

106,482

110,648

 
114,265

115,724

120,194

Total Providers on athenaClinicals
 
52,273

54,909

57,936

60,342

 
62,631

64,317

67,667

Total Providers on athenaCommunicator
 
60,070

62,928

67,590

69,915

 
71,972

74,333

78,290

Total Discharge Bed Days
 
11,350

14,107

19,790

27,399

 
33,385

33,352

39,815

Total Covered Lives
 
2,777,960

2,781,635

3,242,628

3,289,239

 
3,363,678

3,329,133

3,088,009

 
 
 
 
 
 
 
 
 
 
 
Client Performance
 
 
 
 
 
 
 
 
 
 
Total Claims Submitted
 
47,253,923

48,401,956

47,882,116

50,992,161

 
52,902,063

53,116,945

52,329,525

Total Client Collections ($)
 
6,025,219,489

6,418,845,829

6,487,587,258

7,078,108,081

 
6,947,636,548

7,300,000,907

7,228,690,632

Total Working Days
 
62

64

63

61

 
62

64

63

 
 
 
 
 
 
 
 
 
 
 
Employees
 
 
 
 
 
 
 
 
 
 
Cost of Revenue
 
2,859

2,899

2,925

2,711

 
2,626

2,615

2,574

Selling & Marketing
 
745

777

749

615

 
559

561

557

Research & Development
 
1,357

1,388

1,466

1,402

 
1,369

1,418

1,458

General & Administrative
 
458

465

453

428

 
443

470

484

Total Employees
 
5,419

5,528

5,593

5,156

 
4,997

5,063

5,072

 
 
 
 
 
 
 
 
 
 
 
Bookings Performance ($ Millions)
 
 
 
 
 
 
 
 
 
 
Recurring (athenahealth-branded) Bookings
 
68.6

70.5

57.2

53.5

 
39.6

67.1

37.7

Non-recurring (Epocrates-branded) Bookings
 
8.7

8.2

8.5

17.7

 
12.5

7.7

8.9

Total Bookings
 
77.3

78.7

65.7

71.2

 
52.2

74.9

46.6

 









Supplemental Metrics Definitions
 
 
 
Network Growth
 
Total Providers on athenaCollector
The number of providers, including physicians, that have rendered a service which generated a medical claim that was billed during the last 91 days on the athenaCollector platform. Examples of non-physician providers are Nurse Practitioners, Registered Nurses, Behavioral Interventionists, and Certified Physician Assistants.
Total Providers on athenaClinicals
The number of providers, including physicians, that have rendered a service through the athenaClinicals platform which generated a medical claim that was billed during the last 91 days on the athenaCollector platform.
Total Providers on athenaCommunicator
The number of providers, including physicians, that have rendered a service which generated a medical claim that was billed during the last 91 days on the athenaCollector platform and whose practice is actively using athenaCommunicator.
Discharge Bed Days
Discharge bed days is defined as the number of days a patient is hospitalized in an inpatient level of care during the quarter. The day of the admission, but not the day of discharge, is counted. If both admission and discharge occur on the same day, it is counted as one inpatient day.
Covered Lives
Covered lives on the network is defined as the quarterly average of the number of patients for which we have eligibility, claims, pharmacy, or risk data in the Population Health platform, for a given client in a given month.
Client Attrition
Annual recurring revenue of a client that is terminating their agreement after the go-live date of their services.
 
 
Client Performance
 
Total Claims Submitted
The number of claims billed through athenaNet during the period.
Total Client Collections
The dollar value of collections posted on behalf of clients during the period.
Total Working Days
The total number of days during the quarter minus weekends and U.S. Post Office holidays.
 
 
Employees
 
Cost of Revenue
The total number of full time equivalent individuals (“FTEs”) employed by athenahealth to support its service operations as of quarter end. This team includes production systems, enrollment services, paper claim submission, claim resolution, clinical operations, professional services, account management, and client services.
Selling & Marketing
The total number of FTEs employed by athenahealth to support its sales and marketing efforts as of quarter end. This team includes sales representatives, business development staff, and the marketing team.
Research & Development
The total number of FTEs employed by athenahealth to support its research and development efforts as of quarter end. This team includes product development and product management.
General & Administrative
The total number of FTEs employed by athenahealth to support its general and administrative functions as of quarter end. This team includes finance, human resources, compliance, learning and development, internal audit, corporate technology, recruiting, facilities, and legal.
Total Employees
The total number of FTEs employed by athenahealth as of quarter end. This number excludes interns and seasonal employees.
 
 
Bookings
 
Total Bookings
Bookings is defined as the sum of the expected annualized recurring revenue from our athenahealth-branded services and the contracted value from our Epocrates-branded services; net of actual chargebacks.
Chargeback
A chargeback is the value of annual recurring revenue for a booking that is canceled prior to go-live, does not kick off within 6 months of signing, or is not live within a set timeframe (dependent upon segment).


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