ATHENAHEALTH. TEAM Christopher Dunn David Vercoutere Braden Weinstock. ADVISORS Professor Patrick J. Schena Vitaly Veksler, CFA

Transcription

1 ATHENAHEALTH A STORY OF OVERVALUED GROWTH TEAM Christopher Dunn David Vercoutere Braden Weinstock ADVISORS Professor Patrick J. Schena Vitaly Veksler, CFA Boston - February 10, 2014

2 Stock Price ($) Overview RECOMMENDATION Good Company Attractive Industry Overvalued Growth Unfavorable shifts in competitive landscape Current Price Target Price $128.29* $67.31 BUY HOLD SELL Average performance at an exceptional premium Unsustainable growth expectations Grossly Overvalued 0 11/12 12/12 1/13 2/13 3/13 4/13 5/13 6/13 7/13 8/13 9/13 10/13 * Price as of 25 November Source: Bloomberg

3 Overview ATHENAHEALTH THRIVES ON COMPLEXITY Company Profile Record Keeping Compliance Industry Health IT Solution Cloud-Based Virtual Office Billing Referrals Customer Medical Practices Business Model % of Fees Processed Strategy Customer Focus & Product Leadership 3

4 Degree of Understanding Industry & Competition INDUSTRY REGULATORY DRIVEN GROWTH ACA Grows Healthcare Coverage by 15% Physician Understanding of New Claims Procedures 75% 70% 50% 25% 13% 11% 3% 2% 0% Not at all familiar Slightly familiar Moderately familiar Very familiar Extremely familiar Previous Coverage (mil) Current Coverage (mil) Response 4 Source: US Census Source: CNBC

5 Contribution to Total Revenue Industry & Competition CUSTOMER SEGMENTS CORE BASE PLATEAUING Customer consolidation 50% 45% Changes in Revenue Contribution by Segment 40% Longer sales cycle 35% 30% 25% 20% Decreasing margins 15% 10% 5% 0% 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Year Small segment Group segment Enterprise segment National segment 5 Source: Team Estimates

6 Market Presence Industry & Competition COMPETITIVE LANDSCAPE SHIFTING POSITION Greenfield McKesson GE ATHN Siemens MDRX CERN Battlefield CPSI QSII Company Size Source: Company Financials, Team Estimates 6

7 Financial Analysis FINANCIAL ANALYSIS 7

8 Margin (%) Financial Analysis EARNINGS PERSISTENCE PROFITABILITY BELOW PEERS Sub-par performance 12% ATHN Profit Margin vs. Peers 10% Slight improvements 8% 6% Remains below 4% 2% competition 0% E 2014E 2015E 2016E 2017E 2018E Time ATHN Net Profit Margin Peer Average Profit Margin Source: Team estimates 8

9 Return (%) Financial Analysis EARNINGS POWER RETURNS BELOW PEERS Sub-par performance 16% ATHN Return Measures vs. Peers 14% Slight improvements 12% 10% 8% 6% Remains below 4% 2% competition 0% E 2014E 2015E 2016E 2017E 2018E Year ATHN ROE Peer Average ROE ATHN ROIC Peer Average ROIC 9 Source: Team estimates

10 OCF/Revenue (%) Financial Analysis EARNINGS POWER CASH CONVERSION BELOW PEERS High investment rate 25% ATHN Cash Conversion 20% Weakening revenue-tocash conversion 15% 10% 5% Average performance 0% E 2014E 2015E 2016E 2017E 2018E Year Peer Average OCF/Revenue ATHN OCF/Revenue 10 Source: Team estimates

11 Ratio Financial Analysis CAPITAL STRUCTURE INCREASING DEBT Historically debt averse 1.2 ATHN Capital Structure 1.0 Increasing leverage High risk relative to performance E 2014E 2015E 2016E 2017E 2018E Year ATHN Debt to Equity Peer Average Debt to Equity 11 Source: Team estimates

12 Valuation VALUATION 12

13 Value Valuation MULTIPLES EXCEPTIONAL PREMIUM Peer group - blended criteria 120 ATHN Premiums 100 Significant premium per multiple Grossly overvalued $ Forward P/E EV/EBITDA Price/Book (TTM) Price/OCF PEG Multiple 13 Valuation Peer Average ATHN Premium Source: Team estimates

14 Revenue ($M) Valuation DISCOUNTED CASH FLOW (DCF) OVERVALUED GROWTH Growth driven valuation 3,500 Annual Revenue by Scenario Favorable operating structure 3,000 2,500 2,000 23% 3 scenarios blended 1,500 1, $ E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Year 14 Blended Value Bear Base Bull Source: Team estimates

15 Valuation TARGET PRICE BELOW THE MARKET DCF Valuation 75% Multiples Valuation 25% Target Price A Base E PEG P/B F P/E B $67.31 Bull Bear D EV/ EBITDA P/OCF C 15

16 Valuation SUPER BULL SCENARIO UNSUSTAINABLE GROWTH RATE What can drive the current price? An unsustainable growth rate! 42% 42% Super Bull Scenario Source: Team Estimates 21% Historic Peer Average Source: Company Financials 7.2% 7.2% Projected Industry Growth Rate 16 Source: Research and Markets North American Healthcare IT Market Report

17 Stock price ($) Stock Amount Held ($M) Valuation LEADERSHIP STAKE CEO SELLOFF ATHN Price Movement and CEO J. Bush Holding Activity ATHN Stock Price Amount Held Source: Inc. Mag April 1, 2007

18 S&P500 ($) ATHN Price ($) Risks RISKS TO OUR THESIS POSSIBLE, NOT LIKELY Growth and improvement ATHN and S&P 500 Price Correlation Market appreciation S&P 500 Time ATHN Source: Bloomberg 18

19 Conclusion CONCLUSION AVERAGE FIRM AT AN EXCEPTIONAL PREMIUM Good Company Attractive Industry Overvalued Growth Average Operational Performance Challenging Competitive Position Unsustainable Growth Expectations 19

20 THANK YOU Christopher Dunn David Vercoutere Braden Weinstock Business Development 3 years 2013 Summer Associate with Fidelity Worldwide Investment MIB The Fletcher School Graduating May 2014 Sales & Business Development 3 years President Fletcher Finance Club MIB The Fletcher School Graduating May 2014 Management Consultant & Entrepreneur 5 years MBA - IE Business School, Spain MALD - The Fletcher School Graduating Dec

21 APPENDIX 21

22 COMPANY - COSTLY INPUTS DECREASE PROFITS 2012 Cost Breakdown Direct Operating Costs (40%) Sales & Marketing (25%) R&D (8%) SG&A(14%) Dep & Amm (6%) Taxes (4%) Net Income (4%) 22 Source: ATHN Financials

23 COMPANY ACQUISITIONS HAVE BEEN CENTRAL TO GROWTH Epocrates Healthcare Data Services Proxysis Crestline Technologies Anodyne Analytics Source: ATHN Financials

24 COMPETITION MORE PHYSICIANS SELLING OUT Physician Type Distribution Independent Contractor Practice Owned by Hospital or Health System Work for Physician Owned Practice/No Ownership Stake Solo Ownership Stake in Practice Hospital Employed 0% 5% 10% 15% 20% 25% 30% Source: 2013 Physician Outlook and Practice Trends, Jackson Healthcare

25 COMPETITION PORTER S FIVE FORCES 25

26 COMPETITION - LANDSCAPE 26

27 Expenditures ($T) INDUSTRY PROJECTED GROWTH IN US HEALTH EXPENDITURES 5 Projected National Health Expenditures ($Trillion) Year 27 Source: cms.gov

28 Revenue ($M) INDUSTRY - MARKET SHARE Current Market Share 1.17% 60,000 50,000 ATHN Market Share Evolution Base Scenario Future Market Share 3.43% 40,000 30,000 20,000 Growth Captured 7.93% 10, Year 28 Market Size ATHN Market Share Source: Team estimates

29 % of Respondents INDUSTRY PHYSICIANS PARTICIPATING IN LOW-COST HEALTHCARE MODELS 30% Participation in Low-Cost Models 25% 20% 22% 25% 15% 14% 10% 7% 5% 0% Currently Participating Response Plan To Source: 2013 Physician Outlook and Practice Trends, Jackson Healthcare

30 INDUSTRY WHAT IS MEANINGFUL USE UNDER HITECH ACT? Stage 1 : Data Capture and Sharing ( ) Stage 2: Advance Clinical Processes (2014) Stage 3: Improved Outcomes (2016) Electronically capturing health information in a standard format More rigorous Health Information Exchange (HIE) Improving quality, safety, and efficiency, leading to improved health outcomes Using that information to track key clinical conditions Increased requirements for e- prescribing and incorporating lab results Decision support for national high-priority conditions Communicating that information for care coordination processes Electronic transmission of patient care summaries across multiple settings Patient access to self-management tools Initiating the reporting of clinical quality measures and public health information More patient-controlled data Access to comprehensive patient data through patient-centered HIE Using information to engage patients and their families in their care Improving population health 30

31 Percent of Costs Percent of Costs FINANCIAL ANALYSIS OPERATIONAL COST BREAKDOWN Costs by Category Costs by Category ATHN vs. Peers 50% 45% 45% 40% 40% 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 0% Direct operating Selling and marketing Research and development Cost Category General and administrative Depreciation and amortization 5% 0% ATHN SG&A PEER SG&A ATHN R&D PEER R&D ATHN D&A PEER D&A Cost Category

32 Ratio FINANCIAL ANALYSIS LEVERAGE RATIOS 2.00 ATHN Measures of Risk E 2014E 2015E 2016E 2017E 2018E Time Degree of Financial Leverage Degree of Operating Leverage Degree of Total Leverage 32

33 OCF/EBITDA (%) FINANCIAL ANALYSIS OPERATIONAL CASH FLOWS / EBITDA 160% ATHN OCF/EBITDA vs. Peer Average 140% 120% 100% 80% 60% 40% 20% 0% E 2014E 2015E 2016E 2017E 2018E Year ATHN OCF/EBITDA Peer Average OCF/EBITDA 33

34 Cash Flow ($M) Growth (%) FINANCIAL ANALYSIS CASH FLOW FLUCTUATIONS Change in Cash Flows Cash Flow Growth 80 70% 60 60% 40 50% 20 40% Ops CF Inv CF Fin CF 30% 20% 10% 0% -60 Cash Flow by Category Year ATHN Industry Avg.

35 Multiplier Ratio FINANCIAL ANALYSIS - DUPONT ANALYSIS 2.5 Dupont Analysis E 2014E 2015E 2016E 2017E 2018E Time ROA ROE Equity Multiplier Asset Turnover Profit Margin

36 FINANCIAL ANALYSIS PEER COMPARISON RATIOS Comparable Key Ratio's MDRX ATHN CERN CPSI HMSY MDAS QSII Average Profitability Ratio's Revenue (in millions, 2012) 1, , Y Revenue Growth 31.02% 30.84% 16.82% 12.79% 27.37% 23.32% 16.40% 22.65% Gross Margin 43.34% 54.41% 81.00% 45.00% 31.00% 78.00% 57.00% 55.68% Operating Margin 5.83% 7.32% 23.10% 23.62% 18.69% 13.50% 12.71% 14.97% Net Margin -0.08% 4.44% 15.93% 16.12% 9.71% 0.79% 7.75% 7.81% Free Cash Flow Margin 7.59% 8.70% 11.61% 11.24% 11.15% 13.62% 12.31% 10.89% ROA -0.05% 4.82% 11.85% 39.06% 5.65% -0.39% 9.67% 10.09% ROE -8.19% 6.84% 15.44% 52.32% 11.83% -1.61% 14.19% 12.97% ROIC -0.07% 6.84% 14.80% 52.32% 6.81% -0.52% 14.19% 13.48% Liquidity Ratio's Current ratio Quick ratio Cash ratio Activity Ratio's Total Asset Turnover Receivables Turnover A/R Conversion Period Payables Turnover Payables Conversion Period Revenue/employee 229, , , , , , , ,755 Debt/Leverage Ratio's Debt/Equity Debt/Assets (debt ratio) Debt/Capital Assets/Equity (Financial Leverage) Interest Coverage ratio

37 FINANCIAL ANALYSIS RATIO PROJECT TREND Key Financial Ratio's E 2014E 2015E 2016E 2017E 2018E Liquidity Ratio's Current Quick Cash Operating Cash Flow Ratio Efficiency Ratio's Total Asset Turnover Fixed Asset Turnover Accounts Receivable Turnover Average Collection Period (days) Accounts Payable Turnover Average Payment Period (days) Days Payable Outstanding Days Sales Outstanding Cash Conversion Cycle* Profitability Ratio's Gross Profit Margin 60.67% 62.11% 60.48% 62.00% 62.00% 62.00% 62.00% 62.00% 62.00% Operating Profit Margin 9.61% 10.10% 8.20% 6.82% 7.34% 7.56% 7.78% 8.36% 8.29% Net Profit Margin 5.17% 5.88% 4.44% 3.52% 4.05% 4.17% 4.29% 4.61% 4.58% ROA 4.86% 5.46% 4.37% 2.49% 3.78% 4.58% 5.28% 6.13% 6.37% ROE 7.44% 8.06% 6.01% 5.26% 7.44% 9.09% 10.57% 12.24% 12.57% ROIC 5.88% 6.56% 5.14% 3.85% 5.35% 6.87% 8.38% 10.17% 10.87% Leverage Ratio's Debt Ratio Debt to Equity Long Term Debt to Capitalization 22.59% 18.24% 13.82% 31.26% 27.81% 24.12% 20.34% 16.57% 13.15% Financial Leverage Interest Coverage Ratio Cash Flow Ratio's Operating Cash Flow/Debt Operating Cash Flow/Revenue Free Cash Flow/Revenue 3.32% 6.54% 2.41% % 2.96% 3.42% 3.45% 3.77% 3.92% OCF/CAPEX

38 Ratio Value ($M) FINANCIAL ANALYSIS - LIQUIDITY ATHN Measures of Liquidity E 2014E 2015E 2016E 2017E 2018E Time 0 38 Current ratio Quick ratio Cash ratio Current Assets Current Liabilities

39 Ratio FINANCIAL ANALYSIS - SOLVENCY 1.2 ATHN Measures of Solvency E 2014E 2015E 2016E 2017E 2018E Debt Ratio Debt to Equity LT-Debt to Capitalization LT-Debt to Cap Peer Average (2012) Debt to Equity Peer Average (2012) Debt Ratio Peer Average (2012) Year 39

40 Revenue ($M) Net Income ($M) FINANCIAL ANALYSIS - REVENUE AND NET INCOME CHANGES ATHN Revenue and Net Income Over Time E 2014E 2015E 2016E 2017E 2018E Year 0 40 Revenue Net Income

41 Growth (%) FINANCIAL ANALYSIS - REVENUE AND NET INCOME GROWTH 60% ATHN Revenue and Net Income Growth 50% 40% 30% 20% 10% 0% E 2014E 2015E 2016E 2017E 2018E -10% Year 41 Revenue growth Net Income growth

42 VALUATION - WACC WACC Calculations (Base Case) 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E D+E 822, , ,694 1,035,105 1,176,593 1,329,547 1,405,467 1,593,582 Debt (Current, LT, and LOC) 242, , , , , , D/D+E 29% 21% 18% 14% 11% 9% 0% 0% Equity 580, , , ,980 1,044,468 1,212,422 1,405,467 1,593,582 E/D+E 71% 79% 82% 86% 89% 91% 100% 100% D/E 42% 27% 21% 17% 13% 10% 0% 0% Tax rate 45% 45% 45% 45% 45% 45% 45% 45% R[f] 2% 2% 2% 2% 3% 3% 3% 3% R[prem] 6% 6% 6% 6% 6% 6% 6% 6% Unlevered BETA Levered BETA K[d] 1.9% 1.9% 2.4% 2.4% 2.9% 2.9% 3.4% 3.4% K[e] 5.9% 5.6% 6.0% 5.9% 6.3% 6.2% 6.5% 6.5% WACC 4.4% 4.6% 5.1% 5.2% 5.8% 5.8% 6.5% 6.5% Scenario 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Base 4.44% 4.61% 5.14% 5.22% 5.76% 5.82% 6.54% 6.54% Bull 4.44% 4.61% 5.14% 5.22% 5.77% 5.84% 6.54% 6.54% Bear 4.44% 4.61% 5.13% 5.19% 5.74% 5.80% 6.54% 6.54% 42

43 VALUATION - GROWTH RATE CALCULATION Step 1 Revenue Distribution by Customer Segm 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Small segment 30% 31% 32% 33% 34% 34% 34% 34% Group segment 20% 16% 12% 9% 6% 4% 3% 2% Enterprise segment 20% 20% 20% 20% 20% 20% 20% 20% National segment 30% 33% 36% 38% 40% 42% 43% 44% Total 100% 100% 100% 100% 100% 100% 100% 100% Δ In each Segment Contribution to Tota 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Small segment 1% 1% 1% 1% 0% 0% 0% 0% Group segment -4% -4% -3% -3% -2% -1% -1% 0% Enterprise segment 0% 0% 0% 0% 0% 0% 0% 0% National segment 3% 3% 2% 2% 2% 1% 1% 0% Total 0% 0% 0% 0% 0% 0% 0% 0% Step 2 Growth Rate by Customer Segment 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Small segment 40% 35% 30% 30% 25% 20% 15% 10% Group segment 30% 20% 15% 15% 10% 10% 5% 5% Enterprise segment 35% 30% 25% 20% 20% 15% 15% 10% National segment 40% 40% 40% 30% 25% 20% 20% 15% Step 3 Athenahealth Growth Rate 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Small segment 12% 11% 10% 10% 9% 7% 5% 3% Group segment 6% 3% 2% 1% 1% 0% 0% 0% Enterprise segment 7% 6% 5% 4% 4% 3% 3% 2% National segment 12% 13% 14% 11% 10% 8% 9% 7% Total Growth Rate 37% 33% 31% 27% 23% 19% 17% 12% Example using the Base Case 43

44 VALUATION - FCFF 44