athenahealth (NASDAQ:ATHN): Priced for Perfection, But Is Perfection Moving Out of Reach? Downgrade to Underperform - Oppenheimer

Oppenheimer is out with a fairly harsh downgrade on athenahealth (NASDAQ:ATHN) taking their rating to Underperform from Peer Perform while lowering their target to $31 (prev. $37).

Firm believes the risk/reward has turned more negative. Shares have rebounded over the last two days following the successful filing of its Form 10-K (after the initial delay), which signals to them a lack of serious accounting issues to be concerned with. What is of concern is the slowing growth in the company's core service (Collector), evidenced by lackluster physician adds in 4Q. Elongating selling cycle and need for significant increase in sales & marketing expense make it more challenging, in Opco's view, for ATHN to achieve its long-term goals of 30% top-line and 40% bottom-line growth, particularly given lower margin profile for its newer offerings.

- Physician (doc) adds of 884 in the quarter were much lower than expected, particularly given that Caritas Christi represented 500 physicians in 4Q. At the current pace, Opco expects to see q/q doc adds to decline once Cook Children's goes live in 1Q. Achieving a 30% increase in docs in 2010 seems a challenge.

- Indeed, management noted that in order to increase doc adds 30% in 2010, they are increasing the sales force 60%, which they feel will offset an elongating selling cycle. While that might be the case, the firm sees it having a sizable impact on margins and is responsible for a portion of their downward earnings revisions.

- Margins are also taking a hit from two other fronts. First, impact from restatement is hitting EBITDA margin by 400 bps. Second, focus on selling Clinicals and Communicator, which carry much lower margins than Collector, will also be a drag on margins.

Physician adds, particularly for Collector, is important in helping the company achieve its 30% top-line growth targets. Management commented on its 4Q call that Collector sales were less than expected, due in part to a longer sales cycle as potential clients consider Collector in conjunction with Clinicals. In order to offset the longer sales cycle, management noted that it intends to increase its sales force by 60% in 2010. While this may well help accelerate the rate of physician adds, it will have an impact on margins and is responsible for a portion of our downward earnings revisions.

- ATHN would need 300 bps higher revenue growth of mixed services (Collector/Clinicals/Communicator) to maintain similar earnings growth for Collector alone given margin differentials. Margin pressure isn't necessarily an issue if revenue growth is well north of 30%, but given mgmt comments that 30% top-line growth is the goal, Opco sees product mix as a headwind for earnings growth

- Opco lowers their CY10-11 EPS estimates to $0.62 and $0.86 from $0.81 and $1.13, respectively. Firm lowers their PT to $31 from $37 based on our 5-yr DCF analysis, which assumes a WACC of 9.7% and a terminal growth rate of 4%. Their revised price target implies a P/E multiple of 36x their CY11 EPS estimate of $0.86, which is in line with their near-term earnings growth rate and which the firm feels is still a very healthy multiple.

Notablecalls: With ATHN trading 36x CY11 EPS this one is going to hurt. I'm guessing 1.5-2 pts of downside.

Note there's a 25% short interest in the name, so it's not going to do down in a straight line.