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Analysts positive on athenahealth's plans to restructure management, review biz

Athenahealth Inc.'s decision to restructure its management and review its business operations follows months of stock volatility, but also comes amid recent optimism for the company's business prospects among observers.

The company announced Aug. 1 that it would be working with a consulting company to undertake a comprehensive review of its operations, cost structure and capital allocation. The announcement followed a May disclosure from Elliott Associates LP that it had taken a 9.2% stake in athenahealth and was planning to meet with the company's management to boost shareholder value.

As part of its restructuring initiative, athenahealth's board plans to separate the roles of chairman and CEO and to recruit someone to the role of president. Jonathan Bush has served in all three roles since 1997. The company went public in 2007.

The reordering of board and management roles indicates an alignment between the company's leadership and Elliott's active backing, Leerink analyst David Larsen said in an Aug. 1 research note to clients.

"We think this move is largely positive and see the move as significant evidence of Jonathan Bush's receptiveness to Elliott's desires for changes," Larsen wrote.

The company is also looking for a CFO to replace Karl Stubelis, who left the position in July. For his replacement, the board is seeking someone, "with a record of operating discipline and value-creating capital allocation," athenahealth said in a press release. The company's management also wants its new CFO to be a recruiter and developer of top talent.

As part of its restructuring effort, athenahealth identified $100 million in cost savings. Oppenheimer analyst Mohan Naidu estimated that the company's margins could widen by as much as 700 basis points and its earnings could increase by more than $1 per share for fiscal year 2018. Naidu wrote in an Aug. 2 note to clients that he was looking for the company to strike a balance between financial improvement and maintaining its edge in innovation.

"While we hope the cost savings won't dramatically impact innovation at [athenahealth], the financial rigor will certainly be welcomed by investors," he said.

The company's stock price has both climbed steeply and fallen sharply over the last year. In December 2016, shares jumped after it released its fiscal-year 2017 outlook, but then tumbled two months later after affirming that guidance and reporting fourth-quarter 2016 results. The stock experienced another sharp drop in April after it lowered its guidance for the year and reported first-quarter adjusted EPS below estimates.

Shares rallied after news broke of Elliott Associates taking its stake, but investor reaction to athenahealth's second-quarter results was negative on net, despite the fact that the company reported adjusted net income that exceeded the S&P Capital IQ estimate. Reaction to the restructuring plan was positive, though the stock as of the Aug. 3 closing bell had given up more than half the gains it made in the immediate aftermath of the announcement.

Naidu believes the company's most-recent results should remove some of the doubt about athenahealth's overall business model. The sluggish physician market the company serves should pick up, and other target markets look promising, he said in his note.

"We believe the company is taking significant share in the small hospital market ... and continued investment in the platform will likely open up more opportunities in the inpatient segment," the analyst said.