ATHENAHEALTHA STORY OF OVERVALUED GROWTH

TEAM

Christopher Dunn

David Vercoutere

Braden Weinstock

Boston - February 10, 2014

ADVISORS

Professor Patrick J. Schena

VitalyVeksler, CFA

RECOMMENDATION

Current Price Target Price

$128.29* $67.31

BUY HOLD SELL

2

Good Company Attractive Industry Overvalued Growth

0

20

40

60

80

100

120

140

160

11/12 12/12 1/13 2/13 3/13 4/13 5/13 6/13 7/13 8/13 9/13 10/13

Stock

Pri

ce (

$)

Grossly

Overvalued

Unfavorable shifts in competitive

landscape

Average performance at an

exceptional premium

Unsustainable growth expectations

Source: Bloomberg* Price as of 25 November 2013

Overview

ATHENAHEALTH – THRIVES ON COMPLEXITY

3

Billing

Record

KeepingCompliance

Referrals

Company Profile

Industry Health IT

SolutionCloud-Based Virtual

Office

Customer Medical Practices

Business Model % of Fees Processed

StrategyCustomer Focus &

Product Leadership

Overview

INDUSTRY – REGULATORY DRIVEN GROWTH

4

70%

13%11%

3% 2%

0%

25%

50%

75%

Not at all familiar Slightly familiar Moderately familiar Very familiar Extremely familiar

Degr

ee o

f U

nders

tandin

g

Response

Physician Understanding of New Claims Procedures

Source: CNBC

ACA Grows Healthcare Coverage by 15%

Previous Coverage (mil) Current Coverage (mil)

Source: US Census

Industry & Competition

CUSTOMER SEGMENTS – CORE BASE PLATEAUING

5

Customer consolidation

Longer sales cycle

Decreasing margins

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Contr

ibution t

o T

ota

l R

evenue

Year

Changes in Revenue Contribution by Segment

Small segment Group segment Enterprise segment National segment

Source: Team Estimates

Industry & Competition

COMPETITIVE LANDSCAPE – SHIFTING POSITION

6

Greenfield McKesson

Siemens

GE

ATHN

MDRX

CERN

QSIICPSI

Battlefield

Company Size

Mar

ket

Pre

sence

Source: Company Financials, Team Estimates

Industry & Competition

FINANCIAL ANALYSIS

7

Financial Analysis

EARNINGS PERSISTENCE – PROFITABILITY BELOW PEERS

Source: Team estimates

Sub-par performance

Slight improvements

Remains below

competition 0%

2%

4%

6%

8%

10%

12%

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Mar

gin (

%)

Time

ATHN Profit Margin vs. Peers

ATHN Net Profit Margin Peer Average Profit Margin

8

Financial Analysis

EARNINGS POWER – RETURNS BELOW PEERS

9

Source: Team estimates

Sub-par performance

Slight improvements

Remains below

competition 0%

2%

4%

6%

8%

10%

12%

14%

16%

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Retu

rn (

%)

Year

ATHN Return Measures vs. Peers

ATHN ROE Peer Average ROE ATHN ROIC Peer Average ROIC

Financial Analysis

EARNINGS POWER – CASH CONVERSION BELOW PEERS

10

Financial Analysis

High investment rate

Weakening revenue-to-

cash conversion

Average performance 0%

5%

10%

15%

20%

25%

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

OC

F/R

eve

nue (

%)

Year

ATHN Cash Conversion

Peer Average OCF/Revenue ATHN OCF/Revenue

Source: Team estimates

CAPITAL STRUCTURE – INCREASING DEBT

11

Financial Analysis

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Rat

io

Year

ATHN Capital Structure

ATHN Debt to Equity Peer Average Debt to Equity

Historically debt averse

Increasing leverage

High risk relative to

performance

Source: Team estimates

VALUATION

12

Valuation

MULTIPLES – EXCEPTIONAL PREMIUM

Peer group - blended criteria

Significant premium per multiple

Grossly overvalued

13

0

20

40

60

80

100

120

Forward P/E EV/EBITDA Price/Book (TTM) Price/OCF PEG

Val

ue

Multiple

ATHN Premiums

Peer Average ATHN Premium

$39.31

Valuation

Valuation

Source: Team estimates

DISCOUNTED CASH FLOW (DCF) – OVERVALUED GROWTH

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Reve

nue (

$M

)

Year

Annual Revenue by Scenario

Bear Base Bull

Growth driven valuation

Favorable operating

structure

3 scenarios blended

14

$76.73

Blended Value

23%

Valuation

Source: Team estimates

TARGET PRICE – BELOW THE MARKET

Base

BearBull

15

DCFValuation – 75%

A

B

CD

E

$67.31

Target Price

PEG

P/OCF

P/B

F P/E

EV/

EBITDA

Multiples Valuation – 25%

Valuation

SUPER BULL SCENARIO – UNSUSTAINABLE GROWTH RATE

16

What can drive the current price? An unsustainable growth rate!

42%Source: Team Estimates

42% Super Bull Scenario

21%Source: Company Financials

21% Historic Peer Average

7.2%

Source: Research and Markets’ North American Healthcare IT Market Report 2013-2017

7.2% Projected Industry Growth Rate

Valuation

LEADERSHIP STAKE – CEO SELLOFF

17

Source: Inc. Mag April 1, 2007

0.4

0.5

0.5

0.6

0.6

0.7

0

20

40

60

80

100

120

140

160

Stock

Am

ount

Held

($M

)

Stock

pri

ce (

$)

ATHN Price Movement and CEO J. Bush Holding Activity

ATHN Stock Price Amount Held

Valuation

RISKS TO OUR THESIS – POSSIBLE, NOT LIKELY

Growth and improvement

Market appreciation

18

0

20

40

60

80

100

120

140

160

0

200

400

600

800

1000

1200

1400

1600

1800

2000

AT

HN

Pri

ce (

$)

S&P500 (

$)

Time

ATHN and S&P 500 Price Correlation

S&P 500 ATHN Source: Bloomberg

Risks

CONCLUSION – AVERAGE FIRM AT AN EXCEPTIONAL PREMIUM

19

Good Company Attractive Industry Overvalued Growth

Average Operational Performance Challenging Competitive Position Unsustainable Growth Expectations

Conclusion

THANK YOU

Christopher Dunn

20

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. 2014

APPENDIX

21

COMPANY - COSTLY INPUTS DECREASE PROFITS

22

2012 Cost Breakdown

Direct Operating Costs (40%)

Sales & Marketing (25%)

R&D (8%)

SG&A(14%)

Dep & Amm (6%)

Taxes (4%)

Net Income (4%)

Source: ATHN Financials

COMPANY – ACQUISITIONS HAVE BEEN CENTRAL TO GROWTH

23

2011 2013

Anodyn

e

Analytics

2009

Cre

stline

Tech

nolo

gies

Pro

xysis

Health

care

Data

Service

s

Epocrate

s

Source: ATHN Financials

COMPETITION – MORE PHYSICIANS SELLING OUT

240% 5% 10% 15% 20% 25% 30%

Hospital Employed

Ownership Stake in Practice

Solo

Work for Physician Owned Practice/No

Ownership Stake

Practice Owned by Hospital or Health System

Independent Contractor

Physician Type Distribution

2012 2013

Source: 2013 Physician Outlook and Practice Trends, Jackson Healthcare

COMPETITION – PORTER’S FIVE FORCES

25

COMPETITION - LANDSCAPE

26

INDUSTRY – PROJECTED GROWTH IN US HEALTH EXPENDITURES

27

-

1

2

3

4

5

2013 2014 2015 2016 2017 2018 2019 2020

Expenditure

s ($

T)

Year

Projected National Health Expenditures ($Trillion)

Source: cms.gov

INDUSTRY - MARKET SHARE

28

0

10,000

20,000

30,000

40,000

50,000

60,000

2012 2018

Rev

enue (

$M

)

Year

ATHN Market Share Evolution – Base Scenario

Market Size ATHN Market Share

Current Market Share

1.17%

Future Market Share

3.43%

Growth Captured

7.93%

Source: Team estimates

INDUSTRY – PHYSICIANS PARTICIPATING IN LOW-COST

HEALTHCARE MODELS

29

22%

7%

25%

14%

0%

5%

10%

15%

20%

25%

30%

Currently Participating Plan To

% o

f R

esp

ondents

Response

Participation in Low-Cost Models

2012 2013

Source: 2013 Physician Outlook and Practice Trends, Jackson Healthcare

INDUSTRY – WHAT IS “MEANINGFUL USE” UNDER HITECH ACT?

30

Stage 1 : Data Capture and Sharing (2011-2012)

Electronically capturing health information in a standard format

Using that information to track key clinical conditions

Communicating that information for care coordination processes

Initiating the reporting of clinical quality measures and public health

information

Using information to engage patients and their families in their

care

Stage 2: Advance Clinical Processes (2014)

More rigorous Health Information Exchange (HIE)

Increased requirements for e-prescribing and incorporating lab

results

Electronic transmission of patient care summaries across multiple

settings

More patient-controlled data

Stage 3: Improved Outcomes (2016)

Improving quality, safety, and efficiency, leading to improved

health outcomes

Decision support for national high-priority conditions

Patient access to self-management tools

Access to comprehensive patient data through patient-centered HIE

Improving population health

FINANCIAL ANALYSIS – OPERATIONAL COST BREAKDOWN

31

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Direct operating Selling and

marketing

Research and

development

General and

administrative

Depreciation and

amortization

Perc

ent

of C

ost

s

Cost Category

Costs by Category

2012 2011 2010

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

ATHN SG&A PEER SG&A ATHN R&D PEER R&D ATHN D&A PEER D&A

Perc

ent

of C

ost

sCost Category

Costs by Category ATHN vs. Peers

2010 2011 2012

FINANCIAL ANALYSIS – LEVERAGE RATIOS

32

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Rat

io

Time

ATHN Measures of Risk

Degree of Financial Leverage Degree of Operating Leverage Degree of Total Leverage

FINANCIAL ANALYSIS – OPERATIONAL CASH FLOWS / EBITDA

33

0%

20%

40%

60%

80%

100%

120%

140%

160%

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

OC

F/E

BIT

DA

(%

)

Year

ATHN OCF/EBITDA vs. Peer Average

ATHN OCF/EBITDA Peer Average OCF/EBITDA

FINANCIAL ANALYSIS – CASH FLOW FLUCTUATIONS

34

0%

10%

20%

30%

40%

50%

60%

70%

201220112010

Gro

wth

(%

)

Year

Cash Flow Growth

ATHN Industry Avg.

-60

-40

-20

0

20

40

60

80

Ops CF Inv CF Fin CFCas

h F

low

($M

)

Cash Flow by Category

Change in Cash Flows

2010 2011 2012

FINANCIAL ANALYSIS - DUPONT ANALYSIS

35

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.0

0.5

1.0

1.5

2.0

2.5

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Rat

io

Multip

lier

Time

Dupont Analysis

ROA ROE Equity Multiplier Asset Turnover Profit Margin

FINANCIAL ANALYSIS – PEER COMPARISON RATIOS

36

Comparable Key Ratio's MDRX ATHN CERN CPSI HMSY MDAS QSII Average

Profitability Ratio's

Revenue (in millions, 2012) 1,446.33 422.27 2,665.44 183.31 473.70 640.12 460.23

3-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 1.10 1.03 2.91 2.96 5.00 0.56 1.97 2.22

Quick ratio 0.78 0.91 2.48 2.63 4.69 0.44 1.72 1.95

Cash ratio 0.13 0.35 1.58 0.56 2.09 0.00 0.65 0.77

Activity Ratio's

Total Asset Turnover 0.59 1.09 0.80 2.39 0.53 0.36 1.04 0.97

Receivables Turnover 4.13 7.61 4.67 7.39 3.57 6.39 3.10 5.27

A/R Conversion Period 92.25 50.97 69.03 67.02 103.11 51.51 119.09 79.00

Payables Turnover 13.62 29.57 3.76 37.99 2.79 6.43 21.13 16.47

Payables Conversion Period 26.80 12.35 96.83 9.61 130.96 56.77 17.28 50.09

Revenue/employee 229,921 186,256 224,055 128,934 170,516 174,316 214,284 189,755

Debt/Leverage Ratio's

Debt/Equity 0.34 0.50 0.07 0.40 0.72 2.41 0.46 0.70

Debt/Assets (debt ratio) 0.19 0.31 0.05 0.28 0.36 0.53 0.31 0.29

Debt/Capital 0.26 0.40 0.06 0.28 0.42 0.67 0.31 0.34

Assets/Equity (Financial Leverage) 1.98 2.20 1.29 1.40 1.79 3.41 1.46 1.93

Interest Coverage ratio 5.86 14.14 112.80 - 6.01 1.39 180.50 53.45

FINANCIAL ANALYSIS – RATIO PROJECT TREND

37

Key Financial Ratio's 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Liquidity Ratio's

Current 4.03 3.07 4.10 1.30 1.51 1.67 1.87 1.97 2.03

Quick 3.77 2.84 3.82 1.19 1.35 1.49 1.69 1.78 1.85

Cash 2.86 2.01 2.89 0.33 0.41 0.53 0.70 0.78 0.84

Operating Cash Flow Ratio 1.10 1.02 1.05

Efficiency Ratio's

Total Asset Turnover 0.94 0.93 0.99 0.71 0.93 1.10 1.23 1.33 1.39

Fixed Asset Turnover 4.57 3.76 4.06 2.53 3.08 3.57 3.90 4.09 4.12

Accounts Receivable Turnover 6.66 6.61 6.82 4.55 6.67 6.67 6.67 6.67 6.67

Average Collection Period (days) 54.81 55.23 53.52 80.30 54.75 54.75 54.75 54.75 54.75

Accounts Payable Turnover 439.25 51.29 243.66 40.00 50.00 50.00 50.00 50.00 50.00

Average Payment Period (days) 0.83 7.12 1.50 9.13 7.30 7.30 7.30 7.30 7.30

Days Payable Outstanding 2.11 18.78 3.79 24.01 19.21 19.21 19.21 19.21 19.21

Days Sales Outstanding 54.81 55.23 53.52 80.30 54.75 54.75 54.75 54.75 54.75

Cash Conversion Cycle* 52.70 36.45 49.73 56.29 35.54 35.54 35.54 35.54 35.54

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 0.35 0.32 0.27 0.53 0.49 0.50 0.50 0.50 0.49

Debt to Equity 0.53 0.47 0.37 1.11 0.97 0.98 1.00 0.99 0.97

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 1.53 1.47 1.37 2.11 1.97 1.98 2.00 1.99 1.97

Interest Coverage Ratio - - - 1.04 1.52 1.08 1.43 1.54 1.54

Cash Flow Ratio's

Operating Cash Flow/Debt 0.49 0.54 0.60 0.29 0.27 0.22 0.25 0.27 0.28

Operating Cash Flow/Revenue 0.18 0.19 0.17 0.21 0.14 0.10 0.10 0.10 0.10

Free Cash Flow/Revenue 3.32% 6.54% 2.41% -25.15% 2.96% 3.42% 3.45% 3.77% 3.92%

OCF/CAPEX 2.81 3.64 2.94 0.62 2.40 1.68 1.67 1.69 1.65

FINANCIAL ANALYSIS - LIQUIDITY

38

0

100

200

300

400

500

600

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Val

ue (

$M

)

Rat

io

Time

ATHN Measures of Liquidity

Current ratio Quick ratio Cash ratio Current Assets Current Liabilities

FINANCIAL ANALYSIS - SOLVENCY

39

0

0.2

0.4

0.6

0.8

1

1.2

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Rat

io

Year

ATHN Measures of Solvency

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)

FINANCIAL ANALYSIS - REVENUE AND NET INCOME CHANGES

40

0

10

20

30

40

50

60

70

80

90

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Net

Inco

me (

$M

)

Reve

nue (

$M

)

Year

ATHN Revenue and Net Income Over Time

Revenue Net Income

FINANCIAL ANALYSIS - REVENUE AND NET INCOME GROWTH

41

-10%

0%

10%

20%

30%

40%

50%

60%

2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Gro

wth

(%

)

Year

ATHN Revenue and Net Income Growth

Revenue growth Net Income growth

VALUATION - WACC

42

WACC Calculations (Base Case) 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

D+E 822,420 828,585 918,694 1,035,105 1,176,593 1,329,547 1,405,467 1,593,582

Debt (Current, LT, and LOC) 242,125 177,125 162,125 147,125 132,125 117,125 - -

D/D+E 29% 21% 18% 14% 11% 9% 0% 0%

Equity 580,295 651,460 756,569 887,980 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 0.59 0.59 0.59 0.59 0.59 0.59 0.59 0.59

Levered BETA 0.73 0.68 0.66 0.64 0.63 0.62 0.59 0.59

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%

VALUATION - GROWTH RATE CALCULATION

43

Step 1

Revenue Distribution by Customer Segment 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 Total Revenue 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

VALUATION - FCFF

44