The Zacks Analyst Blog Highlights: Verizon Communications, Google, Apple, Athenahealth and Microsoft

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Oct 24, 2011, 09:30 ET

CHICAGO, Oct. 24, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Verizon Communications (NYSE: VZ), Google Inc. (Nasdaq: GOOG), Apple Inc. (Nasdaq: AAPL), Athenahealth (Nasdaq: ATHN) and Microsoft (Nasdaq: MSFT).

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Here are highlights from Friday's Analyst Blog:

Verizon Earns as Expected, Tops Revs

Before the opening bell, the largest U.S. mobile service provider Verizon Communications (NYSE: VZ) reported third quarter 2011 adjusted earnings of 56 cents per share. The quarter's earnings matched the Zacks Consensus Estimate and was a penny above of the year-ago earnings.

The storm in the East Coast and the 14-day labor strike in the Wireline segment increased operating cost by $250 million and hurt profitability in the reported quarter. However, on a GAAP basis, earnings more than doubled from 23 cents per share to 49 cents on strong smartphone sales.

Total revenue grew 5.4% year over year to $27.913 billion and surpassed the Zacks Consensus Estimate of $27.911 billion. EBITDA (earnings before interest, taxes, depreciation and amortization) climbed 19.2% year over year to $8.8 billion in the third quarter.

Segment Results

Wireless revenue increased 9.1% year over year to $17.7 billion in the reported quarter. Service, Equipment and Other revenues grew 6.1%, 41.1% and 10.8%, respectively. Data revenue spiked 20.5% from the year-ago quarter and represented 40.6% of service revenue.

Verizon added 1.3 million subscribers during the reported quarter, including 882,000 retail post-paid customers, 86,000 retail prepaid customers and 367,000 wholesale and other connections such as machine-to-machine and telematics. Rapid expansion of 4G Long-Term Evolution (LTE) services, strong adoption of Google Inc.'s (Nasdaq: GOOG) Android smartphones and Apple Inc.'s (Nasdaq: AAPL) iPhone led to the strong growth in wireless subscribers.

As of October 20, the Verizon LTE deployment covered 165 markets with 186 million people. With this, the company surpassed its 2011 target to cover 185 million people by the end of the year.

At quarter end, the company had 107.7 million subscribers (including 90.7 million retail customers and 17 million wholesale and other connections), reflecting a 6.5% year-over-year increase.

Retail post-paid churn (customer switch) was low at 0.94% in the third quarter compared with 1.07% in the year-ago quarter. Total retail churn also declined to 1.26% from 1.43% in the year-ago quarter. Retail post-paid ARPU (average revenue per user) grew 2.4% year over year to $54.89.

Wireline revenue dipped 1.3% year over year to $10.1 billion due to continued declines across global wholesale and other businesses.

Momentum for the FiOS fiber-optic network and sales of strategic service in the U.S remained strong. During the quarter, Verizon added 131,000 and 138,000 new customers to its FiOS TV and FiOS Internet services, respectively.

The company exited the quarter with 4 million (up 20.9% year over year) FiOS TV customers and 4.6 million (up 18.8%) FiOS Internet customers. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS TV grew to approximately 35% and 31%, respectively, across all markets from the year-ago levels of 31% and 27%.

Guidance

For fiscal 2011, Verizon expects revenue and earnings per share to grow 4–8% and 5–8% year over year, respectively.

Our Analysis

We believe Verizon is on track to meet its revenue and earnings targets this year based on to the introduction of new smartphones, tablets and data devices in the Wireless segment as well as continued strong FiOS fiber-optic network and strategic services in the Wireline business. Additionally, the new iPhone 4S, successful integration of Terremark and the recent acquisition of CloudSwitch would further boost the company's growth prospects.

However, persistent erosion in access lines, uncertain returns from investments, iPhone subsidies and intense competition from cable companies and other alternative services providers are risks to the stock.

We are currently maintaining our long-term Neutral rating on Verizon. The stock retains the Zacks #3 Rank (Hold) for the short term.

Athenahealth Upbeat on Fed Stimulus

Leading vendor of cloud-based services for physician practices Athenahealth (Nasdaq: ATHN) reported third-quarter fiscal 2011 adjusted (excluding one-time items other than stock-based compensation expense) earnings of 15 cents per share squeaking past the Zacks Consensus Estimate of 14 cents.

Net income (as reported) for the quarter increased to $5.3 million (or 15 cents per share) from $3.8 million (or 11 cents per share) a year ago, partly riding on higher revenues. The stock was virtually stagnant during after-hours trading.

Revenues

Revenues for the reported quarter were up sharply 33% year over year to $83.7 million, beating the Zacks Consensus Estimate of $83 million. The company recorded collections of $1.9 billion, up 26.7%.

As for the two reporting segments, sales from Business Services were up 32% to $80.6 million while Implementation and Other revenue rose 50.7% to $3.1 million.

Revenues were bolstered by continued adoption of the company's revenue cycle management offering athenaCollector and its electronic health record ("EHR") service athenaClinicals by physicians. In addition, usage of athenaCommunicator is gathering momentum.

Utilization of athenaCollector by medical providers and physicians increased a respective 20.4% and 21% year over year, in the third quarter. Furthermore, the use of athenaClinicals by medical providers (as well as physicians) more than doubled year over year. The usage of athenaCommunicator shot up exponentially to 4,117 medical providers (of whom 2,931 were physicians).

Outlook

Athenahealth raised the low end of its revenue forecast for fiscal 2011 to $320 million to $325 million (earlier $315 million to $325 million). The company also hiked adjusted gross margin to a band of 63% to 63.5% (earlier 62.5% to 63.5%) and adjusted EBITDA to a range of $64 million to $68 million (earlier $59 million to $67 million). The guidance for adjusted earnings was raised to a band of 78 cents to 85 cents a share from the earlier projection of 70 cents and 83 cents.

Athenahealth's web-based deployment provides a low-cost scalable service while its flexible rules engine leads to higher efficiency in claims settlement. The Software-as-a-Service (SaaS)-based approach allows for a more flexible delivery mechanism that is expected to help Athenahealth win deals. The company has traditionally enjoyed high customer satisfaction rates, which facilitate a larger number of referrals.

Athenahealth's unique business model makes it a strong provider of revenue cycle management ("RCM") services (athenaCollector) to small physician practices. Its EHR product (athenaClinical) is a key player in ambulatory settings. We believe that sales of athenaClinical are likely to remain robust, given the opportunity for physicians to earn incentive payments under the federal stimulus.

The company should benefit from its extensive athenaCollector client base, as only a minority of its subscriber base also utilizes athenaClinical. Cross selling represents a real growth opportunity in the near term. In this regard, Athenahealth has made rapid strides in capturing the EHR business of physician practices. However, this segment is shrinking as hospitals increasingly absorb physician practices.

Athenahealth has geared itself for the enterprise segment through its strategic alliance with Microsoft (Nasdaq: MSFT) and the acquisition of Proxsys, both earlier in 2011. The company has recently signed on, and executed several enterprise-sized deals, which provide it with a credible and reference-able client base.

Though the federal stimulus will gradually wind down, the replacement market is growing. Competition is fierce and larger competitors may benefit from the incumbency factor.

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