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ECLP AT A GLANCE

P/E ► 11.0 AVG EV/EBITDA ► 21.5 HIGH ROA ► 14.5% AVG ROE ► 25.2% AVG Debt to Equity ► 0.752 AVG Current Ratio ► 1.42 AVG Interest Coverage Ratio ► 2.04 AVG

 

 

 

 

 

 

Eclipsys Corporation (NASDAQ:ECLP) makes proprietary software for the pharmaceutical and healthcare industry used for clinical, financial, and operational management.^[1] With an operating revenue of $515.76 million in 2008, Eclipsys Corp. is the third largest company by revenue in the Healthcare Information Services industry^[2]. Eclipsys's software is used to manage medical records databases directly, and also integrates with electronic systems from competitors such as Cerner (CERN) or Allscripts Healthcare Solutions (MDRX).^[3][1] Software sales and support comprised of 96.10% of Eclipsys Corp's revenue in 2008. ^[4]

Since 2005, the percentage of hospitals primarily relying on electronic medical records systems has increased by 18.4% to 28.4%, or 1620 of the roughly 5,700 hospitals in 2008.^[5][6] Ease of use and lower costs have fueled this growth of the IT-based healthcare industry, and increases in healthcare spending, safety and quality concerns, and healthcare deficiets have created a favorable environment for its expansion.^[7] Industry growth drove Eclipsys Corp's 10.42% year-over-year growth on average since 2005.^[8]

The development of IT-based healthcare management has been international, but Eclipsys's global expansion efforts have encountered limited success.^[7] The company operates in highly competitive markets with companies that have greater financial and technical resources, and competitors such as Cerner (CERN) have captured most of the foreign market share using their economies of scale, stagnating Eclipsys Corp's growth both in the U.S and international markets.^[9] As of 2007, Eclipsys Corp has obtained only 2.6% market share in the industry.^[10]

Eclipsys Corp's primary customers are hospitals, drug manufacturers, and other large medical institutions.^[1] Due to the 2008 and 2009 financial crisis, these institutions are forced to reduce immediate spending and maintain paper record databases despite the long-term savings from the adoption of IT-based healthcare. 94% of the hospitals in the United States have cut back on IT spending, while 74% of them have deferred healthcare IT spending to the future.^[11] Eclipsys Corp had a decrease in growth from 11.7% in 2007 to 8.0% in 2008.^[4] Citing the uncertain economic outlook and the increasingly tight hospital budgets, analysts from Caris & Company have downgraded Eclipsys Corp to an average performer in April, 2009. ^[12]

Corporate Overview

Eclipsys Corp. primarily operates in the United States with its management headquarters located in Atlanta, Georgia.^[1] The company provides software services to help medical institutions manage patients and finances. Eclipsys also offers HIT services to blood banks, medical libraries, laboratories, government agencies, drug manufacturers, and most institutions in the healthcare industry.^[1] As of 2009, the company provides 28 different IT-based services to large healthcare institutions.^[13]

Eclipsys Corp. Revenue & Net Income^[14]

Eclipsys Corp, along with most of the healthcare information services industry, is considered a rapidly growing and changing company.^[15] Thus, institutional investors buy company stock in aggregate in an attempt to profit from share price increases associated with rapid growth. More than 95% of Eclipsys stocks are owned by institutional investors.^[16] Therefore, Eclipsys Corp. is funded well by capital investors such as Tremblant Capital, a hedge fund that recently reported wishing to hold 6.01% of all shares outstanding^[17]

Since the end of 2007, Eclipsys has attempted to expand out of the saturated U.S markets. While the company grew international revenues by 293% since 2007, competing companies such as Cerner Corp. have grown as fast as 1000% in the same period.^{[18] [19]} The Healthcare Information Services industry is aggressively competitive, with many companies' products offering similar benefits at similar prices. Since Eclipsys Corp. is a company with smaller resources than most of its competition, it faces the risk of being crowded out by its competition in consumer segments that are not already well established clients.^[20]

Net income has increased a 141% since 2007^[14]. While this increase maybe slightly exaggerated due to various small selling and buying of company divisions, the majority of this increase comes from planned investments and contract revenue.^[21]

Business Segments

The company is officially listed as operating only in one segment, the Healthcare Information Services. However, the company has four distinct sources of revenue. ^[21]

• Ratable services (65% of revenue) include software leasing fees billed per period, software maintenance, outsourcing, and remote hosting.^[21] In 2008, Eclipsys Corp had a revenue of $334.3 million from its ratable services.^[21] This represents a 10.9% increase, or $32.8 million, since the previous year.^[21] New sales bookings for all of the ratable services, and the general trend for hospitals in digitizing their records contributed to this increase in revenue.^[21]

Eclipsys Corp. Revenue Mix^[21][22]

• Periodic revenues (7% of revenue) come from software sales that are considered one-time in nature. Since they are not ratable, Eclipsys recognizes this revenue segment independently.^[21] From a health institution's view, a periodic purchase is a large one-time fee for licensing software provided by Eclipsys. Due to the larger cost and higher risk, uncertainty in the markets may force health institutions to shift towards ratable services.^[21] During the 2008 and 2009 Financial Crisis, this is what happened. In 2008, periodic revenues contributed to 7%, or $37.1 million, of Eclipsys Corp's total revenue.^[21] This is a decrease of $2.3 million since 2007.^[21] The company attributes this decrease to the shift in hospitals' service preferences to ratable services due to the economic uncertainty in the time period.^[21]

• Professional services (24% of revenue) refer to implementation, training, and consulting services Eclipsys Corp. provides to its clients. In 2008, this revenue segment contributed 24%, or $124.3 million, towards the company's total revenue.^[21] This represents an increase of 3.6%, or $4.3 million, since 2007.^[21] This increase is associated with the increase in new sales bookings in the ratable services segment. ^[21]

• Hardware revenues (4% of revenue) include the provision of computing and digital storage hardware required to run Eclipsys Corp. software.^[22] In 2008, hardware services contributed to 4%, or $20.12 million, of the company's total revenue.^[22] This is an increase of $3.4 million, or 20.6% since 2007.^[22] The increase is primarily due to a shift in accounting practices between periodic revenues and hardware revenues.^[22] The actual increase in demand for hardware services from Eclipsys Corp is merely a reflection of the increase in new sales bookings in the ratable services segment.

Key Trends and Forces

Recession has Hurt IT-based Healthcare

The 2008 and 2009 financial crises have adversely affected the availability of resources for hospitals and health institutions.^[23] The National Alliance for Health Information Technology reported that 94% of hospitals in the United States have cut back on spending.^[11] The financial crisis is also making health institutions prefer software subscription and pay-as-you-go plans instead of the traditional software licensing sales.^[24] Since periodic revenue from traditional licensing arrangements carry high margin and contribute significantly to profitability, the health IT sector's profits have seen little growth.

Institutional Investors are moving to Healthcare as a safe growth investment

Even during severe recessions, healthcare tends to perform above market. In the last 45 years, healthcare and healthcare IT have had a minimum growth rate of 5% a year.^[25] Thus, institutional investors such as hedge funds and mutual funds are buying healthcare stocks.^[26]. For example, during the 2009 financial crisis in April of 2009, a hedge fund named Tremblant Capital indicated it wished to acquire a 6.01% ownership stake in Eclipsys. Tremblant's portfolio previously had a negligible amount of healthcare stocks, and this reallocation is consistent with a trend toward safety in healthcare companies among institutional investors. ^[27]

Long-Term Movement Towards Digitizing Healthcare

As of 2009, 96.10% of Eclipsys Corp's revenue comes from the fast-growing sector of IT-based healthcare management.^[4] Since 2005, there has been an 18.4% increase in hospitals using digital healthcare services and digital patient records.^[5] HIMMS, a market research unit, reports that in 2008, hospitals using IT services increased by up to 10%.^[5] With 1620 out of the roughly 5700 hospitals using HIT, HIMMS analysts report that the U.S hospital IT market is nearly $33 billion in the US.^[28] Similarly, Credit Suisse analysts estimate that $30 billion dollars of opportunity exist globally for healthcare information technology services.^[29] They also report that although the 2008 and 2009 financial crisis slowed spending on IT in the short term, the migration to IT-based healthcare is inevitable.^[5] The emergence of the electronic medical record has helped hospitals manage data efficiently. Whereas transportation and human error were important factors in paper healthcare systems, digital systems are instant and accessible without error. Hospitals, insurance agents, and employers use IT services to ensure smooth performance, ease of operation, proper patient care, and financial flexibility. While the adoption of IT services to manage health institutions has been slow, there is increasing demand for permanent IT-based healthcare systems. ^[28] Eclipsys Corp and competitors that offer health information services have the opportunity to provide their services to health institutions in the long term.^[30]

Competition

Eclipsys Corp's direct competitors include:

• McKesson (MCK): is one of the world's largest corporations in the pharmaceutical distribution industry. ^[31] McKesson provides enterprise-level software services such as healthcare database management to hospitals and other healthcare organizations.^[32] McKesson competes with every aspect of software service provided by Eclipsys Corp, and has significantly higher revenue from its other venues of business. Thus, this company is the most direct competitor to Eclipsys Corp.
• Cerner (CERN) : Cerner Corporation is the second largest provider by market share of healthcare information technology (HIT) services in the healthcare industry.^{[33] [34]} Cerner's primary business involves leasing software to help medical organizations manage health records and finances electronically. Eclipsys provides software that integrates with Cerner's healthcare database platform to Cerner's equivalent database managing software.^[35] Thus, this company competes with most of the software services offered by Eclipsys Corp.
• Allscripts Healthcare Solutions (MDRX): AllScripts HealthCare Solutions provides clinical software and information services for physicians that assist in medication. While Allscripts Healthcare offers many of the same software services provided by Eclipsys, Allscripts' software stresses financial and employee management for hospitals as opposed to being patient-oriented. ^[36]
• TriZetto Group (TZIX): The TriZetto Group primarily offers healthcare-oriented financial and human resources management. Its software is geared primarily to optimize and monitor the flow of money in hospitals, but offers a few patient oriented software such as health record management. ^[37]

Market Share of Companies in Healthcare IT sector ^{[10] [38]}

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} Eclipsys Corp: About Us
2. ↑ MarketWatch ECLP Annual Income Statement
3. ↑ Eclipsys 2008 10-K, Item 1, Business Overview, Page 2 (PDF 6)
4. ↑ ^{4.0 4.1 4.2} Eclipsys 2008 10-K Item 7, Result of Operations, Page 37 (PDF 41)
5. ↑ ^{5.0 5.1 5.2 5.3} Health Data Management: 06/30/08
6. ↑ American Hospital Association: Fast Facts
7. ↑ ^{7.0 7.1} Eclipsys 2008 10-K Item 1, Business Overview, Page 4 (PDF 8)
8. ↑ Calculation Based on: Morningstar ECLP Financial Report
9. ↑ Eclipsys 2008 10-K Item 1A, Risk Factors, Page 16 (PDF 20)
10. ↑ ^{10.0 10.1 10.2} CIBC World Markets Corp Cerner Corp. Analyst Cover Initiation, page 5, 2/22/2007
11. ↑ ^{11.0 11.1} Healthcare IT Spending and Economic Realities, December 2008, PDF Page 2, 3
12. ↑ MSN Money Central: Short Stories, April 2, 2009
13. ↑ Eclipsys: Provided Services
14. ↑ ^{14.0 14.1} MarketWatch Financials: ECLP
15. ↑ MorningStar Quote and Stock info: ECLP
16. ↑ Yahoo! Finance: ECLP Major Holders
17. ↑ MarketFolly: Bret Barakett's Tremblant Capital Files 13G on Eclipsys(ECLP), April 14, 2009
18. ↑ ^{18.0 18.1 18.2 18.3} Calculation from: 2008 Eclipsys 10-K, Note S - Geographic Information, Page 89, PDF 93
19. ↑ The Healthcare Blog: Cerner Immune to Economic Troubles, 5/27/2008
20. ↑ Wikinvest: ECLP Competition
21. ↑ ^{21.00 21.01 21.02 21.03 21.04 21.05 21.06 21.07 21.08 21.09 21.10 21.11 21.12 21.13 21.14} 2008 Eclipsys 10-K, Result of Operations, Page 38 (PDF 42)
22. ↑ ^{22.0 22.1 22.2 22.3 22.4} Eclipsys 2008 10-K, Result of Operations, Page 39 (PDF 43)
23. ↑ Medical News: Financial Crisis Will Impact Healthcare Heavily, 08/10/2008
24. ↑ Eclipsys 2008 10-K Item 1, Business, Page 4(PDF 11)
25. ↑ Hedge Pensions Review: Healthcare - A Promising Sector for Hedge Funds, 11/20/2006
26. ↑ BusinessWeek: Health Care Stocks Await a Diagnosis, 12/2/2008
27. ↑ SeekingAlpha: Hedge Fund Tracking - Tremblant Capital
28. ↑ ^{28.0 28.1} MSNBC: Severe US Recession Already Having Major Effect on the Healthcare Sector, 08/01/2009
29. ↑ InvestorPlace: Healthcare Stimulus would Boost Cerner, 12/23/2008
30. ↑ Seeking Alpha: 5 Bear Market Tech Opportunities, 12/02/2008
31. ↑ Wikinvest: McKesson
32. ↑ McKesson: About Health Care Services
33. ↑ Cerner Corporate Profile
34. ↑ Yahoo Key Statistics: CERN
35. ↑ Cerner: About Cerner
36. ↑ Allscripts Company Overview
37. ↑ TriZetto Group: Core Administration Applications
38. ↑ ^{38.0 38.1} SmartMoney: Upward Price Momentum Bodes Well for Stocks, 3/19/2007
39. ↑ ^{39.0 39.1 39.2 39.3} MarketWatch Company Financials