October 22, 2007

1. Google Earnings Soar, WebMD Stock Tanks on Yahoo Deal News

Facts and Background

Google exceeded expectations again when it announced third quarter results last Thursday. The company reported a 57% revenue increase to $4.23 billion and net income of $1.07 billion, or $3.38 per share vs. $2.36 in the same quarter last year. Meanwhile, shares in WebMD dropped sharply after the online health company missed earnings estimates and announced an exclusive, multi-year advertising agreement with Yahoo, disappointing investors who had expected a Google acquisition of the company following widespread rumors started months ago.

Opinion

Google may eventually disappoint high expectation investors, but that hasn't happened yet. A footnote to the earnings announcement included the fact that Google's search engine share increased in September, mostly at the expense of Microsoft's search engine. The stock is at $645 a share, creating thousands of Google employee millionaires. The only slightly troubling note is that Google increased headcount by over 2,000 employees in the quarter. As for WebMD, the premium of a Google acquisition was obviously built into the lofty share price, leaving little foundation once the Yahoo deal appeared to kill those hopes.

Musings

• No one in the foreseeable future will compete effectively with Google for online advertising, search, and nearly anything else that Google builds for the web.
• When it comes to the Internet, the dot-commers were wrong in 1999 - content is not king. There's not much of a barrier to entry for a company like Google to create its own version of WebMD without laying down a premium for WebMD's existing eyeballs and goodwill.
• Google Health's delays and lack of success is an odd exception to the company's nearly perfect track record. They aren't the first company to succeed in nearly every vertical market except healthcare. Still, all they've missed so far is the timeline.

2. Medsphere, Shreeves Settle Lawsuit

Facts and Background

OpenVista vendor Medsphere of Aliso Viejo, CA announced Friday that the company and founding brothers Scott and Steve Shreeve had settled the company's $50 million lawsuit that accused them of releasing proprietary source code to an online open source repository.

Opinion

The suit was settled three days after new Medsphere CEO Mike Doyle was announced. That's probably not a coincidence. Doyle probably told the company's board how unwise they were to be going after the founders for a ridiculous amount of money after firing them. There's no better way to confuse the market than to brag on being an open source product, then sue the founders for releasing code to open source. There's just no good way to spin that story, no matter who's right or wrong.

Musings

• Power struggle or corporate diligence? Regardless of which is the case, it looks like the former since Medsphere has been tight-lipped about its intentions from the beginning. 
• Former CEO Ken Kizer is still chairman of the company's board, as he was before taking the CEO position. In fact, the board consists of former CEOs Kizer and Larry Augustin, Steve Shreeve, and four outside money guys. That must lead to some interesting board discussions.
• The lawsuit was just plain stupid, no matter who was right or wrong. The company was ramping up, earning positive press, and bringing in well-known talent like Marlene McCurdy and Frank Pecaitis (both gone now). What it didn't need was the groundswell of negative publicity cause by firing its two young, passionate, and likeable founders.
• Hospitals like vendor stability. It's a big risk to buy a supposedly open source enterprise suite from a nearly unknown vendor. A company that's had  three CEOs in less than two years doesn't exactly swell that confidence level.
• Mike Doyle's history is in building investor-friendly companies that grow quickly and cash out. Are the money guys getting antsy after the inevitable comparison with high flying open source vendor Red Hat turned out to be unreasonable?
• Other than open source zealots, no one (especially those making buying decisions) cares about what open source even means. No hospital will buy OpenVista if there's a better deal elsewhere, open source or not. It won't help the company to charm the so-called open source community and Doyle doesn't sound like the kind of CEO who will do that anyway. All a hospital needs to know is that OpenVista is less expensive because taxpayers paid for its R&D and that it has been well vetted by VA hospitals everywhere. Whether some spare bedroom programmer can write his own add-on module or not won't sway an enterprise decision.

3. Eclipsys Announce Headquarters Move to Atlanta

Facts and Background

Eclipsys Corporation announced on Tuesday that the company will relocate its corporate headquarters from Boca Raton, FL to Atlanta, GA by March 1, 2008. 

Opinion

This is probably a good move. Income tax free Florida was probably great for employees, particularly when evaluating Atlanta traffic, but having other major vendors like McKesson nearby in Atlanta means the much smaller Eclipsys can poach employees as needed without the hassle of relocating them.  Being located in universally accessible Atlanta will be a plus for corporate visits by prospects and work groups.

Musings

• Is it a rule that every healthcare IT vendor must have offices in Atlanta and Malvern, PA?
•  Eclipsys has some undesirable baggage from the past. Now that most of the executive team has been replaced, this is a good final chapter to a fresh start.
• Vendors don't usually move their headquarters. We suspect that Eclipsys won't regret it, however.

4. Nuance Acquires Results Reporting Vendor Vocada

Facts and Background

Speech solutions vendor Nuance Communications announced Thursday that it would acquire Vocada, Inc. of Dallas, TX. The company's results reporting product, sold via a software-as-a-service model, helps hospitals improve patient safety and compliance.

Opinion

This is a marginally interesting acquisition on its own, but Nuance has been on a tear in 2007, acquiring MobileVoiceControl, Bevocal, VoiceSignal Technologies, Tegic Communications, and Commissure. It had already bought Dictaphone and owns the Dragon NaturallySpeaking product line.

Musings

• A $3.6 billion market cap is pretty good for a company that started out as Visioneer, the low-end home scanner company.
• The company's acquisition history is complex and lengthy. Its 2005 "merger" with ScanSoft was said by some to be an acquisition of Nuance by ScanSoft, which then took the Nuance name.
• Some part of the share price seems to be a hedge just in case Microsoft decides to acquire the company. That's possible, although its technologies don't seem all that relevant to Microsoft unless the money-losing Nuance can start cranking out profits from the hodgepodge of acquisitions. Still, Nuance is building a engine that could roar to life given skilled management of all its offerings, none of which are all that interesting individually.
   

5. Cerner Profit Up, but Prospects Down

Facts and Background

Healthcare software vendor Cerner announced a 34% increase in Q3 earnings on Thursday, but revenue fell short of predictions. Shares dropped 9% Friday. The company said annual revenue will not meet the expectations of analysts because of hardware margins.

Opinion

This could be just a tough quarter for Cerner, or it could be the first sign of the long-expected growth slowdown for the company. Cerner has been looking for higher growth areas than selling hospital systems, such as medication cabinets and life sciences, but those haven't paid off yet. Losing most of the high margin, big hospital business to Epic Systems has certainly hurt.

Musings

• Lower revenue + higher margins = mature industry. Usually, anyway.
• Cerner says revenue growth will continue in the double digits, with earnings rising at 20-25% annually. It has typically been conservative in investor guidance and invariably makes its numbers, so business must be good.
• Hardware margins are usually low, so if those are contributing to lower revenue as the company says, that would explain how profits continued anyway. Hardware is often a pass-through, with the company taking maybe 10% for its trouble and offering some services out of that upcharge.
• Nothing in this report seems to indicate a significant change to Cerner's future prospects.
  

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