Note: This report contains substantially new information. Subsequent reports will have changes highlighted.
Reason for Report: 1Q18 Earnings Flash Update
Prev. Ed.: Feb 13; 4Q17 Earnings Flash update
Flash Update [Note: Earnings update in progress; final report to follow]
Cerner Corporation reported adjusted first-quarter 2018 (1Q18) earnings of 58 cents per share, down 1.7% from the year-ago quarter (1Q17).
Revenues of $1.29 billion rose 2.6% year over year (y/y).
Bookings Detail
The y/y upside in revenues can be primarily attributed to an increase in bookings in 1Q18.
Bookings were $1.40 billion, up 12% y/y. The company registered strong bookings on business office services. However, subscription bookings were lower than expected.
Segment Details
Instead of reporting in three revenue categories — system sales, support maintenance and services — Cerner reported in six segments in 1Q18.
Licensed software in 1Q18 fell 5.3% to $134.8 million, y/y. Lower-than expected subscription bookings marred growth in the segment.
Subscriptions accounted for revenues worth $76.6 million, down 32.4% y/y.
Professional services increased 11.3% y/y to $441.3 million. Per management, strong performance in the segment is likely to enhancerevenue cycle position.
Managed services segment revenues were $268.3 million, up 3.3% y/y.
Support and maintenance revenues were $284.6 million, up 8.6% y/y.
Reimbursed Travel sales amounted to $23.9 million, up 6% from 1Q17.
Margins
Gross margin in 1Q18 was 82.1%, almost flat y/y.
Operating margin for 1Q18 was 15.1%, which contracted 427 basis points (bps) y/y.
The downside was caused by surge in operating expenses, which rose 6% y/y. The growth was driven by personnel expense related to revenue-generating associates and non-cash items.
Financial Position
Cerner exited 1Q18 with free cash flow of $255.7 million. Operating cash flow totaled $409 million.
Long-term debt, including capital lease obligations, was $527 million, down slightly on a sequential basis.
View Downbeat
Cerner expects second-quarter 2018 (2Q18) revenues between $1.31 billion and $1.36 billion.
The 2Q18 adjusted earnings per share is projected in the range of 59-61 cents.
For 2018 (FY18), revenues are projected in the range of $5.33-$5.45 billion, down from a range of $5.45 billion to $5.65 billion.
FY18 adjusted earnings per share is estimated in the range of $2.45-$2.55.
Further. the company expects 2Q18 new business bookings in the range of $1.35-$1.55 billion.
MORE DETAILS WILL COME IN LATER, IMMINENT EDITIONS OF ZACKS RD REPORTSON CERN
Portfolio Manager Executive Summary[Note: Earnings update in progress; final report to follow]
Cerner Corp. (CERN) is one of the leading providers of healthcare information technology (HCIT) solutions worldwide. The company designs, develops, markets, installs, hosts and supports software information technology as well as content solutions for healthcare organizations and consumers.
Of the 20 firms covering the stock, 10 (50%) conferred positive ratings, while 10 (50%) assigned neutral ratings and none (0.00%) issued a negative rating. Target prices range from $52.00 to $77.00, with the average being $68.88.
Positive or equivalent outlook (10/20firms): Firms are encouraged by Cerner’s wide range of products and services, string of business wins, broad customer base and improving competitive position. Per these firms, Cerner is one of the largest pure-play HCIT companies and its wide footprint, large reference-able client base and composite array of solutions make it an ideal candidate for investors seeking an exposure to the HCIT industry. These firms believe that Cerner has significant replacement opportunities which will help it win market share from competitors. The firms with a positive stance also believe that the company’s prospects have improved following The Department of Veterans Affairs’ (VA) announcement to adopt CERN's EHR system. The ongoing demand for Cerner’s core solutions as well as strategic acquisitions have helped the company to rapidly penetrate the HCIT market, which will lend it a competitive edge in the long run. Furthermore, these firms are hopeful about the company’s continued progress in bookings growth and solid guidance for the full year.
Neutral or equivalent outlook (10/20 firms): Per these firms, Cerner's industry is highly regulated by the government. With rapid evolution of product standards and requirements, any change in government regulation may have an adverse impact on Cerner's products. Moreover, as the government EHR program winds down, it is expected to create a significant headwind for Cerner. In fact, firms see limited upside to growth and margin expansion potential for Cerner in the near term. Furthermore, lack of traction with large services deals and lack of hospital incentives for large projects under new administration are indicative of the fact that Cerner’s top line would be affected in the near term. On th positive side, Cerner’s wide range of products and services, string of business wins, broad customer base and improving competitive position are the key catalysts at the moment. believe that the company’s prospects have improved following The Department of Veterans Affairs’ (VA) announcement to adopt CERN's EHR system.
Negative or equivalent outlook (0/20 firms):
Conclusion: The replacement market opportunities and considerable order wins outside the domestic market are encouraging factors. However, increasing competition is a major headwind for Cerner.
Overview[Note: Earnings update in progress; final report to follow]
Based in North Kansas City, MO, Cerner Corp (CERN) provides healthcare information technology (HCIT) solutions worldwide. It designs, develops, markets, installs, hosts and supports software information technology as well as content solutions for healthcare organizations and consumers. It offers software and hardware solutions that give healthcare providers secure access to clinical, administrative and financial data in a short time. The company organizes information for the specific needs of physicians, nurses, laboratory technicians, pharmacists, and other care providers, as well as for front and back office professionals.
Cerner operates under three main segments: System Sales; Support, Maintenance and Services; and Reimbursements
Firms identified the following factors for evaluating the investment merits of the company:
Key Positive Arguments / Key Negative Arguments- Cerner has a sizeable client base and broad product portfolio. The order win from McLeod is a key catalyst.
- The company has developed multiple sources of revenue that reduce product-specific risks.
- Cerner enjoys market share gains including the replacement market.
- Cerner has several meaningful growth drivers in its portfolio and technological platform to catalyze growth beyond the Meaningful Use stages.
- Cerner stands to gain considerably from the ongoing consolidations in the hospital business.
- Higher percentage of long-term contracts improves revenue visibility.
- The industry that Cerner operates in, is highly regulated by the government, and is currently undergoing a change due to the Federal Stimulus. Owing to the fast evolution of product standards and requirements, any change in government regulations may have an adverse impact on Cerner's products.
- Even with the Stimulus, hospital budgets are stringent and competition is rising, which is a headwind for Cerner.
- A growing proportion of low-margin services (versus higher-margin software, support and maintenance services) impede Cerner’s margin expansion.
Further information on the company is available at its website:
Note: The company’s fiscal year coincides with the calendar year.
Sep 19, 2017
Long-Term Growth[Note: Earnings update in progress; final report to follow]
Firms expect EPS growth of 14.8% over the next 5 years. Cerner forecasts double-digit growth through 2025, with more than 10% CAGR over the 2015-2025 period based on a larger base. Bullish firms believe that the target is achievable based on the expanding addressable market as well as robust growth expected from population health, financials, RevWorks, ITWorks and growing international penetration.
Cerner believes that the replacement market will remain active due to a higher number of hospitals on legacy platforms which open up significant growth prospects for the company. Management also noted that its products continue to gain market from competitors.
Cerner stated that most of the new electronic health record (EHR) clients selected the Revenue Cycle product as part of their purchase. Several large clients also chose Cerner’s acute Revenue Cycle and ambulatory business office services, especially during 2Q16. The company also made several client additions to the HealtheIntent platform.
Firms expect Cerner to continue to win market share buoyed by a robust performance by its population health platform. They also believe that continuing increase in the percentage of longer-term deals will improve revenue visibility.
Cerner also highlighted solid annual operating margin expansion beyond FY17 driven by lower operating expenses, growing higher margin business (population health) and expanding service businesses.
Cerner has one of the broadest product offerings in the growing HCIT market. It is well positioned to benefit from higher levels of IT spending across healthcare. Moreover, government regulations have helped drive the implementation of electronic healthcare records (EHR). Given the stiff spending environment in health care, bullish firms believe the company has advantages over its competitors as it helps manage IT expenses and increase customer productivity. According to these firms, the extensive services offering will provide the company with opportunities to expand its customer base.
Cerner’s primary customer base consists of large hospitals, which continue to acquire smaller competitors and physician groups. Acquired hospitals introduce new and higher likelihood selling opportunities. While a majority of the hospitals have implemented some form of EHR, firms believe that there are additional growth opportunities with new software functionality and further expansion into small and medium-sized hospitals.
Apart from the domestic market, Cerner has demonstrated an ability to win overseas contracts, which should be beneficial as more countries open up their healthcare sector. Though its international business is in the early stages of development, Cerner's portfolio of products and leadership in HCIT will likely create long-term growth opportunities.
Cerner is a member of the CommonWell Health Alliance which is a consortium supporting open, interoperable solutions in HCIT. To help drive the long-term value, data needs to be accessible broadly by doctors, testing labs, pharmacies and hospitals. The firms have a positive outlook on Cerner's efforts in this area and believe that an open system would ultimately benefit the company and the industry as a whole.
Sep 19, 2017
Target Price/Valuation[Note: Earnings update in progress; final report to follow]
Rating DistributionPositive / 50.00%
Neutral / 50.00%
Negative / 0.00%
Avg. Target Price / $68.86↑
High / $77.00
Low / $52.00↑
Upside from Current / 6.3%
No. of Analysts with Target Price/Total / 16/20
Risks to the target price include, but are not limited to, regulatory changes, particularly regarding patient information and privacy, reimbursement policies and payment rates; long sales and implementation cycles; strong competition in the HCIT market; decline in bookings growth with the weakening of Stimulus-era demand; decline in government stimulus funds; and lower-than-expected adoption of healthcare software.
Recent Events[Note: Earnings update in progress; final report to follow]
On Sep 5, Cerner announced the creation of an advisory group to provide insights and recommendations on the U.S. Department of Veterans Affairs (VA) Electronic Health Record Modernization (EHRM) program. The group comprises distinguished former government, military and private sector leaders.
On Aug 31, Cerner and HealthSouth Corporation collaborated to form a Post-Acute Innovation Center to develop enhanced tools to manage patients across the continuum of care.
On Aug 14, Cerner announced that MIT Medical adopted Cerner Millennium electronic health record platform. In addition to the Cerner Millennium EHR, MIT Medical will be implementing Cerner’s Healthelntent population health management platform.
On Jul 27, Cerner reported 2Q17 results. Highlights are as follows:
• Revenues increased 6.3% y/y to $1.3 billion
• Adjusted EPS increased 5.7% y/y to 56 cents.
Revenues[Note: Earnings update in progress; final report to follow]
According to the 2Q17 press release, revenues increased 6.3% year over year (y/y) to $1.3 billion. Geographically, domestic revenues increased 8% y/y to $1.16 billion, while non-U.S. revenues fell 5% to $136 million.
Provided below is a summary of total revenue as compiled by Zacks Digest:
Revenues ($ in M) / 2Q16A / 2016A / 1Q17A / 2Q17A / 3Q17E / 2017E / 2018E / 2019EDigest High / $1,216.0 / $4,796.5 / $1,260.5 / $1,292.0 / $1,300.4 / $5,216.0 / $5,670.0 / $6,173.0
Digest Low / $1,216.0 / $4,796.5 / $1,260.5 / $1,292.0 / $1,284.1 / $5,176.7 / $5,543.8 / $5,973.0
Digest Average / $1,216.0 / $4,796.5 / $1,260.5 / $1,292.0 / $1,292.8 / $5,199.9 / $5,614.8 / $6,104.2
Y/Y growth / 8.0% / 8.4% / 10.8% / 6.3% / 9.1% / 8.4% / 8.0% / 8.7%
Q/Q growth / 6.8% / 0.2% / 2.5% / 0.1%
Bookings Update: Bookings in the 2Q17 were $1.636 billion (an all-time high), up 16% y/y. Revenue Cycle has been a strong contributor to the company’s results, courtesy of strong sales and solid contribution from RevWorks services (revenue management services). Population Health service businesses also drove revenues in the second quarter on solid growth in the company’s flagship HealtheIntent solutions. The company also posted an impressive performance in the ambulatory and small hospital market.
Segment Details: System sales increased 4.4% to $347.8 million. Solid sales were buoyed by licensed software and subscriptions, partially offset by a decline in technology resale.
Total services revenues, including professional and managed services, rose 9% y/y to $917.4 million. This reflects solid execution by the company’s service organizations.
Support and maintenance revenues increased 1% in the quarter, slightly below the company’s full-year expected growth rate. Cerner expects growth in the band 3% to 4% at the segment for the rest of the year.
Balance Sheet Details: Cerner ended 2Q17 with $748 million in total cash and investments. Total debt for Cerner, including capital lease obligations, was $543 million.
Provided below is a summary of segment revenues as compiled by Zacks Digest:
Segment Revenues ($ in M) / 2Q16A / 2016A / 1Q17A / 2Q17A / 3Q17E / 2017E / 2018E / 2019ESystem Sales / $333.1 / $1,266.0 / $319.9 / $347.8 / $333.1 / $1,374.7 / $1,462.3 / $1,551.8
Support, Maintenance & Services / $860.8 / $3,442.0 / $918.2 / $917.4 / $936.0 / $3,731.2 / $4,064.7 / $4,503.5
Reimbursed Travels / $22.0 / $88.4 / $22.4 / $26.8 / $24.1 / $99.8 / $109.2 / $114.5
Guidance:
For 3Q17, Cerner forecasts revenues between $1.26 billion and $1.33 billion. The mid-point of the guided range reflects 7% y/y growth.
For FY17, Cerner reaffirmed its revenue guidance at the range of $5.15 billion to $5.25 billion, higher than the previously provided guidance.
Outlook: Most of the firms believe that total market opportunity for the core EMR business, revenue cycle, and IT Works are robust. They expect revenue growth to be driven by a revenue mix shift toward revenue cycle, IT Works and Population Health. They believe that the software business will grow modestly, driven by the opportunities in the EMR replacement market, improving penetration of Financials and strong traction in the ambulatory market.
These firms expect strong growth in content and subscriptions (attributable to population health offerings) and services (ITWorks and RevWorks), which will fully offset the modest growth in the software business. These firms also believe that Cerner will deliver consistent revenue growth due to strong bookings. They also believe that Cerner’s record backlog provides strong visibility.
Please refer to the Zacks Digest spreadsheet on CERN for further details on revenue estimates.
Margins[Note: Earnings update in progress; final report to follow]
According to the 2Q17 press release, gross margin in 2Q17 was 82.7% of revenues, down 40 basis points (bps) from a year ago. The decline was due to the lower mix of sublicensed software and lackluster performance by Cerner’s technology resale business.
Adjusted operating margin in 2Q17 was 23% of net sales, down 80 bps from a year ago.
Provided below is a summary of margins as compiled by Zacks Digest:
Margins / 2Q16A / 2016A / 1Q17A / 2Q17A / 3Q17E / 2017E / 2018E / 2019EGross / 83.1% / 83.8% / 84.2% / 82.7% / 83.8% / 83.5% / 83.9% / 84.2%
Operating / 23.8% / 23.6% / 22.8% / 23.0% / 23.6% / 23.5% / 24.0% / 24.7%
Pre-Tax / 24.0% / 23.8% / 22.8% / 23.2% / 23.8% / 23.7% / 24.1% / 24.6%
Net / 16.4% / 16.5% / 15.7% / 15.9% / 16.2% / 16.2% / 16.6% / 17.1%
For FY17, sales & client service, software development and general & administrative expenses are expected to increase 8.6%, 10.5% and 8.6%, respectively. However, the y/y growth rates are slower than the revenue growth rate of 10.6%.
For FY18, sales & client service and software development expenses are expected to increase 10.6% and 10.9%, respectively, higher than the revenue growth of 10.4%. However, general & administrative expenses are estimated to increase 1.4%, much slower than revenue growth.
Guidance:
While entering 2019 and 2020 the company expects favorable performances in the HealtheIntent and some of the other SaaS and cloud-based higher-margin models. Precisely, these platforms are expected to drive 50 basis points (bps) to 100 bps of operating margin. Per management, while starting fiscal 2019 and 2020, the company would see stellar margin growth.
Please refer to Zacks Digest spreadsheet on CERN for further details on margins.
Earnings per Share [Note: Earnings update in progress; final report to follow]
According to the 2Q17 press release, Adjusted EPS (including stock-based compensation) rose 5.7% y/y to 56 cents.
Provided below is a summary of EPS as compiled by Zacks Digest:
EPS / 2Q16A / 2016A / 1Q17A / 2Q17A / 3Q17E / 2017E / 2018E / 2019EDigest High / $0.58 / $2.30 / $0.59 / $0.61 / $0.63 / $2.53 / $2.85 / $3.10
Digest Low / $0.58 / $2.30 / $0.59 / $0.61 / $0.62 / $2.48 / $2.70 / $2.99
Digest Average / $0.58 / $2.30 / $0.59 / $0.61 / $0.62 / $2.51 / $2.77 / $3.06
Y/Y growth / 11.5% / 8.9% / 11.4% / 5.2% / 5.5% / 8.9% / 10.4% / 10.5%
Q/Q growth / 9.5% / -3.1% / 3.4% / 2.0%
Guidance: For 3Q17, adjusted EPS (before share-based compensation expense and acquisition-related adjustments) are now expected in the range of 61 cents to 63 cents.
For FY17, adjusted EPS (before share-based compensation and acquisition-related adjustments) are expected in the band of $2.46 to $2.54, compared to the previously estimated range of $2.44 and $2.56.
Please refer to the Zacks Digest spreadsheet on CERN for further details on EPS.
Analyst / Sreyoshi MukherjeeEditor
Lead Analyst / Nabaparna Bhattacharya
QCA / Urmimala Biswas
Reason for Update / 1Q18Earnings FlashUpdate
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