Cerner Earnings Rise but In Line with Estimates - Analyst Blog

Cerner Corporation CERN revealed a 9.7% rise in earnings per share to 34 cents for the first quarter of 2014 from 31 cents in the comparable quarter of 2013. However, earnings were flat compared with the Zacks Consensus Estimate. Net earnings rose 8.6% to $119.5 million from $110.0 in the first quarter of 2013.

Revenues

Revenues in the quarter grew 15.4% to $784.8 million, marginally exceeding the Zacks Consensus Estimate of $783 million. The increase can be attributed to stronger revenues from Support, maintenance and services, Reimbursed Travel, and System sales. Global revenues went down 16% due to tough comparables.

Revenues from System Sales revenues rose 3.9% to $206.7 million, Support, Maintenance and Services went up 19.5% to $557.4 million, and from Reimbursed Travel escalated 41.7% to $20.6 million.

Bookings revenues grew 14% to all-time high of $910.2 million, despite weak technology resale. The company did not record any new ITWorks or RevWorks deals in the quarter, but benefited from scope expansions at existing ITWorks clients and good sales of Revenue Cycle solutions. For the quarter, the company recorded 23 contracts valuing over $5 million, including 13 over $10 million.

Bookings margin in the quarter was $824 million or 91% of total bookings. This led to a 22% rise in total backlog to $9.24 billion. Of the total backlog, contract revenue backlog was $8.45 billion, up 24% from the year-ago level, while support revenue backlog was $796 million, up 6% year-over-year.

First quarter days sales outstanding were 66 days, a decline from 69 days in the first quarter of 2013.

Margins

Gross margin for the quarter was 83.5%, up 220 basis points (bps) from 81.3% in the prior-year quarter due to strong software and subscription levels and a lower mix of technology resale.

However, operating margin in the quarter dipped 30 bps to 22.7% from 23.0% in the 2013-first quarter, due to increase in operating expenses.

Financial Status

CERN had cash and cash equivalents of $219.9 million as of Mar 29, 2014, up 8.7% from $202.4 million as of Dec 28, 2013. Total long-term debt and capital lease obligations declined 3.2% to $160.5 million as of Mar 29, 2014 compared with $165.8 million as of Dec 28, 2013.

In the quarter, cash flow from operating activities ebbed 27.1% to $155.8 million from $213.6 million in the 2013-quarter. Capital expenditure soared 40.9% to $69.7 million compared with $49.5 million a year ago. As a result, free cash flow plunged 68.0% to $41.6 million from $129.9 million in the 2013-first quarter.

In December last year, CERN's Board of Directors approved authorization of stock repurchase of up to $217 million of the company's common stock. Out of that, the company has repurchased 1.3 million of shares for roughly $75 million during the quarter, leading to $142 million worth of remaining shares under the program.
 
Outlook

For the second quarter of 2014, CERN anticipates revenues between $790 and $830 million while adjusted earnings are expected between 36 and 37 cents per share, including share based compensation expense. These compared with the Zacks Consensus Estimates of $807 million 37 cents for revenues and earnings per share, respectively for the quarter.

The leading healthcare information technology (“HCIT”) solutions provider also expects new business bookings between $1 billion and $1.06 billion for the quarter.

For full year 2014, CERN upgraded revenue guidance to the range of $3.25 to $3.40 billion from the prior range of $3.20 to $3.40 billion. Adjusted earnings are also expected to be higher at $1.52–$1.55, compared with the prior range of $1.51 to $1.55, including share-based compensation expense. These compared with the Zacks Consensus Estimates of $3.3 billion and $1.54 for revenues and earnings per share, respectively for the year.

For 2014, CERN expects capital expenditures between $260 million and $280 million, down from $353 million in 2013. It also expects capitalized software to remain in the mid-$40 million range throughout the year.

Our Take

Currently, CERN retains a Zacks Rank #3 (Hold). We believe long-term investors may consider CERN, which serves a sizeable installed hospital base that requires composite clinically-oriented applications complying with “meaningful use” needs, reimbursement difficulties and coding challenges. The company has long-standing, integrated and seamless solutions for both inpatient and ambulatory settings.

However, competition is fierce with well reputed names such as Allscripts Healthcare Solutions, Inc. MDRX, athenahealth, Inc. ATHN, Quality Systems Inc. QSII . The intensity of competition may pressure both pricing and margin. Stringent hospital budgets place further pressure on pricing.