Cerner (CERN) Q1 Earnings in Line, FY16 View Maintained

Cerner Corp CERN reported a decent first quarter of 2016, the primary highlight being a booking miss due to tough year-over-year comparisons. However, the company maintained its full-year revenue and earnings guidance based on continuing customer wins, suggesting strong demand across its entire product portfolio.

Cerner reported adjusted earnings of 49 cents per share (including stock-based compensation), which were in line with the Zacks Consensus Estimate but increased 16.74% on a year-over-year basis driven by 14.3% growth in revenues.
 

Excluding stock-based compensation, earnings surged 17.8% year over year to 53 cents in the quarter, in line with the mid-point of management's guided range of 52 cents to 54 cents.

Meanwhile, revenues of almost $1.14 billion missed the consensus mark of $1.17 billion as well as management's guided range of $1.15 billion to $1.20 billion. The miss was primarily due to lower hardware sales.

Quarter Details

System sales increased 7.6% year over year to $279.4 million, supported by strong growth in subscriptions on higher recurring revenues from Siemens Health Services and licensed software.

Total services revenue, including professional and managed services, was up 20% on a year-over-year basis to $589 million. Support and maintenance revenues improved 10% to $251 million.

In the first quarter, bookings decreased 2% year over year to of $1.17 billion, which was within management's guided new business bookings range of $1.15 billion to $1.25 billion. The year-over-year decline was primarily due to tough comparisons, as the long-term bookings in the year-ago quarter were 37%, an all-time record for the company.

In the last quarter, long-term bookings comprised 24% of total bookings. Cerner noted that bookings included 43 large contracts worth over $5 million, of which 18 deals were valued at over $10 million.

Cerner stated that non long-term bookings grew 18% from the year-ago quarter primarily driven by continued client addition like Universal Health Services UHS. In the first quarter, 36% of bookings came from outside the company's core Millennium installed base.

In this regard, management expects the replacement market to remain strong over the next two to three years, which will provide Cerner ample opportunities to win contracts at the cost of its competitors.

Backlog increased 12% from the year-ago quarter to $14.6 billion.

Gross margin expanded 150 basis points (bps) on a year-over-year basis to 84.6%, primarily driven by favorable business mix and strong services revenues. Notably, system sales margin expanded a massive 300 bps to 68.1% in the quarter.

Operating expenses (including share-based compensation expense and acquisition related adjustments) increased 19% to $701 million, driven by personnel expenses related to revenue generating associates, higher non-cash expenses and an extra month of Health Services expenses in the last quarter as compared to the year-ago quarter.

Operating margin (excluding stock-based compensation and amortization adjustments) contracted 70 bps to 23%, in line with management expectations.

Outlook

For the second quarter of 2016, Cerner forecasts revenues between $1.175 billion and $1.25 billion. The mid-point of the guided range reflects 8% year-over-year growth. Management expects revenue growth to be higher in the third quarter, which is an easier comparable period than the second quarter.

Cerner also projects new business bookings between $1.35 billion and $1.48 billion. At mid-point, this reflects 10% growth on a year-over-year basis.

Adjusted earnings (before share-based compensation expense and acquisition-related adjustments) are now expected in the range of 56 cents to 58 cents. At mid-point, this reflects 10% growth on a year-over-year basis.

For full-year 2016, Cerner reiterated its revenue guidance at the range of $4.9 billion to $5.1 billion, reflecting 13% improvement over full-year 2015. Adjusted diluted earnings, before share-based compensation and acquisition-related adjustments, are expected in the band of $2.30 to $2.40 per share, representing almost 11% growth over 2015.

Cerner expects capital expenditures to increase in 2016, primarily due to construction of a new campus. The company still expects to generate solid free cash flow.

Our Take

We believe Cerner's strong product portfolio will help it to win customers in the rest of 2016 and beyond. The company has growth opportunities in the revenue cycle management (RCM) and ambulatory market based on its product strength and enviable track record. Additionally, growing percentage of higher margin software in the business mix is expected to drive margins.

However, the HCIT market is highly competitive, which exerts considerable pressure on both pricing and margins. Moreover, a growing proportion of low-margin services and technology resale may affect margins. Meanwhile, stringent hospital budgets exert further pressure on pricing.

Zacks Rank & Key Picks

Currently, Cerner carries a Zacks Rank #4 (Sell).

Better-ranked stocks in the same space include Medidata Solutions MDSO and Quality Systems QSII. Both the stocks carry a Zacks Rank #2 (Buy).

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