Cerner (CERN)

Q1 2012 Earnings Call

April 26, 2012 4:30 pm ET


Marc G. Naughton - Chief Financial Officer, Executive Vice President and Treasurer

Zane M. Burke - Executive Vice President of Client Organization

Michael R. Nill - Chief Operating Officer and Executive Vice President

Jeffrey A. Townsend - Chief of Staff and Executive Vice President


David Larsen - Leerink Swann LLC, Research Division

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

George Hill - Citigroup Inc, Research Division

Kipp R.F. Davis - Barclays Capital, Research Division

Steve Halper

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Donald Hooker - Morgan Stanley, Research Division

Atif A Rahim - JP Morgan Chase & Co, Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division



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Good day, ladies and gentlemen, and welcome to Cerner Corporation's First Quarter 2012 Conference Call. Today's date is April 26, 2012, and this call is being recorded. The company has asked me to remind you that various remarks made here today by Cerner's management about future expectations, plans, prospectives and prospects constitute forward-looking statements for the purpose of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading risk factors under Item 1A in Cerner's Form 10-K, together with other reports that are on file with the SEC. A reconciliation of non-GAAP financial measures discussed in this earnings call can be found in the company's earnings release that was furnished to the SEC today and posted on the investors section of At this time, I'd like to turn the call over to Mr. Marc Naughton, Chief Financial Officer of Cerner Corporation. Please proceed, sir.

Marc G. Naughton

Thank you, Anne. Good afternoon, everyone, and welcome to the call. I'll lead off today with a review of the numbers. Zane Burke, Executive Vice President of our Client Organization will follow me with sales highlights and marketplace trends. Mike Neal, Executive Vice President and Chief Operating Officer will discuss operations. Mike will be followed by Jeff Townsend, Executive Vice President and Chief of Staff, who will discuss strategic initiatives. Neal Patterson, our Chairman, CEO and President will be available during Q&A.

Now I'll return to the results. We delivered strong results in the first quarter with all key metrics above our expected levels. Bookings exceeded the high end of our guidance range. Our income statement performance was excellent, with revenue and adjusted EPS well above expected levels and continued margin expansion and strong earnings growth. We also had very strong cash flow performance.

Moving to the details. Our total bookings revenue in Q1 was $652 million, which is a record for a first quarter. Bookings exceeded the high-end of our guidance range by more than $50 million and were up 24% from Q1 of 2011. Bookings margin in Q1 was $529 million or 81% of total bookings. As Zane will discuss, the strength of bookings in Q1 spanned across all business models and included a new ITWorks contract. Our bookings performance drove a 22% increase in total backlog to $6.27 billion. Contract revenue backlog of $5.57 billion is 25% higher than a year ago. Support revenue backlog totaled $704 million, up 6% year-over-year. Revenue in the quarter was $641.2 million, which is up 30% over Q1 of '11. The revenue composition for Q1 was $226 million in system sales, $146 million in support and maintenance, $258 million in services, and $11 million in reimbursed travel. The upside relative to our guidance was largely driven by higher system sales, but service revenues was also very strong.

System sales revenue reflects 61% growth from Q1 of '11. This was driven by strong growth in software and subscriptions and especially strong growth in device resale and traditional hardware resale. Services revenue was up 23% compared to Q1 '11, with strong growth in both managed services and professional services. Support and maintenance revenue increased 11% over Q1 of '11.

Looking at revenue by geographic segment. Domestic revenue increased 32% year-over-year to $554 million, and global revenue was $87 million and grew 23% compared to the year-ago period.

Moving to gross margin. Our gross margin for Q1 was 75.4%, which is down from 78.6% in Q4 and 81.6% in Q1 of '11. The decline in our gross margin percentage was driven by the very strong levels of device and hardware resale that I discussed, which impacted the mix of system sales. While the gross margin percentage for the quarter was lower, total dollars of gross margin grew 21% from the year ago period and total margin from system sales grew 32%, driven by the strong growth in software and subscription.

As we've noted in the past, while revenue mix can impact our gross margin percentage in any given period, we continue to drive operating margin expansion and strong earnings growth as I'll discuss in a minute.

Looking at operating spending, our first quarter operating expenses were $346.8 million before share-based compensation expense of $8.9 million. This is an increase of 16% compared to Q1 of '11. Sales and client service expenses increased 22% compared to Q1 of '11, driven by an increase in revenue generating associates in our services business. Our investment in software development was flat compared to the year ago period. We've been hiring in our R&D organization this year and expect our R&D investments to grow throughout the rest of 2012, but the growth will still be moderate compared to expected revenue growth.

G&A expense increased 12% compared to Q1 of '11, driven by personnel and other expenses related to an increase in hiring and training.

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