Cerner Management Discusses Q4 2011 Results - Earnings Call Transcript

Cerner (CERN)

Q4 2011 Earnings Call

February 07, 2012 4:30 pm ET

Executives

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

Zane M. Burke - Executive Vice President

Michael R. Nill - Chief Operating Officer

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

Analysts

Jamie Stockton - Morgan Keegan & Company, Inc., Research Division

George Hill - Citigroup Inc, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Sebastian Paquette - Goldman Sachs Group Inc., Research Division

Donald Hooker - Morgan Stanley, Research Division

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

Ryan Daniels - William Blair & Company L.L.C., Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to Cerner Corporation's Fourth Quarter 2011 Conference Call. Today's date is February 7, 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, perspective, prospects, constitute forward-looking statements for the purpose of the Safe Harbor provisions of the Private Security and 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, including the company's earnings release. A reconciliation of non-GAAP financial measures disclosed in this earnings call can be found in the company's earnings release filed with the SEC and available at www.sec.gov and posted on the company's website at www.cerner.com. Under the About Cerner section, click Investor Relations then presentations and webcast. At this time, I'd like to turn the call over to Mr. Marc Naughton, Chief Financial Officer of Cerner Corporation. Please proceed.

Marc G. Naughton

Thank you, Derrek. 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 Nill, Executive Vice President and Chief Operating Officer, will discuss our works businesses and 2012 imperatives. 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, is traveling today.

Now I'll turn to our results. Our strong fourth quarter results capped off a record year across all key measures. Bookings were very strong and exceeded the high-end of our guidance range. Our income statement performance was excellent, with revenue and adjusted EPS above expected levels due to [ph] continued margin expansion and strong earnings growth, and we had very strong cash flow performance.

Moving to the details, our total bookings revenue in Q4 was a record $899 million. Bookings exceeded the high-end of our guidance range by more than $200 million and were up 44% from Q4 of '10. Bookings margin in Q4 was $755 million or 84% of total bookings. For the full year, bookings revenue was $2.72 billion, up 37% from 2010. As Zane will discuss, the strength of business in Q4 spanned across all business models and included 2 ITWorks contracts and 1 RevWorks contract. Our bookings performance drove a 24% increase in total backlog to $6.11 billion. Contract revenue backlog of $5.4 billion is 26% higher than a year ago. Support revenue backlog totaled $706 million, up 8% year-over-year. Revenue in the quarter was $615.6 million, which is up 23% over Q4 of '10. The revenue composition for Q4 was $220 million in system sales, $142 million in support and maintenance, $242 million in services, $11 million in reimbursed travel. The upside relative to our guidance was largely driven by higher system sales and strong services. For the full year, revenue grew 19% to $2.2 billion.

System sales revenue reflects 34% growth from Q4 of '10. This was driven by strong growth in licensed software, subscriptions and device resale with the growth in these items slightly offset by flat levels of traditional hardware and sublicensed software. For the full year, system sales revenue grew 28%.

Services revenue was up 24% compared to Q4 of '10 and 20% for the full year with strong growth in both managed services and professional services. Support and maintenance revenue increased 7% over Q4 of '10 and 6% for the full year.

Looking at revenue by geographic segment, domestic revenue increased 21% year-over-year to $524 million. Global revenue was $92 million and grew 35% compared to the year ago period. For the full year, domestic revenue grew 21% to $1.89 billion and global revenue grew 7% to $309 million. As a preview to the annual update of our detailed business model that we'll provide at our Investment Community Meeting on February 22, I'd like to provide you with the total revenue and growth by business model for the full year 2011.

Licensed software grew 21% to $325 million. Technology resale was up 39% to $246 million, driven by growth in device resale. Subscriptions and transactions increased 28% to $136 million. Professional services revenue grew 21% to $550 million. Managed services increased 20% to $351 million. Support and maintenance was up 6% to $551 million and reimbursed travel was $45 million, up 38%. We'll go into more business model detail at our Investment Community Meeting.

Moving to gross margin, our gross margin for Q4 was 78.6%, which is basically flat compared to 78.9% in Q3 and down compared to 81% a year ago. The year-over-year decline in gross margin was driven by the strong levels of technology resale that I discussed, as well as an increase in third-party services. For the full year, gross margin was 80%.

As we've noted in the past, while revenue mix can impact gross margins in any given period, we continue to drive operating margin expansion as I'll discuss in a moment. Looking at operating spending, our fourth quarter operating expenses were $337.8 million before share-based compensation expense of $8 million. Total operating expense was up 15% compared to Q4 of '10 with the majority of the growth driven by an increase in revenue generating associates in our services business. For the full year, operating expenses were $1.27 billion, up 11% from 2010. This compares to revenue growth for the year of 19%, reflecting strong operating efficiencies. Sales and client service expenses increased 19% compared to Q4 of '10, and 13% for the full year, driven primarily by growth in managed services and professional services. Our investment in software development increased 4% compared to Q4 of '10, and 5% for the full year. We expect to continue growing our R&D investments in coming years to accelerate innovation in areas Mike and Jeff will discuss. We expect to be able to do this with R&D still growing slower than revenue, so we maintain the leverage we have achieved from our R&D investments.

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