Cerner Q1 2010 Earnings Call Transcript

Cerner Q1 2010 Earnings Call Transcript
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Cerner (CERN)

Q1 2010 Earnings Call

April 28, 2010 4:30 pm ET

Executives

Jeffrey Townsend - Chief of Staff and Executive Vice President

Marc Naughton - Chief Financial Officer, Senior Vice President and Treasurer

Michael Valentine - Chief Operating Officer and Executive Vice President

Neal Patterson - Co-Founder, Chairman and Chief Executive Officer

Earl Devanny - President

Analysts

Corey Tobin - William Blair & Company L.L.C.

Michael Cherny - Deutsche Bank AG

Atif Rahim - JP Morgan Chase & Co

Richard Close - Jefferies & Company, Inc.

Charles Rhyee - Oppenheimer & Co. Inc.

George Hill - Leerink Swann LLC

Greg Bolan - Wells Fargo Securities, LLC

Sean Wieland - Piper Jaffray Companies

Presentation

Operator

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Previous Statements by CERN
» Cerner Corp. Q4 2009 Earnings Call Transcript
» Cerner Corporation Q3 2009 Earnings Conference Call
» Cerner Corporation Q2 2009 Earnings Call Transcript

Welcome to the Cerner Corp.'s First Quarter 2010 Conference Call. [Operator Instructions] The company has asked me to remind you that various remarks made here today by Cerner's management about future expectations, plans, perspectives and prospects constitute forward-looking statements for the purpose of the Safe Harbor provisions of the Security and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning the 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 filed with the SEC.

At this time, I would like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corp. You may proceed.

Marc Naughton

Thanks, Teanna. Good afternoon, everyone. Welcome to the call. I will lead off today with a review of the numbers. Mike Valentine, Executive Vice President and Chief Operating Officer, will follow me with sales and operational highlights and marketplace trends. Then Trace Devanny, our President, will discuss our global business. Trace will be followed by Jeff Townsend, Executive Vice President and Chief of Staff, who will discuss innovation and our long-term strategic direction. Neal Patterson, our chairman and CEO, will join us for Q&A.

Now I will turn to our results. Q1 represented a solid start to the year with all key measures at or above expected levels. Our bookings were the high end of our guidance range and an all-time high for the quarter. Our income statement performance was good with revenue at the high end of our guidance range and strong margin expansion driving earnings upside. Our cash flow performance was also strong, with record levels of free cash flow.

Moving to the details, our total bookings revenue in Q1 was $405 million, which is 22% higher than Q1 '09 bookings, and an all-time high for a first quarter. Bookings margin was $340 million or 84% of total bookings revenue. The bookings margin percentage is lower than the 89% bookings margin percent in Q1 of '09 despite very strong year-over-year growth in Software bookings. This is due to lower margins on Technology Resale bookings, and a lower percentage of total bookings coming from Managed Services, which have 100% bookings margin.

Our total backlog increased 21% year-over-year to $4.32 billion. Contract revenue backlog of $3.7 billion is 24% higher than a year ago. Support revenue backlog totaled $626 million, up 7% year-over-year.

Our revenue in the quarter was $431.3 million, which is up 10% year-over-year and was at the high-end of expected levels. The revenue composition for Q1 was $117 million in System sales, $127 million in Support and Maintenance, $180 million in Services and $7 million in Reimbursed Travel.

Systems sales revenue reflects growth of 17% compared to Q1 '09, with strong software growth offsetting a decline in Hardware revenue. Note that within the Hardware revenue, we had our best quarter to date of device resale. The declines in Traditional Hardware more than offset this.

Traditional Hardware revenue continues to be impacted by the success of our Managed Services offering and lower prices of Data Center Hardware. We are encouraged by the trend of device resale and believe it will continue to grow as a contributor to top line, particularly given the CareFusion agreement Mike will discuss.

Services revenue, which includes Managed Services and Professional Services, was up 13% compared to Q1 '09. This growth reflects continued strong growth in Managed Services and return to growth of Professional Services, which was driven by increased implementation activity coming out of our strong Q4 bookings.

Our Support and Maintenance revenue increased 2% over Q1 '09. As we discussed last year, Support and Maintenance revenue growth has been impacted by the shifting of Services revenue that's previously treated as support to Professional Services, as part of our transition to working with BT [British Telecom] instead of Fujitsu in the southern region of England.

Maintenance revenues has been impacted by lower levels of technology resale, with many existing clients on Hardware Support switching to our hosting option. Additionally, Support revenue has been impacted by a limited amount of software growth in the first three quarters of 2009, and the limited annual CPI [Consumer Price Index] increases. We expect Support growth to improve by the second half of 2010 based on the improved Software bookings in the past two quarters and the good outlook for Software sales.

Looking at revenue by geographic segment, our Domestic revenue increased by 10% to $355 million. Global revenue was $76 million, which also reflects a 10% increase and is a good start to the year after a tough 2009.

Moving to gross margin. Our gross margin for Q1 was 84.2%, which is up 90 basis points year-over-year and 120 basis points sequentially. Our system sales margin was up 320 basis points year-over-year due to the improved Software levels. System Sales margins were down sequentially, largely due to lower Technology Resale margins and an expected decline in software from Q4 record levels to Q1.

Looking at operating spending. Our Q1 operating expenses were $282.1 million before share-based compensation expense of $5.5 million. This is up 8% compared to a year ago.

Sales and client services expenses were up 8% compared to Q1 '09, driven primarily by growth in Managed Services and a higher level of bad debt expense. Software development expense was up 3% compared to Q1 '09, reflecting continued control of this expense volume.

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