Cerner Management Discusses Q2 2012 Results - Earnings Call Transcript

Cerner (CERN)

Q2 2012 Earnings Call

July 26, 2012 4:30 pm ET

Executives

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

Analysts

Charles Rhyee - Cowen and Company, LLC, Research Division

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

George Hill - Citigroup Inc, Research Division

Zachary William Sopcak - Morgan Stanley, Research Division

Andrew O'Hara

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Michael Cherny - ISI Group Inc., Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

Nicholas Juhle - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Good day, ladies and gentlemen. Welcome to Cerner Corporation's Second Quarter 2012 Conference Call. Today's date is July 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, perspectives and prospects constitute forward-looking statements within the meaning of the Federal Securities Laws. Information concerning words intended to identify such forward-looking statements and factors that could cause actual results to differ materially from those in the forward-looking statements may be found under the heading Risk Factors in Cerner's Form 10-K, together with other reports that are furnished to or filed with the SEC.

Please see the company's earnings release that was furnished to the SEC today and posted on the Investors section of cerner.com for a discussion of the risks associated with forward-looking statements, as well as a reconciliation of non-GAAP financial measures discussed in this earnings call.

The company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

At this time, I'd like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation. Please proceed.

Marc G. Naughton

Thank you, Melanie. Good afternoon, everyone. 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 operations and provide an update on our corporate imperatives. Jeff Townsend, Executive Vice President and Chief of Staff; and Neil Paterson, our Chairman, CEO and President are traveling today. Now I will turn to our results.

We delivered strong results in the second quarter. Bookings were above the midpoint of our guidance range. Our income statement performance was good, with revenue at the top end of our guidance range and continued margin expansion, driving strong earnings growth. We also delivered very strong cash flow performance.

Moving to the details. Our total bookings revenue in Q2 was $701 million, which is a record for our second quarter. Bookings were above the midpoint of our guidance range and were up 8% from a very strong result in Q2 '11 when bookings grew 39%. Bookings margin in Q2 was $577 million, or 82% of total bookings. As Zane will discuss, the strength of bookings in Q2 span across several business models and included a new ITWorks contract.

Our bookings performance drove a 20% increase in total backlog to $6.51 billion. Contract revenue backlog of $5.8 billion is 22% higher than a year ago. Support revenue backlog totaled $714 million, up 5% year-over-year. Revenue in the quarter was $637.4 million, which is up 22% over Q2 of '11. The revenue composition for Q2 was $195 million in system sales, $150 million in support and maintenance, $276 million in services and $16 million in reimbursed travel.

System sales revenue reflects 24% growth from Q2 '11. This was driven by continued strong growth in device resale, traditional hardware resale and subscriptions. Software revenue was down slightly, in part related to a lower percent of current quarter software bookings being recognized as revenue in the quarter because of contract terms that result in revenue being spread over a longer period. This is obviously a positive long-term, and the impact on this quarter was more than offset by strong services, which demonstrates the strength and diversity of our overall business model. As Zane will discuss, our pipeline and outlook for the second half of the year is very strong.

Moving to services, total services revenue was up 27% compared to Q2 of '11, with strong growth in both managed services and professional services. Support and maintenance revenue increased 9% over Q2 of '11.

Looking at revenue by geographic segment, domestic revenue increased 25% year-over-year to $562 million. Global revenue was $76 million and grew 2% compared to the year-ago period.

Moving to gross margin. Our gross margin for Q2 was 76.9%, which is up from 75.4% in Q1 and down from 81.2% in Q2 of '11. Similar to the last quarter, the year-over-year decline in our gross margin percent was driven primarily by very strong levels of device and hardware resale. While the gross margin percent for the quarter was lower, total dollars of gross profit grew 15% from the year-ago period, and total margin dollars from system sales is up 15% year-to-date.

As we have 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 moment.

Looking at operating spending, our second quarter operating expenses were $345.2 million before share-based compensation expense of $8.6 million. This is an increase of 11% compared to Q2 of '11. Sales and client service expenses increased 15% compared to Q2 '11, driven by an increase in revenue-generating associates in our services business. Sales and client service expenses were down slightly sequentially, with salary expense growing less than expected due to timing of new hires, and this growth being offset by a sequentially lower other personnel and non-personnel expense.

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