Cerner Corporation (CERN) reported adjusted net earnings of $128.1 million or 36 cents per share for the fourth quarter of 2013, topping the Zacks Consensus Estimate of 34 cents per share. This reflected a 14.6% rise from $111.8 million and 12.5% from 32 cents in the comparable quarter a year ago.
However, reported net earnings fell 46.3% to $60.1 million from $111.8 million in the fourth quarter of 2012 while earnings per share dipped 46.9% to 17 cents from 32 cents in the year-ago quarter.
Q4 Revenues
Revenues in the quarter grew roughly 12% to $795.3 million, exceeding the Zacks Consensus Estimate of $793 million. Global revenues went up 8% for the quarter. The increase can be attributed to stronger revenues from Support, maintenance and services and Reimbursed Travel, partially offset by weaker revenues from System sales.
Segment wise, revenues from System sales dipped 2.4% to $245.8 million. However, Support, maintenance and services revenues rose 19.3% to $531.1 million and Reimbursed Travel revenues went up 36.4% to $18.4 million.
Bookings revenues grew 9% to all-time high of $1.1 billion. Bookings margin was $975 million or 88% of total bookings.
Total backlog increased 23% to $8.9 billion, which comprised of $8.1 billion of contract backlog and $786.0 million of support and maintenance backlog. Bookings performance led to a 23% increase in total backlog.
Full Year Earnings and Revenues
For full year 2013, adjusted earnings per share rose 16.8% to $1.32 from $1.13 a year ago and surpassed the Zacks Consensus Estimate of $1.30. Adjusted net earnings escalated 17.4% to $466.4 million from $397.2 million in 2012. However, reported earnings were almost flat at $398.4 million or $1.13 per share during the year.
Revenues in the year grew 9.2% to $2.9 billion, driven by rise in Support, maintenance and services and Reimbursed Travel revenues, partially offset by a fall in revenues from System sales. Revenues were in line with the Zacks Consensus Estimate during the year. Global revenues were up 11% for the year. Bookings revenues were $3.77 billion, up 20% over 2012.
Margins
Gross margin for the quarter was 82.1%, up 370 basis points (bps) from 78.4% in the prior-year quarter due to record software levels and a lower mix of technology resale. For 2013, gross margin was 82.3%, up 510 bps from 77.2% in 2012, also driven by record software and lower technology resale.
Operating margin in the quarter was 25.6% (before share-based compensation expense and the settlement charge), up 160 bps from the prior-year quarter. For the full year, operating margins increased 220 basis points to 25.1% due to a combination of ongoing operating efficiencies, fall in lower margin technology revenues and strength in software.
Financial Status
CERN had cash and cash equivalents of $202.4 million as of Dec 28, 2013, down from $317.1 million as of Dec 29, 2012. Total debt declined to $165.8 million as of Dec 28, 2013 compared with $196.1 million as of Dec 29, 2012. Consequently, debt-to-capitalization ratio decreased 150 bps to 5.0% from 6.5% as of Dec 29, 2012.
In 2013, cash flow from operating activities ebbed 1.8% to $695.9 million from $708.3 million in 2012. But capital expenditure soared 92.4% to $352.9 million compared with $183.4 million a year ago. As a result, free cash flow plunged 60.4% to $168.3 million from $424.7 million in 2012.
In December 2013, CERN’s Board of Directors approved authorization of stock repurchase of up to 217 million of the company’s common stock.
Outlook
For the first quarter of 2014, CERN anticipates revenues between $770 and $810 million while adjusted earnings are expected between 33 and 34 cents per share, after share based compensation expense. These compared with the Zacks Consensus Estimates of $774 million 34 cents for revenues and earnings per share for the quarter.
The leading healthcare information technology (“HCIT”) solutions provider also expects new business bookings between $860 and $930 million for the quarter.
For full year 2014, CERN anticipates revenues in the range of $3.2 to $3.4 billion. Adjusted earnings are expected between $1.51 and $1.55, after share based compensation expense. These compared with the Zacks Consensus Estimates of $3.3 billion and $1.54 for revenues and earnings per share for the year.
For 2014, CERN anticipates stronger free cash flow, driven by growth in operating cash flow, a decline in capital expenditures and flat-to-slightly-higher capitalized software. The company expects average capital expenditures in the range of $65 to $70 million per quarter, versus about $90 million in 2013.
Our Take
Currently, CERN retains a Zacks Rank #3 (Hold). We believe long-term investors may consider CERN, which serves a sizeable installed hospital base that requires composite clinically-oriented applications complying with “meaningful use” needs, reimbursement difficulties and coding challenges. The company has long-standing, integrated and seamless solutions for both inpatient and ambulatory settings.
However, competition is fierce with well reputed names such as Allscripts Healthcare Solutions (MDRX), athenahealth (ATHN), Quality Systems (QSII) and others. The intensity of competition may pressure both pricing and margin. Stringent hospital budgets place further pressure on pricing.
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