Cerner Corp (CERN) reported adjusted earnings per share (EPS) of 44 cents in the fourth quarter of 2014, which beat the Zacks Consensus Estimate by a penny. On a year-over-year basis, EPS surged an impressive 158.8% driven by strong bookings and revenue growth.
Quarter Details
Revenues in the quarter grew 16.4% year over year to $926 million and surpassed the Zacks Consensus Estimate by $19 million. The upside can be attributed to stronger revenues from system sales and services.
System sales rose 14% year over year to $280.3 million, supported by strong growth in technology resale and software revenues. Support, maintenance and services revenues escalated 18.3% to $628.3 million, riding on strong growth in professional services, managed services and ITWorks.
Reimbursed Travel revenues, however, dipped 5.3% to $17.5 million in the quarter.
Bookings revenues grew 5% year over year to an all-time high of $1.16 billion. Cerner’s bookings performance led to a 19% increase in total backlog to $10.6 billion. Total backlog comprised $9.79 billion in contract revenue backlog and $826 million in support and maintenance backlog.
Booking margin in the fourth quarter was 85% of total bookings.
Gross margin contracted 80 basis points (bps) year over year to 81.3%, primarily owing to higher level of tech resale and third-party services compared to the year-ago quarter.
Sales and client service expenses, as a percentage of revenues, expanded 30 bps year over year to 40.5%, primarily driven by a continued increase in revenue generating associates in Cerner’s services businesses.
Software development expenses, as a percentage of revenues, remained almost flat with the year-ago level at 11.5%. General and administrative expenses declined 58% year over year to $66 million in the quarter under review.
Operating earnings grew nearly 145% year over year to stand at $205.3 million, supported by reduced operating expenses.
Financial Position
As of Jan 3, 2015, Cerner had cash and cash equivalents of $635.2 million, higher than $496.5 million as of Sep 27, 2014. Total long-term debt and capital lease obligations (including current installments) declined to $130.3 million from $146.8 million as of Sep 27, 2014.
In the fourth quarter of 2014, free cash flow stood at $100.2 million, in stark contrast to a cash outflow of $41.7 million in the prior-year quarter. Cerner expects to continue generating strong free cash flow in 2015.
Outlook
For the first quarter of 2015, Cerner anticipates revenues between $1.05 billion and $1.1 billion. The company also projects first-quarter new business bookings between $1.05 billion and $1.15 billion.
Adjusted EPS (before share-based compensation expense and acquisition-related adjustments) are expected in the range of 44–45 cents. Share-based compensation expense is expected to reduce EPS by roughly 3–4 cents in the first quarter of 2015.
For full-year 2015, Cerner projects revenues between $4.8 billion and $5 billion. Adjusted EPS is forecasted in the $2.05–$2.15 band. Share-based compensation expense is expected to impact EPS by roughly 14–16 cents in 2015.
Our Take
We are impressed with Cerner’s strong bookings, revenue and earnings growth posted in the fourth quarter. The recent close of the Siemens Health Services acquisition is expected to significantly enhance Cerner’s capabilities by expanding its range of solutions and services and non-U.S. growth opportunities.
We believe that Cerner is well positioned for growth in 2015 and beyond, driven by a strong pipeline and new business opportunities.
However, the HCIT market is highly competitive, which puts considerable pressure on both pricing and margins. Moreover, a growing proportion of low-margin services and technology resale may further affect margins. Meanwhile, stringent hospital budgets exert further pressure on pricing.
Zacks Rank
Currently, Cerner carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the medical information systems industry include Allscripts Healthcare Solutions (MDRX), athenahealth (ATHN) and Medidata Solutions (MDSO). All these stocks carry a Zacks Rank #2 (Buy).
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