Shares of Cerner Corp CERN fell 3.6% ($2.52) in after-hours trading, after the company slashed its full-year 2015 revenue guidance following unimpressive second-quarter results.
Although adjusted earnings of 48 cents per share (including stock-based compensation) were in line with the Zacks Consensus Estimate, revenues of $1.13 billion lagged the consensus mark of $1.19 billion. The revenue figure also fell below management’s guided range of $1.18 billion to $1.23 billion.
Adjusted earnings per share (EPS) advanced almost 30% on a year-over-year basis driven by 32.2% growth in revenues. However, on a reported basis, earnings declined 10.8% year over year to 33 cents in the quarter.
Quarter Details
Core Cerner revenues were $866 million, while Siemens Health Services contributed $260 million. The revenue miss in the quarter can be primarily attributed to lower services revenues (year-over-year decline in third-party services and limited hiring) and higher number of long-term booking contracts. Reimbursed travel revenues plunged 37.8% to $18.1 million in the quarter.
Meanwhile, system sales increased 34.3% year over year to $315.1 million, supported by strong growth in subscriptions on higher recurring revenue from Siemens Health Services and licensed software. Total services revenue, including professional and managed services, was up 30% year over year backed by higher contribution from Health Services as well as growth in core Cerner managed services.
Support, maintenance and service revenues improved 34.8% to $792.8 million, riding on strong growth in core support and maintenance along with higher contribution from Health Services.
Bookings increased 20% year over year to an all-time high of $1.29 billion. Backlog surged 37% from the year-ago quarter to $13.3 billion. Bookings included 38 large contracts worth over $5 million, of which 23 deals were valued at over $10 million. Long-term bookings comprised 35% of total bookings in the quarter.
Cerner noted that 34% of the bookings came from customers who are not Millennium users, reflecting the company’s improving competitiveness and a market that presents growth opportunities through product replacements.
Domestic revenues increased 30% year over year to $995 million, while international revenues surged 54% to $131 million. The rise in international revenues was primarily supported by higher Health Services revenues.
Gross margin expanded 200 basis points (bps) on a year-over-year basis to 82.9%, primarily owing to favorable business mix.
Sales & client service and Software development expenses, as a percentage of revenues, increased 90 bps each on a year-over-year basis. Also, general and administrative expenses rose 570 bps to 12%.
Financial Position
As of Jul 4, 2015, Cerner had cash and cash equivalents (including short-term and long-term investments) of $856.6 million, which decreased from $888.7 million as of Apr 4, 2015, due to negative free cash flow.
In the second quarter of 2015, free cash outflow stood at $46 million primarily due to lower operating cash flow, which totaled $109 million, from $214 recorded in the first quarter. The decline resulted from expenses related to voluntary separation plans and lower collections owing to delayed billings.
Outlook
For the third quarter of 2015, Cerner forecasts revenues between $1.15 billion and $1.2 billion. The mid-point of the guided range reflects 40% year-over-year growth. The company also projects new business bookings between $1.35 billion and $1.45 billion.
Adjusted EPS (before share-based compensation expense, voluntary separation plan expense and acquisition-related adjustments) is expected in the range of 54 cents to 55 cents. At mid-point, this reflects 30% growth on a year-over-year basis. Share-based compensation expense is expected to impact EPS by roughly 3–4 cents in the third quarter.
Cerner slashed its full-year 2015 revenues guidance range to $4.475–$4.575 billion from $4.65–$4.8 billion. At mid-point, this reflects 33% growth on a year-over-year basis.
Adjusted EPS is now forecasted in the $2.09 to $2.15 range as compared to the earlier band of $2.07–$2.15. At mid-point, this reflects 28% growth on a year-over-year basis. Share-based compensation expense is expected to impact EPS by roughly 14–15 cents in 2015.
Management expects combined operating margin to be close to the 2014 level, better than the original expectation of over 200 bps of decline.
Our Take
We believe Cerner’s strong product portfolio will help it to win customers in the rest of 2015 and beyond. The recent contract wins from Catholic Health Initiatives, University of Missouri (MU) and Baptist Health South Florida reflect growing traction.
Cerner is the core EHR supplier in the consortium that recently won the Defense Healthcare Management System Modernization (DHMSM) project. The group, led by Leidos Holdings LDOS, has notable companies like Accenture ACN, Henry Schein HSIC and Intermountain Healthcare on board. The deal will significantly help Cerner to expand its footprint going forward.
Moreover, Cerner has growth opportunities in the revenue cycle management (RCM) and ambulatory market based on its product strength and enviable track record. Additionally, growing percentage of higher margin software in the business mix is expected to drive margins going forward.
However, the HCIT market is highly competitive, which exerts 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.
Currently, Cerner carries a Zacks Rank #3 (Hold).
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