Cerner Corp CERN recently reported third-quarter 2015 financial numbers with both the top and the bottom line missing the Zacks Consensus Estimate. Further, the company’s preliminary full-year 2016 guidance failed to impress investors, the combined effect of which led to a 9.7% ($6.39) decline in the company’s shares in after-hours trading.
Adjusted earnings of 50 cents per share (including stock-based compensation) missed the Zacks Consensus Estimate by a penny. Revenues of almost $1.13 billion also lagged the consensus mark of $1.17 billion. The revenue figure also fell below management’s guided range of $1.15 billion to $1.20 billion.
However, adjusted earnings advanced almost 28.2% on a year-over-year basis driven by 34.2% growth in revenues. Excluding stock-based compensation, earnings surged 28.6% year over year to 54 cents in the quarter.
Quarter Details
Core Cerner revenues totaled $877 million, while Siemens Health Services contributed $250 million. The revenue miss in the quarter can be primarily attributed to lower-than-expected upfront software revenues on some large contracts and lower technology resale revenues. Reimbursed travel revenues declined 16.8% to roughly $19 million in the quarter.
Meanwhile, system sales surged almost 45% year over year to $325.1 million, supported by strong growth in subscriptions on higher recurring revenues 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 32.2% to $783.9 million, riding on strong growth in core support and maintenance along with higher contribution from Health Services.
Bookings improved 44% year over year to an all-time high of $1.59 billion. Backlog rose 36.3% from the year-ago quarter to $13.9 billion. Bookings included 45 large contracts worth over $5 million, of which 31 deals were valued at over $10 million. Long-term bookings comprised 31% of total bookings in the quarter.
Cerner noted that 39% 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.
Gross margin contracted 20 basis points (bps) on a year-over-year basis to 83.1%, primarily owing to unfavorable business mix (higher low margin tech resale revenues in third-quarter 2015).
Sales & client service and Software development expenses, as a percentage of revenues, increased 10 bps and 20 bps on a year-over-year basis, respectively. Also, general and administrative expenses rose 100 bps to 8.8%.
Outlook
For the fourth quarter of 2015, Cerner forecasts revenues between $1.15 billion and $1.2 billion. The mid-point of the guided range reflects 27% year-over-year growth. The company also projects new business bookings between $1.45 billion and $1.55 billion.
Adjusted earnings (before share-based compensation expense, voluntary separation plan expense and acquisition-related adjustments) are now expected in the range of 56 cents to 58 cents. At mid-point, this reflects 21% growth on a year-over-year basis. Share-based compensation expense is likely to impact earnings by roughly 3–4 cents in the fourth quarter.
The fourth-quarter revenue guidance projects full-year revenues in the range of $4.400– $4.450 billion, lower than the company’s guided range of $4.475–$4.575 billion. At mid-point, this reflects almost 30% growth on a year-over-year basis.
For full-year 2016, Cerner projects revenues of over $5 billion, at least 13% improvement over full-year 2015. Adjusted diluted earnings before share-based compensation and acquisition-related adjustments is expected to be in the band of $2.30 to $2.40 per share, representing almost 13% growth over 2015.
Cerner currently expects approximately 75% of full-year revenues to come from backlog, which is higher than the past levels.
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), Baptist Health South Florida, McLaren Health Care and Geisinger Health System reflect growing traction.
Cerner is the core EHR supplier in the consortium that 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 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.
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 affect margins. Meanwhile, stringent hospital budgets exert further pressure on pricing.
Currently, Cerner carries a Zacks Rank #3 (Hold).
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