Cerner (CERN) Misses Q3 Earnings & Revenue Estimates

Cerner Corp CERN reported adjusted third-quarter 2016 earnings of 55 cents per share, which missed the Zacks Consensus Estimate by a penny. Also, earnings improved 10% on a year-over-year basis.

The company reported net revenues of $1.185 billion, missing the Zacks Consensus Estimate of $1.246 billion. Notably, third-quarter 2016 revenue is $15 million, below the guidance range provided earlier by the company.

Of late, market sentiments have not been very encouraging for the company as it represents a negative one-year return of 13.24%, comparing unfavorably with the S&P 500’s approximately 1% over the same time frame.

Quarter Highlights

Cerner registered lower bookings in the quarter, totaling $1.434 billion. However, the quarter marked the second highest bookings for the company. Notably, bookings totaled $16 million, below the low end of the company’s guidance and down almost 10% on a year-over-year basis.

Revenue Cycle was a strong contributor to the company’s results, courtesy of strong sales, inclusion in new EHR deals and solid contribution from RevWorks services (revenue management services) in the quarter. In this platform, Cerner has displaced more than 10 different competitors in the market so far this year.

Coming to the Population Health platform, the company’s flagship HealtheIntent solution were sold to over 100 clients and currently the company has over 300 data connections from more than 80 unique sources.

The company also witnessed an impressive performance in the ambulatory and the small hospital market.

Quarter in Detail

System sales decreased 7.3% year over year to $301.2 million, with technology resale declining 21% and licensed software falling 12%.

Total services revenue including professional and managed services surged 13% from the year-ago quarter. This is in line with management’s guided range and reflects solid execution by the company’s service organizations.

Due to lower equipment maintenance revenues as a result of technology resale, Support and maintenance revenues increased 3%.

Geographically, domestic revenues increased 6% over the year-ago quarter to $1.06 billion and non-U.S. revenues were flat year over year at $130 million.

Margin Details

Gross margin in the reported quarter expanded a notable 150 basis points, totaling 84.6%, courtesy of the lower mix of technology resale and improving service margins.

Adjusted operating expenses were $713 million, up 8% on a year-over-year basis. The rise was fueled by increasing ‘personnel expense’ which is reflected by the 10% year-over-year hike in sales and client service expenses.

As a percentage of revenues, sales and client services expanded 200 bps to 43.3%, however, both software development and general and administrative expenses contracted 20 and 140 bps, respectively.

Balance Sheet

Cerner had a total backlog of $15.471 billion, up 11% on a year-over-year basis.

Cerner ended the third quarter of 2016 with $837 million of total cash and investments, compared with $720 million in the second quarter. Total debt for Cerner, including capital lease obligations, totaled $573 million. Operating cash flow for the quarter was $240 million, down from $272 million in the year-ago quarter.

Guidance

For fourth-quarter 2016, Cerner forecasts revenues between $1.225 billion and $1.300 billion. The mid-point of the guided range reflects 7% year-over-year growth.

Cerner expect booking revenues in the band of $1.425 billion to $1.575 billion and the midpoint reflects 11% growth.

Adjusted earnings are now expected in the band of 60 cents to 62 cents. At mid-point, this remains flat on a year-over-year basis.

For full-year 2016, Cerner revised down its revenue guidance to the range of $4.9 billion to $5 billion, reflecting 12% improvement over full-year 2015. The decline resulted from lower hardware revenues in the first half of 2016.

Adjusted diluted earnings are still projected in the band of $2.30 to $2.40 per share, representing almost 11% growth over 2015.

For full-year 2017, management expects revenues between $5.200 billion and $5.450 billion, with the midpoint of this range reflecting growth of 11%. Notably, Cerner currently forecasts 2017 adjusted earnings in the band of $2.50 and $2.70 per share, with the midpoint portraying 13% growth on a year-over-year basis.

Our Take

We believe Cerner’s strong product portfolio will help it win customers in the rest of 2016 and beyond. The company has growth opportunities in the revenue cycle management (RCM), Population Health and ambulatory market based on its product strength and enviable track record. Additionally, the 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. Meanwhile, stringent hospital budgets exert further pressure on pricing.

Zacks Rank & Key Picks

Currently, Cerner has a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader medical sector are Intuitive Surgical Inc. ISRG, AngioDynamics Inc. ANGO and Glaukos Corporation GKOS.

Notably, all the stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intuitive Surgical has a long-term expected earnings growth rate of approximately 11.35%. The stock represents an impressive one-year return of roughly 33.04%.

AngioDynamics has a long-term expected earnings growth rate of 15.00%. The company posted a solid one-year return of almost 25.7%.

Glaukos Corporation recorded a stellar one-year return of almost 63.1%. Notably, the company posted positive surprises in the past four quarters, the average being 110.93%.

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