Cerner Beats on Q2 Earnings by a Penny, Upgrades 2014 View

Cerner Corporation (CERN) posted a 15.6% year-over-year rise in earnings per share to 37 cents for the second quarter of 2014 from 32 cents in the comparable quarter of 2013 and beat the Zacks Consensus Estimate by a penny. Net earnings rose 14.3% to $129.0 million from $112.9 million in the second quarter of 2013.

Cerner Corporation - Earnings Surprise | FindTheBest

Revenues

Revenues in the quarter grew 20.4% to $851.8 million, exceeding the Zacks Consensus Estimate of $810 million. The increase can be attributed to stronger revenues from all the businesses. Domestic revenues rose 24% in the quarter. Global revenues continue to fall. It was down 4% in the quarter mainly due to the timing of a couple of global contracts.

Revenues from System sales revenues rose 17.0% to $234.6 million driven by solid gains in software and technology resale. System sales margin grew 19% in the quarter, driven by continued strong software sales.

Support, maintenance and services went up 20.9% to $588.2 million, driven by strong growth in managed services and professional services. Revenues from Reimbursed Travel escalated 42.2% to $29.0 million.

Second quarter days sales outstanding were 66 days, a decline from 68 days in the comparable quarter of 2013.

Bookings

Bookings revenues grew 15% to all-time high of $1.08 billion. Bookings margin was $980 million or 91% of total bookings.

CERN’s bookings performance led to a 21% increase in total backlog to $9.7 billion. Contract revenue backlog increased 23% to $8.9 billion from the year-ago level. Support revenue backlog went up 7% to $806.6 million in the quarter.

Margins

Gross margin for the quarter was 80.9%, down 130 basis points (bps) from 82.2% in the prior-year quarter due to higher level of third party services to support a significant number of systems.

Operating earnings rose 15.1% to $191.6 million from $166.5 million in the year-ago quarter. Operating margin in the quarter dipped 100 bps to 22.5% from 23.5% in the 2013-second quarter, due to increases in third party services and reimbursed travel revenues.

Financial Status

CERN had cash and cash equivalents of $315.3 million as of Jun 28, 2014, significantly up by 55.8% from $202.3 million as of Dec 28, 2013. Total long-term debt and capital lease obligations declined 6.3% to $155.4 million as of Jun 28, 2014 compared with $165.8 million as of Dec 28, 2013.

In the first half of the year, cash flow from operating activities improved 3.6% to $404.1 million from $390.2 million in the 2013-first half. Capital expenditure ebbed 2.2% to $132.0 million compared with $135.0 million in the year-ago period. As a result, free cash flow rose 4.6% to $185.4 million from $177.3 million in the 2013-period.

In December last year, CERN’s board of directors approved authorization of stock repurchase of up to $217 million of the company’s common stock. Thereafter, in May this year, CERN authorized the repurchase of up to an additional $100 million of its common stock.

In the second quarter of 2014, CERN repurchased 2.8 million shares for roughly $142 million, bringing its year-to-date repurchase to 4.1 million shares for an investment of $217 million. With this, the company has exhausted the approved share repurchase authorization in December of 2013. However, CERN still has an additional $100 million worth of shares remaining under the approved authorization in May.

Outlook

For the third quarter of 2014, CERN anticipates revenues between $840 and $870 million, the midpoint of which implies a growth of 17% over the 2013-quarter. Adjusted earnings are expected between 38 and 39 cents per share, including share based compensation expense. These compared with the Zacks Consensus Estimates of $834 million 39 cents for revenues and earnings per share, respectively for the quarter.

The leading healthcare information technology (“HCIT”) solutions provider also expects 2014-third quarter new business bookings between $1 and $1.1 billion, the mid-point of which reflects a 13% growth over the prior-year quarter.

For full year 2014, CERN upgraded revenues guidance to the range of $3.3 to $3.4 billion from the prior range of $3.25 to $3.4 billion. Adjusted earnings are also expected to be higher at $1.64–$1.67, compared with the prior range of $1.63 to $1.67, excluding share based compensation expense (which is expected to be 11 to 12 cents for the full year). These compared with the Zacks Consensus Estimates of $3.3 billion and $1.54 for revenues and earnings per share, respectively for the year.

For 2014, CERN expects capital expenditures between $260 and $280 million, down from $353 million in 2013. It also anticipates capitalized software to remain in the mid-$40 million range per quarter throughout the year, which is flat or modestly higher than $175 million capitalized 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). The intensity of competition may pressure both pricing and margin. Stringent hospital budgets place further pressure on pricing.

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