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Cerner Corporation Underwhelms in the Fourth Quarter

Cerner Corporation's (NASDAQ: CERN) third-quarter results announced in October were just so-so. Although the healthcare technology company reported both revenue and earnings increases, the performance wasn't impressive. However, management projected a little better growth for the fourth quarter.

So when Cerner provided its fourth-quarter update after the market closed on Tuesday, investors were eager to find out if the company was able to deliver better results. However, it again underwhelmed. Here are the highlights from Cerner's fourth-quarter performance.

Physician holding tablet with healthcare icons displaying in foreground.
Physician holding tablet with healthcare icons displaying in foreground.

Image source: Getty Images.

Cerner results: The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Sales

$1.31 billion

$1.26 billion

4.2%

Net income from continuing operations

$336.7 million

$149.7 million

125%

Adjusted diluted earnings per share (EPS)

$0.58

$0.61

(5.2%)

Data source: Cerner.

What happened with Cerner this quarter?

First, the bad news. In its third-quarter update, Cerner projected fourth-quarter revenue between $1.3 billion and $1.35 billion. The company delivered, but just barely. However, Cerner's actual adjusted earnings per share in the fourth quarter fell below its guidance of $0.60 to $0.62. Even worse, adjusted EPS declined from the prior-year period.

The good news was that Cerner posted a huge increase in GAAP net income in the fourth quarter. There is a catch, though. Nearly all of the improvement stemmed from an income tax benefit of $115 million compared to an income tax expense of $66 million in the prior-year period. The fourth-quarter tax benefit included Cerner's current estimates of the impact of U.S. tax reform enacted in December 2017.

Perhaps the best news, though, was that Cerner recorded bookings in the fourth quarter of $2.329 billion. That's an all-time high, and it reflects a year-over-year increase of 62%. Bookings represent the amount of prospective revenue from contracts signed but not yet implemented. Cerner's sales backlog at the end of the fourth quarter stood at $17.55 billion, up 10% over the prior-year period.

The company reported operating cash flow of $348.9 million during the fourth quarter. The company generated free cash flow during the period totaling $185.1 million. As of Dec. 31, 2017, Cerner had a cash position of $805.8 million, including cash, cash equivalents, and short-term investments.

What management had to say

Cerner president Zane Burke put a positive spin on the company's fourth-quarter performance. He said:

We finished the year on a mostly positive note, with record bookings and all other key metrics except for earnings in line with our expectations. Our bookings were at record levels across several key areas, including population health, Cerner ITWorksSM, and revenue cycle, and also included strong contributions from outside of the U.S. We believe the strong bookings in the fourth quarter combined with our robust pipeline and strong competitive position sets us up for solid growth in 2018 and beyond.

Looking forward

How is the current quarter shaping up? Cerner expects first-quarter 2018 revenue between $1.315 billion and $1.365 billion. That reflects roughly 7% year-over-year growth at the mid-point of the range. The company also projects first-quarter adjusted diluted EPS between $0.57 and $0.59. In the same quarter of 2017, Cerner reported adjusted diluted EPS of $0.59.

As for full-year 2018, Cerner projects revenue between $5.45 billion and $5.65 billion. That translates to year-over-year growth of around 8% at the mid-point of the range. However, the full-year revenue guidance was a little lower than the company's preliminary outlook provided three months ago. Full-year 2018 adjusted diluted EPS is expected to come in between $2.57 and $2.73, an 11% increase from 2017.

Investors will certainly want to watch to see what changes new CEO Brent Shafer might make. Shafer took the helm on Feb. 1, 2018. He previously served as CEO of Philips North America, part of Dutch technology company Koninklijke Philips NV. Shafer helped Philips increase profitability and expand market share -- just what Cerner shareholders would love to see in the years ahead.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Cerner. The Motley Fool has a disclosure policy.

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