Services Rather Than Software Drive Cerner's 3rd-Quarter Growth
Cerner Corporation (NASDAQ: CERN) topped expectations the last time it reported quarterly results in August. Strong growth for its professional-services business made a key contribution to the healthcare-technology provider's success. But after a weaker first quarter, the big question for the company was whether or not it could keep the momentum going.
That question was answered on Thursday. Cerner announced its third-quarter results after the market closed. This time around, the company didn't beat expectations but didn't fall short of them, either. Here are the highlights from Cerner's third-quarter update.
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Cerner results: The raw numbers
Metric | Q3 2018 | Q3 2017 | Year-Over-Year Change |
|---|---|---|---|
Sales | $1.34 billion | $1.28 billion | 4.7% |
Net income from continuing operations | $169.4 million | $177.4 million | (4.5%) |
Adjusted earnings per share (EPS) | $0.63 | $0.61 | 3.3% |
Data Source: Cerner.
What happened with Cerner this quarter?
Cerner's sales for the third quarter were close to the low end of its guidance range of $1.335 billion to $1.385 billion. The company continued to experience solid growth with its professional-services and managed-services businesses. Professional-services revenue increased 13.9% year over year, to $456.7 million, while managed-services revenue jumped 14.8%, to $302 million.
However, Cerner also had a couple of glaring weak spots in the third quarter. Licensed-software revenue fell 3.2% year over year, to $139.9 million. Subscriptions revenue plunged 35.4% from the prior-year period, to $79.1 million.
In addition, the company posted a drop in GAAP net income from the third quarter of 2017. The decline would have been worse, but Cerner's third-quarter 2018 income taxes were significantly lower than the prior-year period. The reason for the lower GAAP net income is simple: Cerner's spending grew faster than its revenue did.
Cerner's expenses increased across the board. The biggest percentage jump came from general and administrative expenses, which were 22% higher than the prior-year period. However, the largest dollar increase in spending came from sales and client service -- $41.3 million greater than the same quarter of 2017.
The company still managed to eek out a slight year-over-year boost in adjusted earnings per share (EPS), though. This small increase stemmed primarily from adjusting out higher share-based compensation expense than Cerner reported in the prior-year period.
Cerner also reported third-quarter bookings of $1.588 billion, a strong 43% jump from the same quarter last year. The company's total backlog stood at $14.7 billion, slightly below the $14.79 billion backlog at the end of the second quarter of 2018.
What management had to say
Cerner Chief Client Officer John Peterzalek stated:
Our third quarter results were solid, with all key metrics in our expected ranges. We remain optimistic about our ability to continue delivering solid results and good growth over the long term as healthcare is still in the early stages of driving value from digitization. We believe we are in a great position to play a significant role in helping healthcare stakeholders move toward a more efficient and higher quality system of care.
Looking forward
Perhaps the best news from Cerner's third-quarter update was that the company expects fourth-quarter revenue between $1.37 billion and $1.42 billion. The midpoint of the range reflects a 6% year-over-year increase. Achieving this midpoint also would enable the company to beat the midpoint of the full-year 2018 guidance range that it provided earlier this year.
Cerner also anticipates fourth-quarter adjusted EPS between $0.62 and $0.64. This reflects a 9% increase at the midpoint from the prior-year period. Hitting this mark would bring Cerner's full-year adjusted EPS to $2.46, within the company's full-year guidance range.
One important thing to watch in the days ahead is Cerner's decision on who will replace Zane Burke as president of the company. Cerner announced in September that Burke would step down effective Nov. 2, 2018. Burke joined Cerner in 1996 and served as president since 2013.
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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.
