Cerner Reports Huge Jump in Q4 Bookings
Former Recommended List selection Cerner (CERN, $77.38, -1.58) delivered Q4 results that topped Wall Street’s expectations for both revenues and profits last night, but what really caught the attention of investors was a huge jump in Q4 bookings. The healthcare IT company’s bookings blew away its own guidance and leant credence to the notion that stimulus money is starting to translate into real business.
Bookings in the fourth quarter of 2009 were a record $680 million, up 68% from $405 million in Q4 2008. Full-year 2009 bookings were a record $1.83 billion, up 19% from the prior year.
Management had guided for bookings to be in the range of $425 to $475 million in Q4. Its guidance included $150 million from two big deals that were previously announced with Tenet Healthcare (THC, $5.08, -0.07) and Universal Health Services (UHS, $30.87, 0.63). The company actually booked $200 million from those two contracts, plus another $50 million from a third large deal for its ITWorks product that management didn’t anticipate heading into the quarter. ITWorks is a suite of services targeted at hospital IT departments.
More eye-popping, however, was that even if you factor in the extra $100 million of unexpected upside into the guidance, which would have brought the upper end of the range to $575 million, Cerner topped that number by more than $100 million. The company’s book-to-bill ratio for the quarter was 2.02, the highest since 1.57 in 2007.
“Even without these three large contracts, our bookings would have been within our guidance range, which is reflective of the broad strength in the quarter,” CFO Marc Naughton noted.
The company also said that 36% of bookings came from outside of its core base of customers that have installed its Millennium product, which management views as a strong indicator of Cerner’s competitive position.
As for the reported results, Kansas City, Missouri-based Cerner said its net profit for the quarter ended January 2nd, 2010, equaled $60.5 million, or 71 cents per share, which was down from $71.5 million, or 86 cents per share, in the year-ago period. On an adjusted basis that excludes one-time and non-cash charges, Cerner posted EPS of 75 cents, which was better than the 72 cents that analysts were forecasting.
Sales also came in above the consensus. Cerner reported revenues of $466.3 million, up slightly from $465.7 million last year and better than the $451.2 million analysts were expecting. Revenues benefited from $29 million in catch-up revenue from past work in Britain and an extra week in the quarter.
Q4 sales were comprised of $172 million in system sales, $123 million in support and maintenance, $164 million from services, and $7 million in reimbursed travel expenses. System sales revenue grew by 45% compared to Q3 and 16% year over year, with record levels of software offsetting a decline in hardware sales, the company said.
Services revenue, which includes managed services and professional services, was down -4% compared to an unadjusted Q4 ‘08 and up 9% after adjusting for the U.K. catch-up revenue and the extra week. The improvement stemmed from strong growth in managed services, with professional services down slightly year over year.
“As we have discussed, the lower professional services revenue during 2009 has been driven by a lower billable head count in the U.S., lower services revenue in the U.K., and the weak economy,” Naughton said, but he predicted professional services revenue would rebound in 2010 “due to strong bookings in the second half of 2009 and a strong outlook related to stimulus activity.”
Geographically, the domestic business was the driver as sales grew by 18% to $401 million. International sales of $65 million declined by -48% compared to an unadjusted Q4 2008 and -31% after accounting for the U.K. catch-up. Cerner also booked some unusually high systems sales overseas last year. On a normalized basis, international revenues would have been off about -10%, Naughton told analysts.
“Regardless, it’s still a disappointing but not entirely unexpected level of global performance,” he said. “As we have indicated throughout 2009, our global revenue has been impacted by a very difficult global economy (but) we remain optimistic that our global business will rebound and resume being a contributor to our growth.”
On the cost side, operating expenses grew by 6% year over year and 9% sequentially to $289.2 million, excluding another $4.6 million non-cash expense for stock compensation, which accounted for the lower profit despite the higher revenue. Full-year operating expenses were flat compared to the prior year. The biggest culprit was foreign currency headwinds, which pushed up general and administrative costs by $10 million, or 45%, year over year. G&A costs were up by $4 million, or 14%, from Q3.
“Almost all of the $10-million year-over-year increase in G&A is due to reduced gains related to foreign currency. The sequential increase was primarily driven by property taxes and profit sharing expenses,” Naughton explained.
Looking ahead, the company guided for Q1 revenue in the range of $420 to $435 million; full-year sales are expected to range from $1.8 billion to $1.875 billion.
Adjusted EPS, which excludes stock compensation expense, should come in between 57-62 cents per share. Analysts were looking for EPS of 62 cents. Full-year earnings guidance was for EPS of $2.80 to $2.90 versus the consensus of $2.84.
Q1 bookings are expected to range from $380 million to $410 million.
BMR Take: The company’s Q4 bookings surprised everybody, including us. The obvious question, and analysts asked, was why didn’t the strong bookings translate into a more robust earnings and revenue forecast? The company’s guidance points to growth of 10% for revenues and 17% for EPS. It certainly wouldn’t be a shabby performance, but the numbers look conservative and management conceded that they could well be. Management’s explanation is that revenue recognition from some of these contracts can stretch out over periods of years, in some cases as many as seven. Thus, the bookings base provides a solid foundation for future growth but isn’t an immediate propellant.
Cerner’s stock jumped early on the news, pushing as high $82.50 in the morning session before retreating into negative territory. The company deserves kudos for the strong bookings numbers and it should continue to benefit from the stimulus pipeline, but we still think the stock is fully valued at these levels.
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