Oracle CEO warns Cerner EHR business facing 'near-term' headwinds for revenue growth

Oracle shares fell 13% Tuesday as the software giant's near-term revenue forecast was weaker than Wall Street analysts expected.

The company, which acquired health IT company Cerner a year ago, brought in revenue of $12.45 billion in its fiscal 2024 first quarter ending August 31. Revenue was up 9% year-over-year but analysts were expecting the company to bring in $12.47 billion in the quarter, CNBC reported.

The company reported earnings per share for the quarter of $1.19 per share.

For the second quarter, Oracle is forecasting adjusted net income of $1.30 to $1.34 per share and 5% to 7% revenue growth. Analysts polled by LSEG had predicted $1.33 in adjusted earnings per share and $13.28 billion in revenue, which implies 8% revenue growth.

Oracle's total cloud revenue, including the Cerner business, was $4.6 billion during the quarter, up 30%. But growth in its cloud business slowed from 54% the prior quarter. Excluding Cerner, Oracle's cloud revenue came to $4 billion, CEO Safra Catz told investors during the company's earnings call Monday.

The company did not separately break out revenue for the Cerner EHR business.

Catz also warned investors about near-term weakness in Cerner's revenue growth. "We are in an accelerated transition of Cerner to the cloud. This transition is resulting in some near-term headwinds to the Cerner growth rate as customers move from licensed purchases, which are recognized upfront, to cloud subscriptions, which are recognized relatively," she said during the earnings call.

Oracle is working to “drive Cerner profitability to Oracle standards," she said.

"On the expense side, we still have a ways to go, but I think it will become more obvious to you next quarter, the changes we've made, as they play out through the income statement more clearly," she told investors Monday. "We're always looking to save as much as we can and to spend as little while still really transforming Cerner into a modern system in its entirety."

"We continue to believe high single-digit growth might be unsustainable for Oracle given Cerner integration risks and formidable data center competition," Gil Luria, a DA Davidson analyst forecasted, according to Reuters' reporting.

Oracle bought Cerner for $28 billion in June 2022 to push deeper into the healthcare market, and the database giant is betting big that the acquisition will help scale up its cloud business.

But, Oracle Cerner customers in the healthcare industry continue to have reservations about the future of the EHR company, citing the lack of a concrete road map, according to a March report from KLAS Research. Analysts at KLAS Research have spoken with Oracle Cerner customers in the past year and found that CIOs are concerned about the company's vision.

Two big health systems, Intermountain Healthcare and UPMC, recently announced they are transitioning from Oracle Health's Cerner EHR to rival Epic across their health systems.

During Monday's earnings call, Oracle technology chief and Chairman Larry Ellison told investors and analysts that the Cerner health business expects to be awarded "two large new contracts with a total value of over $1 billion."

"Our cloud applications business is doing quite well, and it's about to get even better," Ellison said.

A year ago, when Oracle, known for its database software, announced it planned to acquire Cerner, Ellison touted plans to modernize Cerner's Millennium EHR platform with updated features such as voice interface, more telehealth capabilities and disease-specific AI models.

"I'll talk about the progress on taking the existing Millennium, Cerner software, and moving it to a new Millennium. We're basically rewriting that software a piece at a time. By the way, it's not going to be a big rip and replace at all. There's a two-phase process with Cerner," Ellison said Monday. "The first thing is to get the lift and shift and get the existing system hardened, which we've done, and moving the customers to the cloud, which we're in the process of moving everybody to the cloud. That will give them better performance, better security, and new features will then start showing up with the system. And so, there's a two-phase shift to the cloud. We're well on our way."

He added, "The next is to replace feature after feature after feature of the older Cerner system with a new Cerner system, new Millennium, which we are not coding in Java like we usually do. The new Cerner system is being generated, as you know, generative AI generates code. We have an application generator called APEX. And we are not writing code for the new Cerner; we are generating that code in APEX, and it's going extremely well."

He noted that Oracle is not using "armies of programmers" to rewrite and modernize the Cerner EHR platform. "We are generating the new Millennium software using APEX, and that's also going to save us a lot of human labor and generate higher-quality code and higher-quality user interfaces and better security, all at once," he said. "On the business side of things, we think the Cerner business is going to get stronger and stronger."


Oracle has been working to catch up to other cloud vendors such as Amazon Web Services, Google and Microsoft.

The company's cloud services and license support segment brought in $9.55 billion in revenue, up 13% year over year. Revenue from cloud infrastructure totaled $1.5 billion in the quarter, up 66% but slowed from the 76% growth in the prior quarter.

"As of today, AI development companies have signed contracts to purchase more than $4 billion of capacity in Oracle's Gen2 Cloud," Ellison said in a statement. "That's twice as much as we had booked at the end of Q4. The largest AI technology companies and the leading AI startups continue to expand their business with Oracle for one simple reason—Oracle's RDMA interconnected NVIDIA Superclusters train AI models at twice the speed and less than half the cost of other clouds."

The company is focused on expanding cloud capacity in anticipation of a demand surge. "Because we have far more demand than we can supply, our biggest challenge is building data centers as quickly as possible,” Catz told investors during the earnings call.

Healthcare AI requires massive amounts of training data, including EHR and imaging data, Ellison noted. "We think this is very good for our database business. And Oracle's new vector database will contain highly specialized training data like electronic health records while keeping that data anonymized and private yet still training the specialized models that can help doctors improve their diagnostic capability and their treatment prescriptions for cancer and heart disease and all sorts of other diseases. So, we think it's a boon to our business, and we are now getting into the deep water of the information age," he told investors.

In previous earnings calls, Ellison told analysts and investors that he expects the company to continue making headway in healthcare with its applications and artificial intelligence capabilities. Oracle executives touted the company's collaborations in the AI space, specifically with a focus on generative AI and large language models.

"Is generative AI the most important new computer technology ever? Maybe. We're about to find out," Ellison said during Monday's call.