Cerner begins search for new CEO as company ups 2021 earnings guidance buoyed by improved margins

Cerner has started searching for a new CEO to replace Brent Shafer, who has led the health IT giant for three years.

Shafer and Cerner's board made a joint decision to initiate the process of finding the company's next CEO, the company announced Wednesday during its first-quarter 2021 earnings call.

Shafer plans to serve as chairman and CEO until the board has identified and appointed a successor to provide a smooth and orderly transition, after which he will serve as a senior advisor for one year.

Shafer was the first CEO after long-time company leader Neal Patterson passed in 2017. Patterson, who co-founded Cerner, served as CEO and chairman for 38 years. As a healthcare technology leader, Shafer joined Cerner with the mission of getting the business operationally turned around and on a trajectory for growth.

"The board believes that now is the right time to identify a successor to [Shafer] who will lead Cerner through its next chapter of growth and shareholder value creation," said William Zollars, lead independent director of the Cerner board in a statement.

He added, "As the board conducts its search, we are focused on selecting a strong leader with a proven track record of operating successfully while executing a strategy driven by innovation, performance excellence and world-class talent practices."

During his leadership at Cerner, the company implemented a new operating model to make the company more efficient and effective, Shafer said.

"I am proud that Cerner is in such a strong position and we’ve made good progress toward improving our operational model and strengthening our leadership team. Because of this progress, I believe my successor will take the reins at a time when Cerner is poised to accelerate its impact on healthcare," Shafer said during the earnings call.

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Q1 financial results

Cerner reported first-quarter revenue dipped 2% from $1.4 billion a year ago to $1.39 billion, primarily due to the impact of divestitures and the pandemic, Cerner chief financial officer Mark Erceg said during the earnings call.

Quarterly revenue also was impacted by lower than anticipated revenue for software, technology resells and reimbursed travel, he said.

The result missed Wall Street expectations as the consensus expectation was first-quarter revenue of $1.4 billion, according to Street Insider.

In the first quarter, Cerner reported profits of $172 million, up 17% from a profit of $147 million during the same quarter a year ago. Earnings per share in the quarter came to 56 cents, compared to 47 cents per share in the first quarter of 2020.

Cerner's fourth-quarter earnings per share, when adjusted for one-time gains and costs, came to 76 cents per share, up 7% compared to 71 cents a year ago, which exceeded Wall Street estimates.

Bookings in the first quarter came to $1.23 billion, up 13% compared to a year ago, Erceg said.

The company reported first-quarter operating cash flow of $450 million, up 59% from $284 million in the same quarter a year ago and free cash flow of $291 million, up 81% compared to $160 million in the first quarter of 2020.

The company has a total backlog of about $13 billion.

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Cerner remains on track with its planned cost optimization efforts as it works to improve its operating performance, executives said. 

The company achieved a first-quarter adjusted operating margin of 21.4% compared to 19.4% in the same quarter a year ago.

"A mid-20% adjusted operating margin is obtainable by 2024, in line with our pre-COVID commitment," Erceg said.

Cerner also announced a new share repurchase program, which allows the company to repurchase up to $3.75 billion through Dec. 31, 2023. This new program is incremental to the current repurchase program under which approximately $465 million remains available for repurchases.

Cerner plans to repurchase shares opportunistically, subject to market conditions and other factors, including price, and intends to fund the program with cash from operations and debt, executives said.

VA and DOD health IT projects

As part of its federal health IT business, Cerner is working to implement EHR systems at the Department of Veterans Affairs (VA), the Department of Defense (DOD) and the U.S. Coast Guard.

The DOD is moving "full speed ahead" on MHS Genesis, its Cerner-powered EHR, Shafer said. At the end of February, DOD went live at Naval Medical Center in San Diego, its largest and most complex go-live to date, Shafer said.

However, the VA said it will pause the Cerner EHR rollout at future sites while it conducts a strategic review of the project. The agency announced in March a review of the EHR modernization project, which could last three months, to increase EHR productivity and clinical workflow optimization at Mann-Grandstaff VA Medical Center in Spokane, WA, and future go-live sites, the VA said.

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"We welcome and strongly support this strategic review as it offers an opportunity to get new VA leadership up to speed on both the successes and challenges of the program, to capture their input and move forward together," Shafer said.

Cerner's work on the ground continues to prepare for go-lives at future sites, however, the strategic review could shave up to one point on the company's projected revenue growth in 2021, Erceg said. Some go-live deployments of the EHR at VA sites could shift into 2022, he said.

The company projects second-quarter 2021 revenue growth in the high-single digits over the second quarter of 2020.

Full-year 2021 revenue growth is expected to be in the mid-single digits.

Cerner has increased its 2021 earnings outlook based on strong margin expansion. The company expects second-quarter 2021 adjusted diluted earnings per share growth of approximately 20% over the second quarter of 2020.

The health IT giant also is projecting full-year 2021 adjusted earnings per share of more than $3.20, an increase compared to the prior range of $3.10 to $3.20 per share.