Cerner Q2 revenue misses Wall Street estimates 3 months after activist investor steps in

Cerner's headquarters are in Kansas City, Missouri
Cerner reported 5% growth in revenue in the second quarter of 2019 as the company rolls out an operational improvement initiative. (Cerner)

As healthcare technology company Cerner continues efforts to turn its financial picture around, the company's second-quarter reported revenue of $1.43 billion fell short of Wall Street estimates of $1.44 billion.

Cerner's second-quarter revenue was up 5% compared to $1.36 billion in the second quarter of 2018. Cerner's earnings per share, adjusted for one-time gains and costs, came to $0.66 per share, beating Wall Street estimates.

During an earnings call on Wednesday, Cerner CFO Marc Naughton said the company remains on track to deliver its targeted 20% adjusted operating margin in the fourth quarter of 2019.

"Our forecasted revenue mix is better, and we expect to benefit from the initial impact of our operational improvement efforts. Further, our ongoing work with AlixPartners continues to support our targeted Q4 2020 targeted adjusted operating margin of 22.5%," Naughton said.

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Cerner reported its operating margin in Q2 was 9.2% compared to 15.2% in the second quarter of 2018. The company's adjusted operating margin for the quarter was 18%, down from 18.7% in Q2 of 2018 but up from 17.5% last quarter.

In April, Cerner announced it had reached a settlement with activist hedge fund Starboard Value to add new directors to its board and buy back more of its shares. Cerner also agreed to take steps to improve operations and committed to hitting certain operating targets. The company also is working with consulting firm AlixPartners to review operations and costs.

The new agreement between Cerner and Starboard Value, which has a 1.2% stake in the company, was seen as welcome news by many financial analysts as a plan to increase the company's profitability.

But so far the health IT company's process improvements have not translated to profitability or growth. 

The company reported net earnings of $127 million in the second quarter, down 25% year over year, and diluted earnings per share of $0.39, down 24% from $0.51 year over year.

Bookings came in at $1.43 billion, near the high end of Cerner's guidance range, for the second quarter.  Bookings are down 19% year over year, with Q2 2018 coming in at $1.77 billion, which Naughton chalked up to higher-than-normal levels of large long-term bookings in the second quarter of 2018. mainly Cerner's $10 billion contract with the Department of Veterans Affairs.

Cerner expects the initial sites of the VA EHR project to go live in 2020, and is continuing to move forward with the DoD EHR project with new sites going live this fall. 

RELATED: Following agreement with activist investor, Cerner reports slight Q1 revenue, earnings growth

The company is investing in 165 business optimization initiatives focused on cost optimization, portfolio and product management, and business simplification, Naughton said.

The company expects to see benefits from these initiatives starting in the fourth quarter of 2019 and continuing into 2020. "We expect these initiatives to result in controlled and/or reduced expenses across all of our operating expense lines and to positively impact the profitability of all business models," he said.

Cerner also established a Transformation Management Office led by Mike Nill, the company's chief operating officer.

The company saw strong growth in both traditional software and software-as-a-service as licensed software revenue in the second quarter of 2019 grew 14% year over year to $197 million.

Cerner's professional services revenue climbed 8% year over year, to $485 million. Managed services revenue growth increased 4% over the prior-year period, to $298 million. Subscriptions revenue also increased by 8% year over year, to $90 million.

RELATED: Cerner misses earnings and revenue expectations despite an increase in bookings

Cerner CEO Brent Shafer said during the earning's call that the electronic health records company has helped to digitize 50% of healthcare in the U.S. and is making "good progress" on the early stages of its transformation initiative.

The company is now focused on strengthening its software-as-a-service platforms and becoming a strategic partner outside of the traditional hospital market to offer analytics and intelligence capabilities, Shafer said.

"Our clients are focused on rising healthcare costs, industry consolidation, payment reform pushing toward risk, the heightened impact of consumerism and the emerging role of artificial intelligence and machine learning," Shafer said. 

The company also is strategically focused on curating healthcare data to be available for life sciences, pharmaceutical, payer and provider organizations.

"We feel like there's a near-term opportunity for us to really build on those strategies in the life sciences and pharma space, starting with the work we did with Duke and also in the medical retrieval space," said Donald Trigg, executive vice president, strategic growth, referring to Cerner's collaboration with Duke Clinical Research Institute to use data to.develop a cardiovascular disease risk calculator app.

The company said it expects revenue in the range of $1.4 billion to $1.45 billion for the fiscal third quarter in 2019 and full-year 2019 revenue between $5.65 billion and $5.85 billion, consistent with previous guidance.