Cerner misses earnings and revenue expectations despite an increase in bookings

Cerner's headquarters are in Kansas City, Missouri
Multiple large transactions contributed to Cerner's high bookings rate in the fourth quarter of 2018, including six contracts greater than $75 million. (Cerner)

Despite boosts from a VA contract and near-record bookings in the fourth quarter, Cerner's earnings took a dip last year and fourth-quarter revenue came in slightly below expectations.

CEO Brent Shafer, who took the helm only a year ago, said during an earnings call on Tuesday that the company had plans in place to increase profitability and predictability.

The company reported fourth-quarter 2018 revenue of $1.36 billion. That was up 4% compared to fourth-quarter 2017’s revenue of $1.31 billion but fell short of the low range of its own guidance of $1.37 billion. Annual revenue also increased by 4% to $5.36 billion in 2018.

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Fourth-quarter revenue came in slightly below previous guidance due to lower-than-expected technology resale, Cerner officials said. Revenue from technology resale declined 42% from the fourth quarter of 2017, as third-party suppliers transition to subscription and software-as-a-service models.

The Kansas City-based health IT company saw a steep decline in operating earnings both in the quarter and full year. Operating earnings for the fourth quarter of 2018 were $164 million, down 25% from the fourth quarter of 2017. Full-year operating earnings ended at $774 million, down 19% from 2017's $960 million.

"While we did deliver within our full-year guidance ranges, I am aware that our results included a decline in operating earnings," Shafer told investors and analysts during Tuesday's call. "This is not something we expect to continue, and I believe the structure and process changes we are making will help make Cerner more focused and efficient, which should allow us to increase our predictability and profitability over time."

Cerner Corp. reported its second-highest quarterly bookings in its history at $1.96 billion during the fourth quarter of 2018. However, this is down from the fourth quarter of 2017, which had a record-setting $2.33 billion in bookings. Full-year 2018 bookings increased 6% to $6.72 billion.

Multiple large transactions contributed to Cerner's high level of bookings last year, including six contracts greater than $75 million, according to Cerner CFO Mark Naughton during the earnings call.

Shafer also said Cerner leadership had developed a new operating model for the company, with a focus on innovating more efficiently and pursuing growth opportunities more effectively. Cerner officials plan to offer more details on the "refined operating model" during the HIMSS Conference in Orlando, Florida, next week.

“We’ve gotten to a scale where, when it comes to efficient deployment of resources, we’ve gotten in our own way,” Shafer said, noting that leadership is focused on finding efficiencies and getting early-stage innovation to the market more quickly. “There’s a strong pipeline of things we can bring to the market, but getting them to scale quickly and getting them to revenue quickly is the emphasis with these moves.”

Regarding the company’s federal IT contracts, John Peterzalek, Cerner’s chief client officer, said the Department of Defense MHS Genesis projects were going as planned with ongoing work on the second wave of DOD hospital sites to deploy the new EHR.

Cerner officially signed a $10 billion contract with the Department of Veterans Affairs to upgrade its EHR system back in May, representing one of the largest federal IT contracts. Cerner expects the VA contract to contribute $1 billion in revenue in the next four years.

“We remain on track to steadily ramp up our work on the project as we go through the year. The first major project milestone will be in 2020 when initial sites are scheduled to go live,” Peterzalek said. However, during a Senate Appropriations subcommittee hearing this week, the VA’s acting deputy secretary told lawmakers the massive overhaul of the agency’s EHR could cost more, and take more time, than they originally thought, according to reporting from Nextgov. Agency officials said in November that the overhaul is already running $350 million over budget.

RELATED: VA signs $10B deal with Cerner, but implementation challenges still loom

During the call with analysts, Shafer also announced that Cerner initiated a quarterly cash dividend of 15 cents a share, the first in the company’s history. “Investing in innovation to fuel growth has been Cerner’s core strategy since inception,” Naughton said. “This will not change, and we are confident that meaningful growth opportunities exist and that we are making the right investments to deliver good long-term growth. We are now at a point where we believe we can invest in this growth while also enhancing shareholder value with a dividend and continued share repurchases.”

Naughton said one of the objectives of the company’s broader capital allocation strategy is having the flexibility to make other investments in growth, “including relationships like Lumeris or strategic acquisitions that complement our organic growth investments.”

In July, Cerner invested $266 million in the parent company of Lumeris, a value-based care management provider, as part of a 10-year agreement to combine the companies’ technologies and services to aid hospitals in the transition to value-based contracts. Cerner now has an ownership stake in Lumeris, and the two companies are developing an “EHR-agnostic” solution called Maestro Advantage, aimed at value-based payment arrangements, including Medicare Advantage and provider-sponsored plans.

RELATED: Cerner sinks $266M into Lumeris as part of strategic partnership targeting Medicare Advantage plans

Naughton acknowledged that the company’s review of M&A opportunities marked a shift from its previous approach. “In the past, we had a mantra that we were going to build it ourselves, and that’s been effective for us. As we get into more of the HealtheIntent platform (Cerner’s population health platform), that’s an agnostic platform and it opens our ability to do some targeted niche acquisitions that could be quickly brought into that architecture and delivered to clients in an efficient, cloud-based manner,” he said.

Naughton added, “We are reviewing a lot of different opportunities. It’s safe to say the majority will be focused on things that can supplement our HealtheIntent platform, or some type of opportunity that helps in our government business, or opportunities where we see the chance to grow, such as networks. The Lumeris investment was very much focused on the ability to grow networks. There are other tangential opportunities that might well be suited to some type of M&A, and we’ll also look at partnerships, as that may be a more effective vehicle.”

Peterzalek said 2018 was also a strong year for key growth areas, with revenue cycle, HealtheIntent population health solutions, and Cerner ITWorks all growing revenue more than 20%.

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