Cerner's expanding partnership with Amazon will be key to its 2020 growth strategy

Cerner plans to tap into Amazon's expertise in customer experience and its artificial intelligence capabilities to drive future growth for its health IT business.

Cerner's partnership with Amazon goes beyond migrating the health IT company's solutions to the public cloud, Cerner Chief Financial Officer Marc Naughton said Tuesday during the company's fourth-quarter and full-year 2019 earnings call.

Cerner wants to leverage Amazon's "deep competencies around the consumer" coupled with the tech company's "strong interest in being a part of the healthcare ecosystem," Naughton said.

The Kansas City, Missouri-based health IT company named Amazon Web Services (AWS) its preferred cloud provider in July. The health IT vendor has since deepened its relationship with AWS, and the two companies are working on a new cloud-based health platform to incorporate AI to improve usability and provide predictive insights for patient care. 

In December, Cerner announced it is collaborating with Amazon to ramp up its healthcare AI capabilities and predictive technology tools, including a virtual medical scribe for healthcare providers. 

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"We view this relationship with Amazon Web Services and Amazon as an enabler of our growth strategies and as part of our development of a cognitive platform and our evolution to become 'the' software-as-a-service healthcare IT partner," Cerner CEO Brent Shafer said during the call.

Cerner will leverage its technology combined with AWS' infrastructure and expertise in AI and machine learning to create "next-generation user experiences and innovations to deliver more predictive patient-centric care," Shafer said.

"We’ve been very happy with our opportunity to engage with [Amazon] and look at key strategies around approach, whether those are publicly disclosed activities around how they think around their employee population and some things they are doing in concert with JPMorgan and Berkshire Hathaway, or acquisitions they have made around capabilities like PillPack," Naughton said during a Q&A with analysts.

"We’ve had good visibility into that, and we think it’s an exciting potential piece of the relationship," he said.

Amazon, JPMorgan Chase and Berkshire Hathaway formed a healthcare joint venture, now called Haven, in early 2018. Amazon bought online pharmacy startup PillPack two years ago.

Q4 and 2019 performance

Following a yearlong focus on improving its operating performance, Cerner reported revenue of $1.4 billion in the fourth quarter of 2019, an increase of 6% over the same quarter last year. Annual revenue also increased by 6% to $5.7 billion in 2019 compared to $5.4 billion in 2018.

Cerner's fourth-quarter revenue beat analysts’ expectations.

Cerner reported profits of $154.3 million for the quarter, or $0.49 per share. That is up about 17% compared to $131.32 million, or $0.40 per share, in last year's fourth quarter.

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Cerner's earnings per share, when adjusted for onetime gains and costs, came to $0.75 per share, also surpassing Wall Street estimates

The company's adjusted operating margin of 20.3% exceeded its target, Shafer said.

Cerner remains on track to deliver its fourth-quarter 2020 targeted adjusted operating margin of 22.5%, Naughton said.

The company's financial performance was welcome news to analysts. Canaccord Genuity analyst Richard Close wrote in an investor note issued Wednesday, "The company stated that over 50% of the actions needed to drive the 2020 margin 'uplift' were put in place during 2019, thus providing confidence that margin improvement is achievable. Finally, the transition to the cloud can provide additional margin expansion, longer-term."

During the earnings call, Shafer said 2019 was an "important and productive year” for Cerner. 

"We began the year by introducing a new operating model to refine our organizational alignment to enhance our client focus and accelerate scalable innovation to make Cerner easier to do business with," Shafer said.

Cerner has a renewed focus on improving its operating performance as part of a settlement with activist hedge fund Starboard Value announced in back in April. Cerner agreed to take steps to improve operations and committed to hitting certain operating targets.

Bookings in the fourth quarter of 2019 were above the company’s expectations at $1.7 billion, down 15% from $1.96 billion in bookings during the same period in 2018. That quarter, Cerner reported its second-highest quarterly bookings in its history. 

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Full-year 2019 bookings were $5.99 billion, down 11% compared to 2018 bookings of $6.72 billion

The decline in bookings was primarily driven by the company being more selective in the types of contracts it pursues, which led to fewer large, long-term outsourcing contracts, executives said.

The company's federal health IT projects with the departments of Veterans Affairs (VA) and Defense will add significant revenue as well. The VA contract will contribute $250 million in revenue and eventually ramp up to $1 billion in annual revenue for the company, Naughton said.

Cerner officially signed a $10 billion contract with the VA to upgrade its electronic health record (EHR) system back in May 2018.

John Peterzalek, Cerner’s chief client officer, said the VA EHR project was on track for its first go-live in March.