Cerner's Feinberg says health IT giant will narrow strategic focus, confirms upcoming layoffs to 'right the ship'

During his first earnings call since taking the reins at Cerner, David Feinberg, M.D., a former executive at Google Health, said the health IT company will narrow its strategic focus to "high-value areas" with a particular focus on making medical records systems more reliable and usable.

"In the past, Cerner has simply tried to do too many things by ourselves. Going forward, we are going to change our approach and only focus on a small number of important high-value areas—some of which we plan to achieve by partnering with highly capable organizations we believe can help us achieve our mission, which is to improve the lives of others," Feinberg told investors and analysts during the company's third-quarter earnings call Friday.

Cerner tapped Feinberg, who spent the past two years at Google leading the tech giant's health efforts, to lead the health tech company back in August after a three-month CEO search.

Chief Financial Officer Mark Erceg said the company will take Feinberg up on his challenge to focus on the patient and plans to "stop or jettison side pursuits” that, in many cases, have proven to be nothing but "resource drains and distractions."

Feinberg said Cerner will focus on enhancing capabilities to the electronic health record (EHR) system to help patients avoid unnecessary tests and medications and help clinicians avoid errors and suggest what treatments may work best.

"The EHR, in my mind, also needs to be a tool that allows grandma's blood sugar to get to where it needs to get to. So it has to be interoperable. It has to have, on top of it, analytics that you can make predictions around individual patients, around communities. You have to be able to use that EHR in a way that allows you to be successful in a fee-for-service or fee-for-value model," he said.

RELATED: While revenue jumped 10% in Q2, Cerner looks to slim down costs by cutting jobs, offices

During a Q&A with investors and analysts, Feinberg also addressed a round of upcoming layoffs that were recently brought to light by an anonymous post on Reddit. In response to the Reddit post, Feinberg sent an email to staff acknowledging that approximately 150 positions will be eliminated from their roles at Cerner, the Kansas City Star reported.

Feinberg said the decision to eliminate some positions was not taken lightly and was necessary to "right the ship."

"I think it oftentimes is a reflection of management not predicting where the business is going and getting folks retrained for areas of growth so that this stuff doesn't happen," he said. "Going forward, we will be more disciplined about thinking about where our business is going and how we can retrain our folks to be best positioned to help us as we're going forward. There's no way we're going to shrink our way to greatness. So while these are some immediate measures, and I think they're corrective and I'm supportive of them, they don't fit with my philosophy going forward."

Cerner’s employee count dropped by 1,000 from the end of the second quarter to the end of the third quarter, equally split between layoffs and managed attrition.

Q3 financial results

The Kansas City-based health IT giant's top line jumped nearly 7% to reach $1.47 billion in the third quarter, up from $1.37 billion a year ago.

The revenue growth was driven in large part by strong growth in its federal business with its EHR projects with the departments of Defense and Veterans Affairs and approximately $45 million of incremental revenue from the Kantar Health acquisition completed earlier this year, Erceg said.

Bookings were up 23% during the quarter versus a year ago to $1.8 billion. Year-to-date bookings grew 13%.

The company reported third-quarter earnings of $175.8 million. On a per-share basis, Cerner said it had net income of 59 cents. Earnings, adjusted for one-time gains and costs, came to 86 cents per share.

Erceg said earnings per share rose nearly 20% over last year due to stronger adjusted operating earnings, a lower tax rate and a lower share count. 

The results topped Wall Street expectations. The average estimate of nine analysts surveyed by Zacks Investment Research was for earnings of 82 cents per share

Revenue also beat analysts' forecasts. Six analysts surveyed by Zacks expected $1.45 billion.

Cerner is eyeing opportunities in its data business, including in the clinical research space. The company acquired the health division of Kantar Group, which provides data, analytics and research to the life sciences industry, for $375 million. Based on that acquisition, it also recently unveiled a new business unit focused on providing real-world data solutions and research services to life sciences companies to support clinical trials. That business is generating $130 million in annual revenue.

The company also is focused on making enhancements to its revenue cycle solutions and launched a new patient accounting product that will marry the strengths of its existing Millennium and Soarian offerings.

Cerner's adjusted operating margin expanded 150 basis points from 20.4% to 21.9% driven primarily by continued expense cost control, including laying off 500 employees in the second quarter, plans to sell some of its office space and eliminating redundant products, Erceg said.

The company aims to deliver a mid-20% adjusted operating margin by fiscal 2024. 

Cerner ended the third quarter with $782 million of cash and short-term investments, which is down from $885 million last quarter, primarily driven by $375 million spent on share repurchases during the quarter. 

"The organizational transformation and productivity measures implemented earlier this year and additional on-going product focus and cost control initiatives are strengthening our business," Erceg said.

Cerner expects fourth-quarter 2021 revenue to grow upper-mid-single digits compared to the fourth quarter of 2020, including about $50million of revenue from the Kantar Health acquisition. The company is projecting full-year 2021 revenue growth of about 5%.

The company is projecting fourth-quarter 2021 adjusted diluted earnings-per share-growth of 10% to 13% over the fourth quarter of 2020. The high end of this range would bring full-year earnings to $3.30 per share, which compares to prior guidance of approximately $3.25.