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

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

With a renewed focus on improving its operating performance, Cerner Corporation posted 8% revenue growth in the first quarter of 2019, $1.39 billion compared to $1.29 billion in the first quarter of 2018, and earnings were up 6%, both in line with expectations.

During an earnings call on Thursday, Cerner CFO Marc Naughton said the company saw strong growth in both traditional software and software-as-a-service as licensed software revenue in the first quarter of 2019 grew 15% year over year to $154 million.

Cerner's professional services revenue climbed 11% year over year, to $490 million. Managed services revenue growth increased 13% over the prior-year period, to $304 million. Subscriptions revenue also increased by 10% year over year, to $84 million.

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Bookings in the first quarter of 2019 were in-line with the company’s expectations at $1.24 billion, $42 million above the company's guidance range, but down from the Q1 2018 booking of $1.39 billion, which included much higher-than-normal levels of large long-term bookings, according to Naughton.

RELATED: As activist investor steps in, analysts remain uncertain about Cerner's future

"During the quarter, we rolled out a refined operating model, which is designed to improve our operating efficiency and speed value creation for our clients. These refinements are foundational to significant improvements in profitably we expect to deliver as part of recently announced operational improvement initiatives," CEO Brent Shafer said during the earnings call

Cerner announced April 9 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 hired consulting firm AlixPartners to review operations and costs.

That announcement immediately buoyed Cerner's stock to jump 10.3% April 9

As part of its operational improvement initiatives, Cerner said it will increase its adjusted operating margin target to 22% for the fourth quarter this year and 22.5% for the fourth quarter of next year. The company is looking to make other operational improvements by eliminating the president role, changing executive responsibilities and finding opportunities to operate more efficiently.

"This will be hard work particularly with the backdrop of a challenging core market environment, but it is necessary to make these changes to enhance efficiency and focus as we position ourselves for ongoing profitable growth," Shafer said during the earnings call. "I want to be clear that we still believe we have good long-term growth opportunities driven by our federal business, opportunities within our large health system, base and our strategic growth initiatives that address adjacent markets.

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

Shafer said during the earnings call the recently announced cooperation agreement with Starboard Value builds on and accelerates the work Cerner has been doing and "formalizes our commitment to improve operating performance, including specific targets that are aggressive, but attainable."

Cerner reported its operating margin in Q1 was 14.2% compared to 15.1% in the first quarter of 2018. The company's adjusted operating margin for the quarter was 17.5% down from 18.8% in Q1 of 2018 and 18.7% last quarter.

During the earnings call, analysts said they viewed the Starboard agreement as a positive move although they see the 22.5% margin target as an aggressive target.

And some analysts question whether the changes and activist involvement will be enough to improve the EHR giant's operating performance and address "structural problems."

"I am not super optimistic that activist will result in anything more than financial engineering," Andrew Freedman, managing director at Hedgeye Risk Management told FierceHealthcare. He noted a number of structural problems facing Cerner, notably slowing EHR demand, margin headwinds from services and cultural problems.

Despite the company's operational improvement initiatives, Cerner officials said its two massive contracts with the Department and Defense and the Department of Veterans Affairs to implement new electronic health record systems are both progressing as planned.

Cerner is continuing its work on the second wave of DoD sites with go-lives on track for this fall, he said. "Similarly, our work with the VA has continued as planned, and we remain on track to steadily ramp our work on the project, as we go through the year and into next year, with the initial sites still expected to go live in 2020."

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