Shafer says COVID-19 pandemic has driven 'burst of innovation' at Cerner

Cerner CEO Brent Shafer giving keynote speech on a stage
Cerner CEO Brent Shafer, picturing speaking during a 2019 Cerner conference, said the COVID-19 pandemic has led to a "burst of innovation" at the health IT company. (Cerner)

Cerner generated $134.7 million in profit during the second quarter, up 6% from $127 million in the same period in 2019.

The health IT company reported a profit of 44 cents per share. That reflects an improvement from its earnings of 39 cents per share in the second quarter 2019.

Its adjusted earnings of $193 million, or 63 cents per share, were down from $215 million, or 66 cents per share, in the prior-year period. However, the results beat Wall Street expectations. The average estimate of 12 analysts surveyed by Zacks Investment Research was for earnings of 61 cents per share.

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But the Kansas City, Missouri company's second-quarter revenue fell 7% from $1.43 million in the second quarter of 2019 to $1.33 million as the COVID-19 pandemic had a slightly bigger topline impact than the company expected. 

Cerner Q2 revenue fell $10 million below the company's guidance range. Cerner's Q2 revenue also fell short of Street forecasts, as ten analysts surveyed by Zacks expected $1.36 billion.

The revenue shortfall also was driven by the company’s exit from a large revenue cycle outsourcing contract in the fourth quarter of 2019.

Cerner chief financial officer Marc Naughton said during the company's second-quarter earning call Wednesday that the revenue shortfall had minimal impact on earnings because it was primarily in low margin areas, including technology resale and reimbursed travel. 

RELATED: Cerner's Q1 revenue grows to $1.4B but misses target due to impact of COVID-19

"These are primarily lower-margin revenue streams, so the impact on earnings was limited and we were able to offset it with expense control," Naughton said.

Cerner also cut its spending as total operating expenses in the quarter fell nearly 6% year over year to $971.5 million.

The company reported Q2 bookings of $1.34 billion, down 6% from second quarter of 2019 but more than $100 million above the top of its guidance range, primarily due to strong levels of managed services bookings in the quarter, Naughton said.

"I'm pleased that we've delivered a very solid second quarter, especially given the unique, unexpected circumstances," Cerner CEO Brent Shafer said during the earnings call.

"Our quarterly bookings reflects strength in our client relationships and our strong focus on cost control drove a favorable earnings result. We're fortunate to have a resilient business model, engaged associates worldwide, highly relevant healthcare technology and a solid transformation plan that positions us to manage through the pandemic with less impact than many other companies," Shafer said.

The COVID pandemic has produced a "real burst of innovation" as Cerner teams delivered critical, quick-turn projects, Shafer said, noting the company's data and analytics capabilities and network solutions.

Cerner president Donald Trigg said the company's focus on innovation positions it well as healthcare organizations rethink the future of health delivery.

"Some argue Silicon Valley start-ups will bring the next wave of change. However, I would argue that none of them have our depth of knowledge of healthcare and IT. None of them have the same ability to impact the last-mile provider workflow, and none of them have our combination of entrepreneurial scale," Trigg said during the earnings call.

During the second quarter, Cerner worked with the Department of Veterans Affairs and the Department of Defense to launch a joint health information exchange, enabling secure data exchange among each department and their expanded network of community partners.

RELATED: R1 RCM buys Cerner's revenue cycle outsourcing business for $30M

Work on the VA and DOD electronic health record projects has been paused during the pandemic and revised go-live dates have not been announced, said John Peterzalek, Cerner's executive chief client and services officer, during the earnings call.

The company continues to move forward with the VA-centralized scheduling solution go-live and its first VA program go-live, he said.

With the DOD, as part of the Leidos partnership for Defense Health, Cerner is making significant progress working virtually to advance the program and have an activation schedule in the coming months.

Cerner also is working on a U.S. Coast Guard pilot site fo implement a new EHR, Peterzalek said. 

More on Cerner's Q2 results

Licensed software revenue in the second quarter was $152 million, down 23% from a record high of $197 million in the same period last year.

Technology resale of $42 million in the second quarter was down 31% year-over-year, primarily driven by a few anticipated new business deals pushing out of the quarter amid the pandemic, according to Naughton. Subscription revenue grew 3% to $92 million in the second quarter.

Naughton said Cerner is remain on track with its planned cost optimization efforts and additional measures the company implemented to mitigate the impact of the crisis.

"We continue to expect our full year adjusted operating margin to be around 20%. This will be approximately 150 basis points of full year margin expansion, which we view as impressive given the circumstances," he said.

For the fourth quarter, Cerner expects its operating margin to be 50 to 100 basis points below its original 22.5% target.

This reflects the reality that even with going beyond its original optimization targets, Cerner won't fully offset the impact of COVID-19 by the end of the year, Naughton said.

Cerner executives believe the largest impact from the pandemic occurred in the second quarter, and that business will improve in the second half of the year.

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

The company's business is "generally resilient with significant recurring elements," Naughton said.

In June Cerner sold its RevWorks revenue cycle business to R1 RCM for $30 million.

Cerner is forecasting third-quarter revenue of between $1.35 billion and $1.4 billion.

The Q3 range reflects a slightly larger pandemic impact than originally anticipated and factors in the pending sale of the remainder of Cerner's RevWorks services business that is expected to close in third quarter, Naughton said, adding that this sale will reduce revenue about $10 million in the third quarter and $20 million in the fourth quarter.

The company also tightened its full year earnings outlook and projects full-year revenue will land between $5.45 billion and $5.55 billion. That's lower than Cerner's previous guidance range of $5.55 billion to $5.7 billion, based on lower-than-expected revenue in Q2, its pending sale of RevWorks, and revised expectations for the second half of 2020.

Cerner also forecasts 2020 adjusted diluted earnings per share to between $2.80 and $2.88, reflecting a narrowing from the prior range of $2.78 to $2.90.

The company expects bookings revenue in the third quarter of $1.35 billion to $1.55 billion, Naughton said.

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