Dive Brief:
- Kansas City, Missouri-based EHR vendor Cerner reported revenue of almost $1.4 billion for the quarter, an 8% year-over-year bump driven largely by professional services at 35% of the total. Operating earnings were up 1% from the year prior at almost $198 million.
- Bookings, at $1.24 billion, were in line with company expectations, though they dropped 11% from the year earlier's high of $1.4 billion. Cerner CFO Marc Naughton said on an investor call Thursday the dip was anticipated because of the high volume of lucrative long-term contracts penned this time last year.
- The results for Cerner, which spent its first quarter restructuring and reaching a deal with activist investors, were generally in line with Wall Street expectations. Though Leerink analysts called the company's performance "solid," shareholders were less certain, sending the stock down over one percentage point Friday morning.
Dive Insight:
Cerner, which contracts with almost 28,000 provider facilities worldwide, is coming off a disappointing fourth quarter that yielded a decline in operating earnings, causing CEO Brent Shafer to pledge to investors the EHR company would do better.
Unwieldy expenses, including costly operating problems, have weighed on Cerner for some time now. In 2018, the company's operating expense growth increased at a faster rate than operating income by 9.8%, miring its financial performance and bogging down its earnings compared to analyst estimates. Operating earnings dropped 19% in 2018 from 2017, disappointing shareholders.
Shafer, appointed in January 2018, was unable to rouse shareholders with his plans for improvement. The company has struggled under the yoke of what Piper Jaffray analyst Sean Wieland has called an "identity crisis" since co-founder and CEO Neal Patterson died in 2017.
Earlier this month, Cerner announced it reached an agreement with activist hedge fund Starboard Value, a move that caused the EHR giant's stock to climb more than 10%. Under the terms of the agreement, Cerner's board is getting an overhaul, with Mayo Clinic President Emeritus Denis Cortese retiring and four new board members joining the ship — two appointed by Starboard, which owns roughly 1.2% of Cerner's shares.
In the first quarter of 2019, Cerner underwent major renovations in its operating and cost structures, meant to pare down excess spending. It removed the role of president, cut a redundant business unit, collapsed myriad operational functions into one office and expanded operating margin targets for 2019 and 2020.
Third party consultants are still reviewing Cerner's organization to identify areas where inefficiencies can be reduced or eliminated, overseen by a five-member board committee.
"The changes we expect to make revolve around focus," Naughton said on the call. "We are doing too many things and we believe we can do better if we target our attention on areas that represent the largest and most profitable growth opportunities."
Two such growth opportunity highlighted by Cerner executives are in the federal space with the EHR vendor's Department of Defense and Veteran's Affairs contracts both "progressing as planned."
Cerner snagged the 10-year, $10 billion VA contract in the second quarter of last year. The company expects to see a 24% year-over-year decrease in bookings next quarter, given the large task order in 2018, Naughton said.
The initial go-live on Cerner's VA sites is expected next year. Schafer told investors Thursday he expects that revenue stream to grow in $250 million increments until it reaches roughly $1 billion a year, supported by a higher volume of bookings as waves of the project continue to roll out.
"You will see the revenue continuing to grow from VA," Shafer said.
Cerner saw first quarter net earnings of $166 million, up almost 4% from the same quarter last year. Diluted earnings per share were $0.51, up from $0.48.
Cerner intends to be more selective on its contracts moving forward, executives said, to combat strong market headwinds and help position it for long-term growth. Leerink analysts called the shift a "good strategic move."
"The lower level of long-term bookings in our forecast is in part driven by our decision to be more selective as we consider certain low-margin, long-term contract opportunities given the current operational review and our focus on higher margin growth," Chief Client Officer John Peterzalek told investors.
The company expects bookings in the second quarter to land between $1.25 and $1.45 billion.
Second quarter revenue is expected to be between $1.41 and $1.46 billion and full-year revenue between $5.65 and $5.85 billion, consistent with previous guidance. Adjusted earnings per share are forecast to be between $0.63 and $0.65 in the second quarter.
Cerner expects full year adjusted diluted earnings per share to land between $2.64 and $2.72, a tad above the previously provided guidance of $2.57 to $2.67.