- EHR giant Cerner reported a mixed bag of earnings results for the second quarter of 2019. The Kansas City-based company beat earnings per share estimates, but Wall Street expected it to have revenue of $1.44 billion, while reported revenue rang in at $1.43 billion.
- Bookings came in at the higher end of Cerner's guidance, also at $1.43 billion, for the three months ended June 30, the EHR vendor announced following market close Wednesday. That's down almost 20% year over year, a fact Cerner executives chalked up to being more selective with contracts and higher than usual bookings in the first half of last year due to a long-term deal with the U.S. Department of Veteran's Affairs.
- Cerner is also investing more than $200 million on 165 initiatives to streamline business processes following years of unwieldy expenses stifling operations, CFO Marc Naughton said on the earnings call. Cerner stock was up slightly following the release.
In the face of industry headwinds like heightening government regulation of health IT and the increasing market dominance of rival Epic Systems, Cerner has revamped its strategy. The vendor is focused on strengthening its software-as-a-service platform, becoming a healthcare partner in nontraditional markets, pursuing value-based care and curating healthcare data that pharmaceutical companies, payers and others can pay to access, CEO Brent Shafer said Wednesday.
Shareholder confidence in Shafer has been shaky as the chief executive has dealt with what one Piper Jaffray analyst called an "identity crisis" at Cerner, stemming from the passing of CEO Neal Patterson two years ago.
In recent years, operating expense growth has increased at a faster rate than operating income, stifling operational flexibility at Cerner, which contracts with almost 28,000 healthcare companies worldwide.
That trend culminated in a disappointing financial performance last year, with results tallying in on the low end of estimates. Shafer promised "structure and process changes" were imminent and, during the first quarter of the new fiscal year, gave Cerner a revamp in removing the role of president, eliminating a redundant business unit, collapsing operational functions into one office and expanding operating margin targets for 2019 and 2020, according to the company.
Cerner also created a "transformation management office" helmed by COO Mike Nill to oversee the changes.
Second quarter operating cash flow was $206.8 million, a relatively low figure Cerner executives chalked up to expenses related to the operational improvements. Cerner expects to see initial benefits from the effort in the fourth quarter of this year, with a second wave mid-2020 and a third in the second half of 2020 and beyond, Naughton told investors and reporters Wednesday.
However, those improvement efforts aren't helping the IT giant with growth or profitability just yet. Cerner's net earnings in the quarter of $127 million were down 25% and diluted earnings per share of $0.39 were down 24% year over year.
But that's a "tough comparison," Naughton said, as Cerner snagged a 10-year, $10 billion VA contract in the second quarter of 2018, and expected the slump. Cerner expects the initial sites from the beleaguered project to go live in 2020, while its other federal contract with the Department of Defense should see go-lives this fall.
Third party consultants continue to review Cerner's operations under an agreement with activist hedge fund Starboard Value in April. The deal set in motion changes to Cerner's board leadership, financial strategy and operations and boosted its stock buyback program by $1.2 billion. Mayo Clinic President Emeritus Denis Cortese retired from the board and four new members joined — two appointed by Starboard, which owns roughly 1.2% of Cerner's shares.
Cerner expects to see third quarter revenue between $1.4 and $1.45 billion in the third quarter and full year revenue between $5.65 and $5.85 billion, in line with previous guidance. Bookings are expected to fall somewhere between $1.5 billion and $1.7 billion.