- Cerner beat Wall Street expectations on earnings and revenue in second-quarter results released Friday, reporting a topline of $1.5 billion, up almost 10% year over year, though net income plummeted as restructuring charges dragged on the health IT giant's margin.
- Management chalked the revenue growth up to Cerner's ongoing business improvement initiatives and a strengthening market presence, though the year-over-year hike was also due to the second quarter last year including the biggest hit on Cerner's business from COVID-19.
- The Kansas City, Missouri-based EHR vendor raised its full-year earnings guidance following the results, while its 2021 revenue forecasts remained unchanged. Cerner expects revenue growth in the mid-single digits, implying the majority of growth in the fourth quarter, analysts said.
Cerner's revenue was depressed last year as hospitals, slammed by COVID-19, spent less on their IT and data infrastructures to prioritize the pandemic response. Leadership said they hoped hospital budgets would recover in 2021, allowing both old and new clients to invest more heavily in software — a key priority for Cerner, which continues to expand its data-as-a-service offerings as it pivots away from its legacy EHR business.
The second quarter seemed to include said about-face for Cerner's health system clients, management said.
"Volume levels are returning to pre-COVID levels and so people are feeling good about core aspects of the business on the provider side and how it's recovering from the disruption last year, but I think at the same time watching with a wary eye as the delta variant plays forward," Cerner President Don Trigg told investors on a Friday morning call.
Strong bookings in the second quarter, up 2% to almost $1.4 billion, represent a "positive inflection point" since total bookings were down overall in 2019 and 2020, CFO Mark Erceg said on the call. And Cerner has nabbed 24 new client footprints and finished 49 major go-lives so far in 2021, according to outgoing CEO Brent Shafer.
Shafer announced in May he would be stepping down once a successor is found, updating investors Friday "it's difficult to provide an exact timeline" on when that would be due to the complexity and ongoing nature of the search process.
Moving forward, Cerner leadership said their clients were showing greater interest in areas like consumer strategies, provider networks in value-based and fee-for-service arrangements and cybersecurity. The latter is of particular interest, management said, due to the lack of a market leader for cybersecurity in healthcare and a rising level of attacks.
"This is an interesting space," Trigg said. "We’re thinking a lot about it and we see organic opportunities to drive business there."
Another focus area for the four-decade-old vendor is data analytics. Cerner completed onboarding Kantar Health, a data analytics company it purchased in December for $375 million in cash as a key building block of its data monetization strategy, in the second quarter.
Analyzing that business post-close has "given us a clear view into data services ... That's an area where we'll take a hard look at where inorganic acquisition can help us move faster," Trigg said. Cerner's goal is to eventually grow into a $1 billion data business for the health and life sciences industries, executives said during J.P. Morgan's healthcare conference in January.
However, some analysts called Cerner's growth outlook for the remainder of 2021 soft. In the third quarter, the vendor expects revenue to grow 6% year over year, implying about $1.45 million in revenue, well below analyst estimates, SVB Leerink analyst Stephanie Davis said in a note on the results.
That also implies a "meaningful acceleration" in the fourth quarter, "which we view as a reach given [Cerner's] track record of single digit growth," Davis said.
Cerner's restructuring charges dragged on its margin in the second quarter. The vendor had an operating margin of 3.4%, down significantly from 11% in the second quarter last year, reflecting impacts from employee separation packages, an impairment related to sold properties and eliminating redundant products and features.
That contributed to a net income drop of 76%, to $32.7 million from a profit of $134.8 million during the same time last year.
However, the cost savings initiatives — including the severance of about 500 people, and the elimination of 300 open positions — should result in annualized savings of about $70 million for Cerner, Erceg said.
In the second quarter, Cerner's professional services division led the company's revenue drivers at $537.1 million, followed by managed services at $320.8 million, support and maintenance at $259.6 million and licensed software at $175.2 million.
Also on the call, management updated investors on the status of its beleaguered $16 billion project to create and implement a new EHR for the Department of Veterans Affairs. The VA told Congress earlier this month it wasn't scheduling any more deployments of its new Cerner EHR for six months, following recent watchdog reports highlighting snowballing spending and shoddy staff training at the record's first go-live at a VA medical center in Spokane, Washington.
The Office of the Inspector General findings "were generally not technology related," Shafer said, noting while the VA worked to finalize new governance Cerner would continue to work on predeployment. "But no further go-lives are expected until 2022," Shafer said.
Recently, the vendor has gained on renewed takeover speculation.