Cerner Corporation Earnings Call Nuggets: Allscripts, Implementations

On Thursday, Cerner Corporation (NASDAQ:CERN) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Allscripts

David Larsen – Leerink Swann: Anything in the proposed stage rule that looks particularly promising from a vendor’s perspective?

Zane Burke – EVP, Client Organization: There’s a number of things which we think are very positive in the Stage 2 elements, which is the physician documentation pieces, some of the med’s pieces. We think there are number of elements that will as well as the quality and outcomes base metrics which – frankly, we’re one of the few EMR providers that actually have those solutions in our capability set. So, that gives us some unique opportunity as we look forward. So, we do continue to see some good opportunities in that space. So, that’s from a new business perspective as well as our install base.

Cerner Earnings Cheat Sheet>>

David Larsen – Leerink Swann: Then I don’t know if you saw, but Allscripts (NASDAQ:MDRX) just pre-announced and they’ve showed a pretty significant decline in bookings year-over-year. Any thoughts on Allscripts (NASDAQ:MDRX) in this space right now or anything you’re seeing in the market for (Eclipse’s relative Eclipse’s)?

Zane Burke – EVP, Client Organization: Dave this is Zane again. I think what we’ve mentioned previously we see a number of install basis that are literally up for grabs, and we would put that particular organization in that situation and we’ve seen that playing out in the marketplace as we’ve talked about and highlighted in both the calls as well as some of the analysts events that we’ve had. So, yes, we do think that presents opportunity for us.

Marc Naughton – EVP and CFO: Dave this is Marc. We’ve continued to say that we think there are basically kind of a duopoly that we’re seeing in the marketplace where two very strong companies are going to be successful. These results are consistent with our view of the marketplace. It’s consistent with our view of our pipeline of who we’re seeing relative to their client base showing up as being in the market for new system. So, the timing is unfortunate for us because we have a lot of good news to talk about today. We know you guys will be having to split your attention, but it is not something that’s surprising to us.

Implementations

Sebastian Paquette – Goldman Sachs: First just on implementations. Can you guys talk to us about after strong ramping year in 2011 how you’re continuing to hire there and for the implementation or the bake-off that are becoming a bit more comparative with some of your key competitors are you seeing any implementation capacity issues with your competitors?

Marc Naughton – EVP and CFO: I think from an implementation standpoint for Cerner, we continue to be ready to start any project as soon as we sign the contract with the client how we’ve done a good job, as you seen from our headcount numbers of on-boarding new people in that area who are very quickly trained, put into our solution center and being basically effectively working on implementations from very soon after they are hired in. So I think that continues to work well. But good news is that the amount of work we have to do gives them experience very quickly. In 12 months those people are getting to work on two or three different projects which would be normally take much longer period of time. So I think all of that is working well for us. We are using our people and not relying on third-parties for the most part for doing implementations. I can’t speak for what other people are doing. There are certainly a lot of consultants in the world that are always willing to kind of come in as a third-party to help do the implementations. But we don’t see that as an issue, we certainly see as a benefit. When we are talking about relative to a new client, is that we will guarantee the implementation and the timing and cost and that doesn’t seem to be something that is the capability for some of the competitors — well basically all of our competitors.

Sebastian Paquette – Goldman Sachs: Then, maybe could you spend a little bit more time talking about your gross margin profile? Maybe first-off just having some of the mix that is going on and many details you can give us around the actual proportion of tech resale and the margins around tech resale or device works, for instance some of the large services contracts. Maybe just talk about kind of when you think about the stage of where some of these services contracts are, if they are starting out at lower gross margins that will potentially ramp up overtime, because it seems like it’s one of the bigger disconnects in the model even though overall profit margins are increasing. Just trying to get a better handle on the trajectory for gross margins will be really helpful?

Marc Naughton – EVP and CFO: Sure. It is actually – we saw a lot of things there but it is actually a fairly simple explanation. Just to provide a little context relative to gross margin for the most part all of our services come through as a 100 % gross margin unless it is provided by a third-party which is a very, very small amount. So, from a gross margin perspective the service business really doesn’t have a significant impact on that from relative to bringing it down below 100% because all of that revenue basically – almost all of it drops to the gross margin line. The real key that you are seeing in Q3, Q4 and now Q1 is us doing much stronger than we would have projected and both the device resale and even on our traditional hardware sales. So, those are single digit margin businesses, but the group of people that is responsible for doing that is basically a relatively small group that doesn’t grow a lot and they are driving more and more revenue. Really for us the key is driving more and more margin. So, what you saw in Q3, Q4 and especially in this Q1 there is significant strength on the device and the hardware sales. So, we are 50 million over the top end of our range of guidance, probably 40 million of that is relating to technology resale in some form or fashion. Now, that over attainment only drove about 3 million to the bottom line because of the low margins that we get on that business. So, from a management of the business we have always talked about I am going manage through the gross margin line because that’s really what I am looking it. I love it; I love all that extra hardware we are selling for really not a lot of extra effort. We are leveraging our client base and our relationships to be able to sell into that base. But I think if you look at the math and the results you will see that that technology resale is what’s kind of brought us down from the 81% range down to kind of the mid to upper 70s. Given that, we’re kind of a 75 point something this quarter. I’m thinking that we’re probably getting to 77% range. At the end of Q3, or with Q2, we think there’s still likelihood to be a little bit higher tech resale, not significantly but a little higher, nothing like we had in Q1, but at that point, you’re going to have kind of a normalized history with each of those preceding year ago quarters having a pretty good impact relative to tech resale, and then you’ll be able to kind of see us doing more of our normal margin level growth at the operating margin level of the 100 to 200 basis point. Does that help clarify?

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