Cerner : Q121 Transcript with Q&A

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

CERN.OQ - Q1 2021 Cerner Corp Earnings Call

EVENT DATE/TIME: MAY 05, 2021 / 1:00PM GMT

OVERVIEW:

Co. reported 1Q21 revenue of $1.39b and 1Q21 adjusted diluted EPS of $0.76. Co. expects full year revenue to grow by mid-single digit and 2Q21 revenue to grow organically by high-single digits. Co. also expects full year adjusted diluted EPS to be over $3.20 and 2Q21 adjusted diluted EPS growth of approx. 20%.

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MAY 05, 2021 / 1:00PM, CERN.OQ - Q1 2021 Cerner Corp Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Allan Kells Cerner Corporation - SVP, IR

David Brent Shafer Cerner Corporation - Chairman & CEO

Donald D. Trigg Cerner Corporation - President

Mark J. Erceg Cerner Corporation - Executive VP & CFO

Travis S. Dalton Cerner Corporation - Executive VP, Chief Client & Services Officer and President of Cerner Government Services

C O N F E R E N C E C A L L P A R T I C I P A N T S

Adam Chase Noble UBS Investment Bank, Research Division - Equity Research Associate of Healthcare

Anne Elizabeth Samuel JPMorgan Chase & Co, Research Division - Analyst

Charles Rhyee Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

David Howard Windley Jefferies LLC, Research Division - MD & Equity Analyst

Elizabeth Hammell Anderson Evercore ISI Institutional Equities, Research Division - Associate

Eric R. Percher Nephron Research LLC - Research Analyst

Jack Rogoff Goldman Sachs Group, Inc., Research Division - Research Analyst

Jeffrey Robert Garro Piper Sandler & Co., Research Division - Senior Research Analyst

Jonathan Yong Barclays Bank PLC, Research Division - Research Analyst

Michael Aaron Cherny BofA Securities, Research Division - Director

Richard Collamer Close Canaccord Genuity Corp., Research Division - MD & Senior Analyst

Rivka Regina Goldwasser Morgan Stanley, Research Division - MD

Sean Wilfred Dodge RBC Capital Markets, Research Division - Analyst

Stephanie July Davis SVB Leerink LLC, Research Division - MD of Healthcare Technology and Distribution

Steven Paul Halper Cantor Fitzgerald & Co., Research Division - Analyst

Maxi Ma Deutsche Bank - Analyst

P R E S E N T A T I O N

Operator

Welcome to Cerner Corporation's First Quarter 2021 Conference Call. Today's date is May 5, 2021, and this call is being recorded. I would now like to turn the call over to your host, Allan Kells, SVP, Investor Relations.

Allan Kells - Cerner Corporation - SVP, IR

Thank you. Good morning, everyone, and thank you for joining us. On the call with me today are Brent Shafer, Chairman and CEO; Mark Erceg, our new Chief Financial Officer; Donald Trigg, our President; and Travis Dalton, our Chief Client and Services Officer. Brent will start off the call with observations on our business in the marketplace, then hand it over to Mark to provide more detail on our results, outlook and capital allocation plans. We'll then transition to Q&A and be joined by Don and Travis.

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MAY 05, 2021 / 1:00PM, CERN.OQ - Q1 2021 Cerner Corp Earnings Call

Before we start, I'd like to remind you that our comments will contain forward-looking statements, including projections for our business and other statements about future events. These comments are based on our current expectations and assumptions that are subject to risks and uncertainties. Our actual results could differ materially from those indicated by our forward-looking statements due to those factors identified in our earnings release, which is posted in the Investors section of cerner.com and other filings with the SEC. Cerner assumes no obligation to update forward-looking statements or information, except as required by law.

We will also be referring to adjusted or non-GAAP financial measures on this call for our discussion of operating margins, earnings per share and free cash flow. A reconciliation of non-GAAP financial measures to GAAP financial measures can be found on our earnings release. These non-GAAP financial measures are not meant to be a substitute for, or superior to, financial measures prepared in accordance with GAAP. With that, I'll turn the call over to Brent.

David Brent Shafer - Cerner Corporation - Chairman & CEO

Thanks, Allan, and good morning, everyone. Thank you for joining us. Well, as we all know, we're now a year into the pandemic, and I personally, I remain so impressed by the resilience of our clients on the front lines and the efforts of our associates around the world supporting them. And as we move past the worst of the pandemic, hopefully, in most regions, an increasing portion of our role in assisting clients has been related to vaccine distribution.

Now we've helped over 175 organizations with our mass vaccination solution, allowing clients to deploy and track vaccinations, document and report reactions and communicate with patients. We've also continued supporting our community and in partnership with local providers and very proud to say we've now delivered over 90,000 COVID vaccinations as part of the Operation Safe initiative I mentioned on our last call.

As we've discussed throughout the year, the pandemic accelerated many trends in health care that Cerner has been actively monitoring and building out capabilities to support for years. Among these, is that providers face increasing pressure on cost and revenue, heightened consumer expectation and shifts in care venues.

We continue to believe that we're well positioned to help our clients navigate these challenges while also enabling them to deliver improved clinical outcomes. Now for example, our Real-Time Health System offerings bring near real-time enterprise transparency to help health systems perform at their peak efficiency and streamline operations and improve care delivery.

In addition, our Health Network capabilities enable our clients to coordinate care across multiple organizations regardless of the core EMR and help them optimize for either a fee-for-service or value-based payment model.

Our enhanced consumer engagement solutions help providers meet the growing expectations by patients who are seamless digital experience. We also continue to demonstrate our ability to bring innovation to the provider workflow to save time and address the very real issue of physician burnout. An example of this is a recent successful pilot of our AI-powered Chart Assist, which abstracts data from the patient's chart and helps ensure correct diagnosis and documentation. This replaces the process of having to do manual queries, days after the patient has been seen to capture missing or often an incomplete diagnosis.

In summary, our ability to provide data-driven insights to providers and patients is at the core of the value we are providing. As a result, our clients are increasingly seeing value in our industry-leading ability to aggregate and normalize data so that meaningful insights can be gleaned.

We're also excited about the opportunity to use insights from data to play a role in improving the safety, efficiency and efficacy of clinical research. Consistent with this, we took a major step towards this call with our recent acquisition of Kantar Health. And we're really pleased to welcome their highly experienced management team that brings that deep understanding of the needs of the pharmaceutical industry. We believe this is an important step as we partner with our network of provider clients and to fundamentally change the time and cost of clinical trials.

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MAY 05, 2021 / 1:00PM, CERN.OQ - Q1 2021 Cerner Corp Earnings Call

I also wanted to comment on the information blocking rules that went into effect last month and the broader interoperability rules in the 21st Century CARES Act. As you know, we've been fully supportive of these rules, and we believe they are an important step toward the health care industry finally realizing the potential of broad digitization, which should lead to improved outcomes lower cost and a better patient experience.

Now up to this point, as you know, the industry has spent billions of dollars on a base level of digitization, but the absence of broad interoperability has limited the return on this investment. So as interoperability and secure access to data improves in the coming years, we expect our proven ability to drive insights from data and to push them to the right place at the right time will remain a key differentiator.

Now I'd like to provide a quick update on our federal business. The Department of Defense continues to move at full speed ahead with deploying MHS GENESIS, their Cerner-powered EHR. At the end of February, they went live at Naval Medical Center in San Diego, which was their largest and most complex go-live to date. And DoD officials said this was their smoothest go-live since the program began. In late April, DoD went live with Wave Carson across 12 states, 2 time zones and more than doubled the number of DoD commands now live.

Now moving to Veterans Affairs. As most of you know, VA Secretary Dennis McDonough recently launched a strategic review of the VA's EHRM program. While at the same time, making it clear he's committed to Cerner and the program. Now, we believe this review is analogous to steps taken by the DoD during their initial go-live. We welcome and strongly support this review because it allows us to bring new VA leadership up to speed on both the successes and the challenges of the program to capture their input and move forward together as we continue providing seamless care for our nation's veterans. We expect to exit this review stronger and ready to push forward with deployments at additional sites this year.

During the review, we expect impact on our results will largely be mitigated since work on the ground continues as we prepare for go-lives at future sites. However, the review could shave up to 1 point off our projected revenue growth this year versus what we had originally expected.

Moving to our results. We had a solid first quarter. And as Mark will share, we now expect to deliver stronger earnings than our prior outlook despite slightly lower top line growth due to the VA strategic review. This is possible because we've sharpened our focus and are moving forward with a renewed sense of urgency to continue delivering value to our clients and shareholders.

Specifically, we're going faster on efficiency initiatives already being actioned by our transformation office, continuing and broadening our product and business portfolio reviews and adjusting our organizational design to centralize key functions. These actions all have a common goal, and that's to tighten our strategic focus so we can more effectively deliver value to our clients while also contributing sustainable, long-term profitable growth to our shareholders.

We'll hear Mark Erceg speak in a moment, but I'd like to say that in the 2 months he's been our CFO, he has just been invaluable in helping us identify additional opportunities to improve our business and has done a terrific job of providing enhanced management reporting that is enabling much better informed decisions, and we're delighted to have him as part of the Cerner family.

I'd also like to comment on the recent passing of Linda M. Dillman, a long-standing member of the Cerner Board. She spent 10 years on our board and was a trusted adviser to many on the leadership team and great, wise counsel provided to all of us, including me, especially as I joined the company. While there's no direct replacement for Linda as a person, we do have an open search and are actively seeking qualified candidates. And Linda is deeply missed by all of us.

Before I turn the call over to Mark, I'd like to comment on news upon my expected departure. As noted in the press release, the Board and I have started a process to identify Cerner's next CEO. And once the Board has named a successor, I plan to serve as an adviser to ensure a smooth transition. It's been an honor to be part of Cerner these past 3 years. And I can tell you, I connected with Cerner's mission from the very beginning. And the dedication of our associates and clients just inspires me every day. And I'm proud that Cerner is in such a strong position and that we've made good progress towards improving our operating model and strengthening our leadership team. Because of this progress, I believe my successor will take the reins at a time when Cerner is poised to accelerate its impact on health care. Mark, I'll turn it over to you.

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MAY 05, 2021 / 1:00PM, CERN.OQ - Q1 2021 Cerner Corp Earnings Call

Mark J. Erceg - Cerner Corporation - Executive VP & CFO

]

Thanks, Brent, and good morning, everyone. Today, I will cover our first quarter results and provide a guidance update. But first, I'd like to share some early observations from my first 2 months at Cerner. First, the people are incredible. Cerner associates are dedicated, passionate professionals who are fully committed to the cause, which is merging technology with health care to improve outcomes for those we serve and love. As Brent often says, Cerner is striving to bring the joy back to practicing medicine, and that is a mission I can proudly lend my full efforts against.

Second, the business is fundamentally sound. Cerner provides real solutions to real problems. Cerner has deep technical know-how, unique capabilities and significant competitive advantages as well as an exceedingly strong balance sheet.

Third, while Cerner does have the associates and the capabilities and has created significant value for clients and shareholders since its inception, there is a clear recognition that a lack of focus, and at times, suboptimal execution has caused revenue growth to slow and margins to compress, which in turn has resulted in bottom quartile total shareholder return versus our proxy peer set over the past several years.

This understanding is what led the Board, Brent and the senior management team to initiate a series of actions to improve results. I believe the actions taken so far are a good start, and I'm excited to play a role in increasing the pace of change so Cerner can realize its full and considerable potential faster. We believe these actions will allow Cerner to help more people than ever before whilst also generating leadership levels of total shareholder return.

So with that understanding and my sincere thanks to Brent and the Board for giving me the opportunity to be part of the team, let me move on to summarize our first quarter results. Please note that my commentary will focus on key points of emphasis since I have no intention of simply repeating information already contained within the press release.

Overall, we had a solid quarter. Bookings were up 13% versus a year ago to $1.23 billion, and we ended the quarter with a revenue backlog of $13.1 billion. While this is admittedly down 3% from a year ago, that was primarily due to the impact of divestitures. Revenue in the first quarter of $1.39 billion was down 2% compared to last year and included lower-than-anticipated software, technology resale and reimbursed travel. However, after adjusting for divestitures, our first quarter revenue grew roughly 2% year-over-year.

Gross margin was up 140 basis points from a year ago to 83.4%, reflecting improved revenue mix due to lower levels of outsourcing, third-party services and reimbursed travel and adjusted operating margin expanded 200 basis points from 19.4% last year to 21.4% this year. Adjusted operating margins benefited from our continued cost optimization efforts and divestitures. And to be fair, we also had some additional expense benefit related to COVID of approximately $10 million in areas such as facilities and travel.

As Brent indicated, we are leaning into our operational improvement efforts. And based on my initial assessment, I believe mid-20% adjusted operating margins should be attainable by 2024 as per our pre-COVID commitments. To achieve this, we are moving faster on our existing road map of cost optimization and process improvement initiatives and adding additional initiatives, including a full review of where COVID era savings can be made permanent in areas such as facilities. We are also going deeper on our product portfolio review with an eye towards consolidating and focusing on items that create the most client value.

Finally, we are significantly building up our internal management reporting capabilities to enhance decision-making and drive accountability. Importantly, these actions will enhance, not dilute our primary focus, which is delighting our clients and motivating and encouraging our associates to reach their full potential because we know that having fully engaged associates and satisfied clients is a clear recipe for marketplace success and strong shareholder return.

To finish off the P&L, our tax rate was 21% for the quarter, and adjusted diluted EPS was $0.76 a share. This was up 7% over last year due primarily to operating margin expansion.

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