Cerner : Q420 Transcript with Q&A

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EDITED TRANSCRIPT

CERN.OQ - Q4 2020 Cerner Corp Earnings Call

EVENT DATE/TIME: FEBRUARY 10, 2021 / 9:30PM GMT

OVERVIEW:

Co. reported 4Q20 revenue of $1.395b and GAAP net earnings of $142m or $0.46 per diluted share. Expects full-year 2021 revenue to be $5.75-5.95b and adjusted diluted EPS to be $3.10-3.20. Expects 1Q21 revenue to be $1.37-1.42b and adjusted diluted EPS to be $0.72-0.76.

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CORPORATE PARTICIPANTS

Allan Kells Cerner Corporation - VP, IR

David Brent Shafer Cerner Corporation - Chairman & CEO Donald D. Trigg Cerner Corporation - President

Marc G. Naughton Cerner Corporation - Executive VP & CFO

Travis S. Dalton Cerner Corporation - Executive VP and Chief Client & Services Officer

CONFERENCE CALL PARTICIPANTS

Alexander Yearley Draper Truist Securities, Inc., Research Division - MD of Equity Research

Donald Houghton Hooker KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst George Robert Hill Deutsche Bank AG, Research Division - MD & Equity Research Analyst

Richard Collamer Close Canaccord Genuity Corp., Research Division - MD & Senior Analyst Rivka Regina Goldwasser Morgan Stanley, Research Division - MD

Robert Patrick Jones Goldman Sachs Group, Inc., Research Division - VP

Steven James Valiquette Barclays Bank PLC, Research Division - Research Analyst Steven Paul Halper Cantor Fitzgerald & Co., Research Division - Analyst

Jeff Garro

Allen Lutz BofA Merrill Lynch, Research Division - Analyst

PRESENTATION

Operator

Welcome to Cerner Corporation's Fourth Quarter 2020 Conference Call. Today's date is February 10, 2021, and this call is being recorded. The company has asked me to remind you that various remarks made here today constitute forward-looking statements, including without limitation, news regarding projections of future revenues or earnings, operating margins, operating and capital expenses, bookings, new solutions, services and offering development, and capital allocation plans; cost optimization and operational improvement initiatives; future business outlook; the expected benefits of our acquisitions, divestitures or other investments or collaborations; and the expected impact of the COVID-19 pandemic.

Actual results may differ materially from those indicated by the forward-looking statements. Please see Cerner's earnings release, which was furnished to the SEC today and posted to the Investors section of cerner.com and other filings with the SEC for information concerning factors that could cause actual results to differ materially from those in the forward-looking statements. The extent to which the COVID-19 pandemic and measures taken in response thereto could materially adversely affect our financial condition, future bookings and results of operations will depend on future developments, which are highly uncertain and difficult to predict. A reconciliation of non-GAAP financial measures discussed in this earnings call can also be found in the company's earnings release. Cerner assumes no obligation to update any forward-looking statements or information, except as required by law.

At this time, I'd like to turn the call over to Brent Shafer, Chairman and CEO of Cerner Corporation.

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David Brent Shafer - Cerner Corporation - Chairman & CEO

Well, thanks very much, and good afternoon, everyone. I'd like to start with a few comments on our fourth quarter and full year performance. And then I'll hand it over to CFO, Marc Naughton; and our new Chief Client and Services Officer, Travis Dalton; and then our President, Don Trigg, for some more marketplace commentary.

Well, 2020 was a remarkable year for all of us. And given the circumstances, Cerner delivered solid results by executing on our plans and really focusing on supporting our clients. The pandemic challenged Cerner and our clients on several fronts, and we continue to be extremely proud to support clients who are battling COVID on the front lines each and every day. And we're very pleased with the way our associates seamlessly transitioned to a remote work environment last March and have really remained productive and focused on our client success throughout this whole period.

I'm also proud that Cerner recently began hosting a series of massive vaccination events at our world headquarters. This is done through a collaboration with North Kansas City Hospital, Liberty Hospital, Clay County Public Health Center in cities within Clay County. This initiative called Operation Safe is being staffed by volunteers from Cerner, North Kansas City Hospital and several partners in the community.

And together, we've vaccinated nearly 5,000 people through 1 week, and we have additional events planned in the weeks ahead. And I've often said that Cerner's -- one of Cerner's strongest assets is how mission-driven our people are, and the willingness of our associates to rise to the challenge of this pandemic has really presented a strong demonstration of that commitment throughout the whole year.

In addition to supporting our clients and communities, we continue to advance our growth strategies and make operational improvements as part of Cerner's ongoing transformation in 2020. As COVID accelerated health care macro trends, it also validated our growth initiatives, including the creation and expansion of health networks, our Real-Time Health System capabilities in consumer-facing health strategies. Cerner is providing data-driven insights that can improve our clients' clinical, operational and financial outcomes.

Our recent investment in Elligo Health Research and agreement to acquire Kantar Health are examples of how we're deploying capital to advance Cerner's growth strategies. And Don will provide more detail about these -- how these investments accelerate Cerner's presence in life sciences and create a strong foundation for our Data-as-a-Service business.

We also continue toward our transformation goals. Cerner's transformation has been focused on simplifying the business, creating operational efficiencies and delivering profitable growth. And we're nearing $300 million in annualized cost reductions since beginning our transformation efforts about 2 years ago. And we believe those efficiencies and our resilient business model really helped mitigate the impacts of COVID on our business.

As part of our portfolio management process, we simplified our product set to go from offering more than 25,000 features to really fewer than 400 products. And we also divested RevWorks outsourcing business in some noncore global assets. Importantly, our work to deliver seamless care for 18 million service members and veterans remains on track. And for the first time in history, the U.S. Department of Defense, U.S. Department of Veterans Affairs and the U.S. Coast Guard are using the same electronic health record. And the number of patients in our Joint Health Information Exchange grew from 700,000 to 4 million since April of last year.

Finally, we supported the evolution and transformation of our business by adding proven leaders who are already bringing a new perspective. Our Chief Technology Officer, Jerome Labat, joined us in June, bringing more than 30 years of CTO and product development experience at Fortune 500 and leading global tech companies like Hewlett Packard Enterprise, Intuit and Oracle.

In September, Chief Strategy Officer, Will Mintz, came to Cerner after working with leading health care and technology businesses, including Aetna and Blue Cross Blue Shield.

You probably know Chief Client and Services Officer, Travis Dalton, from his leadership in our federal business. And we're excited to have Travis now bringing that same leadership to our global client base, while retaining oversight of our critically important federal work.

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Mark Erceg is our most recent appointment and will replace long time Cerner CFO, Marc Naughton, on February 22. Mark is a high energy leader, who will bring more than 25 years of financial leadership experience, including driving transformation across complex global operations and leveraging balance sheets to drive growth and shareholder value.

In addition to those leaders, we are also honored to have Major General Elder Granger join the Cerner Board of Directors in November. Dr. Granger is a proven leader with experiences in clinical, military and business environments.

And before I close, I'd like to acknowledge that this is our last earnings call with CFO, Marc Naughton, who, after nearly 30 years of service and 101 earnings calls, will be leaving Cerner at the end of the first quarter. And I know many of you share my appreciation for Marc and wish him the best of luck in his future endeavors. And Marc, I just have to say, I cannot imagine anything more fun than 101 earnings calls.

In summary, I'm very pleased with what we accomplished in 2020. We delivered toward our revised expectations while driving a significant amount of change in what we all have to say was a very unusual year in health care. It was very hard work. And I sincerely appreciate all Cerner associates in their contributions to this progress. And Marc, let me now turn it over to you for call number 101.

Marc G. Naughton - Cerner Corporation - Executive VP & CFO

Thanks, Brent. They always say the second 100 are the easiest. So for sure, that's true. Good afternoon, everyone. I'm going to cover Q4 results and future guidance. This quarter, we delivered all key metrics in line with our expectations.

I'll start with bookings, which were $1.68 billion, over $30 million above the midpoint of our guidance range. Full year bookings were $5.585 billion, which is down from $5.99 billion in 2019, primarily driven by the impacts of the pandemic and divestitures of our commercial RevWorks and certain global businesses in Q3. We ended the year with a revenue backlog of $13.04 billion, which is down 5% from a year ago, due primarily to the impact of divestitures.

Our backlog revenue, combined with other contracted revenue that is excluded from the ASC 606 backlog definition, still provides visibility to more than 85% of expected revenue over the next 12 months.

Revenue in the quarter of $1.395 billion was above the midpoint of our guidance range and represents roughly 1% year-over-year growth after adjusting for divestitures. Total revenue for the year was $5.506 billion, which also reflects approximately 1% growth from 2019 after adjusting for divestitures.

I'll now go through the business model detail and year-over-year growth compared to Q4 '19 and full year 2019.

Licensed software revenue in Q4 was flat year-over-year at $174 million. Full year licensed software revenue declined 4% from 2019 to $656 million due to pandemic-driven declines in traditional software, partially offset by growth in software and service revenue, which now makes up approximately 60% of total software revenue. To date, this shift has been driven primarily by growth in SaaS revenue related to healthy intent-based solutions. Going forward, we expect this shift to continue for additional factors and -- for additional factors to contribute, including changes this year in how we deliver in contracts for CareAware and CommunityWorks. Given the relatively small sizes of these businesses, the impact of the changes will not be significant. But we expect to use this transition as a guide for a broader move to SaaS with Millennium, which will occur as we continue to advance our platform and modernization.

Technology resale in Q4 was down 8% year-over-year to $56 million and in line with our expectations. Full year technology resale revenue was down 20% to $197 million, primarily due to a tough overall environment for technology resale and the impact of the pandemic.

Subscriptions revenue grew 6% in Q4 to $98 million and grew 5% for the full year to $378 million.

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