Cern Headquarters

Cerner Headquarters. Image Source: Wikimedia Commons

Three months ago, investors in Cerner Corporation (NASDAQ:CERN) weren't happy campers after the company reported lower than expected second-quarter revenue and management provided disappointing third-quarter guidance. The big healthcare information technology company announced its third-quarter results after the market closed on Tuesday. Did Cerner disappoint investors again? 

Cerner results: The raw numbers

 

Q3 2015 Actuals

Q3 2014 Actuals

Growth (YOY)

Sales

$1.128 billion

$840.1 million

34.3%

Net Income From Continuing Operations

$147.3 million

$129 million

14.2%

Adjusted EPS

$0.42

$0.37

13.5%

Data Source: Cerner Corporation

What happened with Cerner this quarter?
The solid year-over-year growth reflected in the chart above was achieved on the back of exceptionally strong bookings, which hit an all-time high of $1.59 billion in the third-quarter -- up a whopping 44% over the same period last year. Bookings reflect the value of new business won, but they aren't recognized as revenue until actually invoiced to the customer. Other highlights from the quarter included:

  • Support, maintenance, and services revenue jumped 32% year-over-year to $783.8 million. This accounted for over two-thirds of Cerner's total revenue for the quarter.
  • Operating cash flow improved to $271.5 million from $219.5 million in the prior year period.
  • Free cash flow increased to $111.4 million from $107 million in the third quarter of 2014.
  • Total backlog rose 37% year-over-year to $13.9 billion. This backlog represents systems that Cerner has sold but not yet implemented.

Cerner also provided guidance for the fourth quarter. Management expects sales between $1.15 billion and $1.2 billion. The midpoint of that range reflects a 27% year-over-year increase. Adjusted earnings per share are projected to be in the $0.56 to $0.58 range -- around 21% higher than the fourth quarter of 2014.

What management had to say
Executives were understandably happy about the all-time high level of bookings. "The highlight of our results in the third quarter was our strong bookings, which again included a record number of new clients joining Cerner," said Chairman and CEO Neal Patterson. "We have signed more new clients in the first three quarters of 2015 than any full-year in our history, and I attribute this success to our strong competitive position in an active marketplace." 

Looking forward
Cerner reported a solid third quarter, but expectations remain high -- and potentially tough to achieve. The company faces a significant challenge in the hospital EHR (electronic health record) market from privately held Epic. Cerner seems to be faring well in that duel, though, as evidenced by its recent snag of Arizona-based client Banner Health from Epic.

It could be an even tougher battle in the physician systems market. Athenahealth (NASDAQ:ATHN) appears to be firing on all cylinders lately. The cloud-based healthcare technology company also recently posted stellar third-quarter results and a strong outlook. And in a recent KLAS study, athenahealth scored higher than Cerner as the easiest system to connect with. 

Athenahealth's CEO, Jonathan Bush, stated earlier this year that he expects Cerner and Epic to "collapse like big black swans." If so, some investors could be disappointed again when Cerner reports next quarter. Based on the company's most recent results, however, Cerner's wings appear to be flapping quite nicely for now.

 

Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Athenahealth and Cerner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.