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Cerner Corporation's Q4 Exclamation Point and 2016 Question Mark

By Keith Speights - Feb 17, 2016 at 11:18AM

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Great Q4 results for the healthcare technology provider, but weaker-than-expected bookings guidance raises eyebrows.

Cerner Headquarters. Image source: Cerner

Things were looking up for Cerner Corporation (CERN) headed into the fourth quarter. Bookings, which reflect new contracts won but not yet recognized as revenue, hit an all-time high. Expectations were for a solid finish to the end of 2015. Cerner announced its fourth-quarter results after the market closed on Tuesday. The company capped off 2015 with an exclamation point -- but there's a question mark now for this year.

Cerner results: The raw numbers

 

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Sales

$1.175 billion

$926 million

26.9%

Net Income From Continuing Operations

$166.1 million

$147.9 million

12.3%

GAAP Earnings Per Share

$0.48

$0.42

14.3%

Data source: Cerner.

What happened with Cerner this quarter?
Those numbers met or exceeded the expectations that Cerner set around three months ago. Fourth-quarter sales were right in the middle of the range that the healthcare technology provider gave in November. Cerner's adjusted earnings of $0.61 per share easily beat the per-share range of $0.56-$0.58 provided earlier. Other highlights from the fourth quarter and full-year 2015 included:

  • Bookings for the fourth quarter increased 16% year over year to $1.35 billion.
  • Full-year bookings reached an all-time high of $5.43 billion.
  • Fourth-quarter operating cash flow topped $353 million, with full-year operating cash flow of $947.5 million.
  • Total contract backlog jumped 34% year over year to $14.2 billion.

Cerner continued to grow its system sales at a strong pace -- up over 36% from the fourth quarter of 2014. Revenue from support, maintenance, and services also rose over 24% year over year.

Operating expenses, however, increased nearly 37%. While higher acquisition-related amortization expenses jumped significantly, Cerner also saw every other expense category increase by at least 30%.     

What management had to say
Zane Burke, Cerner's president, underscored his company's success in the fourth quarter and throughout 2015. Burke said:

Our fourth quarter results reflect a solid finish to a record year. In 2015, we added more than double the number of new EHR clients than any year in our history, including both large health systems and small hospitals. We also continued to advance our cloud-based HealtheIntent platform and had a very strong year of selling our population health solutions both inside and outside our EHR installed base.

Looking forward
With strong double-digit percentage gains on both the top and bottom lines, you might expect investors to be happy with Cerner's performance. However, its stock plunged as much as 16% in after-hours trading following Cerner's announcement of fourth-quarter results. What gives?

Cerner expects first-quarter 2016 revenue between $1.15 billion and $1.2 billion. Adjusted earnings per share for the quarter are projected to come in between $0.52 and $0.54. It expects full-year 2016 revenue of $4.9 billion to $5.1 billion and adjusted earnings per share (before share-based compensation expense and acquisition-related adjustments) between $2.30 and $2.40. All of those are right in line with the consensus of Wall Street analysts.

The problem stems from Cerner's forward guidance on bookings. New business bookings for first quarter are projected to come between $1.15 billion and $1.25 billion. That's slower than the last two sequential quarters and seems to have worried some investors.

There's no doubt that Cerner is facing plenty of competition. In the past, the company faced off frequently with privately-held Epic. Now, however, Cerner also must battle up-and-coming rival athenahealth (ATHN)

Athenahealth's success story so far has been primarily in the physician market. But the company recently landed its first contract with a major hospital, the University of Toledo Medical Center. What's more, athenahealth leveraged its prior relationship with the hospital's physician clinics to win the hospital contract.

Athenahealth CEO Jonathan Bush has stated in the past that he expects Cerner and Epic to "collapse like big black swans." It's definitely a huge overreaction to use Cerner's sluggish bookings forecast to claim that Bush's prediction is coming true. However, investors in the hospital EHR space will definitely want to closely watch the changing competitive dynamics in the industry in the months and years ahead.

 

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.

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