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Leading healthcare information technology (“HCIT”) solutions provider Cerner Corporation (CERN - Analyst Report) reported second-quarter 2013 earnings per share of 32 cents, up 14.3%. Results met the Zacks Consensus Estimate of 32 cents. Net income rose 15.4% year over year to $112.9 million.

Revenues

Revenues in the second quarter rose 11.0% year over year to $707.6 million. However, it missed the Zacks Consensus Estimate of $724 million. The sales growth was at the lower end of Cerner’s earlier assumptions due to reduced volume of tech resale, which carries a lower margin.

Support, maintenance and services rose 14.2% to $486.6 million in the reported quarter. On a positive note, System sales inched up 2.7% to $200.5 million. Revenues from Reimbursed Travel were up 27.5% to about $20.4 million.

Bookings and Revenue Backlog

Bookings rose 33% year over year to $935.0 million, a record high for the company in any second quarter. Total revenue backlog was $8.00 billion at the end of the second quarter, up 23% year over year, including $7.24 billion of contract backlog and $756.9 million of support and maintenance backlog.

Margins

Gross margin in the quarter soared 530 basis points (bps) from the year-ago quarter to 82.2%. Operating margin also increased 210 bps to 23.5% in the quarter.

Balance Sheet & Cash flow

Cerner ended the quarter with cash, cash equivalents and short-term investment of $969.5 million compared with $1,036.8 million at the end of 2012. Cash flow from operations was $176.5 million and free cash flow was $47.4 million. Long-term debt and capital lease obligations was $133.0 million, down from $136.6 million at the end of 2012.

Outlook

For the third quarter of 2013, the company forecasts sales in a band of $740 million and $770 million. The Zacks Consensus Estimate of $770 million lies at the high-end of the guided range. Fresh bookings for the quarter are projected between $875 million and $925 million. Earnings per share, before share based compensation expense, are expected in the range of 35 cents to 36 cents. Cerner projects stock-based compensation costs to dilute second quarter earnings by about 2 cents to 3 cents. The earnings Zacks Consensus Estimate for the third quarter are pegged at 33 cents.

For 2013, the company continues to forecast sales in the region of $2,950 million and $3,050 million. The Zacks Consensus Estimate of $2,995 million lies within the guided range. Earnings per share, before share based compensation expense, are forecast in the range of $1.40 and $1.42 (earlier $1.39 and $1.42). Cerner projects stock-based compensation costs to dilute earnings by about 8 cents to 9 cents. The earnings Zacks Consensus Estimate is pegged for 2013 at $1.32.

Our Take

We remain on the sideline given the mixed second-quarter results posted by Cerner. Although revenues missed the mark, a turnaround in System sales is encouraging. We are impressed with the record bookings, and significant improvement in margins along with stronger bottom-line guidance in the reported quarter.

We believe long-term investors may consider Cerner, which serves a sizeable installed hospital base that requires composite clinically-oriented applications complying with “meaningful use” needs, reimbursement difficulties and coding challenges. The company has long-standing, integrated and seamless solutions for both inpatient and ambulatory settings.

While fresh projects are shrinking in number, the replacement market is growing.  Cerner faces stiff competition from established HCIT players, such as Athenahealth (ATHN - Analyst Report) and Allscripts Healthcare Solutions (MDRX - Analyst Report).

We currently have a Zacks Rank #3 (Hold) on the company. However, we are more positive about other stocks such as Medidata Solutions (MDSO - Snapshot Report), which carries a Zacks Rank #1 (Strong Buy) is expected to do well.

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