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Cerner Beats Est; Outlook Improves

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Leading healthcare information technology (HCIT) solutions provider Cerner Corp (CERN - Free Report) reported third quarter earnings per share of 56 cents, beating the Zacks Consensus Estimate by a penny and surpassing the year-ago earnings of 45 cents per share. Net income surged 25.4% year over year to $98.9 million.


Revenues in the third quarter rose 18% year over year to $676.5 million, well ahead of the Zacks Consensus Estimate of $654 million.

Revenues increased on the back of growth in Support, Maintenance and Services (up 16.4% to $432.3 million), robust System sales (up 21.8% to $229.9 million) and higher revenues from Reimbursed Travel (up 24.4% to about $14.3 million).

Bookings and Revenue Backlog

Bookings came in at $769.9 million, up 18% year over year, a record high for the company in any third quarter. Total revenue backlog came to $6.79 billion, up 20% year over year, including $6.06 billion of contract backlog and $724 million of support and maintenance backlog.  


Gross margin decreased 100 basis points to 77.9% in the third quarter. Operating margin improved roughly 70 basis points to 21.8% in the quarter.

Balance Sheet & Cash flow

Cerner exited the third quarter with cash, cash equivalents and short-term investment of $1,039 million, up 37.6% on a year-over-year basis. Long-term debt and other obligations climbed 42.7% year over year to $141.7 million in the quarter.

Cash flow from operations was $182.2 million in the quarter, up 41.1% year over year. Free cash flow increased almost 24% year over year to $104.8 million.


For the fourth quarter of 2012, Cerner forecasts revenues in a band of $670 million and $700 million. The company envisages adjusted earnings per share before share based compensation expense, in the range of 62 cents to 64 cents. Fresh bookings are estimated between $925 million and $975 million. Cerner expects stock-based compensation to be dilutive to its earnings by about 4 cents for the fourth quarter.

For 2012, Cerner increased its forecast revenues in the range of $2.63 billion and $2.66 billion compared with the earlier range of $2.575 billion to $2.625 billion. The company also narrowed its expected adjusted earnings per share, before share based compensation expense, to be in the neighborhood of $2.34 and $2.36 compared with the earlier range of $2.32 to $2.36. Cerner projects stock-based compensation costs to dilute 2012 earnings by about 13 cents to 14 cents.

Cerner remains the trend setter among pure-play, publicly traded healthcare IT (HCIT) vendors. We believe Cerner has positioned itself as one of the better placed clinical technology vendors to benefit from high HCIT spending over the next few years. The company is diversified not only on a global basis but serves both hospitals and ambulatory outfits. Its integrated solutions have captured market share.

We believe long-term investors may consider Cerner, which serves a sizeable installed hospital base. It requires composite clinically-focused applications complying with ‘meaningful use’ requirements, reimbursement problems and complex coding challenges. The company has long-standing, integrated and seamless solutions for both inpatient and ambulatory settings.

On the negative side, the federal Stimulus program will gradually wind down. Cerner faces stiff competition from established HCIT players, such as Athenahealth (ATHN - Free Report) , Allscripts Healthcare (MDRX - Free Report) and Quality Systems and many others in a crowded field. The company is developing multiple growth drivers which will ensure its future growth.

We have a long-term ‘Neutral’ recommendation on Cerner. The stock currently carries a Zacks #3 Rank, which translates into a short-term Hold rating.

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