Cerner Corporation
Q1 2020 Earnings Call Transcript

Published: 29 Apr 2020

[Operator:]

Welcome to the Cerner Corporation First Quarter 2020 Conference Call. Today's date is April 28, 2020, 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, those 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 including new markets or prospects for the company's solutions and services and the expected benefits of our acquisitions, divestitures and other collaborations and the expected impact of the COVID-19 pandemic.

[Brent Shafer:]

Thank you very much. Good afternoon everyone and welcome to the call. And before we start, I’d just like to express our appreciation for you being with us and hope that you and your families are healthy and safe. Like most of you, we are doing this call from different remote locations, so please bear with us if we have any technical challenges today. We’ll do the best we can to make it smooth. I’ll spend the first few minutes just giving my thoughts about the business and our current environment, then hand it over to the leadership team, including our CFO, Marc Naughton; Chief Client Services Officer, John Peterzalek; and President, Don Trigg. So as we well know, it’d be an understatement to say that this was an eventful quarter. It’s been an extreme. Since we talked at our last virtual investment community meeting the week HIMSS was canceled, the coronavirus pandemic has affected nearly all aspects of our daily lives. In mid-March, we made the decision to transition our associates to a remote workplace. As part of our long-standing business continuity plans, we moved seamlessly the vast majority of our 27,000 associates to a virtual environment and we've been really pleased with the productivity and performance since taking this important step. So first and foremost, I would like to express my appreciation for the incredible dedication of all Cerner associates working tirelessly while balancing home commitments to ensure that we’re delivering on our mission during this critical time. The drive of our associates to support our clients in improved healthcare has always been impressive, but over the past six weeks it's been simply humbling. I’m grateful for all that our associates do for Cerner and for our clients.

[Marc Naughton:]

Thanks, Brent. Good afternoon, everyone. I’m going to cover our Q1 results and share our current views on the impact of COVID-19. This quarter we delivered bookings and revenue slightly below our expectations due to some impact of COVID-19, but our ongoing expense control helped drive earnings at the high-end of our guidance. As we’ll discuss, we do expect an impact on our results for the rest of the year, but we are taking several steps to mitigate the impact and currently expect most of it to be in Q2. Now I’ll go through Q1 results, starting with bookings, which were 1.09 billion and just below our guidance range, as we saw a lower-than-normal volume of contracts signed in the last two weeks of the quarter due to our clients rightfully shifting their full focus to caring for patients amid the coronavirus outbreak. Bookings in the quarter were on track to come in at the high-end or above our guidance range prior to the outbreak and the resulting business disruptions. These opportunities remain in our pipeline and we believe we will close them in future quarters as the global environment stabilizes. We ended the quarter with a revenue backlog of 13.47 billion, which is down 9% from a year ago primarily due to the termination of a RevWorks agreement that I discussed on our Q3 call as well as the lower level of bookings in the first quarter. Our backlog revenue, combined with other contracted revenue that is excluded from the ASC 606 backlog definition, provides revenue visibility of approximately 85% over the next 12 months. Obviously, additional delays on being able to work the services backlog could impact when the backlog rolls out, but this is consistent with our current view. Revenue in the quarter was 1.41 billion, up 2% over Q1 of '19. This is slightly below our expectations but would have been comfortably in our guidance range if it weren’t for lower technology resale and software bookings and lower reimbursed travel revenue related to the COVID-19 crisis. I’ll now go through the business model detail and year-over-year growth compared to Q1 of '19. Licensed software revenue in Q1 grew 2% over Q1 of '19 to 158 million primarily due to strong growth in our SaaS offerings, offset by a decline in traditional license software attributable to lower bookings in the quarter. Technology resale of 51 million in Q1 was also impacted by the lower level of bookings, decreasing 7% compared to Q1 of '19. Subscriptions revenue grew 12% in Q1 to 94 million. Professional services revenue grew 4% in Q1 to 511 million, primarily driven by solid growth in implementation services and partially offset by 42 million less outsourcing revenue due to the termination of the RevWorks agreement we’ve previously discussed.

[John Peterzalek:]

Thanks, Marc. Good afternoon, everyone. Today, I will provide results highlights and an update on our Federal business. I’ll start with our bookings. As Marc mentioned, we delivered very solid bookings given the circumstances, and we were on track to come in at the high-end or above our guidance range prior to the outbreak and the resulting business disruptions. We do not believe these opportunities were lost and we expect to close them in future quarters as the environment stabilizes. Highlights of the quarter were a large expansion with an investor owned client that purchased our EHR solutions for 11 additional sites to displace two different competitors, a strong contribution from our Federal business, and a large client purchasing CareAware Connect, our care team communications offering, for 25 sites. We had a lower level of long-term bookings compared to last year, which contributed to the decline in overall bookings. For the quarter, the percent of bookings coming from long-term contracts was 27% compared to 30% in Q1 of last year. Moving to a Federal update. Many of you have seen headlines about pauses in the DoD and VA projects due to the COVID pandemic. Like the vast majority of our clients, they have had to shift attention to the COVID-19 pandemic. We are doing all we can to support them during this time, including reducing interaction with frontline staff, enabling them to focus on their patients, and ensuring they have the key technical capabilities they need. The programs continue to progress as we actively work and push forward on critical elements including virtual deployment activities, technical build, interfaces, and program management. Further evidence of the continued progress with both VA and DoD is the recent HIE go live that Brent discussed. As we look to future deployments, we are currently working with both programs to revise timelines accordingly, but we believe the impact is manageable and we have factored it into the guidance Marc shared. Looking at the broader marketplace, as Marc and Brent discussed, we are in an unprecedented environment. While this has created some disruption to business activity in the near term, I’ve been pleased that a clear message we are hearing from our clients is they want to move forward with their strategic plans and Cerner is an essential part of their strategies. The timeframe for some clients remain uncertain as they work through the various stages of the COVID surge and recovery. However, the message is clear. They need Cerner to help advance their initiatives and strategy. In the near term, we are focused on supporting our clients in any way we can, with a focus on supporting those experiencing a surge in COVID-19 cases. We are also advancing projects by doing as much work remotely as possible. In the short time we’ve been doing this, we’ve learned a lot about how much work can be done remotely and our clients’ willingness to engage virtually. Not only is this helping us mitigate the financial impact of the pandemic, these learnings represent an opportunity to rethink how we approach projects going forward. I believe we will evolve to a model that requires less travel and less onsite presence, which will save Cerner and our clients’ time and money. More broadly, the pandemic has created a heightened focus on the need for interoperability, secure access to information, analytics, and other needs that align with our capabilities. We believe this could be a catalyst for an industry to move faster to realize the potential that’s yet to be realized from the base level of digitization that was established during the Meaningful Use era. Not doing so would be a missed opportunity. Another reason we are cautiously optimistic about business activity being able to resume is we believe the funding providers receive from the CARES Act will help them recover from the significant near-term impact of the pandemic and put them in a better position to move forward with planned projects and consider new ones as they look to address needs that have been identified during this crisis. In summary, I’m pleased with how we have managed through this pandemic to date, and I believe that in the long run this will lead to healthcare further embracing technology. With that, I’ll turn the call over to Don.

[Donald Trigg:]

Thanks, John. In his opening comments, Brent framed the impact of the pandemic on our clients, our associates and our communities where we work and live. I want talk for a few minutes this afternoon about what we believe the COVID crisis will mean for healthcare and our work to systemically transform it. The first-order impact of any crisis is an acceleration of macro trends already playing out. The Federal government became the top regulator and payor for healthcare in the 2010s. We think COVID will accelerate Washington’s growing role. Health system consolidation has been a multiyear trend. We believe it will accelerate in the quarters to come. The home as venue to include tele-services has had a quickening adoption curve. The pandemic has already accelerated it. From behavioral health to the deployment value of the cloud, the acceleration of existing forces of change is the known-known of any crisis. As we think about our strategies for capital allocation, we look for areas with significant macro trend, clearly understood regulatory requirements, leverage from existing Cerner assets, high gross margin business models and speed-to-revenue. It’s created a set of strategic growth businesses that, in the main, are important to pandemic response and essential for durable recovery. Within the four walls of the hospital, our Real-Time Hospital System solutions are comprised of enterprise communication, hospital operations and workforce and capacity management. As providers surge to deliver additional supply, our CareAware Capacity Management and Clairvia solutions have had significant impacts surfacing data sets to drive real-time decision-making on workforce, equipment and bed management. Outside the hospital, our EMR-agnostic HealtheIntent platform also has been core to crisis response. HealtheIntent aggregates and normalizes essential information sets to include clinical, administrative and geospatial data. Our HealtheIntent teams developed and fully deployed COVID syndromic surveillance to all clients in just days. St. Joseph’s Health in New Jersey called it ‘a key tool in the arsenal’. As our clients move from crisis response to durable recovery, these same tools can help restart their health systems and larger health networks. We believe these reactivation campaigns will drive critical revenue recovery and, over time, be part of how our clients reimagine their larger health network strategies and business models. We also believe these physical and virtual health networks will be a medium-term tailwind for cybersecurity. For all of the disruptive promise of data liquidity, alternative venues of care like the home and new staffing models to support them, secure protection of health information will be paramount. And as policymakers increasingly view healthcare as critical infrastructure for national security, cyber will be further elevated. Our latest announcement with Fortified Health gives us a compelling total solution offering, and the business is on a path for another solid year. Beyond the health network, our data businesses also continued their momentum. The release of information business signed multiple new legal and life insurance clients in the first quarter. In addition, our Cerner Learning Health Networks in the life sciences and pharmaceutical space also made solid progress. Art Glasgow and his team have grown our Learning Health Network to represent one of the largest clinical data sets in the U.S. with 89 million de-identified patients and over 11.5 billion lab results. We leave the first quarter confident in our ability to drive strong year-over-year organic growth. Finally, our efforts across the enterprise, health network and the larger health economy center around a person. David Bradshaw and his consumer team drove strong bookings in Q4 and again in Q1. Our digital experience platform is helping clients connect and deliver important continuity amid the pandemic disruption. In the first quarter, Adventist Health launched a new digital patient experience built on the Cerner consumer framework. It moves us one step closer to the digital front door for health and care that we believe consumers are seeking. In his recent shareholder letter, Jamie Dimon said entering into a crisis is not the time to figure out what you want to be. Crisis doesn’t just accelerate existing trends. It offers the opportunity to shape and lead them. The crisis response of provider organizations worldwide has had an impact on every Cerner associate. We have been humbled by the efforts of frontline caregivers and seen what we call the spirit of Cerner in our businesses like Workforce Health where we are directly supporting essential workers. The pursuit of durable recovery for its part will once again place our technologies and services front and center. We look forward to that challenge and that opportunity in the quarters to come. With that, I’ll turn the call over for questions.

[Operator:]

Thank you. . Our first question comes from the line of Charles Rhyee with Cowen. Your line is open.

[Charles Rhyee:]

Yes. Thanks for taking the question. Just wanted to ask really about how you’re thinking about this durable recovery? I think yourself along with many other companies as we’ve seen them report so far looking at 2Q as the worse and obviously to a degree is getting better as we get through the course of the year. But when you think about your clients and particularly hospitals as they are, you’d be sort of I guess a derivative impact as they kind of get their business back online. How do you see sort of that kind of timeframe in terms of when they start recovering to when you think they’ll start spending and do things like the stimulus plan in the CARES Act? Do those funds, do you see them helping that mitigate some of the impact in terms of sort of a spending slowdown you might expect otherwise?

[Marc Naughton:]

Yes, this is Marc. The primary impact on us is our services business which a lot of that is an implementation project. Many of our clients that were forced to pause a project or defer start are eager to get on with those projects. And I think everything that’s going on currently is emphasizing how important these projects are for them for their operations and to operate more efficiently. Certainly, the CARES Act and likely subsequent stimulus packages are going to help our clients be financially able to go ahead and run their businesses. I think the fact that in the U.S. we’ve seen how critical healthcare really is and how many – how it’s important that we have adequate healthcare and adequate number of beds and adequate facilities. So the funding of healthcare we believe is likely to be maintained or strengthened and we think our clients are going to be looking, as Don mentioned in his comments, for something that not only helped them respond but also recover and then take advantage of what the next opportunities are than some of them wouldn’t sort have opened, such as tele health and other things.

[Donald Trigg:]

This is Don. We’re at our best when we’re aligned with our clients around business strategies and this has put us front and center in terms of that dialogue with our clients. And I think that’s a structural advantage that we have because our systems are heavily deployed and are mission critical. And so what we’re really talking about with clients now is how can we be relevant to COVID response, but we’re having a parallel conversation around how can they begin to think about our strategies around recovery. And many of the solutions that are part of response, the CareAware Solutions suite that I used as an example, it’s a great use case. We’re working on search capacity and how they think about management of their supply side, but those are the same tools and capabilities that are going to be relevant to them in terms of how they think about medium-term strategies to manage the expense line and to think about labor and workforce strategies and what it looks like to make money at Medicare and at Medicaid rates. So I think we’re – relevant to COVID response, we’re going to be central to those economic recovery strategies and those revenue recovery strategies. And if we’re smart, we’ll play into larger strategies around the efforts of our clients to rethink their business strategies on a multiyear basis.

[Charles Rhyee:]

Thanks. And maybe just to follow real quick in that 1 billion to 1.2 billion of bookings guidance for next quarter, is it possible to give us a sense on maybe how much of the mix in your expectations for new sales is shifting to more of a COVID response, more of how to realign your business post pandemic versus what you might have expected, let’s say, business planning at the start of the year? Thanks.

[Marc Naughton:]

This is Marc. So, John, do you want to --

[John Peterzalek:]

Yes, I’ve commented on what we’re looking at in the 1 billion to 1.2 billion in bookings, it frankly isn’t much different than we normally see. And in terms of what our clients are doing and when they’re willing to engage in their strategy. It’s a little bit by depending on where you are in the world, depending on where you are geographically in the U.S. in terms of when you start, but the mix isn’t much different than we’d normally see in any quarter. It’s just that the volumes are a little bit off from what we see in a normal quarter.

[Charles Rhyee:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Eric Percher with Nephron Research. Your line is open.

[Eric Percher:]

Thank you. I want to continue on the assumption on purchasing activity and maybe a different tack, which is you’ve been through a couple of recessions; 2001, 2008 experience might be helpful as we think about how hospitals will manage through what goes beyond the COVID experience. Could we start with that?

[Marc Naughton:]

Sure. This is Marc. Being the old guy in the room, I remember all of those. Clearly back in '07, '08 timeframe, the capital markets shutdown, healthcare didn’t have access to cash for an extended period of time. That just shut . I think what you’re seeing now is much of healthcare economically is doing okay prior to this environment. We believe that those stimulus packages will help them get back on their feet post this environment. So I think in my mind this is much different from those and this is a relatively short-term defined event where they’re going to be providing care to their patients. They don’t have the cycles to go work on their infrastructure. We believe that will dissipate and as we kind of get out – start rolling out Q2, they will be reengaged and with an even higher level of passion on taking advantage of so many opportunities. A lot of these projects were already in flight and we slowed. Some of them, we’re still working on. Because if you look at – if you really look at the revenue impact that we’re talking about for Q2, we’re still delivering 90% of our services growth and it’s still a significant amount of that revenue is coming through we’re working in remote another way. So from our expectation I don’t see them stopping that as we saw in the '07, '08 timeframe. I think this is different to me. My experience would be that it’s a little bit more short-term in nature. We should finish coming pretty strong out of this. And once people are really ready to reengage in contract discussions, engage in project activity.

[Donald Trigg:]

Yes, the only other thing I would say is you tend to see sector-specific orientations to previous downturn. So focus on the transportation sector in a material way, post 9/11, financial sector and '07, '09, I think one of the focal points for government emphasis here will be the provider supply side and it will feature in a meaningful way in terms of their thinking and approach, and in particular sort of thinking about our provider’s supply side clients as critical infrastructure. And it’s probably too early to sort of describe what that will mean from a government focus perspective, but that’s a perspective we share and that we think our technology strategies will help enable.

[Eric Percher:]

That’s helpful. And the services element, is that primarily that today you don’t want to take up the cycles and attention, or is there a need to reinvent some of the model for services that really were always delivered on the ground and may not be now?

[Brent Shafer:]

So, it’s a little bit of both. John?

[John Peterzalek:]

Yes, I think it’s a good point because as we’re working through a different new normal right now, I think both us and our clients are looking at different ways to deliver the services. As we mentioned in the previous question, it’s important to note that the majority of our clients have not stopped their projects. We continue to make progress and we’re working on new and innovative ways to deliver those services and I do believe we’ll see a new normal evolve, both the impact and realities of today as we gradually come back to work, but I give a lot of credit to our clients and how we work with our clients that we’ve been able to work very effectively virtual. And I think some of that has become the new normal.

[Eric Percher:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Steven Valiquette with Barclays. Your line is open.

[Steven Valiquette:]

Thanks. Good afternoon, everyone. And let me commend you on the work that Cerner does just to keep hospitals running efficiently during the pandemic. Couple of questions here. First, I guess given that a lot of hospitals still have fiscal years that end on December 30, I guess I’m curious if there’s any variables in your guidance for the full year that with the reset of some hospital budgets for their fiscal '21 starting October 1 of this year that you’re calendar 4Q could see some rebound in results tied to that, or is it more related just to the flow of volume across the overall acute care hospital customer base?

[Marc Naughton:]

This is Marc. None of our guidance is obviously tied to our forecasting process. We’ll go through each opportunity based on when the client has been engaged or when we think the processes are going to result in a completed contract. We didn’t see a lot of changes or any concept, thoughts around budget processes. Our clients are very busy providing care to people in need. So what we’ve done and what we always do is laid out the forecast data, pull it into a projection and that’s where we baked our guidance on. We provide a little wider range just to give us some room for upside and downside relative to what could happen. But there isn’t anything that’s inside the healthcare purchasers relative to them changing their view as to their purchasing behavior at this point.

[Steven Valiquette:]

Okay. One other quick one, this one’s kind of tough to ask about or answer a little bit, but I guess big picture from our view there seems to be very strong amounts of Federal liquidity and stimulus relief being provided to your overall customer base. But I guess from your perspective, is there any concern that you see in relation to either solvency of hospitals and/or clients in the ambulatory setting or do you think there’s also enough Federal liquidity in stimulus to avoid that sort of risk? How do you think about that just in general in this environment?

[Donald Trigg:]

Yes, I think – to your point I think it’s incredibly difficult to speculate, so I can’t share that view. Having said that, we do think that there is an accelerating impact that the current environment is having. I think one of the things that is going to accelerate is the level of hospital consolidation. And so that is going to extend out into the ambulatory and our vernacular, the health network space. So I think you’re going to see trends around practice and larger health system consolidation as a meaningful feature of what the landscape looks like over the next 24 to 36 months. And what we need to be doing as thinking about HealtheIntent and our HealtheIntent platform has a key enabling technology for the integration strategies that need to feature in those acquisition approaches. It was purpose built as an EHR-agnostic platform and is very well suited to the kinds of strategies that will be required to make those practice acquisitions work inside a larger clinically integrated network. So we think there is trend there. We think it’s a trend that probably accelerates and we need to be smart and effective in terms of positioning HealtheIntent capabilities to make it work.

[Steven Valiquette:]

Okay, all right. I appreciate the extra color. Thanks.

[Operator:]

Thank you. . Our next question comes from the line of Jamie Stockton with Wells Fargo. Your line is open.

[Jamie Stockton:]

Good evening. Thanks for taking my question. I guess and I know this is doubling down some of what’s already been asked, but on the pro services front since that seems to be the area where things are relatively weak incrementally, are there some activities where it’s just not possible to do them remotely or is this really a question of coming up with creative solutions or maybe the client having the staffing available to kind of work with your people to get the work done, if you could just qualitatively touch on that, that would be great?

[John Peterzalek:]

Yes, this is John. I’ll expand on that a little bit. Yes, there are things that you really can’t do virtually. So you can’t do everything virtually if you think about a large activation or those type of things, those tend to be people-heavy type of go lives, and likely so because of the patient safety aspects and those type of things. So where you see some of the challenges being is if you’re mid project, working along, you tend to go on course and continue as you did closer to activation, depending on where you are and the possibility of being able to come back on site and those type of things, you may see pushes of go live as you get closer. That’s the primary issue that’s pretty difficult to do virtually. However, I will say that we have done some virtual activations in some of our smaller projects and they’ve actually gone well. So it will be a combination of both, but the expectation is you can’t do everything virtual.

[Jamie Stockton:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Dave Windley with Jefferies. Your line is open.

[Dave Windley:]

Thank you. So another follow up there, but on guidance. Does your guidance today reflect kind of the maximum amount of conversion to remote activity in professional services or would there be upside there? And then maybe the second part of the question would be, is – we’re calculating incremental and decremental margin of low 40s. Is that reflective of your decision to keep professional services employees fully employed or is that more a mix of the revenue that’s coming out? Thank you.

[Marc Naughton:]

This is Marc. The impact which might not have been fully realized by some investors is that when the revenue from those services go away, because of we think the relatively near-term nature of the impact, we are not reducing our workforce. In a normal world, we would adjust our professional service workforce to match the demand and then you would be basically missing that on the contribution margin in that business. In this case, we know there’s a lot of demand out there. We have government contracts that are ramping up. We have commercial contracts ramping up. So we need to have those people trained and they’re going to be ready when the client is ready. So we are duplicating that workforce, which means that every $1 of revenue we don’t get, it’s basically $1 of operating and earnings that we’re not getting. So I think that’s an important point to make. And it is because our expectation that we are going to see the bounce back and we’re going to meet every one of those people working on there. I actually do believe we will get some efficiencies on how we do our projects, and ideally that will be reflected in a higher utilization rate for those consultants that there will be a higher percent of their time is effective perhaps from reduced travel, perhaps just from techniques, we’re learning as we go through this. There are things we have to do onsite, absolutely go lives and they’re interfacing with the users in a meaningful way. But I think we’re going to come out here more efficient and be able to drive these prices. Keep in mind most of our projects are fixed fee in nature. So any efficiencies we can drive on implementing those can benefit us relative to the bottom line. I think once again from an upside perspective, we’ve tried to give a fairly wide guidance range. Certainly if we can be more efficient, we can get – continue to expand what we do virtually before the project start opening up, that’s potential for upside. If this last longer, if there’s something in the fall that slows us down, then that’s a downside opportunity. But right now given our best view, we think our guidance reflects when we think we’re going to get back to work.

[Dave Windley:]

Okay. Thank you. Thanks, Marc.

[Operator:]

Thank you. Our next question comes from the line of Sean Wieland with Piper Sandler. Your line is open.

[Sean Wieland:]

Hi. Thank you very much. So you mentioned telemedicine is going to become part of the normal course which I think many would agree with, but specifically what changes are you making to help your clients with this transition from a go-to-market perspective, from a product and workflow perspective and any other perspectives you’d like to add?

[Donald Trigg:]

Yes. Sean, this is Don. That’s a great question. So I think the first thing we’ve attempted to do and thinking about virtual health, as we’ve tried to think what it means to actually have an enterprise strategy for our clients and what it means to provide telehealth services in a high acuity setting with our hospital capabilities and our patient server capability, but then also to have effective strategies outside the hospital predominantly through our relationship with AML. And so what’s it look like to give them end-to-end capabilities across the enterprise. I think secondly, we think as you see normalization around the regulatory and payment landscape, which have really sort of been the probably with some change dynamics relative to provider and how they want to think about the provider patient relationship. And as we see those impediments fall back, we think then there becomes this sort of interesting conversation around what’s it look like to think about the mix of physical and digital capabilities required to optimize for business strategy. We think that looks one way in fee-for-service, it looks another way in fee-for-value. And so we see some pretty interesting opportunities there in terms of helping our clients think through that mix. And then the final thing I’d say is in the strategic growth businesses I think there’s some very interesting emerging conversations around how we think about net new offerings in areas like security, say, in the VA space where we know there’s going to be elevated levels of sensitivity and where the solutions technically need to do things like support group business. So I think you’ll see us look to support the enterprise strategy, think through it from a business model perspective and then really look to capitalize on some niche areas that we think have macro trends.

[Sean Wieland:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Stephanie Davis Demko with SVB Leerink. Your line is open.

[Stephanie Davis Demko:]

Hi, guys. Thank you for taking my questions. I’ve got another one on virtual health. You’ve integrated with only a few virtual care players to date like Amwell. Do you plan on remaining aligned with only a few players or could this expand as you look at some adjacencies as we go to further virtual fair ? And as a quick follow up to that, how should we think about the economic for these virtual solutions?

[Donald Trigg:]

Yes, so a couple of things on that, Stephanie. One, we support our integration strategies in all of our major clients across multiple players in the tele space. So if a large client has a relationship with Teladoc or with MDLive or Doctor on Demand, we’re going to support that strategy and help them make it successful. The second thing, yes, we do have some preferred partnership strategies inclusive of the strategy with Amwell and that’s fairly key to how we think about go to market, particularly with our large enterprise clients. The final thing I would say is relative to the economics as – I think our view is there’s some commodity trend around the technology, so A, B, like mobile, we think it will become an expectation of the provider to be able to provide those services to the market against their business strategy. And so the more interesting question for us just like the questions around mix of the channel and how we think about mobility is what are the business model strategies that we’re activating around the tele services? So how do we think about the home as a venue and tele service relative to the Medicare Advantage space and how we think about differentiating and helping clients manage first dollar risk? Those are going to be the kinds of things that we’re going to push ourselves to think through and we think that ends up being the bigger longer-term impact from a market perspective.

[Stephanie Davis Demko:]

Understood. Thank you for that.

[Operator:]

Thank you. Our next question comes from the line of Michael Cherny with Bank of America Securities. Your line is open.

[Michael Cherny:]

Good afternoon and thanks for all the color so far. I want to step back and take another big picture question. I appreciate all the commentary that you’ve given us regarding your conversations with customers going out of your way to make sure that they’re doing as best they can. That being said, so many of the data points that we see continue to point to them essentially having no idea what the pathway forward is for their operations, when electives are going to come back, cash flow dynamics, et cetera. So as you think about your guidance going forward, how does some of that variability in terms of the lack of client understanding of parts of their own business play into the thought process in your guidance or is it a straightforward, as you mentioned, Marc, about essentially a massive dip rather than necessity for so many of your clients as key participants within their local geographies, allows them to get back to normal operations, at least in terms of how they think about running their business, even if volumes are still slower to come back?

[Marc Naughton:]

Yes, this is Marc. Clearly our business has a lot of visibility to it, right? It’s fairly durable. So we have a lot of recurring revenues. We have a lot of relatively highly visible revenues. So when you’re getting to the point of – we go into a year we can see 85% of our kind of revenues being in that category. As you get further in, that can even go up as you have a shorter period of time to get to the end of the year. So I think from – as we look at the backlog, which is how we look at opportunities and then the new business pipeline, we’ve gone through and we’ve tried that handicap based on our knowledge of each individual client what we think their focus is going to be as they work through the next 60 to 90 days. The majority of what we’re hearing from our clients certainly the recurring is going to continue all of those elements. But it’s a project where are very interested in getting started back up. We’re starting to get into conversations of when can I get in the queue for the restart, because I think our clients realize that there’s going to be a lot of demand for those services by a broad client group, and they’re going to want to be able to be in line to make sure that they’re getting bids, if you will, on those services. So clearly, many of them are trying to figure out how are they going to address all of the elected procedures that didn’t get done? I think some of the things that we do in that space, all that we can do in that space is help them analyze how the appointments got canceled. One of the – is there an effective way of using some of our tools to help them start rescheduling those procedures. And we have tools that help them manage their facilities. We have tools to help them manage their workforce. So how can they use all these tools to maximize the opportunities to go address those deferred elective procedures? So I think all of those things, as we talk to our clients, they’re looking for us to help them solve business problems. But I agree that right now their business problems in making sure their people are safe. And they’re delivering high-quality care. But that’s going to more pretty quickly into, all right, now how do I recover, and that’s what Don was talking about earlier.

[Donald Trigg:]

And I would add that I think you’d mentioned that in your comment, you probably didn’t mean it this way but they don’t understand when they can get back. I would say that the vast majority of all be specific to our clients. Many of them are already thinking post surge. They have plans in terms of when they believe they can open up. We’ve been doing activity, I’ll call it, unsurge activity, as we work to convert beds that were converted for the pandemic back to what would be considered a normal use. So I think the planning has begun. There’s a – it isn’t certain by any means, but there’s an idea when we can get back, when they came back to as close to normal as they can. And they’re preparing for how to address some of this volume that’s going to come back to them. So I think preparations are under way and the uncertainty is getting less uncertain every day.

[Brent Shafer:]

John, this is Brent. I’d just add to that. I think Marc, you both made important points. Marc made a very important one, which is these elective procedures, that demand is not gone, right? It’s delayed. So if you talk with hospital systems CEOs, they’re trying to figure out how do they accommodate that demand, the elective demand as it does come back? And if you think about it, there’s a lot of delayed elective procedures where people want to move ahead or need to move ahead for various reasons. So everything that we can do to help plan that is key management.

[Michael Cherny:]

Thank you for all the color. I really appreciate it.

[Operator:]

Thank you. Our next question comes from the line of Jeff Garro with William Blair. Your line is open.

[Jeff Garro:]

Good afternoon. Thanks for taking the question. I think I’ll follow up on that last one a little bit, but maybe try to translate a little to the Cerner business model. Just trying to better understand the impact of COVID-19 and then looking ahead to a more normalized business outlook. And in what areas of the business would you expect that 2020 revenue is a new base to go off of in 2021? And what areas would you call out as expecting higher growth due to a catch-up element in 2021?

[Marc Naughton:]

This is Marc. I would first of all indicate that I don’t know that there’s a catch-up element for Cerner. Certainly, our clients are looking to catch up with some of those elective procedures. But for us, certainly the services revenue that is going to be – we’re not going to be able to address in Q2. It will occur, but it’s going to occur in future periods as we have the same size workforce. We’re not going to expand our workforce in order to meet higher short-term demand. We’ll just continue to work through it in ideally a more effective way which might drive more revenue per associate out of that organization. But I don’t see a surge of demand as we go into 2021 necessarily. So I think that’s from my perspective. I think Don might want to address some of the opportunities from a strategic growth perspective that we see relative to kind of coming out and how those things start really helping to jumpstart some of those businesses.

[Donald Trigg:]

Yes. I think if you just think about that where we’ve got COVID response, durable recovery and the chance of that process for folks to really create elevated levels of certainty around their business model on a five-year basis, that’s the sweet spot we see for engagement with our clients. And so if I’m using HealtheIntent to think about an engagement strategy with elderly seniors to – that I’m taking first dollar risk on to keep them out of the EV and utilizing the hospital that’s part of my surge strategy, those same capabilities, to Marc’s use case, become the opportunity to start to think about recovery strategies around key procedures around service line, let’s say, a service line like orthopedics. And that overlay, that network capability is also then the same capacity that I need on a multiyear basis to start thinking through shift in payment model and what it looks like to manage the top and bottom line. So to John’s point, I think there’s a fair degree of sophistication in the client base in terms of how to think about that progression. There’s a lot of noise, but that’s the signal that you see in the dialogue with the market. And I think what we believe on an out-year basis is the areas that we have made big bets on from a strategic growth perspective are a set of things that are going to have significant trend. We love the real-time in the hospital space. I talked about it. We think it’s going to have elevated rates of trend. Behavioral health has been an area we’ve talked consistently with you about in the LTPAC space. We think BH and well-being end up being a big area of focus on a multi-quarter basis. And then finally, I think as you’re seeing in the bookings data, you’re going to continue to see us have traction and trend around our consumer strategies, you may see some shift in mix including things like Amwell and virtual being a more material piece of the revenue mix, but it’s absolutely going to be something that has traction and trend. There are other areas where we are watching and thinking actively about headwind/tailwind dynamics, employer would be one that I think we believe, given our engagement with our clients around return to work, that there’s a centrality to the employer in that employer-employee dynamic right now that could create somehow quarter out-year trend around that business. We’ll see. And so I think across all the strategic growth businesses, we’re playing through near-term and medium-term dynamics. But I think in the main, we feel very good about mix and long-term potential.

[Marc Naughton:]

Yes. And I would add one thing to Don’s list is data. That’s – one of the things we’ve learned in this timeframe is how valuable it is where you can use -- what kind of – how certain tools can help us predict some of the pandemic areas, where are the hotspots going to be held and where are docking them. So we’ve announced some of the activity on that. Don, I don’t know if you want to quickly --

[Donald Trigg:]

Yes, it’s a great point. So if you just think about the main businesses that make up the data strategy, when it relates to the information perspective, a ton of trend there kind of interestingly, the success we’ve had around legal and life insurance, this is the same dialogue we’re having around professional services. How do you think about virtual interactions in a way that deals with current situational reality? So a ton of trend around the core ROI business. Similarly, Brent talked about the work we’ve been doing to put together a purposeful data set for COVID and to allow academic researchers to explore key protocols and discovery strategies. Again, part of a larger narrative that really plays into the opportunity set around life sciences and pharma. So unquestionably we think a lot of what’s playing out in this space ends up being net positive in terms of the focal point areas that we have for that business.

[Jeff Garro:]

Great. Thanks very much.

[Operator:]

Our next question comes from the line of George Hill with Deutsche Bank. Your line is open.

[George Hill:]

Hi. Good afternoon, guys, and thanks for taking the question. Marc, a lot of color has been provided here. I don’t know if I count as old, but I remember 2007, 2008 and 2002, 2003. And so I guess my question is on – so on the bookings guide, I guess can you talk about how much is in hand? And given that you guys have a high visibility recurring revenue model, I guess can you talk about how much of this year’s revenue is already contracted for? And I guess what I’m thinking about is how much of the bookings guide or the revenue and earnings guidance at risk if the crisis persists longer than expected.

[Marc Naughton:]

Yes, this is Marc. Clearly the key element for us is a lot of revenue is already in backlog. It’s already contracted. The key on the services side is the ability to be able to live with that revenue. That’s really the question and the key thing that we’re working through today is how can we deliver that revenue in certainly a virtual services model and when things get back to normal meet all the demands our clients are going to have with that. So a lot of them is already contracted. So certain of the new bookings are something that we need to deliver. Whenever we have a lower than expected bookings quarter, that’s going to impact the next two or three in the following quarters and that’s another impact on the lower guide for this year is lower Q2 is not going to give me the Q3 or Q4, but that’s a normal we will be looking for. But really from a business overview standpoint, we had a significant amount of visibility, but while it’s contracted, while it’s in backlog and a lot we’re working on strategies to deliver those projects, that’s what we don’t know the exact impact or the exact timing and thus be able to get back into the field. We’re very focused on our clients being able to deliver what they need to do, but very first on the safety of our associates. We’re not going to be able to send associates out there if it not absolutely safe for them to be onsite and be doing the work. So those are two things certainly we’re balancing, but our expectation is we will get back to work. Our clients are eager to do it already started buying plane tickets. Actually we want to be out there helping our clients. So at this point, a lot of things it's in the backlog. It's signed. There’s not a lot of contracting that has to be done of the revenue that happens during the year. But the key actually was delivering on that backlog.

[George Hill:]

Okay. Thank you.

[Marc Naughton:]

Sure.

[Brent Shafer:]

How about we take one more question?

[Operator:]

Thank you. Our next question comes from the line of Robert Jones with Goldman Sachs. Your line is open.

[Robert Jones:]

Great. Thanks for sneaking me in. obviously a lot of the questions have been asked and answered at this point. I guess maybe, John, I appreciate the update on the government business, government work going on. I’m just curious if maybe you could specifically share a little bit more on the VA, what revenue do you still expect, if any, to be in guidance for this year? I know that there was a pause relative to the work there. Just curious of the roughly 250 million a year increase that you guys had shared previously what, if any, is contemplated in this year’s work? And then how do you think about that playing catch up next year?

[Marc Naughton:]

Rob, this is Marc. We don’t disclose specific revenue from the VA or from any specific government contracts. Certainly the VA is in a similar position to many of our clients, right? There’s work we can do virtually, but they are starting to get into a go-live phase, and some of that work needs to be done on site. So they are not a lot different than many of our clients. In a similar way, there isn’t necessarily a catch-up time, right, for these projects. These projects tend to kind of be on a time line. And if the initial project is going to be delayed a little bit, then those – that come waterfall. Now depending on when we’re able to get back to work and relative to the VA, there is an opportunity to perhaps do more go live in the fall and get us back on track, which would mean that we’ve kind of get caught up and get back to where we would normally be in the process. But that would just allow us to then deliver the revenue that we’ve originally expected to come in 2021, which we obviously haven’t talked about at this point. So can’t really give you any more specific guidance than that. But just to say that they’re in the same boat as many of our clients are. But we do have an opportunity there to perhaps to get working on multiple projects at one-time as opposed to doing some sequential work that could let us get caught up by the end of the year.

[Robert Jones:]

Thank you.

[Brent Shafer:]

Well, thank you all for your time this afternoon. Please be safe to take care of yourselves and your families. Good afternoon.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.